Administracin de proyectos para la

construccin.
Conceptos fundamentales para propietarios, ingenieros,
arquitectos y constructores.
1. La visin del propietario.
2. Organizacin para administracin de proyectos.
3. El proceso de diseo y construccin.
4. Utilizacin de mano de obra materiales y e!uipo.
". Estimacin de costos.
#. evaluacin econmica para la $nversin en instalaciones
%. &inanciamiento para instalaciones construidas
'. (ontratacin y precios de construccin.
). *laneacin de la construccin.
1+. *rocedimientos &undamentales para calendarizacin.
11. ,-cnicas avanzadas para calendarizacin.
12. (ontrol de calidad y seguridad durante la construccin.
13. (ontrol de costos monitoreo y contabilidad.
14. Organizacin y uso de la in&ormacin del proyecto.
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Preface
Prefacio.
Este libro es prove=do en la >Aord ?ide<?eb@ como un servicio para la comunidad de
practicantes y estudiantes. La reproduccin con propsitos educacionales es permitida
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University *ittsburg. *2 1"213.
,.is boo0 is provided on t.e ?orld?ide ?eb as a service to t.e community o&
practitioners and students. 3eproduction &or educational purposes is permitted ?it.
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Langer 1epartment o& (ivil and Environmental Engineering (arnegie 4ellon
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Este libro desarrolla un punto de vista espec=&ico en el debate de los participantes el
proceso y las t-cnicas de administracin de proyectos para la construccin. Este punto de
vista es !ue los propietarios !uienes desean una oportuna entrega de proyectos un costo
oportuno. 2lgunas implicaciones pro&undas para los obBetivos y m-todos de la
administracin de proyectos es resultado de esta perspectivaD
,.is boo0 develops a speci&ic vie?point in discussing t.e participants t.e processes and
t.e tec.ni!ues o& proBect management &or construction. ,.is vie?point is t.at o& o?ners
?.o desire completion o& proBects in a timely cost e&&ective &as.ion. ;ome pro&ound
implications &or t.e obBectives and met.ods o& proBect management result &rom t.is
perspectiveD
El ciclo vital de costos y bene&icios desde la planeacin inicial a trav-s de la
operacin y la &acilidad de disposicin son relevantes para la toma de decisiones.
Un propietario estF comprometido con el proyecto desde su iniciacin .asta su
terminacin. Los costos de construccin representan solo una porcin de la amplia
gama del ciclo vital de costos.
La optimizacin del rendimiento en una etapa de un proceso no puede ser del todo
ben-&ica si se producen costos adicionales o retrasos en otros lugares. *or
eBemplo a.orrarse dinero en el proceso de diseo puede ser una salida econmica
&alsa si el resultado son los costos eIcesivos de construccin.
,.e Jli&e cycleJ o& costs and bene&its &rom initial planning t.roug. operation and
disposal o& a &acility are relevant to decision ma0ing. 2n o?ner is concerned ?it.
a proBect &rom t.e cradle to t.e grave. (onstruction costs represent only one
portion o& t.e overall li&e cycle costs.
Optimizing per&ormance at one stage o& t.e process may not be bene&icial overall
i& additional costs or delays occur else?.ere. Kor eIample saving money on t.e
design process ?ill be a &alse economy i& t.e result is eIcess construction costs.

La &ragmentacin de la administracin de proyecto entre los di&erentes

especialistas podr=a ser necesaria pero la comunicacin y la coordinacin es
esencial entre los participantes para lograr todos y cada uno de los obBetivos del
proyecto. Las nuevas tecnolog=as de la in&ormacin pueden ser un instrumento en
este proceso especialmente el internet y EItra<redes especializadas.
La calidad del trabaBo y el rendimiento del mismo son cr=ticamente importantes
para el -Iito del proyecto ya !ue es el propietario !uien tendrF !ue vivir con los
resultados.
Kragmentation o& proBect management among di&&erent specialists may be
necessary but good communication and coordination among t.e participants is
essential to accomplis. t.e overall goals o& t.e proBect. 5e? in&ormation
tec.nologies can be instrumental in t.is process especially t.e $nternet and
specialized EItranets.
*roductivity improvements are al?ays o& importance and value. 2s a result
introducing ne? materials and automated construction processes is al?ays
desirable as long as t.ey are less eIpensive and are consistent ?it. desired
per&ormance.
Luality o& ?or0 and per&ormance are critically important to t.e success o& a
proBect since it is t.e o?ner ?.o ?ill .ave to live ?it. t.e results.
En esencia adoptar el punto de vista del propietario centra la atencin en la rentabilidad
de la construccin en lugar de la prestacin competitiva de los servicios por parte de los
distintos participantes.
$n essence adopting t.e vie?point o& t.e o?ner &ocuses attention on t.e cost
e&&ectiveness o& &acility construction rat.er t.an competitive provision o& services by t.e
various participants.
;i bien este libro estF dedicado a un punto de vista particular con respecto a la
administracin de proyectos para la construccin este no es predecible para propietarios
y sus representantes. *ara el completo entendimiento del proceso todos los participantes
pueden responder de manera mFs e&iciente a los necesidades de los dueos en su propio
trabaBo en vender sus servicios y el la comunicacin con otros participantes. En suma
las t-cnicas y .erramientas espec=&icas discutidas en este libro Mevaluacin econmica
calendarizacin sistemas de in&ormacin de administracin etc.N pueden ser aplicadas
&Fcilmente en cual!uier parte del proceso.
A.ile t.is boo0 is devoted to a particular vie?point ?it. respect to proBect management
&or construction it is not solely intended &or o?ners and t.eir direct representatives. :y
understanding t.e entire process all participants can respond more e&&ectively to t.e
o?nerHs needs in t.eir o?n ?or0 in mar0eting t.eir services and in communicating ?it.
ot.er participants. $n addition t.e speci&ic tec.ni!ues and tools discussed in t.is boo0
Msuc. as economic evaluation sc.eduling management in&ormation systems etc.N can be
readily applied to any portion o& t.e process.
(omo resultado del en&o!ue en la administracin e&icaz de proyectos completos un
novedoso nCmero de en&o!ues organizativos y t-cnicas llegan a ser de inter-s. *rimero y
ante todo es incentivo para sustituir la con&rontacin y relaciones adversas con un esp=ritu
de trabaBo conBunto la colaboracin y la realizacin. *or eBemplo discutimos los medios
adecuados para evaluar los riesgos y los participantes apropiados para asumir los riesgos
inevitables asociados con las instalaciones construidas. (alendarizacin comunicacin
del respaldo de datos y calidad tienen un signi&icado particular desde el punto de vista del
propietario pero no necesariamente para los participantes individuales. El uso de la
tecnolog=a in&ormFtica y la automatizacin tambi-n provee oportunidades para el
incremento de la productividad en el proceso. *resentadas como opciones de
administracin modernas de manera de&inida es el principal obBetivo de este libro.
2s a result o& t.e &ocus on t.e e&&ective management o& entire proBects a number o& novel
organizational approac.es and tec.ni!ues become o& interest. Kirst and &oremost is t.e
incentive to replace con&rontation and adversarial relations.ips ?it. a spirit o& Boint
endeavor partners.ip and accomplis.ment. Kor eIample ?e discuss t.e appropriate
means to evaluate ris0s and t.e appropriate participants to assume t.e unavoidable ris0s
associated ?it. constructed &acilities. ;c.eduling communication o& data and !uality
assurance .ave particular signi&icance &rom t.e vie?point o& an o?ner but not
necessarily &or individual participants. ,.e use o& computer<based tec.nology and
automation also provides opportunities &or increased productivity in t.e process.
*resenting suc. modern management options in a uni&ied &as.ion is a maBor obBective o&
t.is boo0.
El punto de vista de&inido del proceso completo de la administracin de proyecto en este
libro se di&iere de todo lo cercanamente en otra literatura en el tema. La mayor=a de los
libros de teIto en el Frea de lidiar con problema especiales como una estimacin de
costo desde el particular punto de vista de los participantes como los encargados en la
construccin o contratistas. Esta literatura re&leBa la &ragmentacin del proceso de
construccin entre las di&erentes organizaciones y pro&esionistas. $ncluso dentro de una
misma pro&esin como la ingeniera civil .ay grupos muy distintos de especialistas en
planeacin diseo administracin construccin y otras sub<especialidades. La
&ragmentacin de la atencin e inter-s tambi-n eIiste en todo lo relacionado con los
programas educativos. 4ientras !ue el conocimiento especializado puede ser esencial
para realizar tareas particulares los participantes en el proceso deberFn tambi-n entender
el rol y conteIto de sus tareas espec=&icas.
,.e uni&ied vie?point o& t.e entire process o& proBect management in t.is boo0 di&&ers
&rom nearly all ot.er literature on t.e subBect. 4ost teItboo0s in t.e area treat special
problems suc. as cost estimating &rom t.e vie?point o& particular participants suc. as
construction managers or contractors. ,.is literature re&lects t.e &ragmentation o& t.e
construction process among di&&erent organizations and pro&essionals. Even ?it.in a
single pro&ession suc. as civil engineering t.ere are !uite distinct groups o& specialists in
planning design management construction and ot.er sub<specialties. Kragmentation o&
interest and attention also eIists in nearly all educational programs. A.ile specialty
0no?ledge may be essential to accomplis. particular tas0s participants in t.e process
s.ould also understand t.e conteIt and role o& t.eir special tas0s.
Este libro estF dirigido principalmente como un teIto para estudiantes avanzados
comenzando estudiantes graduados o pro&esionistas !ue continCan su educacin en
ingenier=a construccin ar!uitectura o la administracin de instalaciones. ;on eBemplos
seleccionados de discusin para recordad a los lectores !ue la administracin de proyecto
es un desa&=o empresa dinFmica y emocionante y no solo para recordar las practicas
antiguas. ,ambi-n deber=a ser Ctil para los pro&esionales !ue deseen una re&erente
actualizacin en la administracin de proyectos.
,.is boo0 is intended primarily as a teIt &or advanced undergraduates beginning
graduate students or pro&essionals continuing t.eir education in engineering
construction arc.itecture or &acilities management. EIamples and discussion are c.osen
to remind readers t.at proBect management is a c.allenging dynamic and eIciting
enterprise and not Bust a record o& past practices. $t s.ould also be use&ul to pro&essionals
?.o ?is. an up<to<date re&erence on proBect management.
Los cap=tulos 1<3 presentan un general punto de vista de la administracin de la
construccin y el proceso de diseo cual deber=a ser de inter-s para cual!uiera !ue este
comprometido en la administracin de proyectos para la construccin. En esta parte no se
necesita un conocimiento detallado acerca de las tareas individuales o t-cnicas para esta
parte. Las personas pueden leer estos cap=tulos y entender la &iloso&=a y los principios
bFsicos sin mayor elaboracin.
(.apters 1 to 3 present an overvie? o& t.e construction management and design process
?.ic. s.ould be o& interest to anyone engaged in proBect management &or construction.
One need not .ave detailed 0no?ledge about individual tas0s or tec.ni!ues &or t.is part.
$ndividuals can read t.ese c.apters and understand t.e basic p.ilosop.y and principles
?it.out &urt.er elaboration.
Los cap=tulos 4<14 describen las &unciones y t-cnicas espec=&icas de ayuda en el proceso
de la administracin de proyectos. Esta parte presenta re!uerimientos y t-cnicas durante
la planeacin del proyecto incluyendo valoracin de tareas estimacin de costos
evaluacin y previsin econmica. Es durante esta &ase de plani&icacin y diseo en el
!ue un importante a.orro de dinero se pude obtener durante las &ases de construccin y
operacin eventuales. Esto tambi-n aborda temas de planeacin y &inanciacin. (omo la
licitacin y contratacin de servicios &inanciamiento la organizacin de la comunicacin
y asegurar el uso e&icaz de la in&ormacin. Es mFs se analizan t-cnicas de control de
tiempo calidad y costo durante la &ase de construccin. Los cursos para principiantes de
ingenier=a econmica Mincluyen anFlisis de &luBo y descuentoN uso de computadoras
probabilidad y estad=sticas podr=an ser Ctiles. 2demFs el acceso a un ordenador personal
con una .oBa de cFlculo o resolucin de ecuaciones de so&t?are podr=a ser Ctil para
lectores !ue intentan algunos de estos problemas en los cap=tulos 4<14. 5umerosos
programas de so&t?are podr=an ser usados con este propsito incluyendo ambasO .oBa de
cFlculo y resolucin de ecuaciones de so&t?are. ,ambi-n en algunos cap=tulos los
problemas podr=an ser resueltos por cual!uier tipo de pa!uetes de so&t?are eIistentes
para la administracin de in&ormacin y la programacin de proyectos. ;in embargo el
uso de un ordenador personal de esta manera no es re!uerido siguiendo el material del
teIto. (ada instructor puede eBercer discrecin al omitir parte de este material en estos
cap=tulos si son redundantes con otras clases o es muy avanzado para los estudiantes en
sus propias clases.
(.apters 4 t.roug. 14 describe speci&ic &unctions and tec.ni!ues use&ul in t.e process o&
proBect management. ,.is part presents tec.ni!ues and re!uirements during proBect
planning including ris0 assessment cost estimation &orecasting and economic
evaluation. $t is during t.is planning and design p.ase in ?.ic. maBor cost savings may
be obtained during t.e eventual construction and operation p.ases. $t also addresses
programming and &inancing issues suc. as contracting and bidding &or services
&inancing organizing communication and insuring e&&ective use o& in&ormation. $t &urt.er
discusses tec.ni!ues &or control o& time cost and !uality during t.e construction p.ase.
:eginning courses in engineering economics Mincluding cas. &lo? analysis and
discountingN use o& computers probability and statistics ?ould be use&ul. Kurt.ermore
access to a personal computer ?it. spreads.eet or e!uation solving so&t?are ?ould be
.elp&ul &or readers attempting some o& t.e problems in (.apters 4 to 14. 5umerous
so&t?are programs could be used &or t.is purpose including bot. spreads.eet and
e!uation solving programs. *roblems in some c.apters could also be done on any number
o& eIisting so&t?are pac0ages &or in&ormation management and proBect sc.eduling.
/o?ever t.e use o& personal computers in t.is &as.ion is not re!uired in &ollo?ing t.e
teIt material. Eac. instructor may eIercise discretion in omitting some o& t.e material in
t.ese c.apters i& t.ey are redundant ?it. ot.er classes or too advanced &or students in .is
or .er o?n class.
5uestra esperanza es !ue los estudiantes !ue inician su carrera en la administracin de
proyectos para la construccin se preparen para adopta la
$t is our .ope t.at students beginning t.eir career in proBect management &or construction
?ill be prepared to adopt t.e integrated approac. emp.asized in t.is boo0. Kurt.ermore
eIperienced pro&essionals in various &ields may discover in t.is boo0 some surprises t.at
even t.ey .ave not anticipated. /ig. level decision ma0ers in o?ner organizations ?.o
are not directly involved in t.e proBect management process may &ind t.e basic
p.ilosop.y and principles o& interest especially in (.apters 1 t.roug. 3 as o?ners must
invariably pay &or constructed &acilities &or better or ?orse. $& t.e boo0 can &ul&ill even a
small part o& its promises to in&luence t.e &uture o& proBect management &or construction
our e&&orts ?ill .ave been amply re?arded.
Kor version 2.1 M;ummer 2++3N a number o& ne? eIamples updates and re&erences .ave
been inserted t.roug.out t.e teIt. Kor eIample t.ere are ne? discussions o& lean
construction and green buildings. /o?ever t.e basic structure and met.ods remain t.e
same. ,.e &undamentals o& proBect management treated .ere are timeless.
5umerous individuals .elped ?it. t.e preparation o& t.e &irst and second editions o& t.is
boo0. $n particular ?e ?is. to ac0no?ledge :urcu 20inci Ailliam P. /all *aul
(.ristiano ;teven Kenves 1aniel 3e.a0 1ebbie ;cappatura and ;.irley Qnapp. $avor
Qostov ,ommy /endric0son and (urt 9es0e ?ere instrumental in developing t.e ?eb
version o& t.is boo0. ,.is boo0 also re&lects t.e contributions o& numerous students and
colleagues in industry ?.o .ave c.allenged us ?it. problems and s.ared t.eir o?n ideas
and eIperience over many years. Ae are grate&ul to all o& t.ese individuals.
;ome material in t.is boo0 .as been ta0en &rom several papers aut.ored by us and
publis.ed by t.e 2merican ;ociety o& (ivil Engineers. 4aterials ta0en &rom ot.er
sources are ac0no?ledged in &ootnotes tables or &igures. Ae grate&ully ac0no?ledge t.e
permissions given to us by t.ese individuals publis.ers and organizations.
2 series o& p.otograp.s depicting various stages o& construction o& t.e **6 building in
*ittsburg. *2 is inserted in se!uence bet?een c.apters. Ae ?is. to t.an0 **6
$ndustries &or its cooperation in providing t.ese p.otograp.s.
(.ris /endric0son and ,ung 2u
1. The Owners' Perspectie
!. "a perspectia del due#o.
1.1 $ntroduction
1.! $ntroduccion.
2l igual !ue los cinco .ombres ciegos encontrando las di&erentes partes de un ele&ante
cada uno de los numerosos participantes en el proceso de plani&icacion el diseo
&inanciamento construccin y operacin de las instalaciones &=sicas tienen una
perspectiva di&erente en la administracin de proyectos para la construccin.
El conocimiento especializado puede ser muy ben-&ico particularmente en largos y
complicados proyectos ya !ue los eIpertos en varias especialidades pueden proveer
valiosos servicios. ;in embargo es conveniente entender como las di&erentes partes del
proceso ensamblan Buntas. 1esprecio costo eIcesivo y retardos pueden resultar desde la
pobre coordinacin y comunicacin entre los especialistas. Esto particularmente es del
inter-s de los propietarios asegurar !ue tales problemas no ocurran. 9 esto corresponde a
!ue todos los participantes en el proceso presten atencin a los intereses de los
propietarios por!ue al &inal son los propietarios !uienes aportan los recursos y tienen la
Cltima palabra.
Li0e t.e &ive blind men encountering di&&erent parts o& an elep.ant eac. o& t.e numerous
participants in t.e process o& planning designing &inancing constructing and operating
p.ysical &acilities .as a di&&erent perspective on proBect management &or construction.
;pecialized 0no?ledge can be very bene&icial particularly in large and complicated
proBects since eIperts in various specialties can provide valuable services. /o?ever it is
advantageous to understand .o? t.e di&&erent parts o& t.e process &it toget.er. Aaste
eIcessive cost and delays can result &rom poor coordination and communication among
specialists. $t is particularly in t.e interest o& o?ners to insure t.at suc. problems do not
occur. 2nd it be.ooves all participants in t.e process to .eed t.e interests o& o?ners
because in t.e end it is t.e o?ners ?.o provide t.e resources and call t.e s.ots.
4ediante la adopcin del punto de vista de los propietarios nosotros podemos concentrar
nuestra atencin en el proceso completo de la administracin de proyectos para la
construccin de instalaciones en lugar de los roles .istricos de varios especialistas como
planeadores ar!uitectos diseadores de ingenier=a constructores &abricantes
proveedores de material analistas &inancieros entre otros. *ara estar seguros cada
especialidad .a aportado avances importantes en el desarrollo de t-cnicas nuevas y
.erramientas para la implementacin de la construccin e&iciente de proyectos. ;in
embargo es a trav-s de la comprensin del proceso completo de la administracin de
proyectos !ue estos especialistas pueden responder de &orma mFs e&icientemente a los
deseos de los propietarios de sus servicios en la comercializacin sus especialidades y
en la meBora de la productividad y la calidad de su trabaBo.
:y adopting t.e vie?point o& t.e o?ners ?e can &ocus our attention on t.e complete
process o& project management &or constructed &acilities rat.er t.an t.e .istorical roles o&
various specialists suc. as planners arc.itects engineering designers constructors
&abricators material suppliers &inancial analysts and ot.ers. ,o be sure eac. specialty
.as made important advances in developing ne? tec.ni!ues and tools &or e&&icient
implementation o& construction proBects. /o?ever it is t.roug. t.e understanding o& t.e
entire process o& proBect management t.at t.ese specialists can respond more e&&ectively
to t.e o?nerHs desires &or t.eir services in mar0eting t.eir specialties and in improving
t.e productivity and !uality o& t.eir ?or0.
La introduccin de la innovadora y mFs e&icaz administracin de proyectos para la
construccin no es un eBercicio acad-mico. ;egCn .a in&ormado el J(onstruction $ndustry
(ost E&&ectiveness *roBectJ de la rueda de negociosD R1S
,.e introduction o& innovative and more e&&ective proBect management &or construction is
not an academic eIercise. 2s reported by t.e J(onstruction $ndustry (ost E&&ectiveness
*roBectJ o& t.e :usiness 3oundtableD R1S
*or consenso comCn y todas las medidas disponibles los estados unidos ya no consigue
su valor del dinero en la construccin la mFs grande industria de la nacinT.la erosin
progresiva de la construccin e&iciente y productiva son malas noticias para toda la
econom=a de los estados unidos. La construccin es un sector particularmente seminal. El
precio de cada &Fbrica edi&icio de o&icinas /otel o planta de energ=a !ue se construye
a&ecta el precio !ue se debe cobrar por los bienes o servicios producidos en ella o por
ella. 9 ese e&ecto generalmente persiste por d-cadasTel eIceso de la industria
permanece atado al pasado en parte por la inercia y en parte por las divisiones
.istricasT
:y common consensus and every available measure t.e United ;tates no longer gets itHs
moneyHs ?ort. in construction t.e nationHs largest industry ... ,.e creeping erosion o&
construction e&&iciency and productivity is bad ne?s &or t.e entire U.;. economy.
(onstruction is a particularly seminal industry. ,.e price o& every &actory o&&ice
building .otel or po?er plant t.at is built a&&ects t.e price t.at must be c.arged &or t.e
goods or services produced in it or by it. 2nd t.at e&&ect generally persists &or decades ...
,oo muc. o& t.e industry remains tet.ered to t.e past partly by inertia and partly by
.istoric divisions...
La meBora de la administracin de proyectos no solo puede ayudar a la industria de la
construccin pero tambi-n puede ser el motor para la econom=a nacional y mundial. ;in
embargo si vamos a .acer meBoras signi&icativas debemos primero entender la industria
de la construccin su entorno operativo y las limitaciones institucionales !ue a&ectan sus
actividades as= como la naturaleza de la administracin de proyectos.
$mprovement o& proBect management not only can aid t.e construction industry but may
also be t.e engine &or t.e national and ?orld economy. /o?ever i& ?e are to ma0e
meaning&ul improvements ?e must &irst understand t.e construction industry its
operating environment and t.e institutional constraints a&&ecting its activities as ?ell as
t.e nature o& proBect management.
1.! The Pro%ect "ife Cycle
1.! &l Ciclo de 'ida del Proyecto
La ad!uisicin de una instalacin construida usualmente representa una inversin de
capital mayor si su dueo pasa a ser un individuo una corporacin privada o una agencia
pCblica. 1ado el compromiso de los recursos para tal inversin es motivada por la
demanda del mercado o por las necesidades percibidas se espera !ue la instalacin
satis&aga ciertos obBetivos dentro de las restricciones espec=&icas por el dueo y las
regulaciones relevantes. (on la eIcepcin de !ue el mercado inmobiliario especulativo
donde las unidades residenciales pueden ser vendidas como un edi&icio por el
desarrollador de bienes ra=ces la mayor=a de las &acilidades construidas son por
costumbre en consulta con los propietarios. Un desarrollador de bienes ra=ces puede ser
considerado como el patrocinador del edi&icio de proyectos como una unidad de agencia
estatal sobre su &inalizacin. 1esde el punto de vista de la administracin de proyectos
los t-rminos >dueo@ y >patrocinador@ son sinnimos por!ue ambos tienen la mFIima
autoridad para tomar todas las decisiones importantes. *uesto !ue un propietario estF
esencialmente ad!uiriendo una instalacin en una promesa de alguna &orma de acuerdo.
;erF prudente para cual!uier propietario tener un claro entendimiento del proceso de
ad!uisicin con el &in de mantener un control &irme de la calidad oportunidad y costo de
la instalacin completa.
(onstructed &acility usually represents a maBor capital investment ?.et.er its o?ner
.appens to be an individual a private corporation or a public agency. ;ince t.e
commitment o& resources &or suc. an investment is motivated by mar0et demands or
perceived needs t.e &acility is eIpected to satis&y certain obBectives ?it.in t.e constraints
speci&ied by t.e o?ner and relevant regulations. Ait. t.e eIception o& t.e speculative
.ousing mar0et ?.ere t.e residential units may be sold as built by t.e real estate
developer most constructed &acilities are custom made in consultation ?it. t.e o?ners. 2
real estate developer may be regarded as t.e sponsor o& building proBects as muc. as a
government agency may be t.e sponsor o& a public proBect and turns it over to anot.er
government unit upon its completion. Krom t.e vie?point o& proBect management t.e
terms Jo?nerJ and JsponsorJ are synonymous because bot. .ave t.e ultimate aut.ority to
ma0e all important decisions. ;ince an o?ner is essentially ac!uiring a &acility on a
promise in some &orm o& agreement it ?ill be ?ise &or any o?ner to .ave a clear
understanding o& t.e ac!uisition process in order to maintain &irm control o& t.e !uality
timeliness and cost o& t.e completed &acility.
1esde la perspectiva de un dueo el ciclo de vida de un proyecto para la instalacin
construida puede ser ilustrado es!uemFticamente en la &igura 1<1. Esencialmente un
proyecto es concebido para satis&acer las demandas y necesidades en el momento
oportuno. 8arias posibilidades pueden ser consideradas en la etapa de planeacin
conceptual y la viabilidad tecnolgica y econmica de cada alternativa va a ser evaluada
y comparada con el &in de seleccionar la meBor posible para el proyecto. Los es!uemas
&inancieros para las alternativas propuestas deben ser tambi-n eIaminados y el proyecto
serF programado con respecto al calendario de su &inalizacin y una disponibilidad de los
&luBos de e&ectivo. 1espu-s de !ue el alcance del proyecto es claramente de&inido
ingenierilmente detallado y diseado proporcionara el plan para la construccin y el
costo estimado de&initivo servirF de base para el control de costos. En la etapa de
obtencin y construccin la entrega de materiales y el montaBe del proyecto en sitio
deberFn ser planeados y controlados cuidadosamente. 1espu-s de !ue la construccin es
completada .ay un breve periodo usual de poner en marc.a or s.a0e<doen la &acilidad
construida cuando es ocupada por primera vez. Kinalmente la administracin de una
instalacin es entregada al dueo para su plena ocupacin .asta !ue la instalacin
completa su vida Ctil y es designada demolicin o conversin.
Krom t.e perspective o& an o?ner t.e proBect li&e cycle &or a constructed &acility may be
illustrated sc.ematically in Kigure 1<1. Essentially a proBect is conceived to meet mar0et
demands or needs in a timely &as.ion. 8arious possibilities may be considered in t.e
conceptual planning stage and t.e tec.nological and economic &easibility o& eac.
alternative ?ill be assessed and compared in order to select t.e best possible proBect. ,.e
&inancing sc.emes &or t.e proposed alternatives must also be eIamined and t.e proBect
?ill be programmed ?it. respect to t.e timing &or its completion and &or available cas.
&lo?s. 2&ter t.e scope o& t.e proBect is clearly de&ined detailed engineering design ?ill
provide t.e blueprint &or construction and t.e de&initive cost estimate ?ill serve as t.e
baseline &or cost control. $n t.e procurement and construction stage t.e delivery o&
materials and t.e erection o& t.e proBect on site must be care&ully planned and controlled.
2&ter t.e construction is completed t.ere is usually a brie& period o& start<up or s.a0e<
do?n o& t.e constructed &acility ?.en it is &irst occupied. Kinally t.e management o& t.e
&acility is turned over to t.e o?ner &or &ull occupancy until t.e &acility lives out its use&ul
li&e and is designated &or demolition or conversion.
(igure 1)1* ,.e *roBect Li&e (ycle o& a (onstructed Kacility
(igura 1)1* El (iclo de 8ida del *royecto de una $nstalacin (onstruida.
*or supuesto las etapas de desarrollo en la &igura 1<1 pueden no ser estrictamente
secuenciales. 2lgunas etapas re!uieren de iteracin y otras pueden llevarse a cabo en
paralelo o con marcos de superposicin dependiendo de la naturaleza tamao y urgencia
del proyecto. ;in embargo el dueo puede tener las capacidades internas para maneBar el
trabaBo en todas las etapas del proceso completo o puede buscar un conseBo pro&esional y
los servicios para el trabaBo en todas las etapas. (omprensiblemente la mayor=a de los
dueos eligen maneBar parte del trabaBo de &orma interna y contratar los servicios
pro&esionales para otros componentes de la obra segCn sea necesario. 4ediante el
eIamen del ciclo de vida del proyecto desde la perspectiva del propietario podemos
centrarnos en los propios roles de varias actividades y de los participantes en todas las
etapas independientes de los acuerdos contractuales para los di&erentes tipos de trabaBo.
O& course t.e stages o& development in Kigure 1<1 may not be strictly se!uential. ;ome
o& t.e stages re!uire iteration and ot.ers may be carried out in parallel or ?it.
overlapping time &rames depending on t.e nature size and urgency o& t.e proBect.
Kurt.ermore an o?ner may .ave in<.ouse capacities to .andle t.e ?or0 in every stage o&
t.e entire process or it may see0 pro&essional advice and services &or t.e ?or0 in all
stages. Understandably most o?ners c.oose to .andle some o& t.e ?or0 in<.ouse and to
contract outside pro&essional services &or ot.er components o& t.e ?or0 as needed. :y
eIamining t.e proBect li&e cycle &rom an o?nerHs perspective ?e can &ocus on t.e proper
roles o& various activities and participants in all stages regardless o& t.e contractual
arrangements &or di&&erent types o& ?or0.
En los estados unidos por eBemplo el (uerpo de $ngenieros del EB-rcito de EE.UU. tiene
capacidades internas para .acer &rente a la planeacin elaboracin de presupuestos
diseo construccin y operacin de las estructuras de navegacin y del control de
inundaciones. Otras agencias pCblicas como las de departamentos de transporte estatal
son tambi-n intensamente involucradas in todas las &ases del proyecto de construccin.
En el sector privado muc.as de las grandes empresas como 1u*ont EIIon e $:4 son
e!uipadas adecuadamente para .acer &rente a la mayor=a de las actividades para la
ampliacin de la planta. ,odos estos propietarios tanto pCblicos como privados usan
agentes eIternos en mayor o menor grado cuando se .ace mFs ventaBoso .acerlo.
$n t.e United ;tates &or eIample t.e U.;. 2rmy (orps o& Engineers .as in<.ouse
capabilities to deal ?it. planning budgeting design construction and operation o&
?ater?ay and &lood control structures. Ot.er public agencies suc. as state transportation
departments are also deeply involved in all p.ases o& a construction proBect. $n t.e
private sector many large &irms suc. as 1u*ont EIIon and $:4 are ade!uately sta&&ed
to carry out most activities &or plant eIpansion. 2ll t.ese o?ners bot. public and
private use outside agents to a greater or lesser degree ?.en it becomes more
advantageous to do so.
El ciclo de vida de un proyecto puede ser visto como un proceso a trav-s del cual un
proyecto es implementado de la cuna a la tumba. Este proceso &recuentemente es muy
compleBoO sin embargo puede ser desintegrado en varias etapas como lo indica el
es!uema general en la &igura 1<1. Las soluciones de varias de las etapas son despu-s
integradas para obtener el resultado &inal. 2un!ue cada una de las etapas re!uiere de una
.abilidad di&erente usualmente esta puede incluir actividades t-cnicas y de gestin en el
dominio del conocimiento del especialista. El propietario puede elegir descomponer todo
el proceso en mFs o menos etapas basFndose en el tamao y la naturaleza del proyecto y
as= obtener el resultado mFs e&iciente en la implementacin. Krecuentemente el
propietario mantiene el control directo del trabaBo en las etapas de planeacin y
programacin pero plani&icadores cada vez mFs &uera y eIpertos &inancieros son
contratados como consultores debido a la compleBidad de los proyectos. 1ado !ue la
operacin y el mantenimiento de una instalacin vienen despu-s de &inalizacin y
aceptacin del proyecto por lo general se trata como un problema por separado eIcepto
en la consideracin del costo del ciclo de vida de una instalacin. ,odas las etapas desde
la planeacin con conceptual y los estudios de viabilidad para la aceptacin y la
ocupacin de la instalacin pueden ser ampliamente agrupados y re&eridos para el
proceso de diseoUconstruccin mientras !ue la ad!uisicin y construccin son
consideradas tradicionalmente como la provincia de la industria de la construccin.
,.e proBect li&e cycle may be vie?ed as a process t.roug. ?.ic. a proBect is
implemented &rom cradle to grave. ,.is process is o&ten very compleIO .o?ever it can be
decomposed into several stages as indicated by t.e general outline in Kigure 1<1. ,.e
solutions at various stages are t.en integrated to obtain t.e &inal outcome. 2lt.oug. eac.
stage re!uires di&&erent eIpertise it usually includes bot. tec.nical and managerial
activities in t.e knowledge domain o& t.e specialist. ,.e o?ner may c.oose to decompose
t.e entire process into more or less stages based on t.e size and nature o& t.e proBect and
t.us obtain t.e most e&&icient result in implementation. 8ery o&ten t.e o?ner retains
direct control o& ?or0 in t.e planning and programming stages but increasingly outside
planners and &inancial eIperts are used as consultants because o& t.e compleIities o&
proBects. ;ince operation and maintenance o& a &acility ?ill go on long a&ter t.e
completion and acceptance o& a proBect it is usually treated as a separate problem eIcept
in t.e consideration o& t.e li&e cycle cost o& a &acility. 2ll stages &rom conceptual
planning and &easibility studies to t.e acceptance o& a &acility &or occupancy may be
broadly lumped toget.er and re&erred to as t.e 1esignU(onstruct process ?.ile t.e
procurement and construction alone are traditionally regarded as t.e province o& t.e
construction industry.
Los propietarios deben reconocer !ue no .ay un meBor en&o!ue en la organizacin de la
administracin de un proyecto !ue a trav-s del ciclo de vida de este. ,odos los en&o!ues
organizativos tienen ventaBas y desventaBas dependiendo del conocimiento del
propietario en administracin de la construccin como es conocido el tipo el tamao y la
ubicacin del proyecto. Es importante para el dueo estar alerta del aprovec.amiento el
cual es apropiado y ben-&ico para un proyecto particular. En la toma de desiciones los
propietarios deben estar preocupados por el costo del ciclo de vida de las instalaciones
construidas mFs !ue simplemente por los costos iniciales de construccin. 2.orrando
pe!ueas cantidades de dinero durante la construccin no puede no valer la pena si el
resultado es mFs grande en los costos de operacin o !ue no cumplan satis&actoriamente
con los re!uerimientos necesarios para la nueva instalacin. 2s= los propietarios deben
estar preocupados por la calidad del producto terminado como el costo de la misma
construccin. 1esde !ue la operacin y mantenimiento son una parte del ciclo de vida del
proyecto la eIpectativa para satis&acer los obBetivos de inversin durante el ciclo de vida
del proyecto re!uerirF de la consideracin del costo de operacin y mantenimiento. *or lo
tanto la administracin operativa de la instalacin se debe considerar lo antes posible al
igual el proceso de construccin se debe tener en cuenta en las primeras etapas de
planeacin y programacin.
O?ners must recognize t.at t.ere is no single best approac. in organizing proBect
management t.roug.out a proBectHs li&e cycle. 2ll organizational approac.es .ave
advantages and disadvantages depending on t.e 0no?ledge o& t.e o?ner in construction
management as ?ell as t.e type size and location o& t.e proBect. $t is important &or t.e
o?ner to be a?are o& t.e approac. ?.ic. is most appropriate and bene&icial &or a
particular proBect. $n ma0ing c.oices o?ners s.ould be concerned ?it. t.e li&e cycle
costs o& constructed &acilities rat.er t.an simply t.e initial construction costs. ;aving
small amounts o& money during construction may not be ?ort.?.ile i& t.e result is muc.
larger operating costs or not meeting t.e &unctional re!uirements &or t.e ne? &acility
satis&actorily. ,.us o?ners must be very concerned ?it. t.e !uality o& t.e &inis.ed
product as ?ell as t.e cost o& construction itsel&. ;ince &acility operation and maintenance
is a part o& t.e proBect li&e cycle t.e o?nersH eIpectation to satis&y investment obBectives
during t.e proBect li&e cycle ?ill re!uire consideration o& t.e cost o& operation and
maintenance. ,.ere&ore t.e &acilityHs operating management s.ould also be considered as
early as possible Bust as t.e construction process s.ould be 0ept in mind at t.e early
stages o& planning and programming.
1.+ ,a%or Types of Construction
1.- Principales Tipos de Constricon.
(omo la mayor=a de los propietarios estFn generalmente interesados en la ad!uisicin
Cnicamente de un tipo espec=&ico de instalacin construida ellos deben estar conscientes
de las prFcticas industriales comunes para el tipo de construccin para ellos. 2simismo
la industria de la construccin es una conglomeracin de muc.os segmentos diversos y
productos. 2lgunos propietarios pueden procurar una sola instalacin construida en
muc.o tiempo y tienden a buscar ventaBas a corto plazo. ;in embargo muc.os
propietarios re!uieren ad!uisiciones peridicas de nuevas instalaciones yUo la
re.abilitacin de las instalaciones eIistentes. Esto una ventaBa mantener sana y
productiva la industria de la construccin. (onBuntamente los propietarios tienen mFs
poder del !ue ellos se imaginan para in&luir en la industria de la construccin por sus
acciones individuales ellos pueden proveer iniciativas o desincentivos para la
innovacin e&iciencia y calidad en la construccin. Es del inter-s de todos !ue los
propietarios tengan un inter-s activo en la construccin y eBerzan una in&luencia ben-&ica
en el desempeo de la industria.
;ince most o?ners are generally interested in ac!uiring only a speci&ic type o&
constructed &acility t.ey s.ould be a?are o& t.e common industrial practices &or t.e type
o& construction pertinent to t.em. Li0e?ise t.e construction industry is a conglomeration
o& !uite diverse segments and products. ;ome o?ners may procure a constructed &acility
only once in a long ?.ile and tend to loo0 &or s.ort term advantages. /o?ever many
o?ners re!uire periodic ac!uisition o& ne? &acilities andUor re.abilitation o& eIisting
&acilities. $t is to t.eir advantage to 0eep t.e construction industry .ealt.y and productive.
(ollectively t.e o?ners .ave more po?er to in&luence t.e construction industry t.an
t.ey realize because by t.eir individual actions t.ey can provide incentives or
disincentives &or innovation e&&iciency and !uality in construction. $t is to t.e interest o&
all parties t.at t.e o?ners ta0e an active interest in t.e construction and eIercise
bene&icial in&luence on t.e per&ormance o& t.e industry.
$n planning &or various types o& construction t.e met.ods o& procuring pro&essional
services a?arding construction contracts and &inancing t.e constructed &acility can be
!uite di&&erent. Kor t.e purpose o& discussion t.e broad spectrum o& constructed &acilities
may be classi&ied into &our maBor categories eac. ?it. its o?n c.aracteristics.
En la plani&icacin de varios tipos de construccin los m-todos de contratacin de
servicios pro&esionales la adBudicacin de contratos de la construccin y el
&inanciamiento de la instalacin construida puede ser muy di&erente. *ara el propsito de
la discusin el amplio espectro de las instalaciones construidas puede ser clasi&icado
dentro de las cuatro categor=as principales cada una con sus propias caracter=sticas.
Residential Housing Construction
Construccion de viviendas residenciales.
La construccin de viviendas residenciales incluye viviendas uni&amiliares viviendas
multi&amiliares departamentos elevados. 1urante el desarrollo y construccin de este
tipo de proyectos los desarrolladores o patrocinadores !uienes estFn &amiliarizados con
la industria de la construccin suelen servir como propietarios sustitutos y .acerse cargo
.acer acuerdos contractuales para el diseo y construccin y organizar el &inanciamiento
y la venta de las estructuras completas. Los diseos de las viviendas residenciales son
llevados a cabo usualmente por ar!uitectos e ingenieros y la construccin debidamente
eBecutada por constructores !uienes contratan subcontratistas para lo estructural
mecFnico el-ctrico y otro trabaBo de la especialidad. Una eIcepcin para este patrn para
las casas uni&amiliares las cuales pueden ser diseadas por los constructores tambi-n.
3esidential .ousing construction includes single<&amily .ouses multi<&amily d?ellings
and .ig.<rise apartments. 1uring t.e development and construction o& suc. proBects t.e
developers or sponsors ?.o are &amiliar ?it. t.e construction industry usually serve as
surrogate o?ners and ta0e c.arge ma0ing necessary contractual agreements &or design
and construction and arranging t.e &inancing and sale o& t.e completed structures.
3esidential .ousing designs are usually per&ormed by arc.itects and engineers and t.e
construction eIecuted by builders ?.o .ire subcontractors &or t.e structural mec.anical
electrical and ot.er specialty ?or0. 2n eIception to t.is pattern is &or single<&amily
.ouses ?.ic. may be designed by t.e builders as ?ell.
La venta de casas residenciales es &uertemente a&ectada por las condiciones econmicas
generales las leyes &iscales y las pol=ticas monetarias y &iscales del gobierno. 2 menudo
un ligero aumento en la demanda total provocara una importante inversin en la
construccin ya !ue muc.os proyectos de vivienda pueden ser iniciados en di&erentes
locaciones por di&erentes individuos y desarrolladores al mismo tiempo. 1ebido a la
relativa &acilidad de entrada al menos en el eItremo in&erior del mercado muc.os
constructores nuevos son atra=dos por la construccin de viviendas residenciales. *or lo
tanto el mercado es altamente competitivo con riesgos potencialmente altos as= como las
grandes recompensas.
,.e residential .ousing mar0et is .eavily a&&ected by general economic conditions taI
la?s and t.e monetary and &iscal policies o& t.e government. O&ten a slig.t increase in
total demand ?ill cause a substantial investment in construction since many .ousing
proBects can be started at di&&erent locations by di&&erent individuals and developers at t.e
same time. :ecause o& t.e relative ease o& entry at least at t.e lo?er end o& t.e mar0et
many ne? builders are attracted to t.e residential .ousing construction. /ence t.is
mar0et is .ig.ly competitive ?it. potentially .ig. ris0s as ?ell as .ig. re?ards.
(igura 1)!* (onstruccin de viviendas residenciales Mcortes=a de (aterpillar $nc.N
(igure 1)!* 3esidential /ousing (onstruction Mcourtesy o& (aterpillar $nc.N
Institutional and Commercial Building Construction
Construccin Institucional y de Edificios Comerciales
La construccin institucional y de edi&icios comerciales abarca una gran variedad de tipos
y tamaos de proyectos como escuelas y universidades cl=nicas m-dicas y .ospitales
instalaciones recreativas y estadios deportivos cadenas de tiendas al por menor grandes
centros comerciales almacenes y plantas de luz y rascacielos para o&icinas y .oteles. Los
propietarios como los constructores pueden estar o no &amiliarizados con las prFcticas de
la industria de la construccin pero son capaces de seleccionar consultores pro&esionales
competentes y organizar el &inanciacin de las propias instalaciones construidas.
2r!uitectos e ingenieros especializados suelen estar comprometidos con el diseo de un
tipo espec=&ico de edi&icacin mientras !ue los constructores o contratistas generales !ue
realicen este tipo de proyectos tambi-n pueden ser especializados solo en este tipo de
edi&icacin.
$nstitutional and commercial building construction encompasses a great variety o& proBect
types and sizes suc. as sc.ools and universities medical clinics and .ospitals
recreational &acilities and sports stadiums retail c.ain stores and large s.opping centers
?are.ouses and lig.t manu&acturing plants and s0yscrapers &or o&&ices and .otels. ,.e
o?ners o& suc. buildings may or may not be &amiliar ?it. construction industry practices
but t.ey usually are able to select competent pro&essional consultants and arrange t.e
&inancing o& t.e constructed &acilities t.emselves. ;pecialty arc.itects and engineers are
o&ten engaged &or designing a speci&ic type o& building ?.ile t.e builders or general
contractors underta0ing suc. proBects may also be specialized in only t.at type o&
building.
1ebido a los costos mFs altos y la gran so&isticacin de los edi&icios institucionales y
comerciales en comparacin con las viviendas residenciales este segmento del mercado
es compartido por los mFs escasos competidores. 1esde la construccin de algunos de
estos edi&icios es un proceso largo en el cual una vez iniciado tomara algCn tiempo .asta
&inalizar la demanda es menos sensible a las condiciones econmicas generales !ue al de
la vivienda especulativa. *or consiguiente los propietarios pueden en&rentarse a un
oligopolio de contratistas generales a !uienes les compete el mismo mercado. En una
situacin de oligopolio solo eIiste un nCmero limitado de competidores eIiste y el
precio de una empresa de servicios puede basarse en parte de sus estrategias competitivas
en el mercado local.
:ecause o& t.e .ig.er costs and greater sop.istication o& institutional and commercial
buildings in comparison ?it. residential .ousing t.is mar0et segment is s.ared by &e?er
competitors. ;ince t.e construction o& some o& t.ese buildings is a long process ?.ic.
once started ?ill ta0e some time to proceed until completion t.e demand is less sensitive
to general economic conditions t.an t.at &or speculative .ousing. (onse!uently t.e
o?ners may con&ront an oligopoly o& general contractors ?.o compete in t.e same
mar0et. $n an oligopoly situation only a limited number o& competitors eIist and a &irmHs
price &or services may be based in part on its competitive strategies in t.e local mar0et.
(igura 1)+* (onstruccin del edi&icio de **6 en *ittsburg. *ennsylvania M(ortes=a de
$ndustrias **6 $nc.N
(igure 1)+D (onstruction o& t.e **6 :uilding in *ittsburg. *ennsylvania Mcourtesy o&
**6 $ndustries $nc.N
Specialized Industrial Construction
Construccion Industrial Especializada.
La construccin industrial especializada usualmente envuelve una escala de proyectos
con un alto grado de compleBidad tecnolgica tales como re&iner=as de petrleo &Fbricas
de acero plantas de procesamiento de productos !u=micos y plantas de carbn o energ=a
nuclear. Los propietarios generalmente se involucran pro&undamente en el desarrollo del
proyecto y pre&ieren trabaBar con diseadores<constructor de tal manera !ue el tiempo
para la &inalizacin del proyecto se pueda acortar. Ellos tambi-n !uieren elegir un e!uipo
de diseadores y constructores con !uienes el propietario .a desarrollado una buena
relacin de trabaBo con los aos.
;pecialized industrial construction usually involves very large scale proBects ?it. a .ig.
degree o& tec.nological compleIity suc. as oil re&ineries steel mills c.emical
processing plants and coal<&ired or nuclear po?er plants. ,.e o?ners usually are deeply
involved in t.e development o& a proBect and pre&er to ?or0 ?it. designers<builders suc.
t.at t.e total time &or t.e completion o& t.e proBect can be s.ortened. ,.ey also ?ant to
pic0 a team o& designers and builders ?it. ?.om t.e o?ner .as developed good ?or0ing
relations over t.e years.
2un!ue el inicio de este tipo proyectos es a&ectado por el estado de la econom=a el largo
alcance de la previsin de la demanda es el &actor mFs importante ya !ue estos proyectos
son de capital intensivo y re!uieren una considerable cantidad de tiempo en planeacin y
construccin. Las regulaciones gubernamentales como las resoluciones de la 2gencia de
*roteccin 2mbiental y la comisin reguladora nuclear de los estados unidos pueden
tambi-n in&luir &uertemente en las decisiones de estos proyectos.
2lt.oug. t.e initiation o& suc. proBects is also a&&ected by t.e state o& t.e economy long
range demand &orecasting is t.e most important &actor since suc. proBects is capital
intensive and re!uire considerable amount o& planning and construction time.
6overnmental regulation suc. as t.e rulings o& t.e Environmental *rotection 2gency and
t.e 5uclear 3egulatory (ommission in t.e United ;tates can also pro&oundly in&luence
decisions on t.ese proBects.
(igura 1)-* (onstruccin de una planta de benceno en Lima O.io Mcortes=a de
4anito?oc (ompany $nc.N
(igure 1)-* (onstruction o& a :enzene *lant in Lima O.io Mcourtesy o& 4anito?oc
(ompany $nc.N
Infrastructure and Heavy Construction
Infraestructura y Construccin Pesada.
La in&raestructura y la construccin pesada incluyen proyectos tales como autopistas
sistemas de transporte masivo tCneles puentes tuber=as sistemas de drenaBe y plantas de
tratamiento de aguas residuales. La mayor=a de estos proyectos son de propiedad pCblica
y por lo tanto son &inanciados a trav-s de bonos o impuestos. Esta categor=a de la
construccin es caracterizada por el alto grado de mecanizacin el cual .a sustituido
gradualmente algunas operaciones de mano de obra intensiva.
Los ingenieros y constructores comprometidos con la construccin de in&raestructura
suelen ser altamente especializado ya !ue cada segmento del mercado re!uiere de
di&erentes tipos de .abilidades. ;in embargo las demandas de los di&erentes sectores de
la in&raestructura y la construccin pesada pueden cambiar con la saturacin en algunos
segmentos. *or eBemplo los proyectos de construccin de carreteras disponibles estFn
disminuyendo algunos constructores de construccin pesada rFpidamente ponen en
marc.a su &uerza de trabaBo y su e!uipo en el campo de la miner=a donde se dispone de
puestos de trabaBo.
$n&rastructure and .eavy construction includes proBects suc. as .ig.?ays mass transit
systems tunnels bridges pipelines drainage systems and se?age treatment plants. 4ost
o& t.ese proBects are publicly o?ned and t.ere&ore &inanced eit.er t.roug. bonds or taIes.
,.is category o& construction is c.aracterized by a .ig. degree o& mec.anization ?.ic.
.as gradually replaced some labor intensive operations.
,.e engineers and builders engaged in in&rastructure construction are usually .ig.ly
specialized since eac. segment o& t.e mar0et re!uires di&&erent types o& s0ills. /o?ever
demands &or di&&erent segments o& in&rastructure and .eavy construction may s.i&t ?it.
saturation in some segments. Kor eIample as t.e available .ig.?ay construction proBects
are declining some .eavy construction contractors !uic0ly move t.eir ?or0 &orce and
e!uipment into t.e &ield o& mining ?.ere Bobs are available.
(igure 1).* (onstruction o& t.e 1ame *oint :ridge in Pac0sonville Klorida Mcourtesy o&
4ary Lou 4a.erN
(igure 1).* La construccin del puente 1ame *oint en Pac0sonville Klorida Mcortes=a de
4ary Lou 4a.erN
1.. /election of Professional /erices
1.. /eleccion de /ericios Profesionales
(uando los propietarios deciden buscar servicios pro&esionales para el diseo y
construccin de una instalacin se en&renta con una amplia variedad de opciones. El tipo
de servicios !ue seleccione depende en gran medida del tipo de construccin y la
eIperiencia en el trato con varios pro&esionales en proyectos anteriormente emprendidos
por la empresa. 6eneralmente la mayor=a de los servicios pro&esionales pueden ser
contratados por separado o en alguna tipo de combinacin por los propietarios.
A.en an o?ner decides to see0 pro&essional services &or t.e design and construction o& a
&acility .e is con&ronted ?it. a broad variety o& c.oices. ,.e type o& services selected
depends to a large degree on t.e type o& construction and t.e eIperience o& t.e o?ner in
dealing ?it. various pro&essionals in t.e previous proBects underta0en by t.e &irm.
6enerally several common types o& pro&essional services may be engaged eit.er
separately or in some combination by t.e o?ners.
Financial Planning Consultants
Consultores de Planificacin Financiera
En la etapa temprana de la plani&icacin estrat-gica para un proyecto de capital el
propietario &recuentemente busca los servicios de plani&icacin &inanciera tales como un
contador pCblico certi&icado M(*2N empresas !ue evalCan la &iabilidad econmica y
&inanciera de la instalacin construida particularmente respecto a las diversas
disposiciones &ederales leyes de impuestos estatales y locales las cuales pueden a&ectar la
decisin de inversin. Los bancos de inversin tambi-n se pueden consultar dentro de las
diversas opciones para la &inanciacin de la instalacin con el &in de analizar sus e&ectos a
largo plazo en el bienestar &inanciero de la entidad titular.
2t t.e early stage o& strategic planning &or a capital proBect an o?ner o&ten see0s t.e
services o& &inancial planning consultants suc. as certi&ied public accounting M(*2N &irms
to evaluate t.e economic and &inancial &easibility o& t.e constructed &acility particularly
?it. respect to various provisions o& &ederal state and local taI la?s ?.ic. may a&&ect
t.e investment decision. $nvestment ban0s may also be consulted on various options &or
&inancing t.e &acility in order to analyze t.eir long<term e&&ects on t.e &inancial .ealt. o&
t.e o?ner organization.
rc!itectural and Engineering Firms
Empresas de ar"uitectura e ingenier#a.
,radicionalmente el propietario contrata una empresa o consorcio de ingenier=a y
ar!uitectura o consorcio consultor t-cnico en el desarrollo del diseo preliminar. 1espu-s
del diseo ingenieril y los acuerdos de &inanciacin para !ue el proyecto sea completado
el propietario entrara en un contrato de construccin con un contratista general ya sea a
trav-s de una o&erta o de una negociacin competitiva. El contratista general actuara
como un constructor yUo un coordinador de un gran nCmero de contratistas !uienes
realizan varias especialidades para la &inalizacin del proyecto. Las 2UE empresas
completan el diseo y tambi-n proporcionan el control de calidad durante la
construccin. *or tanto las 2UE actCan como un pro&esional de primera en la
representacin del propietario y las supervisiones de construccion para asegurar
resultados satis&actorios. Esta prFctica es la mFs comCn en la construccion de edi&icios.
,raditionally t.e o?ner engages an arc.itectural and engineering M2UEN &irm or
consortium as tec.nical consultant in developing a preliminary design. 2&ter t.e
engineering design and &inancing arrangements &or t.e proBect are completed t.e o?ner
?ill enter into a construction contract ?it. a general contractor eit.er t.roug.
competitive bidding or negotiation. ,.e general contractor ?ill act as a constructor andUor
a coordinator o& a large number o& subcontractors ?.o per&orm various specialties &or t.e
completion o& t.e proBect. ,.e 2UE &irm completes t.e design and may also provide on
site !uality inspection during construction. ,.us t.e 2UE &irm acts as t.e prime
pro&essional on be.al& o& t.e o?ner and supervises t.e construction to insure satis&actory
results. ,.is practice is most common in building construction.
En las Cltimas dos d-cadas el en&o!ue tradicional .a sido menos popular por numerosas
razones particularmente para proyectos de gran escala. Las empresas de 2UE !uienes
son comprometidas por el propietario como un pro&esional de primera para el diseo y la
inspeccin tienen !ue se .an aislado mFs del proceso de construccion. Esto es debido a
las presiones de reducir los .onorarios de las empresas 2UE la amenaza de litigio en
relacin con de&ectos de construccin y la &alta de conocimiento de las nuevas t-cnicas
de construccion en la parte t-cnicas por parte de los pro&esionales de ar!uitectura y de
ingenier=a. En lugar de preparar un plan de construccin Bunto con el diseo muc.as
empresas de 2Ue no son responsables de los detalles de construccion ni proveen las
inspecciones de campo peridicas en muc.os casos. Es un .ec.o las empresas
remplazaran una renuncia prominente de las responsabilidades en cual!uiera de los
planos de taller !ue ellos puedan comprobar y a menudo consideraran sus representantes
en calidad de observadores en el campo en lugar de los inspectores. *or lo tanto las
empresas de 2UE y los contratistas generales suelen ser los antagonistas del proyecto
!uienes buscan sus propios intereses con&lictivos. (omo resultado la constructibilidad de
algunos diseos de ingenier=a puede llegar a ser un tema de contencin. *ara llevar esta
actitud protectora al eItremo las especi&icaciones preparadas por la empresa 2UE a
menudo el contratista general protege los intereses de la empresa de 2UE a eIpensas de
los intereses de propietario y del contratista.
$n t.e past t?o decades t.is traditional approac. .as become less popular &or a number
o& reasons particularly &or large scale proBects. ,.e 2UE &irms ?.ic. are engaged by t.e
o?ner as t.e prime pro&essionals &or design and inspection .ave become more isolated
&rom t.e construction process. ,.is .as occurred because o& pressures to reduce &ees to
2UE &irms t.e t.reat o& litigation regarding construction de&ects and lac0 o& 0no?ledge
o& ne? construction tec.ni!ues on t.e part o& arc.itect and engineering pro&essionals.
$nstead o& preparing a construction plan along ?it. t.e design many 2UE &irms are no
longer responsible &or t.e details o& construction nor do t.ey provide periodic &ield
inspection in many cases. 2s a matter o& &act suc. &irms ?ill place a prominent
disclaimer o& responsibilities on any s.op dra?ings t.ey may c.ec0 and t.ey ?ill o&ten
regard t.eir representatives in t.e &ield as observers instead o& inspectors. ,.us t.e 2UE
&irm and t.e general contractor on a proBect o&ten become antagonists ?.o are loo0ing
a&ter t.eir o?n competing interests. 2s a result even t.e constructibility o& some
engineering designs may become an issue o& contention. ,o carry t.is protective attitude
to t.e eItreme t.e speci&ications prepared by an 2UE &irm &or t.e general contractor o&ten
protects t.e interest o& t.e 2UE &irm at t.e eIpense o& t.e interests o& t.e o?ner and t.e
contractor.
(on el &in de reducir el costo de la construccion algunos propietarios introducen
ingenier=a de valor la cual busca reducir el consto de la construccion mediante la
solicitud de un segundo diseo !ue pudiese costar menos !ue el original realizado por la
empresa de 2UE. en la prFctica el segundo diseo es ignorado por el contratista despu-s
de recibir un contrato de construccin en una suma estipulada y de a.orrar el costo
derivado del rediseo es compartida por el contratista y el propietario. El contratista es
capaz de absorber el costo del reseo para el bene&icio en la construccin o para reducir
el costo de construccin como resultado del re<diseo. ;i el propietario .a estado
dispuesto a pagar la cuota mFs alta a la empresa de 2UE o para dirigir meBor el proceso de
diseo la empresa de 2UE podr=a .aber producido un diseo improvisado el cual podr=a
costar menos en primer lugar. $ndependientemente del m-rito de la ingenier=a de valor
esta prFctica .a indeterminado el rol de las empresas 2UE como la primera actuacin
pro&esional en representacin del propietario para supervisar al contratista.
$n order to reduce t.e cost o& construction some o?ners introduce value engineering
?.ic. see0s to reduce t.e cost o& construction by soliciting a second design t.at mig.t
cost less t.an t.e original design produced by t.e 2UE &irm. $n practice t.e second design
is submitted by t.e contractor a&ter receiving a construction contract at a stipulated sum
and t.e saving in cost resulting &rom t.e redesign is s.ared by t.e contractor and t.e
o?ner. ,.e contractor is able to absorb t.e cost o& redesign &rom t.e pro&it in
construction or to reduce t.e construction cost as a result o& t.e re<design. $& t.e o?ner
.ad been ?illing to pay a .ig.er &ee to t.e 2UE &irm or to better direct t.e design process
t.e 2UE &irm mig.t .ave produced an improved design ?.ic. ?ould cost less in t.e &irst
place. 3egardless o& t.e merit o& value engineering t.is practice .as undermined t.e role
o& t.e 2UE &irm as t.e prime pro&essional acting on be.al& o& t.e o?ner to supervise t.e
contractor.
$esign%Construct Firms
1iseoU(onstruccion de Empresas
Una tendencia comCn en la industria de la construccion particularmente en proyectos
grandes es contratar los servicios de una empresa de diseoUconstruccin. 4ediante la
integracin del diseo y de la administracin de la construccin en una sola organizacin
muc.os de los con&lictos entre diseadores y constructores podr=an evitarse. En
particular los diseos serFn minuciosamente revisados para su constructibilidad. ;in
embargo un propietario encargado de una empresa de diseoUconstruccin debe asegurar
!ue la calidad de la instalacin construida no se sacri&ica por el deseo de reducir el
tiempo o el consto de completar el proyecto. 2demFs es di&=cil .acer un uso competitivo
de las o&ertas en este tipo de proceso diseoUconstruccin. (omo consecuencia los
propietarios deben ser relativamente so&isticados en la negociacin realista y los contratos
de construccin rentables.
2 common trend in industrial construction particularly &or large proBects is to engage t.e
services o& a designUconstruct &irm. :y integrating design and construction management
in a single organization many o& t.e con&licts bet?een designers and constructors mig.t
be avoided. $n particular designs ?ill be closely scrutinized &or t.eir constructibility.
/o?ever an o?ner engaging a designUconstruct &irm must insure t.at t.e !uality o& t.e
constructed &acility is not sacri&iced by t.e desire to reduce t.e time or t.e cost &or
completing t.e proBect. 2lso it is di&&icult to ma0e use o& competitive bidding in t.is type
o& designUconstruct process. 2s a result o?ners must be relatively sop.isticated in
negotiating realistic and cost<e&&ective construction contracts.
Una de las ventaBas mFs evidentes de la integracin del proceso de diseoUconstruccin es
el uso de la construccion por etapas en grandes proyectos. En este porceso el proyecto es
dividido en muc.as etapas cada cual puede ser diseada y construida de &orma
escalonada. 1espu-s de &inalizar el diseo de la primera etapa la construccion puede
iniciar sin demora por el diseo competo de la segunda etapa etc. ;i una coordinacin
apropiada es eBercida. La duracin total del proyecto puede ser en gran medida reducida.
Otra ventaBa es eIplorar la posibilidad de utilizar el en&o!ue llave en mano con lo cual el
propietario puede delegar toda la responsabilidad a la empresa diseoUconstruccin la
cual entregara al propietario la instalacin &inalizada !ue cumpla con las especi&icaciones
de rendimiento al precio especi&icado.
One o& t.e most obvious advantages o& t.e integrated designUconstruct process is t.e use
o& phased construction &or a large proBect. $n t.is process t.e proBect is divided up into
several p.ases eac. o& ?.ic. can be designed and constructed in a staggered manner.
2&ter t.e completion o& t.e design o& t.e &irst p.ase construction can begin ?it.out
?aiting &or t.e completion o& t.e design o& t.e second p.ase etc. $& proper coordination
is eIercised. ,.e total proBect duration can be greatly reduced. 2not.er advantage is to
eIploit t.e possibility o& using t.e turnkey approac. ?.ereby an o?ner can delegate all
responsibility to t.e designUconstruct &irm ?.ic. ?ill deliver to t.e o?ner a completed
&acility t.at meets t.e per&ormance speci&ications at t.e speci&ied price.
Professional Construction &anagers
'erentes profesionales de la construccin
En los Cltimos aos una nueva variedad de encargados de la construccin M(4N o&recen
servicios pro&esionales desde el inicio .asta la &inalizacin de un proyecto de
construccin. Estos encargados de la construccin en su mayor=a proceden de la categor=a
de las empresas de 2 U E o de los contratistas generales !uienes puede o no retener
papeles duales en el servicio de los propietarios. En cual!uier caso el propietario puede
con&iar en los servicios de un pro&esional de primera para administrar el proceso
completo de un proyecto de construccin. ;in embargo las &irmas de 2UE en el pasado
los encargados de la construccin se aprecian por algunos propietarios pero no por otros.
1entro de poco algunos propietarios encuentran !ue muc.os de los encargados de
construccin trataran de proteger sus propios intereses en lugar del de los propietarios
cuando los riesgos son altos.
$n recent years a ne? breed o& construction managers M(4N o&&ers pro&essional services
&rom t.e inception to t.e completion o& a construction proBect. ,.ese construction
managers mostly come &rom t.e ran0s o& 2UE &irms or general contractors ?.o may or
may not retain dual roles in t.e service o& t.e o?ners. $n any case t.e o?ner can rely on
t.e service o& a single prime pro&essional to manage t.e entire process o& a construction
proBect. /o?ever li0e t.e 2UE &irms o& several decades ago t.e construction managers
are appreciated by some o?ners but not by ot.ers. :e&ore long some o?ners &ind t.at t.e
construction managers too may try to protect t.eir o?n interest instead o& t.at o& t.e
o?ners ?.en t.e sta0es are .ig..
1eber=a ser obvio para todos los involucrados en el proceso de construccin cual parte es
re!uerida para tomar los riesgos mFs altos eIige recompensas mFs grandes. ;i un
propietario !uiere contratar una empresa de 2UE sobre la base de las tari&as baBas en lugar
de los t=tulos establecidos &recuentemente a menudo consigue lo !ue se mereceO o si el
propietario !uiere un contratista general para abatir el costo de incertidumbre en la
construccin como las condiciones de &undacin el precio del contrato serF mFs alto
incluso si la licitacin pCblica es usada para llegar a un acuerdo contractual. ;in el
respeto mutuo y la con&ianza el propietario no puede esperar !ue los encargados de la
construccin puedan producir meBores resultados !ue otros pro&esionales. *or lo tanto un
propietario debe entender su propia responsabilidad y el riesgo !ue desea atribuir a s=
mismo y a otros participantes en el proceso.
$t s.ould be obvious to all involved in t.e construction process t.at t.e party ?.ic. is
re!uired to ta0e .ig.er ris0 demands larger re?ards. $& an o?ner ?ants to engage an 2UE
&irm on t.e basis o& lo? &ees instead o& establis.ed !uali&ications it o&ten gets ?.at it
deservesO or i& t.e o?ner ?ants t.e general contractor to bear t.e cost o& uncertainties in
construction suc. as &oundation conditions t.e contract price ?ill be .ig.er even i&
competitive bidding is used in reac.ing a contractual agreement. Ait.out mutual respect
and trust an o?ner cannot eIpect t.at construction managers can produce better results
t.an ot.er pro&essionals. /ence an o?ner must understand its o?n responsibility and t.e
ris0 it ?is.es to assign to itsel& and to ot.er participants in t.e process.
(peration and &aintenance &anagers
'erentes de &antenimiento y (peracin
2 pesar de !ue muc.os propietarios mantienen un personal permanente para la operacin
y mantenimiento de las instalaciones construidas otros pre&ieren este tipo de tareas a los
administradores pro&esionales. (omprensiblemente es comCn encontrar personal interno
para la operacin y el mantenimiento en plantas industriales especializadas e
instalaciones de in&raestructura y el uso eIterno de administradores eIternos con
contratos para la operacin y el mantenimiento de propiedades de al!uiler como
departamentos y edi&icios de o&icinas. ;in embargo .ay eIcepciones a estas prFcticas
comunes. *or eBemplo el mantenimiento de las carreteras pCblicas puede ser contratado
por empresas privadas. En cual!uier caso los generantes pueden proveer un espectro de
servicios de operacin y mantenimiento por un periodo de tiempo espec=&ico acorde con
los t-rminos a los servicios de operacin y mantenimiento de acuerdos contractuales. *or
lo tanto los propietarios pueden librarse de la provisin de la eIperiencia interna para
operar y mantener las instalaciones.
2lt.oug. many o?ners 0eep a permanent sta&& &or t.e operation and maintenance o&
constructed &acilities ot.ers may pre&er to contract suc. tas0s to pro&essional managers.
Understandably it is common to &ind in<.ouse sta&& &or operation and maintenance in
specialized industrial plants and in&rastructure &acilities and t.e use o& outside managers
under contracts &or t.e operation and maintenance o& rental properties suc. as apartments
and o&&ice buildings. /o?ever t.ere are eIceptions to t.ese common practices. Kor
eIample maintenance o& public road?ays can be contracted to private &irms. $n any case
managers can provide a spectrum o& operation and maintenance services &or a speci&ied
time period in accordance to t.e terms o& contractual agreements. ,.us t.e o?ners can
be spared t.e provision o& in<.ouse eIpertise to operate and maintain t.e &acilities.
Facilities &anagement
dministracion de Instalaciones
(omo una eItensin lgica para la obtencin de los meBores servicios a trav-s del ciclo
de vida de una instalacin construida algunos propietarios y desarrolladores son
receptivos a la adicin de la plani&icacin estrat-gica al comienzo y el mantenimiento
mantenimiento de instalaciones como un seguimiento para reducir los costos relacionados
con el espacio en sus bienes de inmuebles. *or consiguiente algunas empresas de
ar!uitecturaUingenier=a y administracin de la construccin con la eIperiencia basada en
el ordenador Bunto con empresas internas de diseo estFn o&reciendo como y servicios
de seguimiento ademFs de los servicios mFs tradicionales en el diseo y construccin.
Este espectro de servicios es descrito en Engineering 5e?s<3ecord Ma.ora E53N de la
siguiente maneraD
2s a logical eItension &or obtaining t.e best services t.roug.out t.e proBect li&e cycle o& a
constructed &acility some o?ners and developers are receptive to adding strategic
planning at t.e beginning and &acility maintenance as a &ollo?<up to reduce space<related
costs in t.eir real estate .oldings. (onse!uently some arc.itecturalUengineering &irms and
construction management &irms ?it. computer<based eIpertise toget.er ?it. interior
design &irms are o&&ering suc. &ront<end and &ollo?<up services in addition to t.e more
traditional services in design and construction. ,.is spectrum o& services is described in
Engineering News-Record Mno? ENRN as &ollo?sD
La administracin de instalaciones es la disciplina de planeacin diseo construccin y
administracin del espacio en todos los tipos de in&raestructura desde edi&icios de o&icinas
.asta plantas de procesos. Esto implica el desarrollo de pol=ticas de instalaciones
corporativas predicciones a largo plazo de bienes ra=ces inventarios espaciales
proyectos Ma trav-s del diseo construccin y renovacinN. *lanes de operacin y
mantenimiento de edi&icios mobiliario y e!uipo de inventarios.
Kacilities management is t.e discipline o& planning designing constructing and
managing space << in every type o& structure &rom o&&ice buildings to process plants. $t
involves developing corporate &acilities policy long<range &orecasts real estate space
inventories proBects Mt.roug. design construction and renovationN building operation
and maintenance plans and &urniture and e!uipment inventories.
Un denominador comCn de todas las empresas !ue entran en estos nuevos servicios es
!ue todos ellos tienen &uerte capacidad computacional y &uertes inversiones in&ormFticas.
2demFs del uso de las computadoras para ayudar en el diseo y seguimiento de la
construccin el servicio incluye la recopilacin del registro in&ormFtico de los planes de
construccin !ue puede ser entregado al t-rmino de la construccin al grupo de
administracin de las instalaciones del propietario. Una base de datos digital de
in&ormacin sobre las instalaciones .ace posible !ue los plani&icadores de la organizacin
del propietario obtengan in&ormacin general de revisiones espaciales de largo alcance
mientras los gerentes de l=nea pueden usar in&ormacin de inter-s tales como los registros
de arrendamiento U in!uilino costos de utilidad etc. *ara las operaciones del d=a a d=a.
2 common denominator o& all &irms entering into t.ese ne? services is t.at t.ey all .ave
strong computer capabilities and .eavy computer investments. $n addition to t.e use o&
computers &or aiding design and monitoring construction t.e service includes t.e
compilation o& a computer record o& building plans t.at can be turned over at t.e end o&
construction to t.e &acilities management group o& t.e o?ner. 2 computer data base o&
&acilities in&ormation ma0es it possible &or planners in t.e o?nerHs organization to obtain
overvie? in&ormation &or long range space &orecasts ?.ile t.e line managers can use as<
built in&ormation suc. as leaseUtenant records utility costs etc. &or day<to<day operations.
1.0 Construction Contractors
1.0 Contratistas de la Construccion
(onstructores !uienes supervisan la eBecucin de proyectos de construccin son
tradicionalmente re&eridos como contratistas o apropiadamente llamados constructores.
El contratista general coordina varias tareas del proyecto mientras los contratistas
especializados como mecFnicos o contratista el-ctricos desempean el trabaBo de sus
especialidades. *roveedores de material y e!uipo a menudo actCan como contratistas de
instalacinO ellos Buegan un rol importante en proyectos de constriccin desde !ue las
condiciones de entrega de materiales y e!uipo a&ectan la calidad costo y el tiempo de
realizacin del proyecto. Es esencial entender la operacin de estos contratistas con el &in
de negociar e&ectivamente con ellos.
:uilders ?.o supervise t.e eIecution o& construction proBects are traditionally re&erred to
as contractors or more appropriately called constructors. ,.e general contractor
coordinates various tas0s &or a proBect ?.ile t.e specialty contractors suc. as mec.anical
or electrical contractors per&orm t.e ?or0 in t.eir specialties. 4aterial and e!uipment
suppliers o&ten act as installation contractorsO t.ey play a signi&icant role in a
construction proBect since t.e conditions o& delivery o& materials and e!uipment a&&ect t.e
!uality cost and timely completion o& t.e proBect. $t is essential to understand t.e
operation o& t.ese contractors in order to deal ?it. t.em e&&ectively.
'eneral Contractors
Contratistas 'enerales.
La &uncin de un contratista general es coordinar todas las tareas en un proyecto de
construccin. 2 menos !ue el dueo realice esta &uncin o contrate a un gerente de
construccin pro&esional para .acerlo un buen contratista general !uien .a trabaBado con
un e!uipo de superintendentes contratistas o subcontratistas especializados Bunto a una
serie de proyectos en el pasado puede ser mFs e&ectivos en la inspiracin de lealtad y
cooperacin. El contratista general es tambi-n tambi-n eIperto en la mano de obra
empleada en la construccin. La &uerza de trabaBo puede ser o no sindicalizada
dependiendo del tamao y la ubicacin de los proyectos. En algunos proyectos ningCn
miembro de la &uerza de trabaBo pertenece a un sindicatoO en otros casos tanto
sindicalizados como no sindicalizados artesanos trabaBan Buntos en lo !ue se llama una
tienda abierta todos los demFs artesanos deben estar a&iliados a los sindicatos en una
tienda cerrada. 1esde !ue los sindicatos proporcionan salas de contratacin con personal
de Bornaleros eIpertos !uienes .an pasado a trav-s de programas de aprendizaBe para
proyectos as= como unidades de servicio de regateo colectivos un contratista general
eIperimentado .arF un buen uso de los bene&icios y evitara las di&icultades en el trato con
los trabaBadores y el trabaBo organizado.
,.e &unction o& a general contractor is to coordinate all tas0s in a construction proBect.
Unless t.e o?ner per&orms t.is &unction or engages a pro&essional construction manager
to do so a good general contractor ?.o .as ?or0ed ?it. a team o& superintendents
specialty contractors or subcontractors toget.er &or a number o& proBects in t.e past can
be most e&&ective in inspiring loyalty and cooperation. ,.e general contractor is also
0no?ledgeable about t.e labor &orce employed in construction. ,.e labor &orce may or
may not be unionized depending on t.e size and location o& t.e proBects. $n some
proBects no member o& t.e ?or0 &orce belongs to a labor unionO in ot.er cases bot.
union and non<union cra&tsmen ?or0 toget.er in ?.at is called an open s.op or all
cra&tsmen must be a&&iliated ?it. labor unions in a closed s.op. ;ince labor unions
provide .iring .alls sta&&ed ?it. s0illed Bourneyman ?.o .ave gone t.roug. apprentice
programs &or t.e proBects as ?ell as serving as collective bargain units an eIperienced
general contractor ?ill ma0e good use o& t.e bene&its and avoid t.e pit&alls in dealing
?it. organized labor.
Specialty Contractors
Contratistas Especializados
Los contratistas especializados incluyen mecFnica el-ctrica creacin eIcavacin y
contratistas de demolicin entre otros. Ellos usualmente sirven como subcontratistas a al
gerente general del proyecto. En algunos casos los estatutos legales pueden re!uerir un
propietario para el tratar directamente con los varios contratistas especializados. En el
estado de 5e? 9or0 por eBemplo los contratistas especializados como los contratistas
mecFnicos y electicos no son sometidos a la supervisin del contratista general del
proyecto de construccin y se debe dar contratos separados en las obras publicas. (on la
eIcepcin de ciertos casos un propietario serF el contratista general responsable de la
negociacin y el cumplimiento de los acuerdos contractuales con los contratistas.
;pecialty contractors include mec.anical electrical &oundation eIcavation and
demolition contractors among ot.ers. ,.ey usually serve as subcontractors to t.e general
contractor o& a proBect. $n some cases legal statutes may re!uire an o?ner to deal ?it.
various specialty contractors directly. $n t.e ;tate o& 5e? 9or0 &or eIample specialty
contractors suc. as mec.anical and electrical contractors are not subBected to t.e
supervision o& t.e general contractor o& a construction proBect and must be given separate
prime contracts on public ?or0s. Ait. t.e eIception o& suc. special cases an o?ner ?ill
.old t.e general contractor responsible &or negotiating and &ul&illing t.e contractual
agreements ?it. t.e subcontractors.
&aterial and E"uipment Suppliers
Proveedores de &aterial y E"uipo
Los principales proveedores de materiales incluyen contratistas especializados en la
&abricacin y montaBe de acero estructural c.apa de metal entrega de concreto
premezclado listo re&orzando los detallistas las barras de acero acristalamiento etc. Los
principales proveedores de e!uipo en la industria de la construccin incluyen &abricantes
de generadores calderas tuber=as y otros e!uipos. 4uc.os proveedores maneBan la
instalacin en el sitio para asegurar !ue los re!uerimientos y las especi&icaciones
contractuales se cumplan. (omo las unidades estructurales mFs grandes son pre&abricadas
&uera de las instalaciones la distribucin entre los contratistas especializados y los
proveedores de materiales es aCn menos evidente.
4aBor material suppliers include specialty contractors in structural steel &abrication and
erection s.eet metal ready miIed concrete delivery rein&orcing steel bar detailers
roo&ing glazing etc. 4aBor e!uipment suppliers &or industrial construction include
manu&acturers o& generators boilers and piping and ot.er e!uipment. 4any suppliers
.andle on<site installation to insure t.at t.e re!uirements and contractual speci&ications
are met. 2s more and larger structural units are pre&abricated o&&<site t.e distribution
bet?een specialty contractors and material suppliers becomes even less obvious.
1.1 (inancing of Constructed (acilities
1.1 (inanciamiento de las $nstalaciones Construidas.
Un importante proyecto de construccin re!uiere una cantidad enorme de capital !ue es a
menudo suministrado por los l=deres !uienes !uieren estar seguros de !ue el proyecto
o&recerF un rendimiento Busto de la inversin. El costo directo asociado con un importante
proyecto de construccin se puede clasi&icar en dos categor=asD M1N los gastos de
construccin pagados al contratista general para el montaBe de la instalacin en el lugar y
M2N los gastos para la ad!uisicin de tierras .onorarios legales .onorarios de
ar!uitectoUingeniero .onorarios de la administracin de la consecucin intereses de los
pr-stamos de construccin y el costo de oportunidad de un espacio vac=o .asta !ue la
instalacin est- totalmente ocupada. Los costos directos de construccin en la primera
etapa representan aproIimadamente del #+ al '+ por ciento de los costos totales en la
mayor=a de los proyectos de construccin. 1esde !ue el costo de construccin es asumido
por el propietario una cuidadosa plani&icacin &inanciera para la instalacin debe ser
.ec.a antes de la construccin.
2 maBor construction proBect re!uires an enormous amount o& capital t.at is o&ten
supplied by lenders ?.o ?ant to be assured t.at t.e proBect ?ill o&&er a &air return on t.e
investment. ,.e direct costs associated ?it. a maBor construction proBect may be broadly
classi&ied into t?o categoriesD M1N t.e construction eIpenses paid to t.e general contractor
&or erecting t.e &acility on site and M2N t.e eIpenses &or land ac!uisition legal &ees
arc.itectUengineer &ees construction management &ees interest on construction loans and
t.e opportunity cost o& carrying empty space in t.e &acility until it is &ully occupied. ,.e
direct construction costs in t.e &irst category represent approIimately #+ to '+ percent o&
t.e total costs in most construction proBects. ;ince t.e costs o& construction are ultimately
borne by t.e o?ner care&ul &inancial planning &or t.e &acility must be made prior to
construction.
Construction Financing
Financiamiento de la Construccion
Los prestamos para la construccion a constratistas son proveidos por los vancos o a.orros
y
(onstruction loans to contractors are usually provided by ban0s or savings and loan
associations &or construction &inancing. Upon t.e completion o& t.e &acility construction
loans ?ill be terminated and t.e post<construction &acility &inancing ?ill be arranged by
t.e o?ner.
(onstruction loans provided &or di&&erent types o& construction vary. $n t.e case o&
residential .ousing construction loans and long<term mortgages can be obtained &rom
savings and loans associations or commercial ban0s. Kor institutional and commercial
buildings construction loans are usually obtained &rom commercial ban0s. ;ince t.e
value o& specialized industrial buildings as collateral &or loans is limited construction
loans in t.is domain are rare and construction &inancing can be done &rom t.e pool o&
general corporate &unds. Kor in&rastructure construction o?ned by government t.e
property cannot be used as security &or a private loan but t.ere are many possible ?ays
to &inance t.e construction suc. as general appropriation &rom taIation or special bonds
issued &or t.e proBect.
,raditionally ban0s serve as construction lenders in a t.ree<party agreement among t.e
contractor t.e o?ner and t.e ban0. ,.e stipulated loan ?ill be paid to t.e contractor on
an agreed sc.edule upon t.e veri&ication o& completion o& various portions o& t.e proBect.
6enerally a payment re!uest toget.er ?it. a standard progress report ?ill be submitted
eac. mont. by t.e contractor to t.e o?ner ?.ic. in turn submits a dra? re!uest to t.e
ban0. *rovided t.at t.e ?or0 to date .as been per&ormed satis&actorily t.e disbursement
is made on t.at basis during t.e construction period. Under suc. circumstances t.e ban0
.as been primarily concerned ?it. t.e completion o& t.e &acility on time and ?it.in t.e
budget. ,.e economic li&e o& t.e &acility a&ter its completion is not a concern because o&
t.e trans&er o& ris0 to t.e o?ner or an institutional lender.
Facility Financing
4any private corporations maintain a pool o& general &unds resulting &rom retained
earnings and long<term borro?ing on t.e strengt. o& corporate assets ?.ic. can be used
&or &acility &inancing. ;imilarly &or public agencies t.e long<term &unding may be
obtained &rom t.e commitment o& general taI revenues &rom t.e &ederal state andUor local
governments. :ot. private corporations and public agencies may issue special bonds &or
t.e constructed &acilities ?.ic. may obtain lo?er interest rates t.an ot.er &orms o&
borro?ing. ;.ort<term borro?ing may also be used &or bridging t.e gaps in long<term
&inancing. ;ome corporate bonds are convertible to stoc0s under circumstances speci&ied
in t.e bond agreement. Kor public &acilities t.e assessment o& user &ees to repay t.e bond
&unds merits consideration &or certain types o& &acilities suc. as toll roads and se?age
treatment plants. ,.e use o& mortgages is primarily con&ined to rental properties suc. as
apartments and o&&ice buildings.
:ecause o& t.e sudden surge o& interest rates in t.e late 1)%+Hs many &inancial institutions
o&&er in addition to t.e traditional &iIed rate long<term mortgage commitments ot.er
arrangements suc. as a combination o& debt and a percentage o& o?ners.ip in eIc.ange
&or a long<term mortgage or t.e use o& adBustable rate mortgages. $n some cases t.e
construction loan may be granted on an open<ended basis ?it.out a long<term &inancing
commitment. Kor eIample t.e plan mig.t be issued &or t.e construction period ?it. an
option to eItend it &or a period o& up to t.ree years in order to give t.e o?ner more time
to see0 alternative long<term &inancing on t.e completed &acility. ,.e ban0 ?ill be dra?n
into situations involving &inancial ris0 i& it c.ooses to be a lender ?it.out long<term
guarantees.
Kor international proBects t.e currency used &or &inancing agreements becomes
important. $& &inancial agreements are ?ritten in terms o& local currencies t.en
&luctuations in t.e currency eIc.ange rate can signi&icantly a&&ect t.e cost and ultimately
pro&it o& a proBect. $n some cases payments mig.t also be made in particular
commodities suc. as petroleum or t.e output &rom t.e &acility itsel&. 2gain t.ese
arrangements result in greater uncertainty in t.e &inancing sc.eme because t.e price o&
t.ese commodities may vary.
1.1 "egal and 2egulatory 2equirements
,.e o?ners o& &acilities naturally ?ant legal protection &or all t.e activities involved in
t.e construction. $t is e!ually obvious t.at t.ey s.ould see0 competent legal advice.
/o?ever t.ere are certain principles t.at s.ould be recognized by o?ners in order to
avoid unnecessary pit&alls.
)egal Responsi*ilities
2ctivities in construction o&ten involve ris0s bot. p.ysical and &inancial. 2n o?ner
generally tries to s.i&t t.e ris0s to ot.er parties to t.e degree possible ?.en entering into
contractual agreements ?it. t.em. /o?ever suc. action is not ?it.out cost or ris0. Kor
eIample a contractor ?.o is assigned t.e ris0s may eit.er as0 &or a .ig.er contract price
to compensate &or t.e .ig.er ris0s or end up in non<per&ormance or ban0ruptcy as an act
o& desperation. ;uc. conse!uences can be avoided i& t.e o?ner is reasonable in ris0
allocation. A.en ris0s are allocated to di&&erent parties t.e o?ner must understand t.e
implications and spell t.em out clearly. ;ometimes t.ere are statutory limitations on t.e
allocation o& liabilities among various groups suc. as pro.ibition against t.e allocation
o& negligence in design to t.e contractor. 2n o?ner must realize its superior po?er in
bargaining and .ence t.e responsibilities associated ?it. t.is po?er in ma0ing
contractual agreements.
&itigation of Conflicts
$t is important &or t.e o?ner to use legal counselors as advisors to mitigate con&licts
be&ore t.ey .appen rat.er t.an to ?ield con&licts as ?eapons against ot.er parties. ,.ere
are enoug. problems in design and construction due to uncertainty rat.er t.an bad
intentions. ,.e o?ner s.ould recognize t.e more enlig.tened approac.es &or mitigating
con&licts suc. as using o?ner<controlled wrap-up insurance ?.ic. ?ill provide
protection &or all parties involved in t.e construction process &or un&oreseen ris0s or
using arbitration mediation and ot.er eItra<Budicial solutions &or disputes among various
parties. /o?ever t.ese compromise solutions are not ?it.out pit&alls and s.ould be
adopted only on t.e merit o& individual cases.
'overnment Regulation
,o protect public sa&ety and ?el&are legislatures and various government agencies
periodically issue regulations ?.ic. in&luence t.e construction process t.e operation o&
constructed &acilities and t.eir ultimate disposal. Kor eIample building codes
promulgated by local aut.orities .ave provided guidelines &or design and construction
practices &or a very long time. ;ince t.e 1)%+Hs many &ederal regulations t.at are related
directly or indirectly to construction .ave been establis.ed in t.e United ;tates. 2mong
t.em are sa&ety standards &or ?or0ers issued by t.e Occupational /ealt. and ;a&ety
2dministration environmental standards on pollutants and toIic ?astes issued by t.e
Environmental *rotection 2gency and design and operation procedures &or nuclear
po?er plants issued by t.e 5uclear 3egulatory (ommission.
O?ners must be a?are o& t.e impacts o& t.ese regulations on t.e costs and durations o&
various types o& construction proBects as ?ell as possibilities o& litigation due to various
contentions. Kor eIample o?ners ac!uiring sites &or ne? construction may be strictly
liable &or any .azardous ?astes already on t.e site or removed &rom t.e site under t.e
U.;. (ompre.ensive Environmental 3esponse (ompensation and Liability M(E3(LN 2ct
o& 1)'+. Kor large scale proBects involving ne? tec.nologies t.e construction costs o&ten
escalate ?it. t.e uncertainty associated ?it. suc. restrictions.
1.3 The Changing &nironment of the Construction
$ndustry
,.e construction industry is a conglomeration o& diverse &ields and participants t.at .ave
been loosely lumped toget.er as a sector o& t.e economy. ,.e construction industry plays
a central role in national ?el&are including t.e development o& residential .ousing o&&ice
buildings and industrial plants and t.e restoration o& t.e nationHs in&rastructure and ot.er
public &acilities. ,.e importance o& t.e construction industry lies in t.e &unction o& its
products ?.ic. provide t.e &oundation &or industrial production and its impacts on t.e
national economy cannot be measured by t.e value o& its output or t.e number o& persons
employed in its activities alone.
,o be more speci&ic construction re&ers to all types o& activities usually associated ?it.
t.e erection and repair o& immobile &acilities. (ontract construction consists o& a large
number o& &irms t.at per&orm construction ?or0 &or ot.ers and is estimated to be
approIimately '"V o& all construction activities. ,.e remaining 1"V o& construction is
per&ormed by o?ners o& t.e &acilities and is re&erred to as force-account construction.
2lt.oug. t.e number o& contractors in t.e United ;tates eIceeds a million over #+V o&
all contractor construction is per&ormed by t.e top 4++ contractors. ,.e value o& ne?
construction in t.e United ;tates MeIpressed in constant dollarsN and t.e value o&
construction as a percentage o& t.e gross national products &rom 1)"+ to 1)'" are s.o?n
in Kigures 1<# and 1<%. $t can be seen t.at construction is a signi&icant &actor in t.e 6ross
5ational *roduct alt.oug. its importance .as been declining in recent years. 5ot to be
ignored is t.e &act t.at as t.e nationHs constructed &acilities become older t.e total
eIpenditure on re.abilitation and maintenance may increase relative to t.e value o& ne?
construction.
(igure 1)0* 8alue o& 5e? (onstruction in t.e United ;tates 1)%"<1))"
(igure 1)1* (onstruction as *ercentage o& 6ross 1omestic *roduct in t.e United ;tates
1)%"<1))"
O?ners ?.o pay close attention to t.e peculiar c.aracteristics o& t.e construction
industry and its c.anging operating environment ?ill be able to ta0e advantage o& t.e
&avorable conditions and to avoid t.e pit&alls. ;everal &actors are particularly note?ort.y
because o& t.eir signi&icant impacts on t.e !uality cost and time o& construction.
+e, -ec!nologies
$n recent years tec.nological innovation in design materials and construction met.ods
.ave resulted in signi&icant c.anges in construction costs. (omputer<aids .ave improved
capabilities &or generating !uality designs as ?ell as reducing t.e time re!uired to
produce alternative designs. 5e? materials not only .ave en.anced t.e !uality o&
construction but also .ave s.ortened t.e time &or s.op &abrication and &ield erection.
(onstruction met.ods .ave gone t.roug. various stages o& mec.anization and
automation including t.e latest development o& construction robotics.
,.e most dramatic ne? tec.nology applied to construction .as been t.e $nternet and its
private corporate $ntranet versions. ,.e $nternet is ?idely used as a means to &oster
collaboration among pro&essionals on a proBect to communicate &or bids and results and
to procure necessary goods and services. 3eal time video &rom speci&ic construction sites
is ?idely used to illustrate construction progress to interested parties. ,.e result .as been
more e&&ective collaboration communication and procurement.
,.e e&&ects o& many ne? tec.nologies on construction costs .ave been miIed because o&
t.e .ig. development costs &or ne? tec.nologies. /o?ever it is unmista0able t.at design
pro&essionals and construction contractors ?.o .ave not adapted to c.anging
tec.nologies .ave been &orced out o& t.e mainstream o& design and construction
activities. Ultimately construction !uality and cost can be improved ?it. t.e adoption o&
ne? tec.nologies ?.ic. are proved to be e&&icient &rom bot. t.e vie?points o&
per&ormance and economy.
)a*or Productivity
,.e term productivity is generally de&ined as a ratio o& t.e production output volume to
t.e input volume o& resources. ;ince bot. output and input can be !uanti&ied in a number
o& ?ays t.ere is no single measure o& productivity t.at is universally applicable
particularly in t.e construction industry ?.ere t.e products are o&ten uni!ue and t.ere is
no standard &or speci&ying t.e levels &or aggregation o& data. /o?ever since labor
constitutes a large part o& t.e cost o& construction labor productivity in terms o& output
volume Mconstant dollar value or &unctional unitsN per person<.our is a use&ul measure.
Labor productivity measured in t.is ?ay does not necessarily indicate t.e e&&iciency o&
labor alone but rat.er measures t.e combined e&&ects o& labor e!uipment and ot.er
&actors contributing to t.e output.
A.ile aggregate construction industry productivity is important as a measure o& national
economy o?ners are more concerned about t.e labor productivity o& basic units o& ?or0
produced by various cra&ts on site. ,.us an o?ner can compare t.e labor per&ormance at
di&&erent geograp.ic locations under di&&erent ?or0ing conditions and &or di&&erent types
and sizes o& proBects.
(onstruction costs usually run parallel to material prices and labor ?ages. 2ctually over
t.e years labor productivity .as increased in some traditional types o& construction and
t.us provides a leveling or compensating e&&ect ?.en .ourly rates &or labor increase
&aster t.an ot.er costs in construction. /o?ever labor productivity .as been stagnant or
even declined in unconventional or large scale proBects.
Pu*lic Scrutiny
Under t.e present litigious climate in t.e United ;tates t.e public is increasingly vocal in
t.e scrutiny o& construction proBect activities. ;ometimes it may result in considerable
di&&iculty in sitting ne? &acilities as ?ell as additional eIpenses during t.e construction
process itsel&. O?ners must be prepared to manage suc. crises be&ore t.ey get out o&
control.
Kigure 1<' can serve to indicate public attitudes to?ards t.e sitting o& ne? &acilities. $t
represents t.e cumulative percentage o& individuals ?.o ?ould be ?illing to accept a
ne? industrial &acility at various distances &rom t.eir .omes. Kor eIample over &i&ty
percent o& t.e people surveyed ?ould accept a ten<story o&&ice building ?it.in &ive miles
o& t.eir .ome but only t?enty<&ive percent ?ould accept a large &actory or coal &ired
po?er plant at a similar distance. 2n even lo?er percentage ?ould accept a .azardous
?aste disposal site or a nuclear po?er plant. Even at a distance o& one .undred miles a
signi&icant &raction o& t.e public ?ould be un?illing to accept .azardous ?aste &acilities
or nuclear po?er plants.
(igure 1)3* *ublic 2cceptance ,o?ards 5e? Kacilities M3eprinted &rom Environmental
Quality - 198 t.e Elevent. 2nnual 3eport o& t.e (ouncil on Environmental Luality
U.;. 6overnment *rinting O&&ice Aas.ington 1( 1ecember 1)'+.N
,.is obBection to ne? &acilities is a ?idespread public attitude representing considerable
s0epticism about t.e eIternal bene&its and costs ?.ic. ne? &acilities ?ill impose. $t is
t.is public attitude ?.ic. is li0ely to ma0e public scrutiny and regulation a continuing
concern &or t.e construction industry.
International Competition
2 &inal trend ?.ic. deserves note is t.e increasing level o& international competition in
t.e construction industry. O?ners are li0ely to &ind non<traditional &irms bidding &or
construction ?or0 particularly on large proBects. ;eparate bids &rom numerous European
5ort. 2merican and 2sian construction &irms are not unusual. $n t.e United ;tates
overseas &irms are becoming increasingly visible and important. $n t.is environment o&
.eig.tened competition good proBect management and improved productivity are more
and more important.
2 bidding competition &or a maBor ne? o&&s.ore drilling plat&orm illustrates t.e
competitive environment in construction. 2s described in t.e Aall ;treet PournalD R"S
,.roug. most o& t.e post?ar years t.e nationHs biggest builders o& o&&s.ore oil plat&orms
enBoyed an unusually cozy relations.ip ?it. t.e :ig Oil (ompanies t.ey served. ,.eir
top o&&icials developed personal &riends.ips ?it. oil eIecutives entertained t.em at
opulent .unting camps< and ?on contracts to build nearly every maBor o&&s.ore oil
plat&orm in t.e ?orld....:ut t.is summerO t.e good<old boy net?or0 &ell apart. ;.ell ROil
(o.S a?arded t.e main contract &or Ra ne?S plat&orm < taller t.an (.icagoHs ;ears ,o?er
&our times .eavier t.an t.e :roo0lyn :ridge < to a tiny upstart.
,.e ?inning bidder arranged overseas &abrication o& t.e rig 0ept over.ead costs lo? and
proposed a novel assembly procedure by ?.ic. construction e!uipment ?as mounted on
completed sections o& t.e plat&orm in order to speed t.e completion o& t.e entire
structure. ,.e result ?as lo?er costs t.an t.ose estimated and bid by traditional &irms.
O& course U.;. &irms including 2UE &irms contractors and construction managers are
also competing in &oreign countries. ,.eir success or &ailure in t.e international arena
may also a&&ect t.eir capacities and vitality to provide services in t.e domestic U.;.
mar0et.
Contractor Financed Pro.ects
$ncreasingly some o?ners loo0 to contractors or Boint ventures as a resource to design to
build and to &inance a constructed &acility. Kor eIample a utility company may see0 a
consortium consisting o& a designUconstruct &irm and a &inancial investment &irm to
assume total liability during construction and t.ereby eliminate t.e ris0s o& cost
escalation to ratepayers stoc0.olders and t.e management. On t.e ot.er .and a local
sanitation district may see0 suc. a consortium to provide private o?ners.ip &or a
proposed ne? se?age treatment plant. $n t.e &ormer case t.e o?ner may ta0e over t.e
completed &acility and service t.e debt on construction t.roug. long<term &inancing
arrangementsO in t.e latter case t.e private o?ner may operate t.e completed &acility and
recover its investment t.roug. user &ees. ,.e activities o& Boint ventures among design
construction and investment &irms are sometimes re&erred to as financial engineering.
,.is type o& Boint venture .as become more important in t.e international construction
mar0et ?.ere aggressive contractors o&ten ?in contracts by o&&ering a more attractive
&inancing pac0age rat.er t.an superior tec.nology. Ait. a deepening s.ado? o&
international debts in recent years many developing countries are not in a position to
underta0e any ne? proBect ?it.out contractor<bac0ed &inancing. ,.us t.e contractors or
Boint ventures in overseas proBects are &orced into very ris0y positions i& t.ey intend to
stay in t.e competition.
)ean Construction
JLean manu&acturingJ .ad a revolutionary e&&ect on many industries especially
automotive assembly companies. (.aracteristics o& t.is approac. includeD
$mprovement in !uality and reduction o& ?aste every?.ere. 3at.er t.an
increasing costs reducing de&ects and ?aste proved to improve !uality and reduce
costs.
Empo?ering ?or0ers to be responsible &or satis&ying customer needs. $n
construction &or eIample cra&tsman s.ould ma0e sure t.eir ?or0 satis&ied t.e
design intent.
(ontinuous improvement o& processes involving t.e entire ?or0&orce.
Lean construction is intended to spread t.ese practices ?it.in t.e construction industry.
O& course ?ell managed construction proBects already .ave many aspects o& lean
construction. Kor eIample Bust<in<time delivery o& materials is commonplace to avoid t.e
?aste o& large inventory stoc0piles. 6reen building proBects attempt to re<use or recycle
all construction ?astes. :ut t.e systematic attention to continuous improvement and zero
accidents and de&ects is ne?.
1.4 The 2ole of Pro%ect ,anagers
$n t.e proBect li&e cycle t.e most in&luential &actors a&&ecting t.e outcome o& t.e proBect
o&ten reside at t.e early stages. 2t t.is point decisions s.ould be based on competent
economic evaluation ?it. due consideration &or ade!uate &inancing t.e prevalent social
and regulatory environment and tec.nological considerations. 2rc.itects and engineers
mig.t specialize in planning in construction &ield management or in operation but as
proBect managers t.ey must .ave some &amiliarity ?it. all suc. aspects in order to
understand properly t.eir role and be able to ma0e competent decisions.
;ince t.e 1)%+Hs many large<scale proBects .ave run into serious problems o&
management suc. as cost overruns and long sc.edule delays. 2ctually t.e management
o& megaprojects or superprojects is not a practice peculiar to our time. Aitness t.e
construction o& transcontinental railroads in t.e (ivil Aar era and t.e construction o& t.e
*anama (anal at t.e turn o& t.is century. 2lt.oug. t.e megaproBects o& t.is generation
may appear in greater &re!uency and present a ne? set o& c.allenge t.e problems are
organizational rat.er t.an tec.nical. 2s noted by /ardy (rossD
$t is customary to t.in0 o& engineering as a part o& a trilogy pure science applied science
and engineering. $t needs emp.asis t.at t.is trilogy is only one o& a triad o& trilogies into
?.ic. engineering &its. ,.is &irst is pure science applied science and engineeringO t.e
second is economic t.eory &inance and engineeringO and t.e t.ird is social relations
industrial relations and engineering. 4any engineering problems are as closely allied to
social problems as t.ey are to pure science.
2s engineers advance pro&essionally t.ey o&ten spend as muc. or more time on planning
management and ot.er economic or social problems as on t.e traditional engineering
design and analysis problems ?.ic. &orm t.e core o& most educational programs. $t is
upon t.e ability o& engineers to tac0le all suc. problems t.at t.eir per&ormance ?ill
ultimately be Budged.
,.e greatest stumbling bloc0 to e&&ective management in construction is t.e inertia and
.istoric divisions among planners designers and constructors. A.ile tec.nical
competence in design and innovation remains t.e &oundation o& engineering practice t.e
social economic and organizational &actors t.at are pervasive in in&luencing t.e success
and &ailure o& construction proBects must also be dealt ?it. e&&ectively by design and
construction organizations. O& course engineers are not eIpected to 0no? every detail o&
management tec.ni!ues but t.ey must be 0no?ledgeable enoug. to anticipate t.e
problems o& management so t.at t.ey can ?or0 .armoniously ?it. pro&essionals in
related &ields to overcome t.e inertia and .istoric divisions.
*aradoIically engineers ?.o are creative in engineering design are o&ten innovative in
planning and management since bot. types o& activities involve problem solving. $n &act
t.ey can rein&orce eac. ot.er i& bot. are included in t.e education process provided t.at
creativity and innovation instead o& routine practice are emp.asized. 2 proBect manager
?.o is ?ell educated in t.e fundamental principles o& engineering design and
management can use&ully apply suc. principles once .e or s.e .as ac!uired basic
understanding o& a ne? application area. 2 proBect manager ?.o .as been trained by rote
learning &or a speci&ic type o& proBect may merely gain one year o& eIperience repeated
t?enty times even i& .e or s.e .as been in t.e &ield &or t?enty years. 2 broadly educated
proBect manager can reasonably .ope to become a leader in t.e pro&essionO a narro?ly
trained proBect manager is o&ten relegated to t.e role o& .is or .er &irst Bob level
permanently.
,.e o?ners .ave muc. at sta0e in selecting a competent proBect manager and in
providing .er or .im ?it. t.e aut.ority to assume responsibility at various stages o& t.e
proBect regardless o& t.e types o& contractual agreements &or implementing t.e proBect. O&
course t.e proBect manager must also possess t.e leaders.ip !uality and t.e ability to
.andle e&&ectively intricate interpersonal relations.ips ?it.in an organization. ,.e
ultimate test o& t.e education and eIperience o& a proBect manager &or construction lies in
.er or .is ability to apply &undamental principles to solving problems in t.e ne? and
un&amiliar situations ?.ic. .ave become t.e .allmar0s o& t.e c.anging environment in
t.e construction industry.
1.15 2eferences
1. 2u ,. and (. /endric0son JEducation in Engineering *lanning and
4anagementJ !roceedings of the "#$E $onference on $ivil Engineering
Education% (olumbus O.io 1)'".
2. :arrie 1.;. MeditorN &irections in 'anaging $onstruction Po.n Ailey and ;ons
5e? 9or0 1)'1.
3. Lean (onstruction $nstitute .ttpDUU???.leanconstruction.orgU
4. :onny P.:. and P.*. Krein (and)ook of $onstruction 'anagement and
*rgani+ation 2nd Edition 8an 5ostrand 3ein.old (o. 5e? 9or0 1)'+.
". /asaga?a Kumio et.al. J:uilt by PapanJ Po.n Ailey W ;ons 1)''.
#. Lang P.E. and 1.L. 4ills ,he $onstruction -ndustry LeIington :oo0s
LeIington 42 1)%).
%. Aal0er 5. E.5. Aal0er and ,.Q. 3o.denburg .egal !itfalls in "rchitecture%
Engineering and /uilding $onstruction 2nd Edition 4c6ra?</ill :oo0 (o.
5e? 9or0 1)%).
1.11 (ootnotes
1. ,.e :usiness 3oundtable 'ore $onstruction for the 'oney ;ummary 3eport o&
t.e (onstruction $ndustry (ost E&&ectiveness *roBect Panuary 1)'3 p. 11.
2. J/ot 5e? 4ar0et Lures 2<E *layers to (utting EdgesJ Engineering News-
Record 2pril 4 1)'" pp. 3+<3%.
3. ;ee /endric0son (. JKinancing (ivil Aor0s ?it. User KeesJ $ivil Engineering
8ol. "3 5o. 2 Kebruary 1)'3 pp. %1<%2.
4. ,.e grap. is derived &rom data in J8alue o& 5e? (onstruction *ut in *lace 1)#+<
1)'3J #tatistical ")stract of the 0nited #tates 1+"t. Edition U.;. 1epartment o&
(ommerce :ureau o& (ensus 1)'" pp. %22<%23 as ?ell as t.e in&ormation in
earlier editions.
". ;ee *etzinger ,.omas Pr. JUpstartHs Ainning :id &or O&&s.ore *lat&orm ;tuns its
Older 3ivalsJ 1all #treet 2ournal p. 1 c. # 5ov. 2+ 1)'".
#. ;ee /. (ross Engineers and -vory ,owers% 4c6ra?</ill :oo0 (o. $nc. 5e?
9or0 1)"2.
!. Organi6ing for Pro%ect ,anagement
!.1 7hat is Pro%ect ,anagement8
,.e management o& construction proBects re!uires 0no?ledge o& modern management as
?ell as an understanding o& t.e design and construction process. (onstruction proBects
.ave a speci&ic set o& obBectives and constraints suc. as a re!uired time &rame &or
completion. A.ile t.e relevant tec.nology institutional arrangements or processes ?ill
di&&er t.e management o& suc. proBects .as muc. in common ?it. t.e management o&
similar types o& proBects in ot.er specialty or tec.nology domains suc. as aerospace
p.armaceutical and energy developments.
6enerally proBect management is distinguis.ed &rom t.e general management o&
corporations by t.e mission<oriented nature o& a proBect. 2 proBect organization ?ill
generally be terminated ?.en t.e mission is accomplis.ed. 2ccording to t.e *roBect
4anagement $nstitute t.e discipline o& proBect management can be de&ined as &ollo?sD
R1S
*roBect management is t.e art o& directing and coordinating .uman and material resources
t.roug.out t.e li&e o& a proBect by using modern management tec.ni!ues to ac.ieve
predetermined obBectives o& scope cost time !uality and participation satis&action.
:y contrast t.e general management o& business and industrial corporations assumes a
broader outloo0 ?it. greater continuity o& operations. 5evert.eless t.ere are su&&icient
similarities as ?ell as di&&erences bet?een t.e t?o so t.at modern management
tec.ni!ues developed &or general management may be adapted &or proBect management.
,.e basic ingredients &or a proBect management &rame?or0 R2S may be represented
sc.ematically in Kigure 2<1. 2 ?or0ing 0no?ledge o& general management and
&amiliarity ?it. t.e special 0no?ledge domain related to t.e proBect are indispensable.
;upporting disciplines suc. as computer science and decision science may also play an
important role. $n &act modern management practices and various special 0no?ledge
domains .ave absorbed various tec.ni!ues or tools ?.ic. ?ere once identi&ied only ?it.
t.e supporting disciplines. Kor eIample computer<based in&ormation systems and
decision support systems are no? common<place tools &or general management.
;imilarly many operations researc. tec.ni!ues suc. as linear programming and net?or0
analysis are no? ?idely used in many 0no?ledge or application domains. /ence t.e
representation in Kigure 2<1 re&lects only t.e sources &rom ?.ic. t.e proBect management
&rame?or0 evolves.
(igure !)1* :asic $ngredients in *roBect 4anagement
;peci&ically proBect management in construction encompasses a set o& obBectives ?.ic.
may be accomplis.ed by implementing a series o& operations subBect to resource
constraints. ,.ere are potential con&licts bet?een t.e stated obBectives ?it. regard to
scope cost time and !uality and t.e constraints imposed on .uman material and
&inancial resources. ,.ese con&licts s.ould be resolved at t.e onset o& a proBect by ma0ing
t.e necessary tradeo&&s or creating ne? alternatives. ;ubse!uently t.e &unctions o&
proBect management &or construction generally include t.e &ollo?ingD
1. ;peci&ication o& proBect obBectives and plans including delineation o& scope
budgeting sc.eduling setting per&ormance re!uirements and selecting proBect
participants.
2. 4aIimization o& e&&icient resource utilization t.roug. procurement o& labor
materials and e!uipment according to t.e prescribed sc.edule and plan.
3. $mplementation o& various operations t.roug. proper coordination and control o&
planning design estimating contracting and construction in t.e entire process.
4. 1evelopment o& e&&ective communications and mec.anisms &or resolving
con&licts among t.e various participants.
,.e *roBect 4anagement $nstitute &ocuses on nine distinct areas re!uiring proBect
manager 0no?ledge and attentionD
1. *roBect integration management to ensure t.at t.e various proBect elements are
e&&ectively coordinated.
2. *roBect scope management to ensure t.at all t.e ?or0 re!uired Mand only t.e
re!uired ?or0N is included.
3. *roBect time management to provide an e&&ective proBect sc.edule.
4. *roBect cost management to identi&y needed resources and maintain budget
control.
". *roBect !uality management to ensure &unctional re!uirements are met.
#. *roBect .uman resource management to development and e&&ectively employ
proBect personnel.
%. *roBect communications management to ensure e&&ective internal and eIternal
communications.
'. *roBect ris0 management to analyze and mitigate potential ris0s.
). *roBect procurement management to obtain necessary resources &rom eIternal
sources.
,.ese nine areas &orm t.e basis o& t.e *roBect 4anagement $nstituteHs certi&ication
program &or proBect managers in any industry.
!.! Trends in ,odern ,anagement
$n recent years maBor developments in management re&lect t.e acceptance to various
degrees o& t.e &ollo?ing elementsD M1N t.e management process approac. M2N t.e
management science and decision support approac. M3N t.e be.avioral science approac.
&or .uman resource development and M4N sustainable competitive advantage. ,.ese &our
approac.es complement eac. ot.er in current practice and provide a use&ul ground?or0
&or proBect management.
,.e management process approac. emp.asizes t.e systematic study o& management by
identi&ying management &unctions in an organization and t.en eIamining eac. in detail.
,.ere is general agreement regarding t.e &unctions o& planning organizing and
controlling. 2 maBor tenet is t.at by analyzing management along &unctional lines a
&rame?or0 can be constructed into ?.ic. all ne? management activities can be placed.
,.us t.e managerHs Bob is regarded as coordinating a process o& interrelated &unctions
?.ic. are neit.er totally random nor rigidly predetermined but are dynamic as t.e
process evolves. 2not.er tenet is t.at management principles can be derived &rom an
intellectual analysis o& management &unctions. :y dividing t.e managerHs Bob into
&unctional components principles based upon eac. &unction can be eItracted. /ence
management &unctions can be organized into a .ierarc.ical structure designed to improve
operational e&&iciency suc. as t.e eIample o& t.e organization &or a manu&acturing
company s.o?n in Kigure 2<2. ,.e basic management &unctions are per&ormed by all
managers regardless o& enterprise activity or .ierarc.ical levels. Kinally t.e
development o& a management p.ilosop.y results in .elping t.e manager to establis.
relations.ips bet?een .uman and material resources. ,.e outcome o& &ollo?ing an
establis.ed p.ilosop.y o& operation .elps t.e manager ?in t.e support o& t.e
subordinates in ac.ieving organizational obBectives.
(igure !)!* $llustrative /ierarc.ical ;tructure o& 4anagement Kunctions
,.e management science and decision support approac. contributes to t.e development
o& a body o& !uantitative met.ods designed to aid managers in ma0ing compleI decisions
related to operations and production. $n decision support systems emp.asis is placed on
providing managers ?it. relevant in&ormation. $n management science a great deal o&
attention is given to de&ining obBectives and constraints and to constructing mat.ematical
analysis models in solving compleI problems o& inventory materials and production
control among ot.ers. 2 topic o& maBor interest in management science is t.e
maIimization o& pro&it or in t.e absence o& a ?or0able model &or t.e operation o& t.e
entire system t.e suboptimization o& t.e operations o& its components. ,.e optimization
or suboptimization is o&ten ac.ieved by t.e use o& operations researc. tec.ni!ues suc. as
linear programming !uadratic programming grap. t.eory !ueuing t.eory and 4onte
(arlo simulation. $n addition to t.e increasing use o& computers accompanied by t.e
development o& sop.isticated mat.ematical models and in&ormation systems
management science and decision support systems .ave played an important role by
loo0ing more care&ully at problem inputs and relations.ips and by promoting goal
&ormulation and measurement o& per&ormance. 2rti&icial intelligence .as also begun to be
applied to provide decision support systems &or solving ill<structured problems in
management.
,.e be.avioral science approac. &or .uman resource development is important because
management entails getting t.ings done t.roug. t.e actions o& people. 2n e&&ective
manager must understand t.e importance o& .uman &actors suc. as needs drives
motivation leaders.ip personality be.avior and ?or0 groups. Ait.in t.is conteIt some
place more emp.asis on interpersonal be.avior ?.ic. &ocuses on t.e individual and
.isU.er motivations as a socio<psyc.ological beingO ot.ers emp.asize more group
be.avior in recognition o& t.e organized enterprise as a social organism subBect to all t.e
attitudes .abits pressures and con&licts o& t.e cultural environment o& people. ,.e maBor
contributions made by t.e be.avioral scientists to t.e &ield o& management includeD M1N
t.e &ormulation o& concepts and eIplanations about individual and group be.avior in t.e
organization M2N t.e empirical testing o& t.ese concepts met.odically in many di&&erent
eIperimental and &ield settings and M3N t.e establis.ment o& actual managerial policies
and decisions &or operation based on t.e conceptual and met.odical &rame?or0s.
;ustainable competitive advantage stems primarily &rom good management strategy. 2s
4ic.ael *orter o& t.e /arvard :usiness ;c.ool arguesD
;trategy is creating &it among a companyHs activities. ,.e success o& a strategy depends
on doing many t.ings ?ell < not Bust a &e? < and integrating among t.em. $& t.ere is no &it
among activities t.ere is no distinctive strategy and little sustainability.
$n t.is vie? success&ul &irms must improve and align t.e many processes under?ay to
t.eir strategic vision. ;trategic positioning in t.is &as.ion re!uiresD
(reating a uni!ue and valuable position.
4a0ing trade<o&&s compared to competitors
(reating a J&itJ among a companyHs activities.
*roBect managers s.ould be a?are o& t.e strategic position o& t.eir o?n organization and
t.e ot.er organizations involved in t.e proBect. ,.e proBect manager &aces t.e di&&icult
tas0 o& trying to align t.e goals and strategies o& t.ese various organizations to
accomplis. t.e proBect goals. Kor eIample t.e o?ner o& an industrial proBect may de&ine
a strategic goal as being &irst to mar0et ?it. ne? products. $n t.is case &acilities
development must be oriented to &ast<trac0 rapid construction. 2s anot.er eIample a
contracting &irm may see t.eir strategic advantage in ne? tec.nologies and emp.asize
pro&it opportunities &rom value engineering Mas described in (.apter 3N.
!.+ /trategic Planning and Pro%ect Programming
,.e programming o& capital proBects is s.aped by t.e strategic plan o& an organization
?.ic. is in&luenced by mar0et demands and resources constraints. ,.e programming
process associated ?it. planning and &easibility studies sets t.e priorities and timing &or
initiating various proBects to meet t.e overall obBectives o& t.e organizations. /o?ever
once t.is decision is made to initiate a proBect mar0et pressure may dictate early and
timely completion o& t.e &acility.
2mong various types o& construction t.e in&luence o& mar0et pressure on t.e timing o&
initiating a &acility is most obvious in industrial construction. R3S 1emand &or an
industrial product may be s.ort<lived and i& a company does not .it t.e mar0et &irst
t.ere may not be demand &or its product later. Ait. intensive competition &or national
and international mar0ets t.e trend o& industrial construction moves to?ard s.orter
proBect li&e cycles particularly in tec.nology intensive industries.
$n order to gain time some o?ners are ?illing to &orego t.oroug. planning and &easibility
study so as to proceed on a proBect ?it. inade!uate de&inition o& t.e proBect scope.
$nvariably subse!uent c.anges in proBect scope ?ill increase construction costsO
.o?ever pro&its derived &rom earlier &acility operation o&ten Busti&y t.e increase in
construction costs. 6enerally i& t.e o?ner can derive reasonable pro&its &rom t.e
operation o& a completed &acility t.e proBect is considered a success even i& construction
costs &ar eIceed t.e estimate based on an inade!uate scope de&inition. ,.is attitude may
be attributed in large part to t.e uncertainties in.erent in construction proBects. $t is
di&&icult to argue t.at pro&its mig.t be even .ig.er i& construction costs could be reduced
?it.out increasing t.e proBect duration. /o?ever some proBects notably some nuclear
po?er plants are clearly unsuccess&ul and abandoned be&ore completion and t.eir
demise must be attributed at least in part to inade!uate planning and poor &easibility
studies.
,.e o?ner or &acility sponsor .olds t.e 0ey to in&luence t.e construction costs o& a
proBect because any decision made at t.e beginning stage o& a proBect li&e cycle .as &ar
greater in&luence t.an t.ose made at later stages as s.o?n sc.ematically in Kigure 2<3.
4oreover t.e design and construction decisions ?ill in&luence t.e continuing operating
costs and in many cases t.e revenues over t.e &acility li&etime. ,.ere&ore an o?ner
s.ould obtain t.e eIpertise o& pro&essionals to provide ade!uate planning and &easibility
studies. 4any o?ners do not maintain an in<.ouse engineering and construction
management capability and t.ey s.ould consider t.e establis.ment o& an ongoing
relations.ip ?it. outside consultants in order to respond !uic0ly to re!uests. Even among
t.ose o?ners ?.o maintain engineering and construction divisions many treat t.ese
divisions as reimbursable independent organizations. ;uc. an arrangement s.ould not
discourage t.eir legitimate use as &alse economies in reimbursable costs &rom suc.
divisions can indeed be very costly to t.e overall organization.
(igure !)+* 2bility to $n&luence (onstruction (ost Over ,ime
Kinally t.e initiation and eIecution o& capital proBects places demands on t.e resources
o& t.e o?ner and t.e pro&essionals and contractors to be engaged by t.e o?ner. Kor very
large proBects it may bid up t.e price o& engineering services as ?ell as t.e costs o&
materials and e!uipment and t.e contract prices o& all types. (onse!uently suc. &actors
s.ould be ta0en into consideration in determining t.e timing o& a proBect.
&9ample !)1* /etting priorities for pro%ects
2 department store planned to eIpand its operation by ac!uiring 2+ acres o& land in t.e
sout.east o& a metropolitan area ?.ic. consists o& ?ell establis.ed suburbs &or middle
income &amilies. 2n arc.itecturalUengineering M2UEN &irm ?as engaged to design a
s.opping center on t.e 2+<acre plot ?it. t.e department store as its &lags.ip plus a large
number o& store&ronts &or tenants. One year later t.e department store o?ner purc.ased
2+++ acres o& &arm land in t.e nort.?est outs0irts o& t.e same metropolitan area and
designated 2+ acres o& t.is land &or a s.opping center. ,.e 2UE &irm ?as again engaged
to design a s.opping center at t.is ne? location.
,.e 2UE &irm ?as 0ept completely in t.e dar0 ?.ile t.e assemblage o& t.e 2+++ acres o&
land in t.e nort.?est !uietly too0 place. A.en t.e plans and speci&ications &or t.e
sout.east s.opping center ?ere completed t.e o?ner in&ormed t.e 2UE &irm t.at it ?ould
not proceed ?it. t.e construction o& t.e sout.east s.opping center &or t.e time being.
$nstead t.e o?ner urged t.e 2UE &irm to produce a ne? set o& similar plans and
speci&ications &or t.e nort.?est s.opping center as soon as possible even at t.e sacri&ice
o& cost saving measures. A.en t.e plans and speci&ications &or t.e nort.?est s.opping
center ?ere ready t.e o?ner immediately aut.orized its construction. /o?ever it too0
anot.er t.ree years be&ore t.e sout.east s.opping center ?as &inally built.
,.e reason be.ind t.e c.ange o& plan ?as t.at t.e o?ner discovered t.e availability o&
t.e &arm land in t.e nort.?est ?.ic. could be developed into residential real estate
properties &or upper middle income &amilies. ,.e immediate construction o& t.e
nort.?est s.opping center ?ould ma0e t.e land development parcels more attractive to
.ome buyers. ,.us t.e o?ner ?as able to recoup enoug. cas. &lo? in t.ree years to
construct t.e sout.east s.opping center in addition to &inancing t.e construction o& t.e
nort.east s.opping center as ?ell as t.e land development in its vicinity.
A.ile t.e o?ner did not ?ant t.e construction cost o& t.e nort.?est s.opping center to
run ?ild it apparently ?as satis&ied ?it. t.e cost estimate based on t.e detailed plans o&
t.e sout.east s.opping center. ,.us t.e o?ner .ad a general idea o& ?.at t.e
construction cost o& t.e nort.?est s.opping center ?ould be and did not ?is. to ?ait &or
a more re&ined cost estimate until t.e detailed plans &or t.at center ?ere ready. ,o t.e
o?ner t.e timeliness o& completing t.e construction o& t.e nort.?est s.opping center
?as &ar more important t.an reducing t.e construction cost in &ul&illing its investment
obBectives.
&9ample !)!* 2esource Constraints for ,ega Pro%ects
2 maBor problem ?it. mega proBects is t.e severe strain placed on t.e environment
particularly on t.e resources in t.e immediate area o& a construction proBect. J4egaJ or
JmacroJ proBects involve construction o& very large &acilities suc. as t.e 2las0a pipeline
constructed in t.e 1)%+Hs or t.e *anama (anal constructed in t.e 1)++Hs. ,.e limitations
in some or all o& t.e basic elements re!uired &or t.e success&ul completion o& a mega
proBect includeD
Engineering design pro&essionals to provide su&&icient manpo?er to complete t.e
design ?it.in a reasonable time limit.
(onstruction supervisors ?it. capacity and eIperience to direct large proBects.
,.e number o& construction ?or0ers ?it. proper s0ills to do t.e ?or0.
,.e mar0et to supply materials in su&&icient !uantities and o& re!uired !uality on
time.
,.e ability o& t.e local in&rastructure to support t.e large number o& ?or0ers over
an eItended period o& time including .ousing transportation and ot.er services.
,o compound t.e problem mega proBects are o&ten constructed in remote environments
a?ay &rom maBor population centers and subBect to severe climate conditions.
(onse!uently special &eatures o& eac. mega proBect must be evaluated care&ully.
!.- &ffects of Pro%ect 2is:s on Organi6ation
,.e uncertainty in underta0ing a construction proBect comes &rom many sources and o&ten
involves many participants in t.e proBect. ;ince eac. participant tries to minimize its o?n
ris0 t.e con&licts among various participants can be detrimental to t.e proBect. Only t.e
o?ner .as t.e po?er to moderate suc. con&licts as it alone .olds t.e 0ey to ris0
assignment t.roug. proper contractual relations ?it. ot.er participants. Kailure to
recognize t.is responsibility by t.e o?ner o&ten leads to undesirable results. $n recent
years t.e concept o& Jris0 s.aringUris0 assignmentJ contracts .as gained acceptance by
t.e &ederal government. R4S ;ince t.is type o& contract ac0no?ledges t.e responsibilities
o& t.e o?ners t.e contract prices are eIpected to be lo?er t.an t.ose in ?.ic. all ris0s
are assigned to contractors.
$n approac.ing t.e problem o& uncertainty it is important to recognize t.at incentives
must be provided i& any o& t.e participants is eIpected to ta0e a greater ris0. ,.e
?illingness o& a participant to accept ris0s o&ten re&lects t.e pro&essional competence o&
t.at participant as ?ell as its propensity to ris0. /o?ever societyHs perception o& t.e
potential liabilities o& t.e participant can a&&ect t.e attitude o& ris0<ta0ing &or all
participants. A.en a claim is made against one o& t.e participants it is di&&icult &or t.e
public to 0no? ?.et.er a &raud .as been committed or simply t.at an accident .as
occurred.
3is0s in construction proBects may be classi&ied in a number o& ?ays. R"S One &orm o&
classi&ication is as &ollo?sD
1. ;ocioeconomic &actors
o Environmental protection
o *ublic sa&ety regulation
o Economic instability
o EIc.ange rate &luctuation
2. Organizational relations.ips
o (ontractual relations
o 2ttitudes o& participants
o (ommunication
3. ,ec.nological problems
o 1esign assumptions
o ;ite conditions
o (onstruction procedures
o (onstruction occupational sa&ety
,.e environmental protection movement .as contributed to t.e uncertainty &or
construction because o& t.e inability to 0no? ?.at ?ill be re!uired and .o? long it ?ill
ta0e to obtain approval &rom t.e regulatory agencies. ,.e re!uirements o& continued re<
evaluation o& problems and t.e lac0 o& de&initive criteria ?.ic. are practical .ave also
resulted in added costs. *ublic sa&ety regulations .ave similar e&&ects ?.ic. .ave been
most noticeable in t.e energy &ield involving nuclear po?er plants and coal mining. ,.e
situation .as created constantly s.i&ting guidelines &or engineers constructors and o?ners
as proBects move t.roug. t.e stages o& planning to construction. ,.ese moving targets
add a signi&icant ne? dimension o& uncertainty ?.ic. can ma0e it virtually impossible to
sc.edule and complete ?or0 at budgeted cost. Economic conditions o& t.e past decade
.ave &urt.er rein&orced t.e climate o& uncertainty ?it. .ig. in&lation and interest rates.
,.e deregulation o& &inancial institutions .as also generated unanticipated problems
related to t.e &inancing o& construction.
Uncertainty stemming &rom regulatory agencies environmental issues and &inancial
aspects o& construction s.ould be at least mitigated or ideally eliminated. O?ners are
0eenly interested in ac.ieving some &orm o& brea0t.roug. t.at ?ill lo?er t.e costs o&
proBects and mitigate or eliminate lengt.y delays. ;uc. brea0t.roug.s are seldom
planned. 6enerally t.ey .appen ?.en t.e rig.t conditions eIist suc. as ?.en innovation
is permitted or ?.en a basis &or incentive or re?ard eIists. /o?ever t.ere is a long ?ay
to go be&ore a true partners.ip o& all parties involved can be &orged.
1uring periods o& economic eIpansion maBor capital eIpenditures are made by industries
and bid up t.e cost o& construction. $n order to control costs some o?ners attempt to use
&iIed price contracts so t.at t.e ris0s o& un&oreseen contingencies related to an over.eated
economy are passed on to contractors. /o?ever contractors ?ill raise t.eir prices to
compensate &or t.e additional ris0s.
,.e ris0s related to organizational relations.ips may appear to be unnecessary but are
!uite real. ;trained relations.ips may develop bet?een various organizations involved in
t.e designUconstruct process. A.en problems occur discussions o&ten center on
responsibilities rat.er t.an proBect needs at a time ?.en t.e &ocus s.ould be on solving
t.e problems. (ooperation and communication bet?een t.e parties are discouraged &or
&ear o& t.e e&&ects o& impending litigation. ,.is barrier to communication results &rom t.e
ill<conceived notion t.at uncertainties resulting &rom tec.nological problems can be
eliminated by appropriate contract terms. ,.e net result .as been an increase in t.e costs
o& constructed &acilities.
,.e ris0s related to tec.nological problems are &amiliar to t.e designUconstruct
pro&essions ?.ic. .ave some degree o& control over t.is category. /o?ever because o&
rapid advances in ne? tec.nologies ?.ic. present ne? problems to designers and
constructors tec.nological ris0 .as become greater in many instances. (ertain design
assumptions ?.ic. .ave served t.e pro&essions ?ell in t.e past may become obsolete in
dealing ?it. ne? types o& &acilities ?.ic. may .ave greater compleIity or scale or bot..
;ite conditions particularly subsur&ace conditions ?.ic. al?ays present some degree o&
uncertainty can create an even greater degree o& uncertainty &or &acilities ?it. .ereto&ore
un0no?n c.aracteristics during operation. :ecause construction procedures may not .ave
been &ully anticipated t.e design may .ave to be modi&ied a&ter construction .as begun.
2n eIample o& &acilities ?.ic. .ave encountered suc. uncertainty is t.e nuclear po?er
plant and many o?ners designers and contractors .ave su&&ered &or underta0ing suc.
proBects.
$& eac. o& t.e problems cited above can cause uncertainty t.e combination o& suc.
problems is o&ten regarded by all parties as being out o& control and in.erently ris0y.
,.us t.e issue o& liability .as ta0en on maBor proportions and .as in&luenced t.e
practices o& engineers and constructors ?.o in turn .ave in&luenced t.e actions o& t.e
o?ners.
4any o?ners .ave begun to understand t.e problems o& ris0s and are see0ing to address
some o& t.ese problems. Kor eIample some o?ners are turning to t.ose organizations
t.at o&&er complete capabilities in planning design and construction and tend to avoid
brea0ing t.e proBect into maBor components to be underta0en individually by specialty
participants. *roper coordination t.roug.out t.e proBect duration and good organizational
communication can avoid delays and costs resulting &rom &ragmentation o& services even
t.oug. t.e components &rom various services are eventually integrated.
2ttitudes o& cooperation can be readily applied to t.e private sector but only in special
circumstances can t.ey be applied to t.e public sector. ,.e ability to deal ?it. compleI
issues is o&ten precluded in t.e competitive bidding ?.ic. is usually re!uired in t.e
public sector. ,.e situation becomes more di&&icult ?it. t.e proli&eration o& regulatory
re!uirements and resulting delays in design and construction ?.ile a?aiting approvals
&rom government o&&icials ?.o do not participate in t.e ris0s o& t.e proBect.
!.. Organi6ation of Pro%ect Participants
,.e top management o& t.e o?ner sets t.e overall policy and selects t.e appropriate
organization to ta0e c.arge o& a proposed proBect. $ts policy ?ill dictate .o? t.e proBect
li&e cycle is divided among organizations and ?.ic. pro&essionals s.ould be engaged.
1ecisions by t.e top management o& t.e o?ner ?ill also in&luence t.e organization to be
adopted &or proBect management. $n general t.ere are many ?ays to decompose a proBect
into stages. ,.e most typical ?ays areD
;e!uential processing ?.ereby t.e proBect is divided into separate stages and eac.
stage is carried out successively in se!uence.
*arallel processing ?.ereby t.e proBect is divided into independent parts suc. t.at
all stages are carried out simultaneously.
;taggered processing ?.ereby t.e stages may be overlapping suc. as t.e use o&
p.ased design<construct procedures &or &ast trac0 operation.
$t s.ould be pointed out t.at some decomposition may ?or0 out better t.an ot.ers
depending on t.e circumstances. $n any case t.e prevalence o& decomposition ma0es t.e
subse!uent integration particularly important. ,.e critical issues involved in organization
&or proBect management areD
/o? many organizations are involvedX
A.at are t.e relations.ips among t.e organizationsX
A.en are t.e various organizations broug.t into t.e proBectX
,.ere are t?o basic approac.es to organize &or proBect implementation even t.oug.
many variations may eIist as a result o& di&&erent contractual relations.ips adopted by t.e
o?ner and builder. ,.ese basic approac.es are divided along t.e &ollo?ing linesD
1. /eparation of organi6ations. 5umerous organizations serve as consultants or
contractors to t.e o?ner ?it. di&&erent organizations .andling design and
construction &unctions. ,ypical eIamples ?.ic. involve di&&erent degrees o&
separation areD
o ,raditional se!uence o& design and construction
o *ro&essional construction management
2. $ntegration of organi6ations. 2 single or Boint venture consisting o& a number o&
organizations ?it. a single command underta0es bot. design and construction
&unctions. ,?o eItremes may be cited as eIamplesD
o O?ner<builder operation in ?.ic. all ?or0 ?ill be .andled in .ouse by
&orce account.
o ,urn0ey operation in ?.ic. all ?or0 is contracted to a vendor ?.ic. is
responsible &or delivering t.e completed proBect
;ince construction proBects may be managed by a spectrum o& participants in a variety o&
combinations t.e organization &or t.e management o& suc. proBects may vary &rom case
to case. On one eItreme eac. proBect may be sta&&ed by eIisting personnel in t.e
&unctional divisions o& t.e organization on an ad<.oc basis as s.o?n in Kigure 2<4 until
t.e proBect is completed. ,.is arrangement is re&erred to as t.e matriI organization as
eac. proBect manager must negotiate all resources &or t.e proBect &rom t.e eIisting
organizational &rame?or0. On t.e ot.er .and t.e organization may consist o& a small
central &unctional sta&& &or t.e eIclusive purpose o& supporting various proBects eac. o&
?.ic. .as its &unctional divisions as s.o?n in Kigure 2<". ,.is decentralized set<up is
re&erred to as t.e proBect oriented organization as eac. proBect manager .as autonomy in
managing t.e proBect. ,.ere are many variations o& management style bet?een t.ese t?o
eItremes depending on t.e obBectives o& t.e organization and t.e nature o& t.e
construction proBect. Kor eIample a large c.emical company ?it. in<.ouse sta&& &or
planning design and construction o& &acilities &or ne? product lines ?ill naturally adopt
t.e matriI organization. On t.e ot.er .and a construction company ?.ose eIistence
depends entirely on t.e management o& certain types o& construction proBects may &ind
t.e proBect<oriented organization particularly attractive. A.ile organizations may di&&er
t.e same basic principles o& management structure are applicable to most situations.
(igure !)-* 2 4atriI Organization
(igure !).* 2 *roBect<Oriented Organization
,o illustrate various types o& organizations &or proBect management ?e s.all consider
t?o eIamples t.e &irst one representing an o?ner organization ?.ile t.e second one
representing t.e organization o& a construction management consultant under t.e direct
supervision o& t.e o?ner.
&9ample !)+* ,atri9 Organi6ation of an &ngineering ;iision
,.e Engineering 1ivision o& an Electric *o?er and Lig.t (ompany .as &unctional
departments as s.o?n in Kigure 2<#. A.en small scale proBects suc. as t.e addition o& a
transmission to?er or a sub<station are aut.orized a matriI organization is used to carry
out suc. proBects. Kor eIample in t.e design o& a transmission to?er t.e pro&essional
s0ill o& a structural engineer is most important. (onse!uently t.e leader o& t.e proBect
team ?ill be selected &rom t.e ;tructural Engineering 1epartment ?.ile t.e remaining
team members are selected &rom all departments as dictated by t.e manpo?er
re!uirements. On t.e ot.er .and in t.e design o& a ne? sub<station t.e pro&essional s0ill
o& an electrical engineer is most important. /ence t.e leader o& t.e proBect team ?ill be
selected &rom t.e Electrical Engineering 1epartment.
(igure !)0* ,.e 4atriI Organization in an Engineering 1ivision
&9ample !)-* &9ample of Construction ,anagement Consultant Organi6ation
A.en t.e same Electric *o?er and Lig.t (ompany in t.e previous eIample decided to
build a ne? nuclear po?er plant it engaged a construction management consultant to
ta0e c.arge o& t.e design and construction completely. /o?ever t.e company also
assigned a proBect team to coordinate ?it. t.e construction management consultant as
s.o?n in Kigure 2<%.
(igure !)1* (oordination bet?een O?ner and (onsultant
;ince t.e company eventually ?ill operate t.e po?er plant upon its completion it is
.ig.ly important &or its sta&& to monitor t.e design and construction o& t.e plant. ;uc.
coordination allo?s t.e o?ner not only to assure t.e !uality o& construction but also to be
&amiliar ?it. t.e design to &acilitate &uture operation and maintenance. 5ote t.e close
direct relations.ips o& various departments o& t.e o?ner and t.e consultant. ;ince t.e
proBect ?ill last &or many years be&ore its completion t.e sta&& members assigned to t.e
proBect team are not eIpected to reBoin t.e Engineering 1epartment but ?ill probably be
involved in t.e &uture operation o& t.e ne? plant. ,.us t.e proBect team can act
independently to?ard its designated mission.
!.0 Traditional ;esigner)Constructor /equence
Kor ordinary proBects o& moderate size and compleIity t.e o?ner o&ten employs a
designer Man arc.itecturalUengineering &irmN ?.ic. prepares t.e detailed plans and
speci&ications &or t.e constructor Ma general contractorN. ,.e designer also acts on be.al&
o& t.e o?ner to oversee t.e proBect implementation during construction. ,.e general
contractor is responsible &or t.e construction itsel& even t.oug. t.e ?or0 may actually be
underta0en by a number o& specialty subcontractors.
,.e o?ner usually negotiates t.e &ee &or service ?it. t.e arc.itecturalUengineering M2UEN
&irm. $n addition to t.e responsibilities o& designing t.e &acility t.e 2UE &irm also
eIercises to some degree supervision o& t.e construction as stipulated by t.e o?ner.
,raditionally t.e 2UE &irm regards itsel& as design pro&essionals representing t.e o?ner
?.o s.ould not communicate ?it. potential contractors to avoid collusion or con&lict o&
interest. Kield inspectors ?or0ing &or an 2UE &irm usually &ollo? t.roug. t.e
implementation o& a proBect a&ter t.e design is completed and seldom .ave eItensive
input in t.e design itsel&. :ecause o& t.e litigation climate in t.e last t?o decades most
2UE &irms only provide observers rat.er t.an inspectors in t.e &ield. Even t.e s.op
dra?ings o& &abrication or construction sc.emes submitted by t.e contractors &or
approval are revie?ed ?it. a disclaimer o& responsibility by t.e 2UE &irms.
,.e o?ner may select a general constructor eit.er t.roug. competitive bidding or
t.roug. negotiation. *ublic agencies are re!uired to use t.e competitive bidding mode
?.ile private organizations may c.oose eit.er mode o& operation. $n using competitive
bidding t.e o?ner is &orced to use t.e designer<constructor se!uence since detailed plans
and speci&ications must be ready be&ore inviting bidders to submit t.eir bids. $& t.e o?ner
c.ooses to use a negotiated contract it is &ree to use p.ased construction i& it so desires.
,.e general contractor may c.oose to per&orm all or part o& t.e construction ?or0 or act
only as a manager by subcontracting all t.e construction to subcontractors. ,.e general
contractor may also select t.e subcontractors t.roug. competitive bidding or negotiated
contracts. ,.e general contractor may as0 a number o& subcontractors to !uote prices &or
t.e subcontracts be&ore submitting its bid to t.e o?ner. /o?ever t.e subcontractors
o&ten cannot &orce t.e ?inning general contractor to use t.em on t.e proBect. ,.is
situation may lead to practices 0no?n as )id shopping and )id peddling. :id s.opping
re&ers to t.e situation ?.en t.e general contractor approac.es subcontractors ot.er t.an
t.ose ?.ose !uoted prices ?ere used in t.e ?inning contract in order to see0 lo?er
priced subcontracts. :id peddling re&ers to t.e actions o& subcontractors ?.o o&&er lo?er
priced subcontracts to t.e ?inning general subcontractors in order to dislodge t.e
subcontractors ?.o originally !uoted prices to t.e general contractor prior to its bid
submittal. $n bot. cases t.e !uality o& construction may be sacri&iced and some state
statutes &orbid t.ese practices &or public proBects.
2lt.oug. t.e designer<constructor se!uence is still ?idely used because o& t.e public
perception o& &airness in competitive bidding many private o?ners recognize t.e
disadvantages o& using t.is approac. ?.en t.e proBect is large and compleI and ?.en
mar0et pressures re!uire a s.orter proBect duration t.an t.at ?.ic. can be accomplis.ed
by using t.is traditional met.od.
!.1 Professional Construction ,anagement
*ro&essional construction management re&ers to a proBect management team consisting o&
a pro&essional construction manager and ot.er participants ?.o ?ill carry out t.e tas0s o&
proBect planning design and construction in an integrated manner. (ontractual
relations.ips among members o& t.e team are intended to minimize adversarial
relations.ips and contribute to greater response ?it.in t.e management group. 2
pro&essional construction manager is a &irm specialized in t.e practice o& pro&essional
construction management ?.ic. includesD
Aor0 ?it. o?ner and t.e 2UE &irms &rom t.e beginning and ma0e
recommendations on design improvements construction tec.nology sc.edules
and construction economy.
*ropose design and construction alternatives i& appropriate and analyze t.e
e&&ects o& t.e alternatives on t.e proBect cost and sc.edule.
4onitor subse!uent development o& t.e proBect in order t.at t.ese targets are not
eIceeded ?it.out t.e 0no?ledge o& t.e o?ner.
(oordinate procurement o& material and e!uipment and t.e ?or0 o& all
construction contractors and mont.ly payments to contractors c.anges claims
and inspection &or con&orming design re!uirements.
*er&orm ot.er proBect related services as re!uired by o?ners.
*ro&essional construction management is usually used ?.en a proBect is very large or
compleI. ,.e organizational &eatures t.at are c.aracteristics o& mega<proBects can be
summarized as &ollo?sD R#S
,.e overall organizational approac. &or t.e proBect ?ill c.ange as t.e proBect
advances. ,.e J&unctionalJ organization may c.ange to a JmatriIJ ?.ic. may
c.ange to a JproBectJ organization Mnot necessarily in t.is orderN.
Ait.in t.e overall organization t.ere ?ill probably be &unctional proBect and
matriI suborganizations all at t.e same time. ,.is &eature greatly complicates t.e
t.eory and t.e practice o& management yet is essential &or overall cost
e&&ectiveness.
;uccess&ul giant compleI organizations usually .ave a strong matriI<type
suborganization at t.e level ?.ere basic cost and sc.edule control responsibility
is assigned. ,.is suborganization is re&erred to as a Jcost centerJ or as a JproBectJ
and is .eaded by a proBect manager. ,.e cost center matriI may .ave participants
assigned &rom many di&&erent &unctional groups. $n turn t.ese &unctional groups
may .ave tec.nical reporting responsibilities to several di&&erent and .ig.er tiers
in t.e organization. ,.e 0ey to a cost e&&ective e&&ort is t.e development o& t.is
proBect suborganization into a single team under t.e leaders.ip o& a strong proBect
manager.
,.e eItent to ?.ic. decision<ma0ing ?ill be centralized or decentralized is
crucial to t.e organization o& t.e mega<proBect.
(onse!uently it is important to recognize t.e c.anging nature o& t.e organizational
structure as a proBect is carried out in various stages.
&9ample !).* ,anaging of the Alas:a Pipeline Pro%ect
,.e 2las0a *ipeline *roBect ?as t.e largest most eIpensive private construction proBect
in t.e 1)%+Hs ?.ic. encompassed '++ miles t.ousands o& employees and 1+ billion
dollars.
2t t.e planning stage t.e o?ner Ma consortiumN employed a (onstruction 4anagement
(ontractor M(4(N to direct t.e pipeline portion but retained centralized decision ma0ing
to assure single direction and to integrate t.e e&&ort o& t.e (4( ?it. t.e pump stations
and t.e terminals per&ormed by anot.er contractor. ,.e (4( also centralized its decision
ma0ing in directing over 4++ subcontractors and t.ousands o& vendors. :ecause t.ere
?ere 1) di&&erent construction camps and .undreds o& di&&erent construction sites t.is
centralization caused delays in decision ma0ing.
2t about t.e 1"V point o& p.ysical completion t.e o?ner decided to reorganize t.e
decision ma0ing process and c.ange t.e role o& t.e (4(. ,.e ne? organization ?as a
combination o& o?ner and (4( personnel assigned ?it.in an integrated organization.
,.e obBective ?as to develop a single proBect team responsible &or controlling all
subcontractors. $nstead o& .aving nine tiers o& organization &rom t.e 6eneral 4anager o&
t.e (4( to t.e subcontractors t.e ne? organization .ad only &our tiers &rom t.e ;enior
*roBect 4anager o& t.e o?ner to subcontractors. :esides uni&ied direction and
coordination t.is reduction in tiers o& organization greatly improved communications
and t.e ability to ma0e and implement decisions. ,.e ne? organization also allo?ed
decentralization o& decision ma0ing by treating &ive sections o& t.e pipeline at di&&erent
geograp.ic locations as separate proBects ?it. a section manager responsible &or all
&unctions o& t.e section as a pro&it center.
2t about )'V point o& p.ysical completion all remaining activities ?ere to be
consolidated to identi&y single bottom<line responsibility to reduce duplication in
management sta&& and to uni&y coordination o& remaining ?or0. ,.us t.e proBect ?as
&irst .andled by separate organizations but later ?as run by an integrated organization
?it. decentralized pro&it centers. Kinally t.e organization in e&&ect became small and ?as
ready to be p.ased out o& operation.
&9ample !)0* ,anaging the Channel Tunnel Construction from <ritain to (rance
,.e Underground 3ailroad tunnel &rom :ritain to Krance is commonly called t.e (.annel
,unnel or (.unnel. $t ?as built by tunneling &rom eac. side. ;tarting in 1)'% t.e tunnels
.ad a brea0 t.oug. in 1))+.
4anagement turmoil dogged t.e proBect &rom t.e start. $n 1)') seven o& t.e eig.t top
people in t.e construction organization le&t. ,.ere ?as a built in con&lict bet?een t.e
contractors and government overseersD J,.e &undamental t.ing ?rong is t.at t.e
contractors o?n less t.an #V o& Eurotunnel. ,.eir interest is to build and sell t.e proBect
at a pro&it. MEurotunnelHsN interest is &or it to operate economically sa&ely and reliably &or
t.e neIt "+ years.J M2lastair 4orton Eurotunnel (EO !uoted in E53 12U1+U)+ p. "#N.
!.3 Owner)<uilder Operation
$n t.is approac. an o?ner must .ave a steady &lo? o& on<going proBects in order to
maintain a large ?or0 &orce &or in<.ouse operation. /o?ever t.e o?ner may c.oose to
subcontract a substantial portion o& t.e proBect to outside consultants and contractors &or
bot. design and construction even t.oug. it retains centralized decision ma0ing to
integrate all e&&orts in proBect implementation.
&9ample !)1* =./. Army Corps of &ngineers Organi6ation
,.e 1istrict EngineerHs O&&ice o& t.e U.;. 2rmy (orps o& Engineers may be vie?ed as a
typical eIample o& an o?ner<builder approac. as s.o?n in Kigure 2<'.
(igure !)3* Organization o& a 1istrict o& (orps o& Engineers
$n t.e 1istrict EngineerHs O&&ice o& t.e U.;. (orps o& Engineers t.ere usually eIist an
Engineering 1ivision and an Operations 1ivision and in a large district a (onstruction
1ivision. Under eac. division t.ere are several branc.es. ;ince t.e aut.orization o& a
proBect is usually initiated by t.e U.;. (ongress t.e planning and design &unctions are
separated in order to &acilitate operations. ;ince t.e aut.orization o& t.e &easibility study
o& a proBect may precede t.e aut.orization o& t.e design by many years eac. stage can
best be .andled by a di&&erent branc. in t.e Engineering 1ivision. $& construction is
ultimately aut.orized t.e ?or0 may be .andled by t.e (onstruction 1ivision or by
outside contractors. ,.e Operations 1ivision .andles t.e operation o& loc0s and ot.er
&acilities ?.ic. re!uire routine attention and maintenance.
A.en a proBect is aut.orized a proBect manager is selected &rom t.e most appropriate
branc. to .ead t.e proBect toget.er ?it. a group o& sta&& dra?n &rom various branc.es to
&orm t.e proBect team. A.en t.e proBect is completed all members o& t.e team including
t.e proBect manager ?ill return to t.eir regular posts in various branc.es and divisions
until t.e neIt proBect assignment. ,.us a matriI organization is used in managing eac.
proBect.
!.4 Turn:ey Operation
;ome o?ners ?is. to delegate all responsibilities o& design and construction to outside
consultants in a turnkey proBect arrangement. 2 contractor agrees to provide t.e
completed &acility on t.e basis o& per&ormance speci&ications set &ort. by t.e o?ner. ,.e
contractor may even assume t.e responsibility o& operating t.e proBect i& t.e o?ner so
desires. $n order &or a turn0ey operation to succeed t.e o?ner must be able to provide a
set o& unambiguous per&ormance speci&ications to t.e contractor and must .ave complete
con&idence in t.e capability o& t.e contractor to carry out t.e mission.
,.is approac. is t.e direct opposite o& t.e o?ner<builder approac. in ?.ic. t.e o?ner
?is.es to retain t.e maIimum amount o& control &or t.e design<construction process.
&9ample !)3* An &9ample of a Turn:ey Organi6ation
2 1"+<4? po?er plant ?as proposed in 1)'" by t.e ,eIas<5e? 4eIico *o?er
(ompany o& Kort Aort. ,eIas ?.ic. ?ould ma0e use o& t.e turn0ey operation. R%S
Upon approval by t.e ,eIas Utility (ommission a consortium consisting o& /.:. Yac.ry
(o. Aesting.ouse Electric (o. and (ombustion Engineering $nc. ?ould design build
and &inance t.e po?er plant &or completion in 1))+ &or an estimated construction cost o&
G2++ million in 1))+ dollars. ,.e consortium ?ould assume total liability during
construction including debt service costs and t.ereby eliminate t.e ris0s o& cost
escalation to rate payers stoc0.olders and t.e utility company management.
!.15 "eadership and ,otiation for the Pro%ect Team
,.e proBect manager in t.e broadest sense o& t.e term is t.e most important person &or
t.e success or &ailure o& a proBect. ,.e proBect manager is responsible &or planning
organizing and controlling t.e proBect. $n turn t.e proBect manager receives aut.ority
&rom t.e management o& t.e organization to mobilize t.e necessary resources to complete
a proBect.
,.e proBect manager must be able to eIert interpersonal in&luence in order to lead t.e
proBect team. ,.e proBect manager o&ten gains t.e support o& .isU.er team t.roug. a
combination o& t.e &ollo?ingD
Kormal aut.ority resulting &rom an o&&icial capacity ?.ic. is empo?ered to issue
orders.
3e?ard andUor penalty po?er resulting &rom .isU.er capacity to dispense directly
or indirectly valued organization re?ards or penalties.
EIpert po?er ?.en t.e proBect manager is perceived as possessing special
0no?ledge or eIpertise &or t.e Bob.
2ttractive po?er because t.e proBect manager .as a personality or ot.er
c.aracteristics to convince ot.ers.
$n a matriI organization t.e members o& t.e &unctional departments may be accustomed
to a single reporting line in a .ierarc.ical structure but t.e proBect manager coordinates
t.e activities o& t.e team members dra?n &rom &unctional departments. ,.e &unctional
structure ?it.in t.e matriI organization is responsible &or priorities coordination
administration and &inal decisions pertaining to proBect implementation. ,.us t.ere are
potential con&licts bet?een &unctional divisions and proBect teams. ,.e proBect manager
must be given t.e responsibility and aut.ority to resolve various con&licts suc. t.at t.e
establis.ed proBect policy and !uality standards ?ill not be Beopardized. A.en contending
issues o& a more &undamental nature are developed t.ey must be broug.t to t.e attention
o& a .ig. level in t.e management and be resolved eIpeditiously.
$n general t.e proBect managerHs aut.ority must be clearly documented as ?ell as
de&ined particularly in a matriI organization ?.ere t.e &unctional division managers
o&ten retain certain aut.ority over t.e personnel temporarily assigned to a proBect. ,.e
&ollo?ing principles s.ould be observedD
,.e inter&ace bet?een t.e proBect manager and t.e &unctional division managers
s.ould be 0ept as simple as possible.
,.e proBect manager must gain control over t.ose elements o& t.e proBect ?.ic.
may overlap ?it. &unctional division managers.
,.e proBect manager s.ould encourage problem solving rat.er t.an role playing
o& team members dra?n &rom various &unctional divisions.
!.11 $nterpersonal <ehaior in Pro%ect Organi6ations
A.ile a success&ul proBect manager must be a good leader ot.er members o& t.e proBect
team must also learn to ?or0 toget.er ?.et.er t.ey are assembled &rom di&&erent
divisions o& t.e same organization or even &rom di&&erent organizations. ;ome problems
o& interaction may arise initially ?.en t.e team members are un&amiliar ?it. t.eir o?n
roles in t.e proBect team particularly &or a large and compleI proBect. ,.ese problems
must be resolved !uic0ly in order to develop an e&&ective &unctioning team.
4any o& t.e maBor issues in construction proBects re!uire e&&ective interventions by
individuals groups and organizations. ,.e &undamental c.allenge is to en.ance
communication among individuals groups and organizations so t.at obstacles in t.e ?ay
o& improving interpersonal relations may be removed. ;ome be.avior science concepts
are .elp&ul in overcoming communication di&&iculties t.at bloc0 cooperation and
coordination. $n very large proBects pro&essional be.avior scientists may be necessary in
diagnosing t.e problems and advising t.e personnel ?or0ing on t.e proBect. ,.e po?er o&
t.e organization s.ould be used Budiciously in resolving con&licts.
,.e maBor symptoms o& interpersonal be.avior problems can be detected by eIperienced
observers and t.ey are o&ten t.e sources o& serious communication di&&iculties among
participants in a proBect. Kor eIample members o& a proBect team may avoid eac. ot.er
and ?it.dra? &rom active interactions about di&&erences t.at need to be dealt ?it.. ,.ey
may attempt to criticize and blame ot.er individuals or groups ?.en t.ings go ?rong.
,.ey may resent suggestions &or improvement and become de&ensive to minimize
culpability rat.er t.an ta0e t.e initiative to maIimize ac.ievements. 2ll t.ese actions are
detrimental to t.e proBect organization.
A.ile t.ese symptoms can occur to individuals at any organization t.ey are compounded
i& t.e proBect team consists o& individuals ?.o are put toget.er &rom di&&erent
organizations. $nvariably di&&erent organizations .ave di&&erent cultures or modes o&
operation. $ndividuals &rom di&&erent groups may not .ave a common loyalty and may
pre&er to eIpand t.eir energy in t.e directions most advantageous to t.emselves instead
o& t.e proBect team. ,.ere&ore no one s.ould ta0e it &or granted t.at a proBect team ?ill
?or0 toget.er .armoniously Bust because its members are placed p.ysically toget.er in
one location. On t.e contrary it must be assumed t.at good communication can be
ac.ieved only t.roug. t.e deliberate e&&ort o& t.e top management o& eac. organization
contributing to t.e Boint venture.
!.1! Perceptions of Owners and Contractors
2lt.oug. o?ners and contractors may .ave di&&erent perceptions on proBect management
&or construction t.ey .ave a common interest in creating an environment leading to
success&ul proBects in ?.ic. per&ormance !uality completion time and &inal costs are
?it.in prescribed limits and tolerances. $t is interesting t.ere&ore to note t.e opinions o&
some leading contractors and o?ners ?.o ?ere intervie?ed in 1)'4. R'S
Krom t.e responses o& siI contractors t.e 0ey &actors cited &or success&ul proBects areD
?ell de&ined scope
eItensive early planning
good leaders.ip management and &irst line supervision
positive client relations.ip ?it. client involvement
proper proBect team c.emistry
!uic0 response to c.anges
Engineering managers concerned ?it. t.e total proBect not Bust t.e engineering
elements.
(onversely t.e 0ey &actors cited &or unsuccess&ul proBects areD
ill<de&ined scope
poor management
poor planning
brea0do?n in communication bet?een engineering and construction
unrealistic scope sc.edules and budgets
many c.anges at various stages o& progress
lac0 o& good proBect control
,.e responses o& eig.t o?ners indicated t.at t.ey did not al?ays understand t.e concerns
o& t.e contractors alt.oug. t.ey generally agreed ?it. some o& t.e 0ey &actors &or
success&ul and unsuccess&ul proBects cited by t.e contractors. ,.e signi&icant &indings o&
t.e intervie?s ?it. o?ners are summarized as &ollo?sD
2ll o?ners .ave t.e same perception o& t.eir o?n role but t.ey di&&er
signi&icantly in assuming t.at role in practice.
,.e o?ners also di&&er dramatically in t.e amount o& early planning and in
providing in&ormation in bid pac0ages.
,.ere is a trend to?ard brea0ing a proBect into several smaller proBects as t.e
proBects become larger and more compleI.
4ost o?ners recognize t.e importance o& sc.edule but t.ey adopt di&&erent
re!uirements in controlling t.e sc.edule.
2ll agree t.at people are t.e 0ey to proBect success.
Krom t.e results o& t.ese intervie?s it is obvious t.at o?ners must be more a?are and
involved in t.e process in order to generate &avorable conditions &or success&ul proBects.
1esign pro&essionals and construction contractors must provide better communication
?it. eac. ot.er and ?it. t.e o?ner in proBect implementation.
!.1+ 2eferences
1. :arrie 1onald ;. and :oyd (. *aulson Pr. !rofessional $onstruction
'anagement% 4c6ra?</ill :oo0 (ompany 2nd Ed. 1)'4.
2. /alpin 1aniel A. and 3onald A. Aood.ead $onstruction 'anagement Po.n
Ailey and ;ons 1)'+.
3. /odgetts 3.4. 'anagement3 ,heory% !rocess and !ractice A.:. ;aunders (o.
*.iladelp.ia *2 1)%).
4. Qerzner /. !roject 'anagement3 " #ystems "pproach to !lanning% #cheduling
and $ontrolling4 2nd. Ed. 8an 5ostrand 3ein.old 5e? 9or0 1)'4.
". Levitt 3.E. 3.1. Logc.er and 5./. Luaddumi J$mpact o& O?ner<Engineer 3is0
;.aring on 1esign (onservatismJ "#$E 2ournal of !rofessional -ssues in
Engineering 8ol. 11+ 1)'4 pp. 1"%<1#%.
#. 4oolin K.*. Pr. and K.2. 4c(oyD J4anaging t.e 2las0a *ipeline *roBectJ $ivil
Engineering 5ovember 1)'1 pp. "1<"4.
%. 4urray L. E. 6allardo ;. 2ggar?al and 3. Aay?it0a J4ar0eting (onstruction
4anagement ;ervicesJ "#$E 2ournal of $onstruction &ivision 8ol. 1+% 1)'1
pp. ##"<#%%.
'. *roBect 4anagement $nstitute " 5uide to the !roject 'anagement /ody of
6nowledge% 5e?to?n ;!uare *ennsylvania 2+++.
!.1- (ootnotes
1. ;ee 3. 4. Aideman J,.e *4:OQ 3eport << *4$ :ody o& Qno?ledge
;tandardJ !roject 'anagement 2ournal 8ol. 1% 5o. 3 2ugust l)'# pp. l"<24.
2. ;ee L. (. ;tuc0enbruc0 J*roBect 4anagement Krame?or0J !roject 'anagement
2ournal 8ol. 1% 5o. 3 2ugust 1)'# pp. 2"<3+.
3. ;ee &or eIample OH(onnor P.,. and 8ic0ory (.6. $ontrol of $onstruction
!roject #cope 2 3eport to t.e (onstruction $ndustry $nstitute ,.e University o&
,eIas at 2ustin 1ecember 1)'".
4. ;ee &or eIample Kederal Korm 23<2 and E*2Hs 2ppendiI (<2 clauses.
". ;ee E. 1H2ppolonia J(oping ?it. Uncertainty in 6eotec.nical Engineering and
(onstructionJ #pecial !roceedings of the 9th -nternational $onference on #oil
'echanics and 7oundation Engineering ,o0yo Papan 8ol. 4 1)%) pp. 1<1'.
#. ,.ese &eatures and t.e &ollo?ing eIample are described in K.*. 4oolin Pr. and
K.2. 4c(oy J4anaging t.e 2las0a *ipeline *roBectJ $ivil Engineering
5ovember 1)'1 pp. "1<"4.
%. J*rivate 4oney Kinances ,eIas UtilityHs *o?er *lantJ Engineering News RecordD
Puly 2" 1)'" p. 13.
'. ;ee P.E. 1ie0mann and Q.:. ,.rus. !roject $ontrol in &esign Engineering 2
3eport to t.e (onstruction $ndustry $nstitute ,.e University o& ,eIas at 2ustin
,eIas 4ay 1)'#.
+. The ;esign and Construction Process
+.1 ;esign and Construction as an $ntegrated /ystem
$n t.e planning o& &acilities it is important to recognize t.e close relations.ip bet?een
design and construction. ,.ese processes can best be vie?ed as an integrated system.
:roadly spea0ing design is a process o& creating t.e description o& a ne? &acility usually
represented by detailed plans and speci&icationsO construction planning is a process o&
identi&ying activities and resources re!uired to ma0e t.e design a p.ysical reality. /ence
construction is t.e implementation o& a design envisioned by arc.itects and engineers. $n
bot. design and construction numerous operational tas0s must be per&ormed ?it. a
variety o& precedence and ot.er relations.ips among t.e di&&erent tas0s.
;everal c.aracteristics are uni!ue to t.e planning o& constructed &acilities and s.ould be
0ept in mind even at t.e very early stage o& t.e proBect li&e cycle. ,.ese include t.e
&ollo?ingD
5early every &acility is custom designed and constructed and o&ten re!uires a
long time to complete.
:ot. t.e design and construction o& a &acility must satis&y t.e conditions peculiar
to a speci&ic site.
:ecause eac. proBect is site speci&ic its eIecution is in&luenced by natural social
and ot.er locational conditions suc. as ?eat.er labor supply local building
codes etc.
;ince t.e service li&e o& a &acility is long t.e anticipation o& &uture re!uirements is
in.erently di&&icult.
:ecause o& tec.nological compleIity and mar0et demands c.anges o& design
plans during construction are not uncommon.
$n an integrated system t.e planning &or bot. design and construction can proceed almost
simultaneously eIamining various alternatives ?.ic. are desirable &rom bot. vie?points
and t.us eliminating t.e necessity o& eItensive revisions under t.e guise o& value
engineering. Kurt.ermore t.e revie? o& designs ?it. regard to t.eir constructibility can
be carried out as t.e proBect progresses &rom planning to design. Kor eIample i& t.e
se!uence o& assembly o& a structure and t.e critical loadings on t.e partially assembled
structure during construction are care&ully considered as a part o& t.e overall structural
design t.e impacts o& t.e design on construction &alse?or0 and on assembly details can
be anticipated. /o?ever i& t.e design pro&essionals are eIpected to assume suc.
responsibilities t.ey must be re?arded &or s.aring t.e ris0s as ?ell as &or underta0ing
t.ese additional tas0s. ;imilarly ?.en construction contractors are eIpected to ta0e over
t.e responsibilities o& engineers suc. as devising a very elaborate sc.eme to erect an
unconventional structure t.ey too must be re?arded accordingly. 2s long as t.e o?ner
does not assume t.e responsibility &or resolving t.is ris0<re?ard dilemma t.e concept o&
a truly integrated system &or design and construction cannot be realized.
$t is interesting to note t.at European o?ners are generally more open to ne?
tec.nologies and to s.are ris0s ?it. designers and contractors. $n particular t.ey are
more ?illing to accept responsibilities &or t.e un&oreseen subsur&ace conditions in
geotec.nical engineering. (onse!uently t.e designers and contractors are also more
?illing to introduce ne? tec.ni!ues in order to reduce t.e time and cost o& construction.
$n European practice o?ners typically present contractors ?it. a conceptual design and
contractors prepare detailed designs ?.ic. are c.ec0ed by t.e o?nerHs engineers. ,.ose
detailed designs may be alternate designs and specialty contractors may also prepare
detailed alternate designs.
&9ample +)1* Responsibility for Shop Drawings
,.e ?illingness to assume responsibilities does not come easily &rom any party in t.e
current litigious climate o& t.e construction industry in t.e United ;tates. On t.e ot.er
.and i& o?ner arc.itect engineer contractor and ot.er groups t.at represent parts o& t.e
industry do not Bointly &iI t.e responsibilities o& various tas0s to appropriate parties t.e
standards o& practice ?ill eventually be set by court decisions. $n an attempt to provide a
guide to t.e entire spectrum o& participants in a construction proBect t.e 2merican
;ociety o& (ivil Engineers issued a 4anual o& *ro&essional *ractice entitled Quality in
the $onstructed !roject in 1))+. ,.is manual is intended to .elp bring a turn around o&
t.e &ragmentation o& activities in t.e design and construction process.
;.op dra?ings represent t.e assembly details &or erecting a structure ?.ic. s.ould re&lect
t.e intent and rationale o& t.e original structural design. ,.ey are prepared by t.e
construction contractor and revie?ed by t.e design pro&essional. /o?ever since t.e
responsibility &or preparing s.op dra?ings ?as traditionally assigned to construction
contractors design pro&essionals too0 t.e vie? t.at t.e revie? process ?as advisory and
assumed no responsibility &or t.eir accuracy. ,.is Busti&ication ?as ruled unacceptable by
a court in connection ?it. t.e ?al0?ay &ailure at t.e /yatt /otel in Qansas (ity in 1)'".
$n preparing t.e 2;(E 4anual o& *ro&essional *ractice &or Luality in t.e (onstructed
*roBect t.e responsibilities &or preparation o& s.op dra?ings proved to be t.e most
di&&icult to develop. R1S ,.e reason &or t.is situation is not di&&icult to &at.om since t.e
responsibilities &or t.e tas0 are di&&used and all parties must agree to t.e ne?
responsibilities assigned to eac. in t.e recommended ris0<re?ard relations s.o?n in
,able 3<1.
,raditionally t.e o?ner is not involved in t.e preparation and revie? o& s.op dra?ings
and per.aps is even una?are o& any potential problems. $n t.e recommended practice t.e
o?ner is re!uired to ta0e responsibility &or providing ade!uate time and &unding
including approval o& sc.eduling in order to allo? t.e design pro&essionals and
construction contractors to per&orm satis&actorily.
Ta>le +)1 3ecommended 3esponsibility &or ;.op 1ra?ings
Tas:
2esponsi>le Party
Owner
;esign
Professional
Construction
Contractor
*rovide ade!uate time and &unding &or s.op
dra?ing preparation and revie?
*rime
2rrange &or structural design *rime
*rovide structural design *rime
Establis. overall responsibility &or connection
design
*rime
2ccomplis. connection design Mby design
pro&essionalN
*rime
2lternatively provide loading re!uirement and
ot.er in&ormation necessary &or s.op dra?ing
preparation
*rime
2lternatively accomplis. some or all o&
connection design Mby constructor ?it. a
licensed *.E.N
*rime
;peci&y s.op dra?ing re!uirements and
procedures
3evie? *rime
2pprove proper sc.eduling *rime 2ssisting 2ssisting
*rovide s.op dra?ing and submit t.e dra?ing
on sc.edule
*rime
4a0e timely revie?s and approvals *rime
*rovide erection procedures construction
bracing s.oring means met.ods and
tec.ni!ues o& construction and construction
sa&ety
*rime
&9ample +)!* ,odel ,etro Pro%ect in ,ilan, $taly ?!@
Under $talian la? un&oreseen subsur&ace conditions are t.e o?nerHs responsibility not
t.e contractorHs. ,.is is a stri0ing di&&erence &rom U.;. construction practice ?.ere
c.anged conditions clauses and claims and t.e ade!uacy o& prebid site investigations are
points o& contention. $n e&&ect t.e $talian la? means t.at t.e o?ner assumes t.ose ris0s.
:ut under t.e same la? a contractor may elect to assume t.e ris0s in order to lo?er t.e
bid price and t.ereby beat t.e competition.
2ccording to t.e ,ec.nical 1irector o& 3odio t.e 4ilan<based contractor ?.ic. is
.eavily involved in t.e grouting Bob &or tunneling in t.e 4odel 4etro proBect in 4ilan
$taly t.ere are t?o typical contractual arrangements &or specialized subcontractor &irms
suc. as t.eirs. One is to ?or0 on a unit price basis ?it. no responsibility &or t.e design.
,.e ot.er is ?.at .e calls t.e Jnominated subcontractorJ or turn0ey met.odD pre!uali&ied
subcontractors o&&er t.eir o?n designs and guarantee t.e price !uality !uantities and i&
t.ey ?is. t.e ris0s o& un&oreseen conditions.
2t t.e beginning o& t.e 4ilan metro proBect t.e 3odio contract ratio ?as "+U"+ unit price
and turn0ey. ,.e &irm convinced t.e metro o?ners t.at t.ey ?ould save money ?it. t.e
turn0ey approac. and t.e ratio became '+V turn0ey. A.atHs more in t.e ?or0 pac0ages
?.ere 3odio ?or0ed ?it. ot.er grouting specialists t.ose subcontractors paid 3odio a
&ee to assume all ris0s &or un&oreseen conditions.
Under t.ese circumstances it ?as critical t.at t.e &irm s.ould 0no? t.e subsur&ace
conditions as precisely as possible ?.ic. ?as a maBor reason ?.y t.e &irm developed a
computerized electronic sensing program to predict stratigrap.y and t.us control grout
miIes pressures and most important !uantities.
+.! $nnoation and Technological (easi>ility
,.e planning &or a construction proBect begins ?it. t.e generation o& concepts &or a
&acility ?.ic. ?ill meet mar0et demands and o?ner needs. $nnovative concepts in design
are .ig.ly valued not &or t.eir o?n sa0e but &or t.eir contributions to reducing costs and
to t.e improvement o& aest.etics com&ort or convenience as embodied in a ?ell<designed
&acility. /o?ever t.e constructor as ?ell as t.e design pro&essionals must .ave an
appreciation and &ull understanding o& t.e tec.nological compleIities o&ten associated
?it. innovative designs in order to provide a sa&e and sound &acility. ;ince t.ese concepts
are o&ten preliminary or tentative screening studies are carried out to determine t.e
overall tec.nological viability and economic attractiveness ?it.out pursuing t.ese
concepts in great detail. :ecause o& t.e ambiguity o& t.e obBectives and t.e uncertainty o&
eIternal events screening studies call &or unin.ibited innovation in creating ne? concepts
and Budicious Budgment in selecting t.e appropriate ones &or &urt.er consideration.
One o& t.e most important aspects o& design innovation is t.e necessity o&
communication in t.e designUconstruction partners.ip. $n t.e case o& bridge design it can
be illustrated by t.e &ollo?ing !uotation &rom Lin and 6er?ic0 concerning bridge
constructionD R3S
,.e great pioneering steel bridges o& t.e United ;tates ?ere built by an open or covert
alliance bet?een designers and constructors. ,.e turn0ey approac. o& designer<
constructor .as developed and built our c.emical plants re&ineries steel plants and
nuclear po?er plants. $t is time to as0 seriously ?.et.er ?e may not .ave adopted a
restrictive approac. by divorcing engineering and construction in t.e &ield o& bridge
construction.
$& a contractor<engineer by some stro0e o& genius ?ere to present to design engineers
today a ?onder&ul ne? sc.eme &or long span prestressed concrete bridges t.at made t.em
&ar c.eaper .e ?ould .ave to ma0e t.ese ideas available to all ot.er constructors even
limiting or ?atering t.em do?n so as to Jget a group o& truly competitive bidders.J ,.e
engineer ?ould .ave to ma0e sure t.at .e &ound ot.er contractors to bid against t.e
ingenious innovator.
$& an engineer s.ould by a similar stro0e o& genius .it on suc. a uni!ue and brilliant
sc.eme .e ?ould .ave to ?orry ?ondering i& t.e lo? bidder ?ould be one ?.o .ad any
concept o& ?.at .e ?as trying to accomplis. or ?as in any ?ay !uali&ied &or .ig. class
tec.nical ?or0.
$nnovative design concepts must be tested &or tec.nological &easibility. ,.ree levels o&
tec.nology are o& special concernD tec.nological re!uirements &or operation or
production design resources and construction tec.nology. ,.e &irst re&ers to t.e ne?
tec.nologies t.at may be introduced in a &acility ?.ic. is used &or a certain type o&
production suc. as c.emical processing or nuclear po?er generation. ,.e second re&ers
to t.e design capabilities t.at are available to t.e designers suc. as ne? computational
met.ods or ne? materials. ,.e t.ird re&ers to ne? tec.nologies ?.ic. can be adopted to
construct t.e &acility suc. as ne? e!uipment or ne? construction met.ods.
2 ne? &acility may involve compleI ne? tec.nology &or operation in .ostile
environments suc. as severe climate or restricted accessibility. Large proBects ?it.
unprecedented demands &or resources suc. as labor supply material and in&rastructure
may also call &or care&ul tec.nological &easibility studies. 4aBor elements in a &easibility
study on production tec.nology s.ould include but are not limited to t.e &ollo?ingD
*roBect type as c.aracterized by t.e tec.nology re!uired suc. as synt.etic &uels
petroc.emicals nuclear po?er plants etc.
*roBect size in dollars design engineerHs .ours construction labor .ours etc.
1esign including sources o& any special tec.nology ?.ic. re!uire licensing
agreements.
*roBect location ?.ic. may pose problems in environmental protection labor
productivity and special ris0s.
2n eIample o& innovative design &or operation and production is t.e use o& entropy
concepts &or t.e design o& integrated c.emical processes. ;imple calculations can be used
to indicate t.e minimum energy re!uirements and t.e least number o& .eat eIc.ange
units to ac.ieve desired obBectives. ,.e result is a ne? incentive and criterion &or
designers to ac.ieve more e&&ective designs. 5umerous applications o& t.e ne?
met.odology .as s.o?n its e&&icacy in reducing bot. energy costs and construction
eIpenditures. R4S ,.is is a case in ?.ic. innovative design is not a matter o& trading<o&&
operating and capital costs but better designs can simultaneously ac.ieve improvements
in bot. obBectives.
,.e c.oice o& construction tec.nology and met.od involves bot. strategic and tactical
decisions about appropriate tec.nologies and t.e best se!uencing o& operations. Kor
eIample t.e eItent to ?.ic. pre&abricated &acility components ?ill be used represents a
strategic construction decision. $n turn pre&abrication o& components mig.t be
accomplis.ed o&&<site in eIisting manu&acturing &acilities or a temporary on<site
&abrication plant mig.t be used. 2not.er eIample o& a strategic decision is ?.et.er to
install mec.anical e!uipment in place early in t.e construction process or at an
intermediate stage. ;trategic decisions o& t.is sort s.ould be integrated ?it. t.e process
o& &acility design in many cases. 2t t.e tactical level detailed decisions about .o? to
accomplis. particular tas0s are re!uired and suc. decisions can o&ten be made in t.e
&ield.
(onstruction planning s.ould be a maBor concern in t.e development o& &acility designs
in t.e preparation o& cost estimates and in &orming bids by contractors. Un&ortunately
planning &or t.e construction o& a &acility is o&ten treated as an a&ter t.oug.t by design
pro&essionals. ,.is contrasts ?it. manu&acturing practices in ?.ic. t.e assem)ly o&
devices is a maBor concern in design. 1esign to insure ease o& assembly or construction
s.ould be a maBor concern o& engineers and arc.itects. 2s t.e :usiness 3oundtable noted
J2ll too o&ten c.ances to cut sc.edule time and costs are lost because construction
operates as a production process separated by a c.asm &rom &inancial planning
sc.eduling and engineering or arc.itectural design. ,oo many engineers separated &rom
&ield eIperience are not up to date about .o? to build ?.at t.ey design or .o? to design
so structures and e!uipment can be erected most e&&iciently.J R"S
&9ample +)+* Innovative use of structural frames for buildings ?0@
,.e structural design o& s0yscrapers o&&ers an eIample o& innovation in overcoming t.e
barrier o& .ig. costs &or tall buildings by ma0ing use o& ne? design capabilities. 2
revolutionary concept in s0yscraper design ?as introduced in t.e 1)#+Hs by Kazlur Q.an
?.o argued t.at &or a building o& a given .eig.t t.ere is an appropriate structural system
?.ic. ?ould produce t.e most e&&icient use o& t.e material.
:e&ore 1)#" most s0yscrapers ?ere steel rigid &rames. /o?ever Kazlur Q.an believed
t.at it ?as uneconomical to construct all o&&ice buildings o& rigid &rames and proposed an
array o& appropriate structural systems &or steel buildings o& speci&ied .eig.ts as s.o?n in
Kigure 3<1. :y c.oosing an appropriate structural system an engineer can use structural
materials more e&&iciently. Kor eIample t.e #+<story (.ase 4an.attan :uilding in 5e?
9or0 used about #+ pounds per s!uare &oot o& steel in its rigid &rame structure ?.ile t.e
1++<story Po.n /ancoc0 (enter in (.icago used only 3+ pounds per s!uare &oot &or a
trusted tube system. 2t t.e time t.e (.ase 4an.attan :uilding ?as constructed no
bracing ?as used to sti&&en t.e core o& a rigid &rame building because design engineers
did not .ave t.e computing tools to do t.e compleI mat.ematical analysis associated
?it. core bracing.
(igure +)1* *roposed ;tructural ;ystem &ir ;teel :uildings
M3eprinted ?it. permission &rom $ivil Engineering% 4ay 1)'3N
+.+ $nnoation and &conomic (easi>ility
$nnovation is o&ten regarded as t.e engine ?.ic. can introduce construction economies
and advance labor productivity. ,.is is obviously true &or certain types o& innovations in
industrial production tec.nologies design capabilities and construction e!uipment and
met.ods. /o?ever t.ere are also limitations due to t.e economic in&easibility o& suc.
innovations particularly in t.e segments o& construction industry ?.ic. are more
&ragmented and permit ease o& entry as in t.e construction o& residential .ousing.
4ar0et demand and &irm size play an important role in t.is regard. $& a builder is to
construct a larger number o& similar units o& buildings t.e cost per unit may be reduced.
,.is relations.ip bet?een t.e mar0et demand and t.e total cost o& production may be
illustrated sc.ematically as in Kigure 3<2. 2n initial t.res.old or &iIed cost K is incurred
to allo? any production. :eyond t.is t.res.old cost total cost increases &aster t.an t.e
units o& output but at a decreasing rate. 2t eac. point on t.is total cost curve t.e average
cost is represented by t.e slope o& a line &rom t.e origin to t.e point on t.e curve. 2t a
point / t.e average cost per unit is at a minimum. :eyond / to t.e rig.t t.e total cost
again increases &aster t.an t.e units o& output and at an increasing rate. A.en t.e rate o&
c.ange o& t.e average cost slope is decreasing or constant as bet?een + and / on t.e
curve t.e range bet?een + and / is said to be increasing return to scaleO ?.en t.e rate o&
c.ange o& t.e average cost slope is increasing as beyond / to t.e rig.t t.e region is said
to be decreasing return to scale. ,.us i& &e?er t.an . units are constructed t.e unit price
?ill be .ig.er t.an t.at o& eIactly . units. On t.e ot.er .and t.e unit price ?ill increase
again i& more t.an . units are constructed.
(igure +)!* 4ar0et 1emand and ,otal (ost 3elations.ip
5o?.ere is t.e e&&ect o& mar0et demand and total cost more evident t.an in residential
.ousing. R%S ,.e .ousing segment in t.e last &e? decades accepted many innovative
tec.nical improvements in building materials ?.ic. ?ere promoted by material suppliers.
;ince material suppliers provide products to a large number o& .omebuilders and ot.ers
t.ey are in a better position to eIploit production economies o& scale and to support ne?
product development. /o?ever .omebuilders t.emselves .ave not been as success&ul in
ma0ing t.e most &undamental &orm o& innovation ?.ic. encompasses c.anges in t.e
tec.nological process o& .omebuilding by s.i&ting t.e miIture o& labor and material
inputs suc. as substituting large scale o&&<site pre&abrication &or on<site assembly.
,.ere are several maBor barriers to innovation in t.e tec.nological process o&
.omebuilding including demand instability industrial &ragmentation and building codes.
;ince mar0et demand &or ne? .omes &ollo?s demograp.ic trends and ot.er socio<
economic conditions t.e variation in .ome building .as been anyt.ing but regular. ,.e
pro&itability o& t.e .omebuilding industry .as closely matc.ed aggregate output levels.
;ince entry and eIist &rom t.e industry are relatively easy it is not uncommon during
periods o& slac0 demand to &ind builders leaving t.e mar0et or suspending t.eir
operations until better times. ,.e inconsistent levels o& retained earnings over a period o&
years even among t.e more establis.ed builders are li0ely to discourage support &or
researc. and development e&&orts ?.ic. are re!uired to nurture innovation. Kurt.ermore
because t.e .omebuilding industry is &ragmented ?it. a vast maBority o& .omebuilders
active only in local regions t.e typical .omebuilder &inds it eIcessively eIpensive to
eIperiment ?it. ne? designs. ,.e potential costs o& a &ailure or even a moderately
success&ul innovation ?ould out?eig. t.e eIpected bene&its o& all but t.e most success&ul
innovations. 8ariation in local building codes .as also caused ine&&iciencies alt.oug.
repeated attempts .ave been made to standardize building codes.
$n addition to t.e scale economies visible ?it.in a sector o& t.e construction mar0et t.ere
are also possibilities &or scale economies in individual &acility. Kor eIample t.e
relations.ip bet?een t.e size o& a building MeIpressed in s!uare &eetN and t.e input labor
MeIpressed in labor .ours per s!uare &ootN varies &or di&&erent types and sizes o& buildings.
2s s.o?n in Kigure 3<3 t.ese relations.ips &or several types o& buildings eI.ibit di&&erent
c.aracteristics. R'S ,.e labor .ours per s!uare &oot decline as t.e size o& &acility increases
&or .ouses public .ousing and public buildings. /o?ever t.e labor .ours per s!uare &oot
almost remains constant &or all sizes o& sc.ool buildings and increases as t.e size o& a
.ospital &acility increases.
(igure +)+* $llustrative 3elations.ips bet?een :uilding ;ize and $nput Labor by ,ypes
o& :uildingO M3eprinted ?it. permission &rom *.P. (assimatis Economics of the
$onstruction -ndustry4 ,.e 5ational $ndustry (on&erence :oard ;E: 5o. 111 1)#)
p."3N
&9ample +)-* Use of new materials ?4@
$n recent years an almost entirely ne? set o& materials is emerging &or construction
largely &rom t.e aerospace and electronics industries. ,.ese materials ?ere developed
&rom ne? 0no?ledge about t.e structure and properties o& materials as ?ell as ne?
tec.ni!ues &or altering eIisting materials. 2dditives to traditional materials suc. as
concrete and steel are particularly prominent. Kor eIample it .as been 0no?n &or some
time t.at polymers ?ould increase concrete strengt. ?ater resistance and ability to
insulate ?.en t.ey are added to t.e cement. /o?ever t.eir use .as been limited by t.eir
costs since t.ey .ave .ad to replace as muc. as 1+ percent o& t.e cement to be e&&ective.
/o?ever ;?edis. researc.ers .ave .elped reduce costs by using polymer micro sp.eres
' milliont.s o& an inc. across ?.ic. occupy less t.an 1 percent o& t.e cement. (oncretes
made ?it. t.ese micro sp.eres meet even t.e strict standards &or o&&s.ore structures in
t.e 5ort. ;ea. 3esearc. on micro<additives ?ill probably produce use&ul concretes &or
repairing road and bridges as ?ell.
&9ample +).* Green Buildings?15@
,.e Leaders.ip in Energy and Environmental 1esign MLEE1N 6reen :uilding 3ating
;ystem is intended to promote voluntary improvements in design and construction
practices. $n t.e rating system buildings receive points &or a variety o& aspects including
reduced energy use greater use o& daylig.t rat.er t.an arti&icial lig.ts recycling
construction ?aste rain&all runo&& reduction availability o& public transit access etc. $& a
building accumulates a su&&icient number o& points it may be certi&ied by t.e 6reen
:uilding 2lliance as a Jgreen building.J A.ile some o& t.ese aspects may increase
construction costs many reduce operating costs or ma0e buildings more attractive. 6reen
building approac.es are spreading to industrial plants and ot.er types o& construction.
+.- ;esign ,ethodology
A.ile t.e conceptual design process may be &ormal or in&ormal it can be c.aracterized
by a series o& actionsD &ormulation analysis searc. decision speci&ication and
modi&ication. /o?ever at t.e early stage in t.e development o& a ne? proBect t.ese
actions are .ig.ly interactive as illustrated in Kigure 3<4. R11S 4any iterations o& redesign
are eIpected to re&ine t.e &unctional re!uirements design concepts and &inancial
constraints even t.oug. t.e analytic tools applied to t.e solution o& t.e problem at t.is
stage may be very crude.
(igure +)-* (onceptual 1esign *rocess. M2dapted ?it. permission &rom 3.A. Pensen and
(.(. ,onies #oftware Engineering8 *rentice /all Engle?ood (li&&s 5P 1)%) p.22N
,.e series o& actions ta0en in t.e conceptual design process may be described as &ollo?sD
Kormulation re&ers to t.e de&inition or description o& a design problem in broad
terms t.roug. t.e synt.esis o& ideas describing alternative &acilities.
2nalysis re&ines t.e problem de&inition or description by separating important
&rom perip.eral in&ormation and by pulling toget.er t.e essential detail.
$nterpretation and prediction are usually re!uired as part o& t.e analysis.
;earc. involves gat.ering a set o& potential solutions &or per&orming t.e speci&ied
&unctions and satis&ying t.e user re!uirements.
1ecision means t.at eac. o& t.e potential solutions is evaluated and compared to
t.e alternatives until t.e best solution is obtained.
;peci&ication is to describe t.e c.osen solution in a &orm ?.ic. contains enoug.
detail &or implementation.
4odi&ication re&ers to t.e c.ange in t.e solution or re<designs i& t.e solution is
&ound to be ?anting or i& ne? in&ormation is discovered in t.e process o& design.
2s t.e proBect moves &rom conceptual planning to detailed design t.e design process
becomes more &ormal. $n general t.e actions o& &ormulation analysis searc. decision
speci&ication and modi&ication still .old but t.ey represent speci&ic steps ?it. less
random interactions in detailed design. ,.e design met.odology t.us &ormalized can be
applied to a variety o& design problems. Kor eIample t.e analogy o& t.e sc.ematic
diagrams o& t.e structural design process and o& t.e computer program development
process is s.o?n in Kigure 3<" R12S.
(igure +).* 2n 2nalogy :et?een ;tructural 1esign and (omputer *rogram
1evelopment *rocess. M3eprinted ?it. permission &rom E./. 6aylord and (. 5. 6aylord
eds. #tructural Engineering (and)ook8 2nd Ed. 4c6ra?</ill :oo0 (ompany 5e?
9or0 1)%).N
,.e basic approac. to design relies on decomposition and integration. ;ince design
problems are large and compleI t.ey .ave to be decomposed to yield subproblems t.at
are small enoug. to solve. ,.ere are numerous alternative ?ays to decompose design
problems suc. as decomposition by &unctions o& t.e &acility by spatial locations o& its
parts or by lin0s o& various &unctions or parts. ;olutions to subproblems must be
integrated into an overall solution. ,.e integration o&ten creates conceptual con&licts
?.ic. must be identi&ied and corrected. 2 .ierarc.ical structure ?it. an appropriate
number o& levels may be used &or t.e decomposition o& a design problem to subproblems.
Kor eIample in t.e structural design o& a multistory building t.e building may be
decomposed into &loors and eac. &loor may in turn be decomposed into separate areas.
,.us a .ierarc.y representing t.e levels o& building &loor and area is &ormed.
1i&&erent design styles may be used. ,.e adoption o& a particular style o&ten depends on
&actors suc. as time pressure or available design tools as ?ell as t.e nature o& t.e design
problem. EIamples o& di&&erent styles areD
Top)down design. :egin ?it. a be.avior description o& t.e &acility and ?or0
to?ards descriptions o& its components and t.eir interconnections.
<ottom)up design. :egin ?it. a set o& components and see i& t.ey can be arranged to
meet t.e be.avior description o& t.e &acility.
,.e design o& a ne? &acility o&ten begins ?it. t.e searc. o& t.e &iles &or a design t.at
comes as close as possible to t.e one needed. ,.e design process is guided by
accumulated eIperience and intuition in t.e &orm o& .euristic rules to &ind acceptable
solutions. 2s more eIperience is gained &or t.is particular type o& &acility it o&ten
becomes evident t.at parts o& t.e design problem are amenable to rigorous de&inition and
algorit.mic solution. Even &ormal optimization met.ods may be applied to some parts o&
t.e problem.
+.. (unctional ;esign
,.e obBective o& &unctional design &or a proposed &acility is to treat t.e &acility as a
compleI system o& interrelated spaces ?.ic. are organized systematically according to
t.e &unctions to be per&ormed in t.ese spaces in order to serve a collection o& needs. ,.e
arrangement o& p.ysical spaces can be vie?ed as an iterative design process to &ind a
suitable &loor plan to &acilitate t.e movement o& people and goods associated ?it. t.e
operations intended.
2 designer o&ten relies on a .euristic approac. i.e. applying selected rules or strategies
serving to stimulate t.e investigation in searc. &or a solution. ,.e .euristic approac. used
in arranging spatial layouts &or &acilities is based generally on t.e &ollo?ing
considerationsD
1. identi&ication o& t.e goals and constraints &or speci&ied tas0s
2. determination o& t.e current state o& eac. tas0 in t.e iterative design process
3. evaluation o& t.e di&&erences bet?een t.e current state and t.e goals
4. 4eans o& directing t.e e&&orts o& searc. to?ards t.e goals on t.e basis o& past
eIperience.
/ence t.e procedure &or see0ing t.e goals can be recycled iteratively in order to ma0e
tradeo&&s and t.us improve t.e solution o& spatial layouts.
(onsider &or eIample an integrated &unctional design &or a proposed .ospital. R13S ;ince
t.e responsibilities &or satis&ying various needs in a .ospital are divided among di&&erent
groups o& personnel ?it.in t.e .ospital administrative structure a .ierarc.y o& &unctions
corresponding to di&&erent levels o& responsibilities is proposed in t.e systematic
organization o& .ospital &unctions. $n t.is model t.e &unctions o& a .ospital system are
decomposed into a .ierarc.y o& several levelsD
1. Aospital<<conglomerate o& all .ospital services resulting &rom top policy
decisions
2. ;iision<<broadly related activities assigned to t.e same general area by
administrative decisions
3. ;epartment<<combination o& services delivered by a service or treatment group
4. /uite<<speci&ic style o& common services or treatments per&ormed in t.e same
suite o& rooms
". 2oom<<all activities t.at can be carried out in t.e same internal environment
surrounded by p.ysical barriers
#. Bone<<several closely related activities t.at are underta0en by individuals
%. O>%ect<<a single activity associated ?it. an individual.
$n t.e integrated &unctional design o& .ospitals t.e connection bet?een p.ysical spaces
and &unctions is most easily made at t.e lo?est level o& t.e .ierarc.y and t.en eItended
up?ard to t.e neIt .ig.er level. Kor eIample a bed is a p.ysical obBect immediately
related to t.e activity o& a patient. 2 set o& &urniture consisting o& a bed a nig.t table and
an armc.air arranged com&ortably in a zone indicates t.e sp.ere o& private activities &or a
patient in a room ?it. multiple occupancy. ,.us t.e spatial representation o& a .ospital
can be organized in stages starting &rom t.e lo?est level and moving to t.e top. $n eac.
step o& t.e organization process an element Mspace or &unctionN under consideration can
be related directly to t.e elements at t.e levels above it to t.ose at t.e levels belo? it
and to t.ose ?it.in t.e same level.
;ince t.e primary &actor relating spaces is t.e movement o& people and supplies t.e
obBective o& arranging spaces is t.e minimization o& movement ?it.in t.e .ospital. On
t.e ot.er .and t.e internal environmental &actors suc. as atmosp.eric conditions
Mpressure temperature relative .umidity odor and particle pollutionN sound lig.t and
&ire protection produce constraining e&&ects on t.e arrangement o& spaces since certain
spaces cannot be placed adBacent to ot.er spaces because o& di&&erent re!uirements in
environmental conditions. ,.e consideration o& logistics is important at all levels o& t.e
.ospital system. Kor eIample t.e travel patterns bet?een obBects in a zone or t.ose
bet?een zones in a room are &re!uently e!ually important &or devising an e&&ective
design. On t.e ot.er .and t.e adBacency desirability matriI based upon environmental
conditions ?ill not be important &or organization o& &unctional elements belo? t.e room
level since a room is t.e lo?est level t.at can provide a p.ysical barrier to contain
desirable environmental conditions. /ence t.e organization o& &unctions &or a ne?
.ospital can be carried out t.roug. an interactive process starting &rom t.e &unctional
elements at t.e lo?est level t.at is regarded as stable by t.e designer and moving step by
step up to t.e top level o& t.e .ierarc.y. 1ue to t.e strong correlation bet?een &unctions
and t.e p.ysical spaces in ?.ic. t.ey are per&ormed t.e arrangement o& p.ysical spaces
&or accommodating t.e &unctions ?ill also &ollo? t.e same iterative process. Once a
satis&actory spatial arrangement is ac.ieved t.e .ospital design is completed by t.e
selection o& suitable building components ?.ic. complement t.e spatial arrangement.
&9ample +)0* Top-down design style
$n t.e &unctional design o& a .ospital t.e designer may begin ?it. a Jre&erence modelJ
i.e. t.e spatial layouts o& eIisting .ospitals o& similar size and service re!uirements. On
t.e basis o& past eIperience spaces are allocated to various divisions as s.o?n
sc.ematically in Kigure 3<#. ,.e space in eac. division is t.en divided &urt.er &or various
departments in t.e division and all t.e ?ay do?n t.e line o& t.e .ierarc.y. $n every step
along t.e ?ay t.e pertinent in&ormation o& t.e elements immediately belo? t.e level
under consideration ?ill be assessed in order to provide input &or ma0ing necessary
adBustments at t.e current level i& necessary. ,.e maBor dra?bac0 o& t.e top<do?n design
style is t.at t.e connection bet?een p.ysical spaces and &unctions at lo?er levels cannot
be easily anticipated. (onse!uently t.e ne? design is essentially based on t.e intuition
and eIperience o& t.e designer rat.er t.an an obBective analysis o& t.e &unctions and
space needs o& t.e &acility. $ts greatest attraction is its simplicity ?.ic. 0eeps t.e time
and cost o& design relatively lo?.
(igure +)0* 2 4odel &or ,op<1o?n 1esign o& a /ospital
&9ample +)1* Bottom-up design style
2 multi<purpose eIamination suite in a .ospital is used as an illustration o& bottom<up
design style. $n Kigure 3<% t.e most basic elements M&urnitureN are &irst organized into
zones ?.ic. ma0e up t.e room. ,.us t.e size o& t.e room is determined by spatial layout
re!uired to per&orm t.e desired services. Kinally t.e suite is de&ined by t.e rooms ?.ic.
are parts o& t.e multi<purpose eIamination suite.
(igure +)1* 2 4odel &or :ottom<up design o& an EIamination ;uite
+.0 Physical /tructures
,.e structural design o& compleI engineering systems generally involves bot. synt.esis
and analysis. ;ynt.esis is an inductive process ?.ile analysis is a deductive process. ,.e
activities in synt.esis are o&ten described as an art rat.er t.an a science and are regarded
more a0in to creativity t.an to 0no?ledge. ,.e conception o& a ne? structural system is
by and large a matter o& subBective decision since t.ere is no establis.ed procedure &or
generating innovative and .ig.ly success&ul alternatives. ,.e initial selection o& a
?or0able system &rom numerous possible alternatives relies .eavily on t.e Budicious
Budgment o& t.e designer. Once a structural system is selected it must be subBected to
vigorous analysis to insure t.at it can sustain t.e demands in its environment. $n addition
compatibility o& t.e structural system ?it. mec.anical e!uipment and piping must be
assured.
Kor traditional types o& structures suc. as o&&ice buildings t.ere are standard systems
derived &rom t.e past eIperience o& many designers. /o?ever in many situations special
systems must be developed to meet t.e speci&ied re!uirements. ,.e c.oice o& materials
&or a structure depends not only on t.e suitability o& materials and t.eir in&luence on t.e
&orm o& t.e structure. Kor eIample in t.e design o& an airplane .angar a steel s0eleton
&rame may be selected because a similar &rame in rein&orced concrete ?ill limit t.e span
o& t.e structure o?ing to its un&avorable ratio or resistance to ?eig.t. /o?ever i& a t.in<
s.elled roo& is adopted rein&orced concrete may prove to be more suitable t.an steel.
,.us t.e interplay o& t.e structural &orms and materials a&&ects t.e selection o& a
structural system ?.ic. in turn may in&luence t.e met.od o& construction including t.e
use o& &alse?or0.
&9ample +)3* Steel frame supporting a turbo-blower ?1-@
,.e design o& a structural &rame supporting a turbo<blo?er supplying pressurized air to a
blast &urnace in a steel mill can be used to illustrate t.e structural design process. 2s
s.o?n in Kigure 3<' t.e turbo<blo?er consists o& a turbine and a blo?er lin0ed to an air
inlet stac0. ;ince t.e vibration o& t.e turbo<blo?er is a maBor concern to its operation a
preliminary investigation calls &or a supporting &rame ?.ic. is separated &rom t.e
structural &rame o& t.e building. 2n analysis o& t.e vibration c.aracteristics o& t.e turbo<
blo?er indicates t.at t.e lo?est mode o& vibration consists o& independent vibration o&
t.e turbine s.a&t and t.e blo?er s.a&t ?it. .ig.er modes &or t.e coupled turbo<blo?er
system ?.en bot. s.a&ts vibrate eit.er in<p.ase or out<o&<p.ase. (onse!uently a steel
&rame ?it. separate units &or t.e blo?er side and t.e turbine side is selected. ,.e
columns o& t.e steel &rame are mounted on pile &oundation and all Boints o& t.e steel
&rame are ?elded to reduce t.e vibration levels.
;ince t.e structural steel &rame also supports a condenser an air inlet and eI.aust and a
steam inlet and eI.aust in addition to t.e turbo<blo?er a static analysis is made to size
its members to support all applied loads. ,.en a dynamic analysis is conducted to
determine t.e vibration c.aracteristics o& t.e system incorporating t.e structural steel
&rame and t.e turbo<blo?er. A.en t.e limiting conditions &or static loads and natural
&re!uencies o& vibration are met t.e design is accepted as satis&actory.
(igure +)3* ;teel Krame ;upporting a ,urbo<:lo?er
&9ample +)4* ultiple hierarchy descriptions of pro!ects
$n t.e previous section a .ierarc.y o& &unctional spaces ?as suggested &or describing a
&acility. ,.is description is appropriate &or &unctional design o& spaces and processes
?it.in a building but may be inade!uate as a vie? o& t.e &acilityHs structural systems. 2
.ierarc.y suitable &or t.is purpose mig.t divide elements into structural functions suc. as
slabs ?alls &rames &ootings piles or mats. Lo?er levels o& t.e .ierarc.y ?ould describe
individual design elements. Kor eIample &rames ?ould be made up o& column beam and
diagonal groups ?.ic. in turn are composed o& individual structural elements. ,.ese
individual structural elements comprise t.e limits on &unctional spaces suc. as rooms in a
di&&erent .ierarc.ical perspective. 1esigners typically ?ill initiate a vie? appropriate &or
t.eir o?n concerns and t.ese di&&erent .ierarc.ical vie?s must be synt.esized to insure
consistency and ade!uacy o& t.e overall design.
+.1 Ceotechnical &ngineering $nestigation
;ince construction is site speci&ic it is very important to investigate t.e subsur&ace
conditions ?.ic. o&ten in&luence t.e design o& a &acility as ?ell as its &oundation. ,.e
uncertainty in t.e design is particularly acute in geotec.nical engineering so t.at t.e
assignment o& ris0s in t.is area s.ould be a maBor concern. ;ince t.e degree o&
uncertainty in a proBect is perceived di&&erently by di&&erent parties involved in a proBect
t.e assignment o& un!uanti&iable ris0s arising &rom numerous un0no?ns to t.e o?ner
engineer and contractor is in.erently di&&icult. $t is no ?onder t.at courts or arbitrators
are o&ten as0ed to distribute e!uitably a ris0 to parties ?.o do not perceive t.e same ris0s
and do not ?ant to assume a disproportionate s.are o& suc. ris0s.
&9ample +)15* Design of a tie-bac" retaining wall ?1.@
,.is eIample describes t.e use o& a tie<bac0 retaining ?all built in t.e 1)#+Hs ?.en suc.
construction ?as uncommon and posed a considerable ris0. ,.e engineer designing it and
t.e o?ner ?ere a?are o& t.e ris0 because o& potentially eItreme &inancial losses &rom
bot. remedial and litigation costs in t.e event t.at t.e retaining ?all &ailed and permitted
a &ailure o& t.e slope. :ut t.e bene&its ?ere perceived as being ?ort. t.e ris0<<bene&its to
t.e o?ner in terms o& bot. lo?er cost and s.orter sc.edule and bene&its to t.e engineer
in terms o& pro&essional satis&action in meeting t.e o?nerHs needs and solving ?.at
appeared to be an insurmountable tec.nical problem.
,.e tie<bac0 retaining ?all ?as designed to permit a cut in a .illside to provide additional
space &or t.e eIpansion o& a steel<ma0ing &acility. Kigure 3<) s.o?s a cross section o& t.e
original .illside located in an urban area. 5umerous residential d?ellings ?ere located on
top o& t.e .ill ?.ic. ?ould .ave been pro.ibitively costly or per.aps impossible to
remove to permit regrading o& t.e .illside to pus. bac0 t.e toe o& t.e slope. ,.e only
realistic ?ay o& accomplis.ing t.e desired goal ?as to attempt to remove t.e toe o& t.e
eIisting slope and use a tie<bac0 retaining ?all to stabilize t.e slope as s.o?n in Kigure
3<1+.
(igure +)4* ,ypical (ross ;ection o& /illside 2dBoining ;ite
(igure +)15* ;c.ematic ;ection o& 2nc.ored ;teel ;.eet *ile 3etaining Aall
2 commitment ?as made by bot. t.e o?ner and t.e engineer to accomplis. ?.at ?as a
common goal. ,.e engineer made a commitment to design and construct t.e ?all in a
manner ?.ic. permitted a real<time evaluation o& problems and t.e ability to ta0e
mitigating measures t.roug.out t.e construction o& t.e ?all. ,.e o?ner made a
commitment to give t.e engineer bot. t.e pro&essional latitude and resources re!uired to
per&orm .is ?or0. 2 design<construct contract ?as negotiated ?.ereby t.e design could
be modi&ied as actual conditions ?ere encountered during construction. :ut even ?it. all
o& t.e planning investigation and design e&&orts t.ere still remained a sizable ris0 o&
&ailure.
,.e ?all ?as success&ully built<<not according to a pre<devised plan ?.ic. ?ent
smoot.ly and not ?it.out numerous problems to be resolved as uneIpected ground?ater
and geological conditions ?ere encountered. Estimated costs ?ere eIceeded as eac.
uneIpected condition ?as addressed. :ut t.ere ?ere no construction delays and t.eir
attendant costs as disputes over c.anged conditions and contract terms ?ere reconciled.
,.ere ?ere no costs &or legal &ees arising &rom litigation nor increased interest costs as
construction stopped ?.ile disputes ?ere litigated. ,.e o?ner paid more t.an ?as
estimated but not more t.an ?as necessary and not as muc. as i& .e .ad to ac!uire t.e
property at t.e top o& t.e .ill to regrade t.e slope. $n addition t.e o?ner ?as able to
attain t.e desired &acility eIpansion in &ar less time t.an by any ot.er met.od.
2s a result o& t.e success o& t.is eIperience and ot.ers t.e use o& tie<bac0 retaining ?alls
.as become a routine practice.
+.3 Construction /ite &nironment
A.ile t.e general in&ormation about t.e construction site is usually available at t.e
planning stage o& a proBect it is important &or t.e design pro&essionals and construction
manager as ?ell as t.e contractor to visit t.e site. Eac. group ?ill be bene&ited by &irst<
.and 0no?ledge ac!uired in t.e &ield.
Kor design pro&essionals an eIamination o& t.e topograp.y may &ocus t.eir attention to
t.e layout o& a &acility on t.e site &or maIimum use o& space in compliance ?it. various
regulatory restrictions. $n t.e case o& industrial plants t.e production or processing
design and operation o&ten dictate t.e site layout. 2 poor layout can cause construction
problems suc. as inade!uate space &or staging limited access &or materials and
personnel and restrictions on t.e use o& certain construction met.ods. ,.us design and
construction inputs are important in t.e layout o& a &acility.
,.e construction manager and t.e contractor must visit t.e site to gain some insig.t in
preparing or evaluating t.e bid pac0age &or t.e proBect. ,.ey can veri&y access roads and
?ater electrical and ot.er service utilities in t.e immediate vicinity ?it. t.e vie? o&
&inding suitable locations &or erecting temporary &acilities and t.e &ield o&&ice. ,.ey can
also observe any inter&erence o& eIisting &acilities ?it. construction and develop a plan
&or site security during construction.
$n eIamining site conditions particular attention must be paid to environmental &actors
suc. as drainage ground?ater and t.e possibility o& &loods. O& particular concern is t.e
possible presence o& .azardous ?aste materials &rom previous uses. (leaning up or
controlling .azardous ?astes can be eItremely eIpensive.
&9ample +)11* Groundwater #ollution from a $andfill ?10@
,.e presence o& ?aste deposits on a potential construction site can .ave substantial
impacts on t.e surrounding area. Under eIisting environmental regulations in t.e United
;tates t.e responsibility &or cleaning up or ot.er?ise controlling ?astes generally resides
?it. t.e o?ner o& a &acility in conBunction ?it. any outstanding insurance coverage.
2 typical eIample o& a ?aste problem is illustrated in Kigure 3<11. $n t.is &igure a small
pus.over burning dump ?as located in a depression on a slope. ,.e land&ill consisted o&
general re&use and ?as covered by a very sandy material. ,.e inevitable in&iltration o&
?ater &rom t.e sur&ace or &rom t.e ground?ater into t.e land&ill ?ill result in vertical or
.orizontal percolation o& leac.able ions and organic contamination. ,.is leac.ate ?ould
be odorous and potentially .azardous in ?ater. ,.e pollutant ?ould s.o? up as seepage
do?n.ill as pollution in sur&ace streams or as pollution entering t.e regional
ground?ater.
(igure +)11* (ross<;ection $llustration o& a Land&ill
:e&ore ne? construction could proceed t.is land&ill site ?ould .ave to be controlled or
removed. ,ypical control met.ods mig.t involveD
;ur&ace ?ater control measures suc. as contour grading or sur&ace sealing.
*assive ground?ater control tec.ni!ues suc. as underground barriers bet?een t.e
ground?ater and t.e land&ill.
*lume management procedures suc. as pumping ?ater &rom surrounding ?ells.
(.emical immobilization tec.ni!ues suc. as applying sur&ace seals or c.emical
inBections.
EIcavation and reburial o& t.e land&ill re!uiring t.e availability o& an engineered
and environmentally sound land&ill.
,.e eIcavation and reburial o& even a small land&ill site can be very eIpensive. Kor
eIample t.e estimated reburial cost &or a land&ill li0e t.at s.o?n in Kigure 3<11 ?as in
eIcess o& G 4 million in 1)%'.
+.4 'alue &ngineering
8alue engineering may be broadly de&ined as an organized approac. in identi&ying
unnecessary costs in design and construction and in soliciting or proposing alternative
design or construction tec.nology to reduce costs ?it.out sacri&icing !uality or
per&ormance re!uirements. $t usually involves t.e steps o& gat.ering pertinent
in&ormation searc.ing &or creative ideas evaluating t.e promising alternatives and
proposing a more cost e&&ective alternative. ,.is approac. is usually applied at t.e
beginning o& t.e construction p.ase o& t.e proBect li&e cycle.
,.e use o& value engineering in t.e public sector o& construction .as been &ostered by
legislation and government regulation but t.e approac. .as not been ?idely adopted in
t.e private sector o& construction. One eIplanation may lie in t.e di&&erence in practice o&
engineering design services in t.e public and private sectors. $n t.e public sector t.e &ee
&or design services is tig.tly monitored against t.e Jmar0et priceJ or may even be based
on t.e lo?est bid &or service. ;uc. a practice in setting pro&essional &ees encourages t.e
design pro&essionals to adopt 0no?n and tried designs and construction tec.nologies
?it.out giving muc. t.oug.t to alternatives t.at are innovative but ris0y. (ontractors are
?illing to eIamine suc. alternatives ?.en o&&ered incentives &or s.aring t.e savings by
o?ners. $n t.e private sector t.e o?ner .as t.e &reedom to o&&er suc. incentives to design
pro&essionals as ?ell as t.e contractors ?it.out being concerned about t.e appearance o&
&avoritism in engaging pro&essional services.
2not.er source o& cost savings &rom value engineering is t.e ability o& contractors to ta0e
advantage o& proprietary or unusual tec.ni!ues and 0no?ledge speci&ic to t.e contractorHs
&irm. Kor eIample a contractor may .ave muc. more eIperience ?it. a particular
met.od o& tunneling t.at is not speci&ied in t.e original design and because o& t.is
eIperienceO t.e alternative met.od may be less eIpensive. $n advance o& a bidding
competition a design pro&essional does not 0no? ?.ic. contractor ?ill underta0e t.e
construction o& a &acility. Once a particular contractor is c.osen t.en modi&ications to t.e
construction tec.nology or design may ta0e advantage o& peculiar advantages o& t.e
contractorHs organization.
2s a &inal source o& savings in value engineering t.e contractor may o&&er genuine ne?
design or construction insig.ts ?.ic. .ave escaped t.e attention o& t.e design
pro&essional even i& t.e latter is not restrained by t.e &ee structure to eIplore more
alternatives. $& t.e eIpertise o& t.e contractor can be utilized o& course t.e best time to
employ it is during t.e planning and design p.ase o& t.e proBect li&e cycle. ,.at is ?.y
pro&essional construction management or integrated designUconstruction is o&ten pre&erred
by private o?ners.
+.15 Construction Planning
,.e development o& a construction plan is very muc. analogous to t.e development o& a
good &acility design. ,.e planner must ?eig. t.e costs and reliability o& di&&erent options
?.ile at t.e same time insuring tec.nical &easibility. (onstruction planning is more
di&&icult in some ?ays since t.e building process is dynamic as t.e site and t.e p.ysical
&acility c.ange over time as construction proceeds. On t.e ot.er .and construction
operations tend to be &airly standard &rom one proBect to anot.er ?.ereas structural or
&oundation details mig.t di&&er considerably &rom one &acility to anot.er.
Korming a good construction plan is an eIceptionally c.allenging problem. ,.ere are
numerous possible plans available &or any given proBect. A.ile past eIperience is a good
guide to construction planning eac. proBect is li0ely to .ave special problems or
opportunities t.at may re!uire considerable ingenuity and creativity to overcome or
eIploit. Un&ortunately it is !uite di&&icult to provide direct guidance concerning general
procedures or strategies to &orm good plans in all circumstances. ,.ere are some
recommendations or issues t.at can be addressed to describe t.e characteristics o& good
plans but t.is does not necessarily tell a planner .o? to discover a good plan. /o?ever
as in t.e design process strategies o& decomposition in ?.ic. planning is divided into
subproblems and hierarchical planning in ?.ic. general activities are repeatable
subdivided into more speci&ic tas0s can be readily adopted in many cases.
Krom t.e standpoint o& construction contractors or t.e construction divisions o& large
&irms t.e planning process &or construction proBects consists o& t.ree stages t.at ta0e
place bet?een t.e moments in ?.ic. a planner starts t.e plan &or t.e construction o& a
&acility to t.e moment in ?.ic. t.e evaluation o& t.e &inal output o& t.e construction
process is &inis.ed.
,.e estimate stage involves t.e development o& a cost and duration estimate &or t.e
construction o& a &acility as part o& t.e proposal o& a contractor to an o?ner. $t is t.e stage
in ?.ic. assumptions o& resource commitment to t.e necessary activities to build t.e
&acility are made by a planner. 2 care&ul and t.oroug. analysis o& di&&erent conditions
imposed by t.e construction proBect design and by site c.aracteristics are ta0en into
consideration to determine t.e best estimate. ,.e success o& a contractor depends upon
t.is estimate not only to obtain a Bob but also to construct t.e &acility ?it. t.e .ig.est
pro&it. ,.e planner .as to loo0 &or t.e time<cost combination t.at ?ill allo? t.e
contractor to be success&ul in .is commitment. ,.e result o& a .ig. estimate ?ould be to
lose t.e Bob and t.e result o& a lo? estimate could be to ?in t.e Bob but to lose money in
t.e construction process. A.en c.anges are done t.ey s.ould improve t.e estimate
ta0ing into account not only present e&&ects but also &uture outcomes o& succeeding
activities. $t is very seldom t.e case in ?.ic. t.e output o& t.e construction process
eIactly ec.oes t.e estimate o&&ered to t.e o?ner.
$n t.e monitoring and control stage o& t.e construction process t.e construction manager
.as to 0eep constant trac0 o& bot. activitiesH durations and ongoing costs. $t is misleading
to t.in0 t.at i& t.e construction o& t.e &acility is on sc.edule or a.ead o& sc.edule t.e cost
?ill also be on t.e estimate or belo? t.e estimate especially i& several c.anges are made.
(onstant evaluation is necessary until t.e construction o& t.e &acility is complete. A.en
?or0 is &inis.ed in t.e construction process and in&ormation about it is provided to t.e
planner t.e t.ird stage o& t.e planning process can begin.
,.e evaluation stage is t.e one in ?.ic. results o& t.e construction process are matc.ed
against t.e estimate. 2 planner deals ?it. t.is uncertainty during t.e estimate stage. Only
?.en t.e outcome o& t.e construction process is 0no?n is .eUs.e able to evaluate t.e
validity o& t.e estimate. $t is in t.is last stage o& t.e planning process t.at .e or s.e
determines i& t.e assumptions ?ere correct. $& t.ey ?ere not or i& ne? constraints emerge
.eUs.e s.ould introduce corresponding adBustments in &uture planning.
+.11 $ndustriali6ed Construction and Pre)fa>rication
2not.er approac. to construction innovation is to apply t.e principles and organizational
solutions adopted &or manu&acturing. $ndustrialized construction and pre<&abrication
?ould involve trans&erring a signi&icant portion o& construction operations &rom t.e
construction site to more or less remote sites ?.ere individual components o& buildings
and structures are produced. Elements o& &acilities could be pre&abricated o&& t.e erection
site and assembled by cranes and ot.er li&ting mac.inery.
,.ere are a ?ide variety and degrees o& introducing greater industrialization to t.e
construction process. 4any components o& constructed &acilities .ave al?ays been
manu&actured suc. as air conditioning units. Lumber piping and ot.er individual
components are manu&actured to standard sizes. Even temporary items suc. as &orms &or
concrete can be assembled o&&<site and transported &or use. 3ein&orcing bars &or concrete
can also be pre<cut and s.aped to t.e desired con&iguration in a manu&acturing plant or in
an automated plant located proIimate to a construction site.
2 maBor problem in eItending t.e use o& pre<&abricated units is t.e lac0 o&
standardization &or systems and building regulations.R1%S A.ile designers .ave long
adopted standard sizes &or individual components in designs t.e adoption o& standardized
sub<assemblies is rarer. Ait.out standardization t.e ac.ievement o& a large mar0et and
scale economies o& production in manu&acturing may be impossible. 2n innovative and
more t.oroug. industrialization o& t.e entire building process may be a primary source o&
construction cost savings in t.e &uture.
&9ample +)1!* #lanning of pre-fabrication
A.en mig.t pre<&abricated components be used in pre&erence to components assembled
on a construction siteX 2 straig.t&or?ard ans?er is to use pre<&abricated components
?.enever t.eir cost including transportation is less t.an t.e cost o& assembly on site. 2s
an eIample &orms &or concrete panels mig.t be transported to a construction site ?it.
rein&orcing bars already built in necessary coatings applied to t.e &orms and even
special &eatures suc. as electrical conduit already installed in t.e &orm. $n some cases it
mig.t be less eIpensive to pre<&abricate and transport t.e entire concrete panel to a
manu&acturing site. $n contrast traditional construction practice ?ould be to assemble all
t.e di&&erent &eatures o& t.e panel on<site. ,.e relevant costs o& t.ese alternatives could be
assessed during construction planning to determine t.e lo?est cost alternative.
$n addition to t.e consideration o& direct costs a construction planner s.ould also
consider some ot.er aspects o& t.is tec.nology c.oice. Kirst t.e planner must insure t.at
pre<&abricated components ?ill satis&y t.e relevant )uilding codes and regulations.
;econd t.e relative 9uality o& traditional versus pre<&abricated components as
eIperienced in t.e &inal &acility s.ould be considered. Kinally t.e availa)ility of
components at t.e re!uired time during t.e construction process s.ould also be
considered.
&9ample +)1+* Impacts of building codes?13@
:uilding codes originated as a part o& t.e building regulatory process &or t.e sa&ety and
general ?el&are o& t.e public. ,.e source o& all aut.ority to enact building codes is based
on t.e police po?er o& t.e state ?.ic. may be delegated by t.e state legislature to local
government units. (onse!uently about '+++ localities .aving t.eir o?n building codes
eit.er by &ollo?ing a national model code or developing a local code. ,.e lac0 o&
uni&ormity o& building codes may be attributed to a variety o& reasonsD
5eig.boring municipalities may adopt di&&erent national models as t.e basis &or
local regulation.
*eriodic revisions o& national codes may not be adopted by local aut.orities
be&ore t.e lapse o& several years.
4unicipalities may eIplicitly decline to adopt speci&ic provisions o& national
model codes or may use t.eir o?n variants o& 0ey provisions.
Local aut.orities may di&&er in interpretation o& t.e same language in national
model codes.
,.e lac0 o& uni&ormity in building codes .as serious impact on design and construction as
?ell as t.e regulatory process &or buildings. 2mong t.e signi&icant &actors areD
1elay in t.e di&&usion o& ne? building innovations ?.ic. may ta0e a long time to
&ind t.eir ?ays to be incorporated in building codes.
1iscouragement to ne? production organizations suc. as industrialized
construction and pre&abrication.
1uplication o& administrative cost o& public agencies and compliance cost
incurred by private &irms.
+.1! Computer)Aided &ngineering
$n t.e past t?enty years t.e computer .as become an essential tool in engineering
design and accounting. ,.e innovative designs o& complicated &acilities cited in t.e
previous sections ?ould be impossible ?it.out t.e aid o& computer based analysis tools.
:y using general purpose analysis programs to test alternative designs o& compleI
structures suc. as petroc.emical plants engineers are able to greatly improve initial
designs. 6eneral purpose accounting systems are also available and adopted in
organizations to per&orm routine boo00eeping and &inancial accounting c.ores. ,.ese
applications eIploit t.e capability &or computers to per&orm numerical calculations in a
pre<programmed &as.ion rapidly ineIpensively and accurately.
1espite t.ese advances t.e computer is o&ten used as only an incidental tool in t.e
design construction and proBect management processes. /o?ever ne? capabilities
systems and application programs are rapidly being adopted. ,.ese are motivated in part
by t.e remar0able improvement in computer .ard?are capability t.e introduction o& t.e
$nternet and an eItraordinary decline in cost. 5e? concepts in computer design and in
so&t?are are also contributing. Kor eIample t.e introduction o& personal computers using
microcircuitry .as encouraged t.e adoption o& interactive programs because o& t.e lo?
cost and considerable capability o& t.e computer .ard?are. *ersonal computers available
&or a t.ousand dollars in 1))" .ave essentially t.e same capability as eIpensive
main&rame computer systems o& &i&teen years earlier.
(omputer grap.ics provide anot.er pertinent eIample o& a potentially revolutionary
mec.anism &or design and communication. 6rap.ical representations o& bot. t.e p.ysical
and ?or0 activities on proBects .ave been essential tools in t.e construction industry &or
decades. /o?ever manual dra&ting o& blueprints plans and ot.er diagrams is laborious
and eIpensive. ;tand alone computer aided dra&ting e!uipment .as proved to be less
eIpensive and &ully capable o& producing t.e re!uiring dra?ings. 4ore signi&icantly t.e
geometric in&ormation re!uired &or producing desired dra?ings mig.t also be used as a
database &or computer aided design and computer integrated construction. (omponents o&
&acilities can be represented as t.ree dimensional computer based solid models &or t.is
purpose. 6eometric in&ormation &orms only one component o& integrated design
databases in ?.ic. t.e computer can assure consistency completeness and compliance
?it. relevant speci&ications and constraints. ;everal approac.es to integrated computer
aided engineering environments o& t.is type .ave already been attempted. R1)S
(omputers are also being applied more and more eItensively to non<analytical and non<
numerical tas0s. Kor eIample computer based speci&ication ?riting assistants are used to
rapidly assemble sets o& standard speci&ications or to insert special clauses in t.e
documentation o& &acility designs. 2s anot.er eIample computerized trans&er o&
in&ormation provides a means to avoid laborious and error<prone transcription o& proBect
in&ormation. A.ile most o& t.e traditional applications and researc. in computer aids
.ave emp.asized numerical calculations t.e use o& computers ?ill rapidly s.i&t to?ards
t.e more prevalent and di&&icult problems o& planning communication design and
management.
Qno?ledge based systems represent a prominent eIample o& ne? so&t?are approac.es
applicable to proBect management. ,.ese systems originally emerged &rom researc. in
arti&icial intelligence in ?.ic. .uman cognitive processes ?ere modeled. $n limited
problem domains suc. as e!uipment con&iguration or process control 0no?ledge based
systems .ave been demonstrated to approac. or surpass t.e per&ormance o& .uman
eIperts. ,.e programs are mar0ed by a separation bet?een t.e reasoning or Jin&erenceJ
engine program and t.e representation o& domain speci&ic 0no?ledge. 2s a result system
developers need not speci&y complete problem solving strategies Mor algorit.msN &or
particular problems. ,.is c.aracteristic o& 0no?ledge based systems ma0es t.em
particularly use&ul in t.e ill<structured domains o& design and proBect management.
(.apter 1" ?ill discuss 0no?ledge based systems in greater detail.
(omputer program assistants ?ill soon become ubi!uitous in virtually all proBect
management organizations. ,.e c.allenge &or managers is to use t.e ne? tools in an
e&&ective &as.ion. (omputer intensive ?or0 environments s.ould be structured to aid and
to ampli&y t.e capabilities o& managers rat.er t.an to divert attention &rom real problems
suc. as ?or0er motivation.
+.1+ Pre)Pro%ect Planning
Even be&ore design and construction processes begin t.ere is a stage o& Jpre<proBect
planningJ t.at can be critical &or proBect success. $n t.is process t.e proBect scope is
establis.ed. ;ince construction and design pro&essionals are o&ten not involved in t.is
proBect scope stage t.e terminology o& describing t.is as a Jpre<proBectJ process .as
arisen. Krom t.e o?nerHs perspective de&ining t.e proBect scope is Bust anot.er p.ase in
t.e process o& ac!uiring a constructed &acility.
,.e de&inition o& a proBect scope typically involves developing proBect alternatives at a
conceptual level analyzing proBect ris0s and economic payo&& developing a &inancial
plan ma0ing a decision to proceed Mor notN and deciding upon t.e proBect organization
and control plan. ,.e neIt &e? c.apters ?ill eIamine t.ese di&&erent problems at some
lengt..
,.e danger o& poor proBect de&inition comes &rom escalating costs Mas ne? items are
addedN or in t.e eItreme proBect &ailure. 2 good de&inition o& scope allo?s all t.e parties
in t.e proBect to understand ?.at is needed and to ?or0 to?ards meeting t.ose needs.
&9ample +)1-* The Pro%ect ;efinition 2ating $nde9 DP;2$E for <uilding Pro%ects
,.e (onstruction $ndustry $nstitute .as developed rating indeIes &or di&&erent types o&
proBects to assess t.e ade!uacy o& proBect scope de&initions.R2+S ,.ese are intended to
re&lect best practices in t.e building industry and provides a c.ec0list &or recommended
activities and milestones to de&ine a proBect scope. ,.e rating indeI is a ?eig.ted sum o&
scores received &or a variety o& items on t.e scope de&inition c.ec0list. Eac. item in t.e
c.ec0list is rated as Jnot applicableJ M+N Jcomplete de&initionJ M1N Jminor de&icienciesJ
M2N Jsome de&icienciesJ M3N JmaBor de&icienciesJ M4N or Jincomplete or poor de&initionJ
M"N. Lo?er scores in t.ese categories are pre&erable. ;ome items in t.e c.ec0list includeD
:usiness ;trategy &or building use Busti&ication plan economic analysis &acility
re!uirements eIpansionUalteration consideration site selection issues and proBect
obBectives.
O?ner *.ilosop.y ?it. regard to reliability maintenance operation and design.
*roBect 3e!uirements &or value engineering design eIisting &acility scope o&
?or0 revie? sc.edule and budget.
;ite $n&ormation including applicable regulatory reporting and permits
re!uirements.
:uilding *rogramming including room by room de&initions &or use &inis.es
interior re!uirements and .vac M.eating ventilating and air conditioningN.
1esign *arameters including all components and a constructability analysis.
E!uipment including inventory locations and utility re!uirements.
+.1- 2eferences
1. 2u ,. and *. (.ristiano #tructural "nalysis *rentice</all $nc. Engle?ood
(li&&s 5P 1)'%.
2. :uilding 3esearc. 2dvisory :oard E:ploratory #tudy on Responsi)ility%
.ia)ility and "ccounta)ility for Risks in $onstruction% 5ational 2cademy o&
;ciences Aas.ington 1.(. 1)%'.
3. 1ruc0er *.K. -nnovation and Entrepreneurship3 !ractice and !rinciples% /arper
and 3o? 5e? 9or0 1)'".
4. 6aylord E. and (. 6aylord MEditorsN #tructural Engineering (and)ook
4c6ra?</ill :oo0 (o. 5e? 9or0 1)%).
". Levitt 3.E. 3.1. Logc.er and 5./. Luaddumi J$mpact o& O?ner<Engineer 3is0
;.aring on 1esign (onservatismJ "#$E 2ournal of !rofessional -ssues in
Engineering% 8ol. 11+ 1)'4 pp. 1"%<1#%.
#. ;imon /.2. ,he #cience of the "rtificial ;econd Edition 4$, *ress
(ambridge 42 1)'1.
%. ,atum (.:. J$nnovation on t.e (onstruction *roBectD 2 *rocess 8ie?J !roject
'anagement 2ournal% 8ol. 1' 5o. " 1)'% pp. "%<#%.
'. *re<*roBect *lanning 3esearc. ,eam !re-!roject !lanning (and)ook
(onstruction $ndustry $nstitute *ublication 3)<2 2pril 1))".
+.1. (ootnotes
1. ;ee J2;(E Unveils Luality 4anualJ ENR 5ovember " 1)'% p. 14N
2. ;ee 8. Kair?eat.er J4ilanHs 4odel 4etroJ $ivil Engineering 1ecember 1)'%
pp. 4+<43.
3. ;ee ,.9. Lin and :.6. 6er?ic0 Pr. J1esign o& Long ;pan (oncrete :ridges ?it.
;pecial 3e&erences to *restressing *recasting ;tructural :e.avior and
EconomicsJ 2($ *ublication ;*<23 Kirst $nternational ;ymposium 1)#) pp.
#)3<%+4
4. ;ee Linn.o&& :. 1.A. ,o?nsend 1. :oland 6.K. /e?itt :.E.2. ,.omas 2.3.
6uy and 3./. 4arsland 0ser 5uide on !rocess -ntegration for the Efficient 0se
of Energy $nstitution o& (.emical Engineers 3ugby Aar0s. England 1)'2.
". J4ore (onstruction &or t.e 4oneyJ #ummary Report of the $onstruction
-ndustry $ost Effectiveness !roject ,.e :usiness 3oundtable 5e? 9or0 1)'3
pg. 3+.
#. ;ee J,.e Luiet 3evolution in ;0yscraper 1esign J $ivil Engineering 4ay 1)'3
pp. "4<").
%. ;ee P. Landis JA.y /omebuilders 1onHt $nnovateJ /uilt Environment 8ol. '
5o. 1 1)'2 pp. 4#<"3.
'. ;ee *.P. (assimates Economics of the $onstruction -ndustry% 5ational $ndustry
(on&erence :oard M;:E 5o. 111N 1)#).
). ;ee K. 4oavenzade. J(onstructionHs /ig. ,ec.nology 3evolutionJ ,echnology
Review October 1)'" pp. 32<3).
1+. Kor more in&ormation on 6reen :uildings see t.e LEE1 ?ebsiteD
.ttpDUU???.usgbc.orgULEE1ULEE1Zmain.asp
11. ;ee 3.A. Pensen and (.(. ,onies MEditorsN #oftware Engineering *rentice</all
$nc. Engle?ood (li&&s 5P 1)%) p. 22.
12. ;ee ;.P. Kenves J(omputer 2pplicationsJ in #tructural Engineering (and)ook
M6aylord E. and (. 6aylord EditorsN 4c6ra?</ill :oo0 (o. 5e? 9or0 59
1)%).
13. ;ee ,. 2u E.A. *arti and 2.Q.(. Aong J(omputer 2pplications &or /ealt. (are
Kacility 1esignJ $omputers in /iology and 'edicine 8ol. 1 5o. 4 1)%1 pp.
2))<31#.
14. ,.e aut.ors are indebted to E. 1H2ppolonia &or suggesting t.is eIample.
1". ;ee E. 1H2ppolonia 3. 2lperstein and 1.P. 1H2ppolonia J:e.avior o& (olluvial
;lopeJ "#$E 2ournal of #oil 'echanics and 7oundations &ivision 8ol. )3 5o.
;44 1)#% pp. 44%<4%3.
1#. ,.e material in t.is eIample is adapted &rom 2.L. ,olman 2. *. :allestero
A.A. :ec0 6./. Emric. J6uidance 4anual &or 4inimizing *ollution &rom
Aaste 1isposal ;itesJ 3eport to t.e 4unicipal Environmental 3esearc.
Laboratory U.;. Environmental *rotection 2gency E*2<#++U2<%'<142 2ugust
1)%'.
1%. Kor discussions o& industrialized building see :ender 3ic.ard " $rack in the
Rear ;iew 'irror - " ;iew of -ndustriali+ed /uilding% 8on 5ostrand 3ein.old
(o. 1)'3O 5utt<*o?ell ,.omas E. 'anufactured (omes3 'aking #ense of a
(ousing *pportunity% 2uburn /ouse 1)'2O or Aarza?s0i 2. 4. 2vra.am and
1. (armel JUtilization o& *recast (oncrete Elements in :uildingJ "#$E 2ournal
of $onstruction Engineering and 'anagement 8ol. 11+ 5o. (O4 1)'4 pp.
4%#<4'".
1'. ;ee (.6. Kield and ;.3. 3iv0in ,he /uilding $ode /urden LeIington :oo0s
1.(. /eat. and (o. LeIington 42 1)%".
1). ;ee 3e.a0 1aniel 3. and L.2. Lopez $omputer "ided Engineering !ro)lems
and !rospects 1ept. o& (ivil Engineering University o& $llinois 1)'1.
2+. ;ee *13$ &or :uilding *roBects 3esearc. ,eam !&R-3 !roject &efinition Rating
-nde: for /uilding !rojects (onstruction $ndustry $nstitute 3esource 1""<2 Puly
1))).
-. "a>or, ,aterial and &quipment
=tili6ation
-.1 Aistorical Perspectie
6ood proBect management in construction must vigorously pursue t.e e&&icient utilization
o& labor material and e!uipment. $mprovement o& labor productivity s.ould be a maBor
and continual concern o& t.ose ?.o are responsible &or cost control o& constructed
&acilities. 4aterial .andling ?.ic. includes procurement inventory s.op &abrication and
&ield servicing re!uires special attention &or cost reduction. ,.e use o& ne? e!uipment
and innovative met.ods .as made possible ?.olesale c.anges in construction
tec.nologies in recent decades. Organizations ?.ic. do not recognize t.e impact o&
various innovations and .ave not adapted to c.anging environments .ave Busti&iably been
&orced out o& t.e mainstream o& construction activities.
Observing t.e trends in construction tec.nology presents a very miIed and ambiguous
picture. On t.e one .and many o& t.e tec.ni!ues and materials used &or construction are
essentially unc.anged since t.e introduction o& mec.anization in t.e early part o& t.e
t?entiet. century. Kor eIample a .istory o& t.e *anama (anal construction &rom 1)+4 to
1)14 argues t.atD
R,S.e ?or0 could not .ave done any &aster or more e&&iciently in our day despite all
tec.nological and mec.anical advances in t.e time since t.e reason being t.at no present
system could possibly carry t.e spoil a?ay any &aster or more e&&iciently t.an t.e system
employed. 5o motor truc0s ?ere used in t.e digging o& t.e canalO everyt.ing ran on rails.
2nd because o& t.e mud and rain no ot.er met.od ?ould .ave ?or0ed .al& so ?ell. R1S
$n contrast to t.is vie? o& one large proBect one may also point to t.e continual c.ange
and improvements occurring in traditional materials and tec.ni!ues. :ric0laying provides
a good eIample o& suc. c.angesD
:ric0laying...is said not to .ave c.anged in t.ousands o& yearsO per.aps in t.e literal
placing o& bric0 on bric0 it .as not. :ut masonry tec.nology .as c.anged a great deal.
4otorized ?.eelbarro?s and mortar miIers sop.isticated sca&&olding systems and
&or0li&t truc0s no? assist t.e bric0layer. 5e? epoIy mortars give stronger ad.esion
bet?een bric0s. 4ortar additives and cold<?eat.er protection eliminate ?inter
s.utdo?ns. R2S
2dd to t.is list o& eIisting innovations t.e possibility o& robotic bric0layingO automated
prototypes &or masonry construction already eIist. ,ec.nical c.ange is certainly
occurring in construction alt.oug. it may occur at a slo?er rate t.an in ot.er sectors o&
t.e economy.
,.e United ;tates construction industry o&ten points to &actors ?.ic. cannot be controlled
by t.e industry as a maBor eIplanatory &actor in cost increases and lac0 o& tec.nical
innovation. ,.ese include t.e imposition o& restrictions &or protection o& t.e environment
and .istorical districts re!uirements &or community participation in maBor construction
proBects labor la?s ?.ic. allo? union stri0es to become a source o& disruption
regulatory policies including building codes and zoning ordinances and taI la?s ?.ic.
in.ibit construction abroad. /o?ever t.e construction industry s.ould bear a large s.are
o& blame &or not realizing earlier t.at t.e tec.nological edge .eld by t.e large U.;.
construction &irms .as eroded in &ace o& sti&& &oreign competition. 4any past practices
?.ic. ?ere tolerated ?.en U.;. contractors .ad a tec.nological lead must no? be
c.anged in t.e &ace o& sti&& competition. Ot.er?ise t.e U.;. construction industry ?ill
continue to &ind itsel& in trouble.
Ait. a strong tec.nological base t.ere is no reason ?.y t.e construction industry cannot
catc. up and reassert itsel& to meet competition ?.erever it may be. $ndividual design
andUor construction &irms must eIplore ne? ?ays to improve productivity &or t.e &uture.
O& course operational planning &or construction proBects is still important but suc.
tactical planning .as limitations and may soon reac. t.e point o& diminis.ing return
because muc. t.at can be ?rung out o& t.e eIisting practices .ave already been tried.
A.at is needed t.e most is strategic planning to us.er in a revolution ?.ic. can improve
productivity by an order o& magnitude or more. ;trategic planning s.ould loo0 at
opportunities and as0 ?.et.er t.ere are potential options along ?.ic. ne? goals may be
soug.t on t.e basis o& eIisting resources. 5o one can be certain about t.e success o&
various development options &or t.e design pro&essions and t.e construction industry.
/o?ever ?it. t.e availability o& todayHs .ig. tec.nology some options .ave good
potential o& success because o& t.e social and economic necessity ?.ic. ?ill eventually
pus. barriers aside. Ultimately decisions &or action not plans ?ill dictate &uture
outcomes.
-.! "a>or Productiity
*roductivity in construction is o&ten broadly de&ined as output per labor .our. ;ince labor
constitutes a large part o& t.e construction cost and t.e !uantity o& labor .ours in
per&orming a tas0 in construction is more susceptible to t.e in&luence o& management
t.an are materials or capital t.is productivity measure is o&ten re&erred to as la)or
productivity. /o?ever it is important to note t.at labor productivity is a measure o& t.e
overall e&&ectiveness o& an operating system in utilizing labor e!uipment and capital to
convert labor e&&orts into use&ul output and is not a measure o& t.e capabilities o& labor
alone. Kor eIample by investing in a piece o& ne? e!uipment to per&orm certain tas0s in
construction output may be increased &or t.e same number o& labor .ours t.us resulting
in .ig.er labor productivity.
(onstruction output may be eIpressed in terms o& &unctional units or constant dollars. $n
t.e &ormer case labor productivity is associated ?it. units o& product per labor .our suc.
as cubic yards o& concrete placed per .our or miles o& .ig.?ay paved per .our. $n t.e
latter case labor productivity is identi&ied ?it. value o& construction Min constant dollarsN
per labor .our. ,.e value o& construction in t.is regard is not measured by t.e bene&it o&
constructed &acilities but by construction cost. Labor productivity measured in t.is ?ay
re!uires considerable care in interpretation. Kor eIample ?age rates in construction .ave
been declining in t.e U; during t.e period 1)%+ to 1))+ and since ?ages are an
important component in construction costs t.e value o& construction put in place per .our
o& ?or0 ?ill decline as a result suggesting lo?er productivity.
Productivity at t!e /o* Site
(ontractors and o?ners are o&ten concerned ?it. t.e labor activity at Bob sites. Kor t.is
purpose it is convenient to eIpress labor productivity as &unctional units per labor .our
&or eac. type o& construction tas0. /o?ever even &or suc. speci&ic purposes di&&erent
levels o& measure may be used. Kor eIample cubic yards o& concrete placed per .our is a
lo?er level o& measure t.an miles o& .ig.?ay paved per .our. Lo?er<level measures are
more use&ul &or monitoring individual activities ?.ile .ig.er<level measures may be
more convenient &or developing industry<?ide standards o& per&ormance.
A.ile eac. contractor or o?ner is &ree to use its o?n system to measure labor
productivity at a site it is a good practice to set up a system ?.ic. can be used to trac0
productivity trends over time and in varied locations. (onsiderable e&&orts are re!uired to
collect in&ormation regionally or nationally over a number o& years to produce suc.
results. ,.e productivity indices compiled &rom statistical data s.ould include parameters
suc. as t.e per&ormance o& maBor cra&ts e&&ects o& proBect size type and location and
ot.er maBor proBect in&luences.
$n order to develop industry<?ide standards o& per&ormance t.ere must be a general
agreement on t.e measures to be use&ul &or compiling data. ,.en t.e Bob site productivity
data collected by various contractors and o?ners can be correlated and analyzed to
develop certain measures &or eac. o& t.e maBor segment o& t.e construction industry.
,.us a contractor or o?ner can compare its per&ormance ?it. t.at o& t.e industry
average.
Productivity in t!e Construction Industry
:ecause o& t.e diversity o& t.e construction industry a single indeI &or t.e entire industry
is neit.er meaning&ul nor reliable. *roductivity indices may be developed &or maBor
segments o& t.e construction industry nation?ide i& reliable statistical data can be
obtained &or separate industrial segments. Kor t.is general type o& productivity measure it
is more convenient to eIpress labor productivity as constant dollars per labor .ours since
dollar values are more easily aggregated &rom a large amount o& data collected &rom
di&&erent sources. ,.e use o& constant dollars allo?s meaning&ul approIimations o& t.e
c.anges in construction output &rom one year to anot.er ?.en price de&lators are applied
to current dollars to obtain t.e corresponding values in constant dollars. /o?ever since
most construction price de&lators are obtained &rom a combination o& price indices &or
material and labor inputs t.ey re&lect only t.e c.ange o& price levels and do not capture
any savings arising &rom improved labor productivity. ;uc. de&lators tend to overstate
increases in construction costs over a long period o& time and conse!uently understate
t.e p.ysical volume or value o& construction ?or0 in years subse!uent to t.e base year
&or t.e indices.
-.+ (actors Affecting Fo>)/ite Productiity
Pob<site productivity is in&luenced by many &actors ?.ic. can be c.aracterized eit.er as
labor c.aracteristics proBect ?or0 conditions or as non<productive activities. ,.e labor
c.aracteristics includeD
age s0ill and eIperience o& ?or0&orce
leaders.ip and motivation o& ?or0&orce
,.e proBect ?or0 conditions include among ot.er &actorsD
Pob size and compleIity.
Pob site accessibility.
Labor availability.
E!uipment utilization.
(ontractual agreements.
Local climate.
Local cultural c.aracteristics particularly in &oreign operations.
,.e non<productive activities associated ?it. a proBect may or may not be paid by t.e
o?ner but t.ey nevert.eless ta0e up potential labor resources ?.ic. can ot.er?ise be
directed to t.e proBect. ,.e non<productive activities include among ot.er &actorsD
$ndirect labor re!uired to maintain t.e progress o& t.e proBect
3e?or0 &or correcting unsatis&actory ?or0
,emporary ?or0 stoppage due to inclement ?eat.er or material s.ortage
,ime o&& &or union activities
2bsentee time including late start and early !uits
5on<?or0ing .olidays
;tri0es
Eac. category o& &actors a&&ects t.e productive labor available to a proBect as ?ell as t.e
on<site labor e&&iciency.
)a*or C!aracteristics
*er&ormance analysis is a common tool &or assessing ?or0er !uality and contribution.
Kactors t.at mig.t be evaluated includeD
Luality o& Aor0 < caliber o& ?or0 produced or accomplis.ed.
Luantity o& Aor0 < volume o& acceptable ?or0
Pob Qno?ledge < demonstrated 0no?ledge o& re!uirements met.ods tec.ni!ues
and s0ills involved in doing t.e Bob and in applying t.ese to increase productivity.
3elated Aor0 Qno?ledge < 0no?ledge o& e&&ects o& ?or0 upon ot.er areas and
0no?ledge o& related areas ?.ic. .ave in&luence on assigned ?or0.
Pudgment < soundness o& conclusions decisions and actions.
$nitiative < ability to ta0e e&&ective action ?it.out being told.
3esource Utilization < ability to delineate proBect needs and locate plan and
e&&ectively use all resources available.
1ependability < reliability in assuming and carrying out commitments and
obligations.
2nalytical 2bility < e&&ectiveness in t.in0ing t.roug. a problem and reac.ing
sound conclusions.
(ommunicative 2bility < e&&ectiveness in using orgal and ?ritten communications
and in 0eeping subordinates associates superiors and ot.ers ade!uately in&ormed.
$nterpersonal ;0ills < e&&ectiveness in relating in an appropriate and productive
manner to ot.ers.
2bility to Aor0 Under *ressure < ability to meet tig.t deadlines and adapt to
c.anges.
;ecurity ;ensitivity < ability to .andle con&idential in&ormation appropriately and
to eIercise care in sa&eguarding sensitive in&ormation.
;a&ety (onsciousness < .as 0no?ledge o& good sa&ety practices and demonstrates
a?areness o& o?n personal sa&ety and t.e sa&ety o& ot.ers.
*ro&it and (ost ;ensitivity < ability to see0 out generate and implement pro&it<
ma0ing ideas.
*lanning E&&ectiveness < ability to anticipate needs &orecast conditions set goals
and standards plan and sc.edule ?or0 and measure results.
Leaders.ip < ability to develop in ot.ers t.e ?illingenss and desire to ?or0
to?ards common obBectives.
1elegating < e&&ectiveness in delegating ?or0 appropriately.
1evelopment *eople < ability to select train and appraise personnel set standards
o& per&ormance and provide motivation to gro? in t.eir capacity. [ li\1iversity
ME!ual Employment OpportunityN < ability to be sensitive to t.e needs o&
minorities &emales and ot.er protected groups and to demonstrate a&&irmative
action in responding to t.ese needs.
,.ese di&&erent &actors could eac. be assessed on a t.ree point scaleD M1N recognized
strengt. M2N meets eIpectations M3N area needing improvement. EIamples o& ?or0
per&ormance in t.ese areas mig.t also be provided.
Pro.ect 0or1 Conditions
Pob<site labor productivity can be estimated eit.er &or eac. cra&t Mcarpenter bric0layer
etc.N or eac. type o& construction Mresidential .ousing processing plant etc.N under a
speci&ic set o& ?or0 conditions. 2 )ase la)or productivity may be de&ined &or a set o&
?or0 conditions speci&ied by t.e o?ner or contractor ?.o ?is.es to observe and measure
t.e labor per&ormance over a period o& time under suc. conditions. 2 la)or productivity
inde: may t.en be de&ined as t.e ratio o& t.e Bob<site labor productivity under a di&&erent
set o& ?or0 conditions to t.e base labor productivity and is a measure o& t.e relative
labor e&&iciency o& a proBect under t.is ne? set o& ?or0 conditions.
,.e e&&ects o& various &actors related to ?or0 conditions on a ne? proBect can be
estimated in advance some more accurately t.an ot.ers. Kor eIample &or very large
construction proBects t.e labor productivity indeI tends to decrease as t.e proBect size
andUor compleIity increase because o& logistic problems and t.e JlearningJ t.at t.e ?or0
&orce must undergo be&ore adBusting to t.e ne? environment. Pob<site accessibility o&ten
may reduce t.e labor productivity indeI i& t.e ?or0ers must per&orm t.eir Bobs in round
about ?ays suc. as avoiding tra&&ic in repaving t.e .ig.?ay sur&ace or maintaining t.e
operation o& a plant during renovation. Labor availability in t.e local mar0et is anot.er
&actor. ;.ortage o& local labor ?ill &orce t.e contractor to bring in non<local labor or
sc.edule overtime ?or0 or bot.. $n eit.er case t.e labor e&&iciency ?ill be reduced in
addition to incurring additional eIpenses. ,.e degree o& e!uipment utilization and
mec.anization o& a construction proBect clearly ?ill .ave direct bearing on Bob<site labor
productivity. ,.e contractual agreements play an important role in t.e utilization o& union
or non<union labor t.e use o& subcontractors and t.e degree o& &ield supervision all o&
?.ic. ?ill impact Bob<site labor productivity. ;ince on<site construction essentially
involves outdoor activities t.e local climate ?ill in&luence t.e e&&iciency o& ?or0ers
directly. $n &oreign operations t.e cultural c.aracteristics o& t.e .ost country s.ould be
observed in assessing t.e labor e&&iciency.
+on2Productive ctivities
,.e non<productive activities associated ?it. a proBect s.ould also be eIamined in order
to eIamine t.e productive la)or yield ?.ic. is de&ined as t.e ratio o& direct labor .ours
devoted to t.e completion o& a proBect to t.e potential labor .ours. ,.e direct labor .ours
are estimated on t.e basis o& t.e best possible conditions at a Bob site by eIcluding all
&actors ?.ic. may reduce t.e productive labor yield. Kor eIample in t.e repaving o&
.ig.?ay sur&ace t.e &lagmen re!uired to divert tra&&ic represent indirect labor ?.ic.
does not contribute to t.e labor e&&iciency o& t.e paving cre? i& t.e .ig.?ay is closed to
t.e tra&&ic. ;imilarly &or large proBects in remote areas indirect labor may be used to
provide .ousing and in&rastructure &or t.e ?or0ers .ired to supply t.e direct labor &or a
proBect. ,.e labor .ours spent on re?or0 to correct unsatis&actory original ?or0 represent
eItra time ta0en a?ay &rom potential labor .ours. ,.e labor .ours related to suc.
activities must be deducted &rom t.e potential labor .ours in order to obtain t.e actual
productive labor yield.
&9ample -)1* &ffects of %o> si6e on productiity
2 contractor .as establis.ed t.at under a set o& JstandardJ ?or0 conditions &or building
construction a Bob re!uiring "+++++ labor .ours is considered standard in determining
t.e base labor productivity. 2ll ot.er &actors being t.e same t.e labor productivity indeI
?ill increase to 1.1 or 11+V &or a Bob re!uiring only 4+++++ labor<.ours. 2ssuming t.at
a linear relation eIists &or t.e range bet?een Bobs re!uiring 3+++++ to %+++++ labor
.ours as s.o?n in Kigure 4<1 determine t.e labor productivity indeI &or a ne? Bob
re!uiring #"++++ labor .ours under ot.er?ise t.e same set o& ?or0 conditions.
(igure -)1* $llustrative 3elations.ip bet?een *roductivity $ndeI and Pob ;ize
,.e labor productivity indeI $ &or t.e ne? Bob can be obtained by linear interpolation o&
t.e available data as &ollo?sD
,.is implies t.at labor is 1"V less productive on t.e large Bob t.an on t.e standard
proBect.
&9ample -)!* Productie la>or yield R3S
$n t.e construction o& an o&&<s.ore oil drilling plat&orm t.e potential labor .ours ?ere
&ound to be L ] %." million .ours. O& t.is total t.e non<productive activities eIpressed in
t.ousand labor .ours ?ere as &ollo?sD
2 ] 41% &or .olidays and stri0es
: ] 141" &or absentees Mi.e. vacation sic0 time etc.N
( ] 1141 &or temporary stoppage Mi.e. ?eat.er ?aiting union activities etc.N
1 ] 1431 &or indirect labor Mi.e. building temporary &acilities cleaning up t.e site
re?or0 to correct errors etc.N
1etermine t.e productive labor yield a&ter t.e above &actors are ta0en into consideration.
,.e percentages o& time allocated to various non<productive activities 2 : ( and 1 areD
,.e total percentage o& time ^ &or all non<productive activities isD
,.e productive labor yield 9 ?.en t.e given &actors &or 2 : ( and 1 are considered
is as &ollo?sD
2s a result only 41V o& t.e budgeted labor time ?as devoted directly to ?or0 on t.e
&acility.
&9ample -)+* =tili6ation of on)site wor:er's time
2n eIample illustrating t.e e&&ects o& indirect labor re!uirements ?.ic. limit productive
labor by a typical cra&tsman on t.e Bob site ?as given by 3. ,uc0er ?it. t.e &ollo?ing
percentages o& time allocationD R4S
*roductive time 4+V
Unproductive time #+V
2dministrative delays 2+V
$ne&&icient ?or0 met.ods 2+V
Labor Burisdictions and ot.er ?or0 restrictions 1"V
*ersonal time "V
$n t.is estimate as muc. time is spent on productive ?or0 as on delays due to
management and ine&&iciencies due to anti!uated ?or0 met.ods.
-.- "a>or 2elations in Construction
,.e mar0et demand in construction &luctuates greatly o&ten ?it.in s.ort periods and ?it.
uneven distributions among geograp.ical regions. Even ?.en t.e volume o& construction
is relatively steady some types o& ?or0 may decline in importance ?.ile ot.er types
gain. Under an unstable economic environment employers in t.e construction industry
place great value on &leIibility in .iring and laying o&& ?or0ers as t.eir volumes o& ?or0
?aI and ?ane. On t.e ot.er .and construction ?or0ers sense t.eir insecurity under suc.
circumstances and attempt to limit t.e impacts o& c.anging economic conditions t.roug.
labor organizations.
,.ere are many cra&ts in t.e construction labor &orces but most contractors .ire &rom
only a &e? o& t.ese cra&ts to satis&y t.eir specialized needs. :ecause o& t.e peculiar
c.aracteristics o& employment conditions employers and ?or0ers are placed in a more
intimate relations.ip t.an in many ot.er industries. Labor and management arrangements
in t.e construction industry include bot. unionized and non<unionized operations ?.ic.
compete &or &uture dominance. 1ramatic s.i&ts in unionization can occur. Kor eIample
t.e &raction o& trade union members in t.e construction industry declined &rom 42V in
1))2 to 2#V in 2+++ in 2ustralia a 4+V decline in ' years.
3nionized Construction
,.e cra&t unions ?or0 ?it. construction contractors using unionized labor t.roug.
various mar0et institutions suc. as Burisdiction rules apprentices.ip programs and t.e
re&erral system. (ra&t unions ?it. speci&ic Burisdiction rules &or di&&erent trades set
uni&orm .ourly ?age rates &or Bourneymen and o&&er &ormal apprentices.ip training to
provide common and e!uivalent s0ill &or eac. trade. (ontractors t.roug. t.e contractorsH
associations enter into legally binding collective bargaining agreements ?it. one or more
o& t.e cra&t unions in t.e construction trades. ,.e system ?.ic. bind bot. parties to a
collective bargaining agreement is re&erred to as t.e Junion s.opJ. ,.ese agreements
obligate a contractor to observe t.e ?or0 Burisdictions o& various unions and to .ire
employees t.roug. a union operated re&erral system commonly 0no?n as t.e .iring .all.
,.e re&erral systems operated by union organizations are re!uired to observe several
conditionsD
1. 2ll !uali&ied ?or0ers reported to t.e re&erral system must be made available to
t.e contractor ?it.out discrimination on t.e basis o& union members.ip or ot.er
relations.ip to t.e union. ,.e Jclosed s.opJ ?.ic. limits re&erral to union
members only is no? illegal.
2. ,.e contractor reserves t.e rig.t to .ire or re&use to .ire any ?or0er re&erred by
t.e union on t.e basis o& .is or .er !uali&ications.
3. ,.e re&erral plan must be posted in public including any priorities o& re&errals or
re!uired !uali&ications.
A.ile t.ese principles must prevail re&erral systems operated by labor organizations
di&&er ?idely in t.e construction industry.
(ontractors and cra&t unions must negotiate not only ?age rates and ?or0ing conditions
but also .iring and apprentice training practices. ,.e purpose o& trade Burisdiction is to
encourage considerable investment in apprentice training on t.e part o& t.e union so t.at
t.e contractor ?ill be protected by .aving only !uali&ied ?or0ers per&orm t.e Bob even
t.oug. suc. ?or0ers are not permanently attac.ed to t.e contractor and t.us may .ave no
sense o& security or loyalty. ,.e re&erral system is o&ten a rapid and dependable source o&
?or0ers particularly &or a contractor ?.o moves into a ne? geograp.ical location or
starts a ne? proBect ?.ic. .as .ig. &luctuations in demand &or labor. :y and large t.e
re&erral system .as &unctioned smoot.ly in providing !uali&ied ?or0ers to contractors
even t.oug. some ot.er aspects o& union operations are not as ?ell accepted by
contractors.
+on23nionized Construction
$n recent years non<union contractors .ave entered and prospered in an industry ?.ic.
.as a long tradition o& unionization. 5on<union operations in construction are re&erred to
as Jopen s.ops.J /o?ever in t.e absence o& collective bargaining agreements many
contractors operate under policies adopted by non<union contractorsH associations. ,.is
practice is re&erred to as Jmerit s.opJ ?.ic. &ollo?s substantially t.e same policies and
procedures as collective bargaining alt.oug. under t.e control o& a non<union contractorsH
association ?it.out union participation. Ot.er contractors may c.oose to be totally
JunorganizedJ by not &ollo?ing eit.er union s.op or merit s.op practices.
,.e operations o& t.e merit s.op are national in scope eIcept &or t.e local or state
apprentices.ip and training plans. ,.e compre.ensive plans o& t.e contractorsH
association apply to all employees and cra&ts o& a contractor regardless o& t.eir trades.
Under suc. operations ?or0ers .ave &ull rig.ts to move t.roug. t.e nation among
member contractors o& t.e association. ,.us t.e non<union segment o& t.e industry is
organized by contractorsH associations into an integral part o& t.e construction industry.
/o?ever since merit s.op ?or0ers are employed directly by t.e construction &irms t.ey
.ave a greater loyalty to t.e &irm and recognize t.at t.eir o?n interest ?ill be a&&ected by
t.e &inancial .ealt. o& t.e &irm.
*laying a signi&icant role in t.e early gro?t. and continued eIpansion o& merit s.op
construction is t.e 2ssociated :uilders and (ontractors association. :y 1)'% it .ad a
members.ip o& nearly 2++++ contractors and a net?or0 o& %" c.apters t.roug. t.e
nation. 2mong t.e merit s.op contractors are large construction &irms suc. as Kluor
1aniel :lount $nternational and :ro?n W 3oot (onstruction. ,.e advantages o& merit
s.ops as claimed by its advocates areD
t.e ability to manage t.eir o?n ?or0 &orce
&leIibility in ma0ing timely management decisions
t.e emp.asis on ma0ing maIimum usage o& local labor &orce
t.e emp.asis on encouraging individual ?or0 advancement t.roug. continued
development o& s0ills
,.e s.ared interest t.at management and ?or0ers .ave in seeing an individual
&irm prospers.
:y s.ouldering t.e training responsibility &or producing s0ill ?or0ers t.e merit s.op
contractors .ave de&lected t.e most serious complaints o& users and labor t.at used to be
raised against t.e open s.op. On t.e ot.er .and t.e use o& miIed cre?s o& s0illed
?or0ers at a Bob site by merit s.op contractors enables t.em to remove a maBor source o&
ine&&iciencies caused by t.e eIclusive Burisdiction practiced in t.e union s.op namely t.e
idea t.at only members o& a particular union s.ould be permitted to per&orm any given
tas0 in construction. 2s a result merit s.op contractors are able to eIert a bene&icial
in&luence on productivity and cost<e&&ectiveness o& construction proBects.
,.e unorganized &orm o& open s.op is &ound primarily in .ousing construction ?.ere a
large percentage o& ?or0ers are c.aracterized as uns0illed .elpers. ,.e s0illed ?or0ers in
various cra&ts are developed gradually t.roug. in&ormal apprentices.ips ?.ile serving as
.elpers. ,.is &orm o& open s.op is not eIpected to eIpand beyond t.e type o&
construction proBects in ?.ic. .ig.ly specialized s0ills are not re!uired.
-.. Pro>lems in Collectie <argaining
$n t.e organized building trades in 5ort. 2merican construction t.e primary unit is t.e
international union ?.ic. is an association o& local unions in t.e United ;tates and
(anada. 2lt.oug. only t.e international unions .ave t.e po?er to issue or remove
c.arters and to organize or combine local unions eac. local union .as considerable
degrees o& autonomy in t.e conduct o& its a&&airs including t.e negotiation o& collective
bargaining agreements. ,.e business agent o& a local union is an elected o&&icial ?.o is
t.e most important person in .andling t.e day to day operations on be.al& o& t.e union.
,.e contractorsH associations representing t.e employers vary ?idely in composition and
structure particularly in di&&erent geograp.ical regions. $n general local contractorsH
associations are considerably less ?ell organized t.an t.e union ?it. ?.ic. t.ey deal but
t.ey try to strengt.en t.emselves t.roug. a&&iliation ?it. state and national organizations.
,ypically collective bargaining agreements in construction are negotiated bet?een a
local union in a single cra&t and t.e employers o& t.at cra&t as represented by a
contractorsH association but t.ere are many eIceptions to t.is pattern. Kor eIample a
contractor may remain outside t.e association and negotiate independently o& t.e union
but it usually cannot obtain a better agreement t.an t.e association.
:ecause o& t.e great variety o& bargaining structures in ?.ic. t.e union and contractorsH
organization may c.oose to stage negotiations t.ere are many problems arising &rom
Burisdictional disputes and ot.er causes. 6iven t.e traditional rivalries among various
cra&ts and t.e ine&&ective organization o& some o& contractorsH associations coupled ?it.
t.e lac0 o& ade!uate mec.anisms &or settling disputes some possible solutions to t.ese
problems deserve serious attentionD R"S
Regional Bargaining
(urrently t.e geograp.ical area in a collective bargaining agreement does not necessarily
coincide ?it. t.e territory o& t.e union and contractorsH associations in t.e negotiations.
,.ere is overlapping o& Burisdictions as ?ell as territories ?.ic. may create successions
o& contract termination dates &or di&&erent cra&ts. 4ost collective bargaining agreements
are negotiated locally but regional agreements ?it. more compre.ensive coverage
embracing a number o& states .ave been establis.ed. ,.e role o& national union
negotiators and contractorsH representatives in local collective bargaining is limited. ,.e
national agreement bet?een international unions and a national contractor normally binds
t.e contractorsH association and its bargaining unit. (onse!uently t.e most promising
re&orm lies in t.e broadening o& t.e geograp.ic region o& an agreement in a single trade
?it.out overlapping territories or Burisdictions.
&ulticraft Bargaining
,.e treatment o& interrelations.ips among various cra&t trades in construction presents
one o& t.e most compleI issues in t.e collective bargaining process. *ast eIperience on
proBect agreements .as dealt ?it. suc. issues success&ully in t.at collective bargaining
agreements are signed by a group o& cra&t trade unions and a contractor &or t.e duration o&
a proBect. *roBect agreements may re&erence ot.er agreements on particular points suc.
as ?age rates and &ringe bene&its but may set t.eir o?n ?or0ing conditions and
procedures &or settling disputes including a commitment o& no<stri0e and no<loc0out. ,.is
type o& agreement may serve as a starting point &or multicra&t bargaining on a regional
non<proBect basis.
Improvement of Bargaining Performance
2lt.oug. bot. sides o& t.e bargaining table are to some degree responsible &or t.e
success or &ailure o& negotiation contractors .ave o&ten been responsible &or t.e poor
per&ormance o& collective bargaining in construction in recent years because local
contractorsH associations are generally less ?ell organized and less pro&essionally sta&&ed
t.an t.e unions ?it. ?.ic. t.ey deal. Legislation providing &or contractorsH association
accreditation as an eIclusive bargaining agent .as no? been provided in several
provinces in (anada. $t provides a government board t.at could .old .earings and
establis. an appropriate bargaining unit by geograp.ic region or sector o& t.e industry on
a single<trade or multi<trade basis.
-.0 ,aterials ,anagement
4aterials management is an important element in proBect planning and control. 4aterials
represent a maBor eIpense in construction so minimizing procurement or purchase costs
presents important opportunities &or reducing costs. *oor materials management can also
result in large and avoidable costs during construction. Kirst i& materials are purc.ased
early capital may be tied up and interest c.arges incurred on t.e eIcess inventory o&
materials. Even ?orse materials may deteriorate during storage or be stolen unless
special care is ta0en. Kor eIample electrical e!uipment o&ten must be stored in
?aterproo& locations. ;econd delays and eItra eIpenses may be incurred i& materials
re!uired &or particular activities are not available. 2ccordingly insuring a timely &lo? o&
material is an important concern o& proBect managers.
4aterials management is not Bust a concern during t.e monitoring stage in ?.ic.
construction is ta0ing place. 1ecisions about material procurement may also be re!uired
during t.e initial planning and sc.eduling stages. Kor eIample activities can be inserted
in t.e proBect sc.edule to represent purc.asing o& maBor items suc. as elevators &or
buildings. ,.e availability o& materials may greatly in&luence t.e sc.edule in proBects
?it. a fast track or very tig.t time sc.eduleD su&&icient time &or obtaining t.e necessary
materials must be allo?ed. $n some case more eIpensive suppliers or s.ippers may be
employed to save time.
4aterials management is also a problem at t.e organization level i& central purc.asing
and inventory control is used &or standard items. $n t.is case t.e various proBects
underta0en by t.e organization ?ould present re!uests to t.e central purc.asing group. $n
turn t.is group ?ould maintain inventories o& standard items to reduce t.e delay in
providing material or to obtain lo?er costs due to bul0 purc.asing. ,.is organizational
materials management problem is analogous to inventory control in any organization
&acing continuing demand &or particular items.
4aterials ordering problems lend t.emselves particularly ?ell to computer based systems
to insure t.e consistency and completeness o& t.e purc.asing process. $n t.e
manu&acturing realm t.e use o& automated materials re9uirements planning systems is
common. $n t.ese systems t.e master production sc.edule inventory records and
product component lists are merged to determine ?.at items must be ordered ?.en t.ey
s.ould be ordered and .o? muc. o& eac. item s.ould be ordered in eac. time period.
,.e .eart o& t.ese calculations is simple arit.meticD t.e proBected demand &or eac.
material item in eac. period is subtracted &rom t.e available inventory. A.en t.e
inventory becomes too lo? a ne? order is recommended. Kor items t.at are non<standard
or not 0ept in inventory t.e calculation is even simpler since no inventory must be
considered. Ait. a materials re!uirement system muc. o& t.e detailed record 0eeping is
automated and proBect managers are alerted to purc.asing re!uirements.
&9ample -)-* &9amples of >enefits for materials management systems.R#S
Krom a study o& t?enty .eavy construction sites t.e &ollo?ing bene&its &rom t.e
introduction o& materials management systems ?ere notedD
$n one proBect a #V reduction in cra&t labor costs occurred due to t.e improved
availability o& materials as needed on site. On ot.er proBects an 'V savings due to
reduced delay &or materials ?as estimated.
2 comparison o& t?o proBects ?it. and ?it.out a materials management system
revealed a c.ange in productivity &rom 1.)2 man<.ours per unit ?it.out a system
to 1.14 man<.ours per unit ?it. a ne? system. 2gain muc. o& t.is di&&erence can
be attributed to t.e timely availability o& materials.
Aare.ouse costs ?ere &ound to decrease "+V on one proBect ?it. t.e introduction
o& improved inventory management representing a savings o& G )2+++. $nterest
c.arges &or inventory also declined ?it. one proBect reporting a cas. &lo?
savings o& G '"+++ &rom improved materials management.
2gainst t.ese various bene&its t.e costs o& ac!uiring and maintaining a materials
management system .as to be compared. /o?ever management studies suggest t.at
investment in suc. systems can be !uite bene&icial.
-.1 ,aterial Procurement and ;eliery
,.e main sources o& in&ormation &or &eedbac0 and control o& material procurement are
re!uisitions bids and !uotations purc.ase orders and subcontracts s.ipping and
receiving documents and invoices. Kor proBects involving t.e large scale use o& critical
resources t.e o?ner may initiate t.e procurement procedure even be&ore t.e selection o&
a constructor in order to avoid s.ortages and delays. Under ordinary circumstances t.e
constructor ?ill .andle t.e procurement to s.op &or materials ?it. t.e best
priceUper&ormance c.aracteristics speci&ied by t.e designer. ;ome overlapping and
re.andling in t.e procurement process is unavoidable but it s.ould be minimized to
insure timely delivery o& t.e materials in good condition.
,.e materials &or delivery to and &rom a construction site may be broadly classi&ied asD
M1N bul0 materials M2N standard o&&<t.e<s.el& materials and M3N &abricated members or
units. ,.e process o& delivery including transportation &ield storage and installation ?ill
be di&&erent &or t.ese classes o& materials. ,.e e!uipment needed to .andle and .aul t.ese
classes o& materials ?ill also be di&&erent.
:ul0 materials re&er to materials in t.eir natural or semi<processed state suc. as
eart.?or0 to be eIcavated ?et concrete miI etc. ?.ic. are usually encountered in large
!uantities in construction. ;ome bul0 materials suc. as eart.?or0 or gravels may be
measured in ban0 Msolid in situN volume. Obviously t.e !uantities o& materials &or
delivery may be substantially di&&erent ?.en eIpressed in di&&erent measures o& volume
depending on t.e c.aracteristics o& suc. materials.
;tandard piping and valves are typical eIamples o& standard o&&<t.e<s.el& materials ?.ic.
are used eItensively in t.e c.emical processing industry. ;ince standard o&&<t.e<s.el&
materials can easily be stoc0piled t.e delivery process is relatively simple.
Kabricated members suc. as steel beams and columns &or buildings are pre<processed in a
s.op to simpli&y t.e &ield erection procedures. Aelded or bolted connections are attac.ed
partially to t.e members ?.o are cut to precise dimensions &or ade!uate &it. ;imilarly
steel tan0s and pressure vessels are o&ten partly or &ully &abricated be&ore s.ipping to t.e
&ield. $n general i& t.e ?or0 can be done in t.e s.op ?.ere ?or0ing conditions can better
be controlled it is advisable to do so provided t.at t.e &abricated members or units can
be s.ipped to t.e construction site in a satis&actory manner at a reasonable cost.
2s a &urt.er step to simpli&y &ield assembly an entire ?all panel including plumbing and
?iring or even an entire room may be pre&abricated and s.ipped to t.e site. A.ile t.e
&ield labor is greatly reduced in suc. cases JmaterialsJ &or delivery are in &act
manu&actured products ?it. value added by anot.er type o& labor. Ait. modern means o&
transporting construction materials and &abricated units t.e percentages o& costs on direct
labor and materials &or a proBect may c.ange i& more pre&abricated units are introduced in
t.e construction process.
$n t.e construction industry materials used by a speci&ic cra&t are generally .andled by
cra&tsmen not by general labor. ,.us electricians .andle electrical materials pipe&itters
.andle pipe materials etc. ,.is multiple .andling diverts scarce s0illed cra&tsmen and
contractor supervision into activities ?.ic. do not directly contribute to construction.
;ince contractors are not normally in t.e &reig.t business t.ey do not per&orm t.e tas0s
o& &reig.t delivery e&&iciently. 2ll t.ese &actors tend to eIacerbate t.e problems o& &reig.t
delivery &or very large proBects.
&9ample -).* (reight deliery for the Alas:a Pipeline Pro%ect R%S
,.e &reig.t delivery system &or t.e 2las0a pipeline proBect ?as set up to .andle #+++++
tons o& materials and supplies. ,.is tonnage did not include t.e pipes ?.ic. comprised
anot.er "+++++ tons and ?ere s.ipped t.roug. a di&&erent routing system.
,.e compleIity o& t.is delivery system is illustrated in Kigure 4<2. ,.e rectangular boIes
denote geograp.ical locations. ,.e points o& origin represent plants and &actories
t.roug.out t.e U; and else?.ere. ;ome o& t.e materials ?ent to a primary staging point
in ;eattle and some ?ent directly to 2las0a. ,.ere ?ere &ive ports o& entryD 8aldez
2nc.orage A.ittier ;e?ard and *rud.oe :ay. ,.ere ?as a secondary staging area in
Kairban0s and t.e pipeline itsel& ?as divided into siI sections. :eyond t.e 9u0on 3iver
t.ere ?as not.ing available but a dirt road &or .auling. ,.e amounts o& &reig.t in
t.ousands o& tons s.ipped to and &rom various locations are indicated by t.e numbers
near t.e net?or0 branc.es M?it. arro?s s.o?ing t.e directions o& material &lo?sN and t.e
modes o& transportation are noted above t.e branc.es. $n eac. o& t.e locations t.e
contractor .ad supervision and construction labor to identi&y materials unload &rom
transport determine ?.ere t.e material ?as going repac0age i& re!uired to split
s.ipments and t.en re<load material on outgoing transport.
(igure -)!* (reight ;eliery for the Alas:a Pipeline Pro%ect
&9ample -)0* Process plant equipment procurement R'S
,.e procurement and delivery o& bul0 materials items suc. as piping electrical and
structural elements involves a series o& activities i& suc. items are not standard andUor in
stoc0. ,.e times re!uired &or various activities in t.e procurement o& suc. items mig.t be
estimated to be as &ollo?sD
Actiities ;uration Cumulatie
D;aysE ;uration
3e!uisition ready by designer + +
O?ner approval " "
$n!uiry issued to vendors 3 '
8endor !uotations received 1" 23
(omplete bid evaluation by designer % 3+
O?ner approval " 3"
*lace purc.ase order " 4+
3eceive preliminary s.op dra?ings 1+ "+
3eceive &inal design dra?ings 1+ #+
Kabrication and delivery #+<2++ 12+<2#+
2s a result t.is type o& e!uipment procurement ?ill typically re!uire &our to nine
mont.s. ;lippage or contraction in t.is standard sc.edule is also possible based on suc.
&actors as t.e eItent to ?.ic. a &abricator is busy.
-.3 $nentory Control
Once goods are purc.ased t.ey represent an inventory used during t.e construction
process. ,.e general obBective o& inventory control is to minimize t.e total cost o&
0eeping t.e inventory ?.ile ma0ing tradeo&&s among t.e maBor categories o& costsD M1N
purc.ase costs M2N order cost M3N .olding costs and M4N unavailable cost. ,.ese cost
categories are interrelated since reducing cost in one category may increase cost in ot.ers.
,.e costs in all categories generally are subBect to considerable uncertainty.
Purc!ase Costs
,.e purchase cost o& an item is t.e unit purc.ase price &rom an eIternal source including
transportation and &reig.t costs. Kor construction materials it is common to receive
discounts &or bul0 purc.ases so t.e unit purc.ase cost declines as !uantity increases.
,.ese reductions may re&lect manu&acturersH mar0eting policies economies o& scale in t.e
material production or scale economies in transportation. ,.ere are also advantages in
.aving .omogeneous materials. Kor eIample a bul0 order to insure t.e same color or size
o& items suc. as bric0s may be desirable. 2ccordingly it is usually desirable to ma0e a
limited number o& large purc.ases &or materials. $n some cases organizations may
consolidate small orders &rom a number o& di&&erent proBects to capture suc. bul0
discountsO t.is is a basic saving to be derived &rom a central purc.asing o&&ice.
,.e cost o& materials is based on prices obtained t.roug. e&&ective bargaining. Unit prices
o& materials depend on bargaining leverage !uantities and delivery time. Organizations
?it. potential &or long<term purc.ase volume can command better bargaining leverage.
A.ile orders in large !uantities may result in lo?er unit prices t.ey may also increase
.olding costs and t.us cause problems in cas. &lo?. 3e!uirements o& s.ort delivery time
can also adversely a&&ect unit prices. Kurt.ermore design c.aracteristics ?.ic. include
items o& odd sizes or s.apes s.ould be avoided. ;ince suc. items normally are not
available in t.e standard stoc0pile purc.asing t.em causes .ig.er prices.
,.e transportation costs are a&&ected by s.ipment sizes and ot.er &actors. ;.ipment by t.e
&ull load o& a carrier o&ten reduces prices and assures !uic0er delivery as t.e carrier can
travel &rom t.e origin to t.e destination o& t.e &ull load ?it.out .aving to stop &or
delivering part o& t.e cargo at ot.er stations. 2voiding transs.ipment is anot.er
consideration in reducing s.ipping cost. A.ile t.e reduction in s.ipping costs is a maBor
obBective t.e re!uirements o& delicate .andling o& some items may &avor a more
eIpensive mode o& transportation to avoid brea0age and replacement costs.
(rder Cost
,.e order cost re&lects t.e administrative eIpense o& issuing a purc.ase order to an
outside supplier. Order costs include eIpenses o& ma0ing re!uisitions analyzing
alternative vendors ?riting purc.ase orders receiving materials inspecting materials
c.ec0ing on orders and maintaining records o& t.e entire process. Order costs are usually
only a small portion o& total costs &or material management in construction proBects
alt.oug. ordering may re!uire substantial time.
Holding Costs
,.e holding costs or carrying costs are primarily t.e result o& capital costs .andling
storage obsolescence s.rin0age and deterioration. (apital cost results &rom t.e
opportunity cost or &inancial eIpense o& capital tied up in inventory. Once payment &or
goods is made borro?ing costs are incurred or capital must be diverted &rom ot.er
productive uses. (onse!uently a capital carrying cost is incurred e!ual to t.e value o& t.e
inventory during a period multiplied by t.e interest rate obtainable or paid during t.at
period. 5ote t.at capital costs only accumulate ?.en payment &or materials actually
occursO many organizations attempt to delay payments as long as possible to minimize
suc. costs. /andling and storage represent t.e movement and protection c.arges incurred
&or materials. ;torage costs also include t.e disruption caused to ot.er proBect activities
by large inventories o& materials t.at get in t.e ?ay. Obsolescence is t.e ris0 t.at an item
?ill lose value because o& c.anges in speci&ications. ;.rin0age is t.e decrease in
inventory over time due to t.e&t or loss. 1eterioration re&lects a c.ange in material !uality
due to age or environmental degradation. 4any o& t.ese holding cost components are
di&&icult to predict in advanceO a proBect manager 0no?s only t.at t.ere is some c.ance
t.at speci&ic categories o& cost ?ill occur. $n addition to t.ese maBor categories o& cost
t.ere may be ancillary costs o& additional insurance taIes Mmany states treat inventories
as taIable propertyN or additional &ire .azards. 2s a general rule .olding costs ?ill
typically represent 2+ to 4+V o& t.e average inventory value over t.e course o& a yearO
t.us i& t.e average material inventory on a proBect is G 1 million over a year t.e .olding
cost mig.t be eIpected to be G2+++++ to G4+++++.
3navaila*ility Cost
,.e unavaila)ility cost is incurred ?.en a desired material is not available at t.e desired
time. $n manu&acturing industries t.is cost is o&ten called t.e stockout or depletion cost.
;.ortages may delay ?or0 t.ereby ?asting labor resources or delaying t.e completion o&
t.e entire proBect. 2gain it may be di&&icult to &orecast in advance eIactly ?.en an item
may be re!uired or ?.en a s.ipment ?ill be received. A.ile t.e proBect sc.edule gives
one estimate deviations &rom t.e sc.edule may occur during construction. 4oreover t.e
cost associated ?it. a s.ortage may also be di&&icult to assessO i& t.e material used &or one
activity is not available it may be possible to assign ?or0ers to ot.er activities and
depending upon ?.ic. activities are critical t.e proBect may not be delayed.
-.4 Tradeoffs of Costs in ,aterials ,anagement.
,o illustrate t.e type o& trade<o&&s encountered in materials management suppose t.at a
particular item is to be ordered &or a proBect. ,.e amount o& time re!uired &or processing
t.e order and s.ipping t.e item is uncertain. (onse!uently t.e proBect manager must
decide .o? muc. lead time to provide in ordering t.e item. Ordering early and t.ereby
providing a long lead time ?ill increase t.e c.ance t.at t.e item is available ?.en
needed but it increases t.e costs o& inventory and t.e c.ance o& spoilage on site.
Let , be t.e time &or t.e delivery o& a particular item 3 be t.e time re!uired &or process
t.e order and ; be t.e s.ipping time. ,.en t.e minimum amount o& time &or t.e delivery
o& t.e item is , ] 3 _ ;. $n general bot. 3 and ; are random variablesO .ence , is also a
random variable. Kor t.e sa0e o& simplicity ?e s.all consider only t.e case o& instant
processing &or an order i.e. 3 ] +. ,.en t.e delivery time , e!uals t.e s.ipping time ;.
;ince , is a random variable t.e c.ance t.at an item ?ill be delivered on day t is
represented by t.e probability pMtN. ,.en t.e probability t.at t.e item ?ill be delivered
on or be&ore t day is given byD
4.1
$& a and b are t.e lo?er and upper bounds o& possible delivery dates t.e eIpected
delivery time is t.en given byD
4.2
,.e lead time L &or ordering an item is t.e time period a.ead o& t.e delivery time and
?ill depend on t.e tradeo&& bet?een .olding costs and unavailability costs. 2 proBect
manager may ?ant to avoid t.e unavailable cost by re!uiring delivery on t.e sc.eduled
date o& use or may be to lo?er t.e .olding cost by adopting a more &leIible lead time
based on t.e eIpected delivery time. Kor eIample t.e manager may ma0e t.e tradeo&& by
speci&ying t.e lead time to be 1 days more t.an t.e eIpected delivery time i.e.
4.3
A.ere 1 may vary &rom + to t.e number o& additional days re!uired to produce certain
delivery on t.e desired date.
$n a more realistic situation t.e proBect manager ?ould also contend ?it. t.e uncertainty
o& eIactly ?.en t.e item mig.t be re!uired. Even i& t.e item is scheduled &or use on a
particular date t.e ?or0 progress mig.t vary so t.at t.e desired date ?ould di&&er. $n
many cases greater t.an eIpected ?or0 progress may result in no savings because
materials &or &uture activities are unavailable.
&9ample -)1* "ead time for ordering with no processing time.
,able 4<1 summarizes t.e probability o& di&&erent delivery times &or an item. $n t.is table
t.e &irst column lists t.e possible s.ipping times Mranging &rom 1+ to 1# daysN t.e second
column lists t.e probability or c.ance t.at t.is s.ipping time ?ill occur and t.e t.ird
column summarizes t.e c.ance t.at t.e item arrives on or be&ore a particular date. ,.is
table can be used to indicate t.e c.ance t.at t.e item ?ill arrive on a desired date &or
di&&erent lead times. Kor eIample i& t.e order is placed 12 days in advance o& t.e desired
date Mso t.e lead time is 12 daysN t.en t.ere is a 1"V c.ance t.at t.e item ?ill arrive
eIactly on t.e desired day and a 3"V c.ance t.at t.e item ?ill arrive on or be&ore t.e
desired date. 5ote t.at t.is implies t.at t.ere is a 1 < +.3" ] +.#" or #"V c.ance t.at t.e
item ?ill not arrive by t.e desired date ?it. a lead time o& 12 days. 6iven t.e in&ormation
in ,able 4<1 ?.en s.ould t.e item order be placedX
Ta>le -)1 1elivery 1ate on Orders and *robability
o& 1elivery &or an EIample
;eliery
;ate
t
Pro>a>ility of
deliery on date t
pDtE
Cumulatie
pro>a>ility
of deliery >y day t
PrGT tH
1+ +.1+ +.1+
11 +.1+ +.2+
12
+.1" +.3"
13 +.2+ +.""
14 +.3+ +.'"
1" +.1+ +.)"
1#
+.+"
1.++
;uppose t.at t.e sc.eduled date o& use &or t.e item is in 1# days. ,o be completely
certain to .ave delivery by t.e desired day t.e order s.ould be placed 1# days in
advance. /o?ever t.e eIpected delivery date ?it. a 1# day lead time ?ould beD
] M1+NM+.1N _ M11NM+.1N _ M12NM+.1"N _ M13NM+.2+N _ M14NM+.3+N _ M1"NM+.1+N _ M1#NM+.+"N ]
13.+
,.us t.e actual delivery date may be 1#<13 ] 3 days early and t.is early delivery mig.t
involve signi&icant .olding costs. 2 proBect manager mig.t t.en decide to provide a lead
time so t.at t.e e:pected delivery date ?as e!ual to t.e desired assembly date as long as
t.e availability o& t.e item ?as not critical. 2lternatively t.e proBect manager mig.t
negotiate a more certain delivery date &rom t.e supplier.
-.15 Construction &quipment
,.e selection o& t.e appropriate type and size o& construction e!uipment o&ten a&&ects t.e
re!uired amount o& time and e&&ort and t.us t.e Bob<site productivity o& a proBect. $t is
t.ere&ore important &or site managers and construction planners to be &amiliar ?it. t.e
c.aracteristics o& t.e maBor types o& e!uipment most commonly used in construction. R)S
E4cavation and )oading
One &amily o& construction mac.ines used &or eIcavation is broadly classi&ied as a crane-
shovel as indicated by t.e variety o& mac.ines in Kigure 4<3. ,.e crane<s.ovel consists o&
t.ree maBor componentsD
2 carrier or mounting ?.ic. provides mobility and stability &or t.e mac.ine.
2 revolving dec0 or turntable ?.ic. contains t.e po?er and control units.
2 &ront end attac.ment ?.ic. serves t.e special &unctions in an operation.
,.e type o& mounting &or all mac.ines in Kigure 4<3 is re&erred to as crawler mounting
?.ic. is particularly suitable &or cra?ling over relatively rugged sur&aces at a Bob site.
Ot.er types o& mounting include truck mounting and wheel mounting ?.ic. provide
greater mobility bet?een Bob sites but re!uire better sur&aces &or t.eir operation. ,.e
revolving dec0 includes a cab to .ouse t.e person operating t.e mounting andUor t.e
revolving dec0. ,.e types o& &ront end attac.ments in Kigure 4<3 mig.t include a crane
?it. .oo0 claim s.ell dragline bac0.oe s.ovel and piledriver.
(igure -)+ ,ypical 4ac.ines in t.e (rane<;.ovel Kamily
2 tractor consists o& a cra?ler mounting and a non<revolving cab. A.en an eart. moving
blade is attac.ed to t.e &ront end o& a tractor t.e assembly is called a bulldozer. A.en a
buc0et is attac.ed to its &ront end t.e assembly is 0no?n as a loader or buc0et loader.
,.ere are di&&erent types o& loaders designed to .andle most e&&iciently materials o&
di&&erent ?eig.ts and moisture contents.
;crapers are multiple<units o& tractor<truc0 and blade<buc0et assemblies ?it. various
combinations to &acilitate t.e loading and .auling o& eart.?or0. 4aBor types o& scrapers
include single engine t?o<aIle or t.ree aIle scrapers t?in<engine all<?.eel<drive
scrapers elevating scrapers and pus.<pull scrapers. Eac. type .as di&&erent
c.aracteristics o& rolling resistance maneuverability stability and speed in operation.
Compaction and 'rading
,.e &unction o& compaction e!uipment is to produce .ig.er density in soil mec.anically.
,.e basic &orces used in compaction are static ?eig.t 0neading impact and vibration.
,.e degree o& compaction t.at may be ac.ieved depends on t.e properties o& soil its
moisture content t.e t.ic0ness o& t.e soil layer &or compaction and t.e met.od o&
compaction. ;ome maBor types o& compaction e!uipment are s.o?n in Kigure 4<4 ?.ic.
includes rollers ?it. di&&erent operating c.aracteristics.
,.e &unction o& grading e!uipment is to bring t.e eart.?or0 to t.e desired s.ape and
elevation. 4aBor types o& grading e!uipment include motor graders and grade trimmers.
,.e &ormer is an all<purpose mac.ine &or grading and sur&ace &inis.ing ?.ile t.e latter is
used &or .eavy construction because o& its .ig.er operating speed.
(igure -)- ;ome 4aBor ,ypes o& (ompaction E!uipment
$rilling and Blasting
3oc0 eIcavation is an audacious tas0 re!uiring special e!uipment and met.ods. ,.e
degree o& di&&iculty depends on p.ysical c.aracteristics o& t.e roc0 type to be eIcavated
suc. as grain size planes o& ?ea0ness ?eat.ering brittleness and .ardness. ,.e tas0 o&
roc0 eIcavation includes loosening loading .auling and compacting. ,.e loosening
operation is specialized &or roc0 eIcavation and is per&ormed by drilling blasting or
ripping.
4aBor types o& drilling e!uipment are percussion drills rotary drills and rotary<
percussion drills. 2 percussion drill penetrates and cuts roc0 by impact ?.ile it rotates
?it.out cutting on t.e upstro0e. (ommon types o& percussion drills include a
Bac0.ammer ?.ic. is .and<.eld and ot.ers ?.ic. are mounted on a &iIed &rame or on a
?agon or cra?l &or mobility. 2 rotary drill cuts by turning a bit against t.e roc0 sur&ace.
2 rotary<percussion drill combines t.e t?o cutting movements to provide a &aster
penetration in roc0.
:lasting re!uires t.e use o& eIplosives t.e most common o& ?.ic. is dynamite.
6enerally electric blasting caps are connected in a circuit ?it. insulated ?ires. *o?er
sources may be po?er lines or blasting mac.ines designed &or &iring electric cap circuits.
2lso available are non<electrical blasting systems ?.ic. combine t.e precise timing and
&leIibility o& electric blasting and t.e sa&ety o& non<electrical detonation.
,ractor<mounted rippers are capable o& penetrating and prying loose most roc0 types. ,.e
blade or ripper is connected to an adBustable s.an0 ?.ic. controls t.e angle at t.e tip o&
t.e blade as it is raised or lo?ered. 2utomated ripper control may be installed to control
ripping dept. and tip angle.
$n roc0 tunneling special tunnel mac.ines e!uipped ?it. multiple cutter .eads and
capable o& eIcavating &ull diameter o& t.e tunnel are no? available. ,.eir use .as
increasingly replaced t.e traditional met.ods o& drilling and blasting.
)ifting and Erecting
1erric0s are commonly used to li&t e!uipment o& materials in industrial or building
construction. 2 derric0 consists o& a vertical mast and an inclined boom sprouting &rom
t.e &oot o& t.e mast. ,.e mast is .eld in position by guys or sti&&legs connected to a base
?.ile a topping li&t lin0s t.e top o& t.e mast and t.e top o& t.e inclined boom. 2 .oo0 in
t.e road line .anging &rom t.e top o& t.e inclined boom is used to li&t loads. 6uy derric0s
may easily be moved &rom one &loor to t.e neIt in a building under construction ?.ile
sti&&leg derric0s may be mounted on trac0s &or movement ?it.in a ?or0 area.
,o?er cranes are used to li&t loads to great .eig.ts and to &acilitate t.e erection o& steel
building &rames. /orizon boom type to?er cranes are most common in .ig.rise building
construction. $nclined boom type to?er cranes are also used &or erecting steel structures.
&i4ing and Paving
:asic types o& e!uipment &or paving include mac.ines &or dispensing concrete and
bituminous materials &or pavement sur&aces. (oncrete miIers may also be used to miI
portland cement sand gravel and ?ater in batc.es &or ot.er types o& construction ot.er
t.an paving.
2 truc0 miIer re&ers to a concrete miIer mounted on a truc0 ?.ic. is capable o&
transporting ready miIed concrete &rom a central batc. plant to construction sites. 2
paving miIer is a sel& propelled concrete miIer e!uipped ?it. a boom and a buc0et to
place concrete at any desired point ?it.in a road?ay. $t can be used as a stationary miIer
or used to supply slip&orm pavers t.at are capable o& spreading consolidating and
&inis.ing a concrete slab ?it.out t.e use o& &orms.
2 bituminous distributor is a truc0<mounted plant &or generating li!uid bituminous
materials and applying t.em to road sur&aces t.roug. a spray bar connected to t.e end o&
t.e truc0. :ituminous materials include bot. asp.alt and tar ?.ic. .ave similar
properties eIcept t.at tar is not soluble in petroleum products. A.ile asp.alt is most
&re!uently used &or road sur&acing tar is used ?.en t.e pavement is li0ely to be .eavily
eIposed to petroleum spills.
Construction -ools and (t!er E"uipment
2ir compressors and pumps are ?idely used as t.e po?er sources &or construction tools
and e!uipment. (ommon pneumatic construction tools include drills .ammers grinders
sa?s ?renc.es staple guns sandblasting guns and concrete vibrators. *umps are used
to supply ?ater or to de?ater at construction sites and to provide ?ater Bets &or some
types o& construction.
utomation of E"uipment
,.e introduction o& ne? mec.anized e!uipment in construction .as .ad a pro&ound e&&ect
on t.e cost and productivity o& construction as ?ell as t.e met.ods used &or construction
itsel&. 2n eIciting eIample o& innovation in t.is regard is t.e introduction o& computer
microprocessors on tools and e!uipment. 2s a result t.e per&ormance and activity o&
e!uipment can be continually monitored and adBusted &or improvement. $n many cases
automation o& at least part o& t.e construction process is possible and desirable. Kor
eIample ?renc.es t.at automatically monitor t.e elongation o& bolts and t.e applied
tor!ue can be programmed to ac.ieve t.e best bolt tig.tness. On grading proBects laser
controlled scrapers can produce desired cuts &aster and more precisely t.an ?.olly
manual met.ods. R1+S *ossibilities &or automation and robotics in construction are
eIplored more &ully in (.apter 1#.
&9ample -)3* Tunneling &quipment R11S
$n t.e mid<1)'+Hs some Papanese &irms ?ere success&ul in obtaining construction
contracts &or tunneling in t.e United ;tates by using ne? e!uipment and met.ods. Kor
eIample t.e Papanese &irm o& O.bayas.i ?on t.e se?er contract in ;an Krancisco
because o& its advanced tunneling tec.nology. A.en a tunnel is dug t.roug. so&t eart. as
in ;an Krancisco it must be maintained at a &e? atmosp.eres o& pressure to 0eep it &rom
caving in. Aor0ers must spend several .ours in a pressure c.amber be&ore entering t.e
tunnel and several more in decompression a&ter?ards. ,.ey can stay inside &or only t.ree
or &our .ours al?ays at considerable ris0 &rom cave<ins and asp.yIiation. O.bayas.i
used t.e ne? Papanese Jeart.<pressure<balanceJ met.od ?.ic. eliminates t.ese
problems. A.irling blades advance slo?ly cutting t.e tunnel. ,.e loose eart.
temporarily remains be.ind to balance t.e pressure o& t.e compact eart. on all sides.
4ean?.ile pre&abricated concrete segments are inserted and Boined ?it. ?aterproo&
seals to line t.e tunnel. ,.en t.e loose eart. is conveyed a?ay. ,.is ne? tunneling
met.od enabled O.bayas.i to bid G" million belo? t.e engineerHs estimate &or a ;an
Krancisco se?er. ,.e &irm completed t.e tunnel t.ree mont.s a.ead o& sc.edule. $n
e&&ect an innovation involving ne? tec.nology and met.od led to considerable cost and
time savings.
-.11 Choice of &quipment and /tandard Production
2ates
,ypically construction e!uipment is used to per&orm essentially repetitive operations
and can be broadly classi&ied according to t?o basic &unctionsD M1N operators suc. as
cranes graders etc. ?.ic. stay ?it.in t.e con&ines o& t.e construction site and M2N
.aulers suc. as dump truc0s ready miIed concrete truc0 etc. ?.ic. transport materials
to and &rom t.e site. $n bot. cases t.e cycle o& a piece o& e!uipment is a se!uence o&
tas0s ?.ic. is repeated to produce a unit o& output. Kor eIample t.e se!uence o& tas0s
&or a crane mig.t be to &it and install a ?all panel Mor a pac0age o& eig.t ?all panelsN on
t.e side o& a buildingO similarly t.e se!uence o& tas0s o& a ready miIed concrete truc0
mig.t be to load .aul and unload t?o cubic yards Mor one truc0 loadN o& &res. concrete.
$n order to increase Bob<site productivity it is bene&icial to select e!uipment ?it. proper
c.aracteristics and a size most suitable &or t.e ?or0 conditions at a construction site. $n
eIcavation &or building construction &or eIamples &actors t.at could a&&ect t.e selection
o& eIcavators includeD
1. /i6e of the %o>* Larger volumes o& eIcavation ?ill re!uire larger eIcavators or
smaller eIcavators in greater number.
2. Actiity time constraints* ;.ortage o& time &or eIcavation may &orce contractors
to increase t.e size or numbers o& e!uipment &or activities related to eIcavation.
3. Aaila>ility of equipment* *roductivity o& eIcavation activities ?ill diminis. i&
t.e e!uipment used to per&orm t.em is available but not t.e most ade!uate.
4. Cost of transportation of equipment* ,.is cost depends on t.e size o& t.e Bob
t.e distance o& transportation and t.e means o& transportation.
". Type of e9caation* *rincipal types o& eIcavation in building proBects are cut
andUor &ill eIcavation massive and eIcavation &or t.e elements o& &oundation.
,.e most ade!uate e!uipment to per&orm one o& t.ese activities is not t.e most
ade!uate to per&orm t.e ot.ers.
#. /oil characteristics* ,.e type and condition o& t.e soil is important ?.en
c.oosing t.e most ade!uate e!uipment since eac. piece o& e!uipment .as
di&&erent outputs &or di&&erent soils. 4oreover one eIcavation pit could .ave
di&&erent soils at di&&erent stratums.
%. Ceometric characteristics of elements to >e e9caated* Kunctional
c.aracteristics o& di&&erent types o& e!uipment ma0e suc. considerations
necessary.
'. /pace constraints* ,.e per&ormance o& e!uipment is in&luenced by t.e spatial
limitations &or t.e movement o& eIcavators.
). Characteristics of haul units* ,.e size o& an eIcavator ?ill depend on t.e .aul
units i& t.ere is a constraint on t.e size andUor number o& t.ese units.
1+. "ocation of dumping areas* ,.e distance bet?een t.e construction site and
dumping areas could be relevant not only &or selecting t.e type and number o&
.aulers but also t.e type o& eIcavators.
11. 7eather and temperature* 3ain sno? and severe temperature conditions a&&ect
t.e Bob<site productivity o& labor and e!uipment.
:y comparing various types o& mac.ines &or eIcavation &or eIample po?er s.ovels are
generally &ound to be t.e most suitable &or eIcavating &rom a level sur&ace and &or
attac0ing an eIisting digging sur&ace or one created by t.e po?er s.ovelO &urt.ermore
t.ey .ave t.e capability o& placing t.e eIcavated material directly onto t.e .aulers.
2not.er alternative is to use bulldozers &or eIcavation.
,.e c.oice o& t.e type and size o& .aulers is based on t.e consideration t.at t.e number
o& .aulers selected must be capable o& disposing o& t.e eIcavated materials eIpeditiously.
Kactors ?.ic. a&&ect t.is selection includeD
1. Output of e9caators* ,.e size and c.aracteristics o& t.e eIcavators selected ?ill
determine t.e output volume eIcavated per day.
2. ;istance to dump site* ;ometimes part o& t.e eIcavated materials may be piled
up in a corner at t.e Bob<site &or use as bac0&ill.
3. Pro>a>le aerage speed* ,.e average speed o& t.e .aulers to and &rom t.e
dumping site ?ill determine t.e cycle time &or eac. .auling trip.
4. 'olume of e9caated materials* ,.e volume o& eIcavated materials including
t.e part to be piled up s.ould be .auled a?ay as soon as possible.
". /patial and weight constraints* ,.e size and ?eig.t o& t.e .aulers must be
&easible at t.e Bob site and over t.e route &rom t.e construction site to t.e
dumping area.
1ump truc0s are usually used as .aulers &or eIcavated materials as t.ey can move &reely
?it. relatively .ig. speeds on city streets as ?ell as on .ig.?ays.
,.e cycle capacity ( o& a piece o& e!uipment is de&ined as t.e number o& output units per
cycle o& operation under standard ?or0 conditions. ,.e capacity is a &unction o& t.e
output units used in t.e measurement as ?ell as t.e size o& t.e e!uipment and t.e
material to be processed. ,.e cycle time , re&ers to units o& time per cycle o& operation.
,.e standard production rate 3 o& a piece o& construction e!uipment is de&ined as t.e
number o& output units per unit time. /enceD
4.4
orD
4."
,.e daily standard production rate *
e
o& an eIcavator can be obtained by multiplying its
standard production rate 3
e
by t.e number o& operating .ours /
e
per day. ,.usD
4.#
?.ere (
e
and ,
e
are cycle capacity Min units o& volumeN and cycle time Min .oursN o& t.e
eIcavator respectively.
$n determining t.e daily standard production rate o& a .auler it is necessary to determine
&irst t.e cycle time &rom t.e distance 1 to a dump site and t.e average speed ; o& t.e
.auler. Let ,
t
be t.e travel time &or t.e round trip to t.e dump site ,
o
be t.e loading time
and ,
d
be t.e dumping time. ,.en t.e travel time &or t.e round trip is given byD
4.%
,.e loading time is related to t.e cycle time o& t.e eIcavator ,
e
and t.e relative
capacities (
.
and (
e
o& t.e .auler and t.e eIcavator respectively. $n t.e optimum or
standard caseD
4.'
Kor a given dumping time ,
d
t.e cycle time ,
.
o& t.e .auler is given byD
4.)
,.e daily standard production rate *
.
o& a .auler can be obtained by multiplying its
standard production rate 3
.
by t.e number o& operating .ours /
.
per day. /enceD
4.1+
,.is eIpression assumes t.at .aulers begin loading as soon as t.ey return &rom t.e dump
site.
,.e number o& .aulers re!uired is also o& interest. Let ? denote t.e s?ell &actor o& t.e
soil suc. t.at ?*
e
denotes t.e daily volume o& loose eIcavated materials resulting &rom
t.e eIcavation volume *
e
. ,.en t.e approIimate number o& .aulers re!uired to dispose o&
t.e eIcavated materials is given byD
4.11
A.ile t.e standard production rate o& a piece o& e!uipment is based on JstandardJ or ideal
conditions e!uipment productivities at Bob sites are in&luenced by actual ?or0 conditions
and a variety o& ine&&iciencies and ?or0 stoppages. 2s one eIample various &actor
adBustments can be used to account in an approIimate &as.ion &or actual site conditions.
$& t.e conditions t.at lo?er t.e standard production rate are denoted by n &actors K
1

K
2
... K
n
eac. o& ?.ic. is smaller t.an 1 t.en t.e actual e!uipment productivity 3H at t.e
Bob site can be related to t.e standard production rate 3 as &ollo?sD
4.12
On t.e ot.er .and t.e cycle time T' at t.e Bob site ?ill be increased by t.ese &actors
re&lecting actual ?or0 conditions. $& only t.ese &actors are involved T' is related to t.e
standard cycle time , asD
4.13
Eac. o& t.ese various adBustment &actors must be determined &rom eIperience or
observation o& Bob sites. Kor eIample a bul0 composition &actor is derived &or bul0
eIcavation in building construction because t.e standard production rate &or general bul0
eIcavation is reduced ?.en an eIcavator is used to create a ramp to reac. t.e bottom o&
t.e bul0 and to open up a space in t.e bul0 to accommodate t.e .auler.
$n addition to t.e problem o& estimating t.e various &actors K
1
K
2
... K
n
it may also be
important to account &or interactions among t.e &actors and t.e eIact in&luence o&
particular site c.aracteristics.
&9ample -)4* ;aily standard production rate of a power shoel R12S
2 po?er s.ovel ?it. a dipper o& one cubic yard capacity .as a standard operating cycle
time o& 3+ seconds. Kind t.e daily standard production rate o& t.e s.ovel.
Kor (
e
] 1 cu. yd. ,
e
] 3+ sec. and /
e
] ' .ours t.e daily standard production rate is
&ound &rom E!. M4.#N as &ollo?sD
$n practice o& course t.is standard rate ?ould be modi&ied to re&lect various production
ine&&iciencies as described in EIample 4<11.
&9ample -)15* ;aily standard production rate of a dump truc:
2 dump truc0 ?it. a capacity o& # cubic yards is used to dispose o& eIcavated materials
at a dump site 4 miles a?ay. ,.e average speed o& t.e dump truc0 is 3+ mp. and t.e
dumping time is 3+ seconds. Kind t.e daily standard production rate o& t.e truc0. $& a &leet
o& dump truc0s o& t.is capacity is used to dispose o& t.e eIcavated materials in EIample
4<) &or ' .ours per day determine t.e number o& truc0s needed daily assuming a s?ell
&actor o& 1.1 &or t.e soil.
,.e daily standard production rate o& a dump truc0 can be obtained by using E!uations
M4.%N t.roug. M4.1+ND
/ence t.e daily .auler productivity isD
Kinally &rom E!uation M4.12N t.e number o& truc0s re!uired isD
implying t.at ' truc0s s.ould be used.
&9ample -)11* Fo> site productiity of a power shoel
2 po?er s.ovel ?it. a dipper o& one cubic yard capacity Min EIample 4<)N .as a standard
production rate o& )#+ cubic yards &or an '<.our day. 1etermine t.e Bob site productivity
and t.e actual cycle time o& t.is s.ovel under t.e ?or0 conditions at t.e site t.at a&&ects
its productivity as s.o?n belo?D
7or: Conditions at the /ite (actors
:ul0 composition +.)"4
;oil properties and ?ater content +.)'3
E!uipment idle time &or ?or0er brea0s +.'++
4anagement e&&iciency +.%++
Using E!uation M4.11N t.e Bob site productivity o& t.e po?er s.ovel per day is given byD
,.e actual cycle time can be determined as &ollo?sD
5oting E!uation M4.#N t.e actual cycle time can also be obtained &rom t.e relation ,H
e
]
M(
e
/
e
NU*H
e
. ,.usD
&9ample -)1!* Fo> site productiity of a dump truc:
2 dump truc0 ?it. a capacity o& # cubic yards Min EIample 4<1+N is used to dispose o&
eIcavated materials. ,.e distance &rom t.e dump site is 4 miles and t.e average speed o&
t.e dump truc0 is 3+ mp.. ,.e Bob site productivity o& t.e po?er s.ovel per day Min
EIample 4<11N is "+4 cubic yards ?.ic. ?ill be modi&ied by a s?ell &actor o& 1.1. ,.e
only &actors a&&ecting t.e Bob site productivity o& t.e dump truc0 in addition to t.ose
a&&ecting t.e po?er s.ovel are +.'+ &or e!uipment idle time and +.%+ &or management
e&&iciency. 1etermine t.e Bob site productivity o& t.e dump truc0. $& a &leet o& suc. truc0s
is used to .aul t.e eIcavated material &ind t.e number o& truc0s needed daily.
,.e actual cycle time ,H
.
o& t.e dump truc0 can be obtained by summing t.e actual times
&or traveling loading and dumpingD
/ence t.e actual cycle time isD
,.e Bobsite productivity *H
.
o& t.e dump truc0 per day isD
,.e number o& truc0s needed daily isD
/o* 3 truc:s are required.
-.1! Construction Processes
,.e previous sections described t.e primary inputs o& labor material and e!uipment to
t.e construction process. 2t varying levels o& detail a proBect manager must insure t.at
t.ese inputs are e&&ectively coordinated to ac.ieve an e&&icient construction process. ,.is
coordination involves bot. strategic decisions and tactical management in t.e &ield. Kor
eIample strategic decisions about appropriate tec.nologies or site layout are o&ten made
during t.e process o& construction planning. 1uring t.e course o& construction &oremen
and site managers ?ill ma0e decisions about ?or0 to be underta0en at particular times o&
t.e day based upon t.e availability o& t.e necessary resources o& labor materials and
e!uipment. Ait.out coordination among t.ese necessary inputs t.e construction process
?ill be ine&&icient or stop altoget.er.
&9ample -)1+* /teel erection
Erection o& structural steel &or buildings bridges or ot.er &acilities is an eIample o& a
construction process re!uiring considerable coordination. Kabricated steel pieces must
arrive on site in t.e correct order and !uantity &or t.e planned e&&ort during a day. (re?s
o& steel?or0ers must be available to &it pieces toget.er bolt Boints and per&orm any
necessary ?elding. (ranes and crane operators may be re!uired to li&t &abricated
components into placeO ot.er activities on a Bob site may also be competing &or use o&
particular cranes. Aelding e!uipment ?renc.es and ot.er .and tools must be readily
available. Kinally ancillary materials suc. as bolts o& t.e correct size must be provided.
$n coordinating a process suc. as steel erection it is common to assign di&&erent tas0s to
speci&ic cre?s. Kor eIample one cre? may place members in place and insert a &e? bolts
in Boints in a speci&ic area. 2 &ollo?ing cre? ?ould be assigned to &inis. bolting and a
t.ird cre? mig.t per&orm necessary ?elds or attac.ment o& brac0ets &or items suc. as
curtain ?alls.
Ait. t.e re!uired coordination among t.ese resources it is easy to see .o? poor
management or ot.er problems can result in considerable ine&&iciency. Kor eIample i& a
s.ipment o& &abricated steel is improperly prepared t.e cre?s and e!uipment on site may
.ave to ?ait &or ne? deliveries.
&9ample -)1-* Construction process simulation models
(omputer based simulation o& construction operations can be a use&ul alt.oug. laborious
tool in analyzing t.e e&&iciency o& particular processes or tec.nologies. ,.ese tools tend
to be eit.er oriented to?ard modeling resource processes or to?ards representation o&
spatial constraints and resource movements. Later c.apters ?ill describe simulation in
more detail but a small eIample o& a construction operation model can be described .ere.
R13S ,.e process involved placing concrete ?it.in eIisting &orm?or0 &or t.e columns o&
a ne? structure. 2 crane<and<buc0et combination ?it. one cubic yard capacity and a
&leIible Jelep.ant trun0J ?as assumed &or placement. (oncrete ?as delivered in truc0s
?it. a capacity o& eig.t cubic yards. :ecause o& site constraints only one truc0 could be
moved into t.e delivery position at a time. (onstruction ?or0ers and electric immersion<
type concrete vibrators ?ere also assumed &or t.e process.
,.e simulation model o& t.is process is illustrated in Kigure 4<". 5ode 2 signals t.e
availability o& a concrete truc0 arriving &rom t.e batc. plant. 2s ?it. ot.er circular nodes
in Kigure 4<" t.e availability o& a truc0 may result in a resource ?aiting or 9ueueing &or
use. $& a truc0 Mnode 2N and t.e crane Mnode 3N are bot. available t.en t.e crane can load
and .oist a buc0et o& concrete Mnode 4N. 2s ?it. ot.er rectangular nodes in t.e model
t.is operation ?ill re!uire an appreciable period o& time. On t.e completion o& t.e load
and .oist operations t.e buc0et Mnode "N is available &or concrete placement. *lacement
is accomplis.ed by .aving a ?or0er guide t.e buc0etHs elep.ant trun0 bet?een t.e
concrete &orms and .aving a second ?or0er operate t.e buc0et release lever. 2 t.ird
laborer operates a vibrator in t.e concrete ?.ile t.e buc0et Mnode 'N moves bac0 to
receive a ne? load. Once t.e concrete placement is complete t.e cre? becomes available
to place a ne? buc0et load Mnode %N. 2&ter t?o buc0ets are placed t.en t.e column is
complete Mnode )N and t.e e!uipment and cre? can move to t.e neIt column Mnode 1+N.
2&ter t.e movement to t.e ne? column is complete placement in t.e ne? column can
begin Mnode 11N. Kinally a&ter a truc0 is emptied Mnodes 12 and 13N t.e truc0 departs and
a ne? truc0 can enter t.e delivery stall Mnode 14N i& one is ?aiting.
(igure -).* $llustration o& a (oncrete<*lacing ;imulation 4odel
2pplication o& t.e simulation model consists o& tracing t.roug. t.e time re!uired &or
t.ese various operations. Events are also simulated suc. as t.e arrival times o& concrete
truc0s. $& random elements are introduced numerous simulations are re!uired to estimate
t.e actual productivity and resource re!uirements o& t.e process. Kor eIample one
simulation o& t.is process using &our concrete truc0s &ound t.at a truc0 ?as ?aiting '3V
o& t.e time ?it. an average ?ait at t.e site o& 14 minutes. ,.is type o& simulation can be
used to estimate t.e various productivity adBustment &actors described in t.e previous
section.
-.1+ Iueues and 2esource <ottlenec:s
2 proBect manager needs to insure t.at resources re!uired &or andUor s.ared by numerous
activities are ade!uate. *roblems in t.is area can be indicated in part by t.e eIistence o&
!ueues o& resource demands during construction operations. 2 9ueue can be a waiting
line &or service. One can imagine a !ueue as an orderly line o& customers ?aiting &or a
stationary server suc. as a tic0et seller. /o?ever t.e demands &or service mig.t not be
so neatly arranged. Kor eIample ?e can spea0 o& t.e 9ueue o& ?elds on a building site
?aiting &or inspection. $n t.is case demands do not come to t.e server but a roving
inspector travels among t.e ?aiting service points. Aaiting &or resources suc. as a
particular piece o& e!uipment or a particular individual is an endemic problem on
construction sites. $& ?or0ers spend appreciable portions o& time ?aiting &or particular
tools materials or an inspector costs increase and productivity declines. $nsuring
ade!uate resources to serve eIpected demands is an important problem during
construction planning and &ield management.
$n general t.ere is a trade<o&& bet?een ?aiting times and utilization o& resources.
Utilization is t.e proportion o& time a particular resource is in productive use. /ig.er
amounts o& resource utilization ?ill be bene&icial as long as it does not impose undue
costs on t.e entire operation. Kor eIample a ?elding inspector mig.t .ave one .undred
percent utilization but ?or0ers t.roug.out t.e Bobsite mig.t be ?asting inordinate time
?aiting &or inspections. *roviding additional inspectors may be cost e&&ective even i&
t.ey are not utilized at all times.
2 &e? conceptual models o& !ueueing systems may be .elp&ul to construction planners in
considering t.e level o& ade!uate resources to provide. Kirst ?e s.all consider t.e case o&
time<varying demands and a server ?it. a constant service rate. ,.is mig.t be t.e
situation &or an elevator in ?.ic. large demands &or transportation occur during t.e
morning or at a s.i&t c.ange. ;econd ?e s.all consider t.e situation o& randomly arriving
demands &or service and constant service rates. Kinally ?e s.all consider brie&ly t.e
problems involving multiple serving stations.
Single2Server ,it! $eterministic rrivals and Services
;uppose t.at t.e cumulative number o& demands &or service or JcustomersJ at any time t
is 0no?n and e!ual to t.e value o& t.e &unction 2MtN. ,.ese JcustomersJ mig.t be crane
loads ?eld inspections or any ot.er de&ined group o& items to be serviced. ;uppose
&urt.er t.at a single server is available to .andle t.ese demands suc. as a single crane or
a single inspector. Kor t.is model o& !ueueing ?e assume t.at t.e server can .andle
customers at some constant maIimum rate denoted as I JcustomersJ per unit o& time.
,.is is a maIimum rate since t.e server may be idle &or periods o& time i& no customers
are ?aiting. ,.is system is deterministic in t.e sense t.at bot. t.e arrival &unction and t.e
service process are assumed to .ave no random or un0no?n component.
(igure -)0* (umulative 2rrivals and 1epartures in a 1eterministic Lueue
2 cumulative arrival &unction o& customers 2MtN is s.o?n in Kigure 4<# in ?.ic. t.e
vertical aIis represents t.e cumulative number o& customers ?.ile t.e .orizontal aIis
represents t.e passage o& time. ,.e arrival o& individual customers to t.e !ueue ?ould
actually represent a unit step in t.e arrival &unction 2MtN but t.ese small steps are
approIimated by a continuous curve in t.e &igure. ,.e rate o& arrivals &or a unit time
interval t &rom t<1 to t is given byD
4.14
A.ile an .our or a minute is a natural c.oice as a unit time interval ot.er time periods
may also be used as long as t.e passage o& time is eIpressed as multiples o& suc. time
periods. Kor instance i& .al& an .our is used as unit time interval &or a process involving
ten .ours t.en t.e arrivals s.ould be represented by 2+ steps o& .al& .our eac.. /ence
t.e unit time interval bet?een t<1 and t is t ] t < Mt<1N ] 1 and t.e slope o& t.e
cumulative arrival &unction in t.e interval is given byD
4.1"
,.e cumulative number o& customers served over time is represented by t.e cumulative
departure &unction 1MtN. A.ile t.e maIimum service rate is I per unit time t.e actual
service rate &or a unit time interval t &rom t<1 to t isD
4.1#
,.e slope o& t.e cumulative departure &unction isD
4.1%
2ny time t.at t.e rate o& arrivals to t.e !ueue eIceeds t.e maIimum service rate t.en a
!ueue begins to &orm and t.e cumulative departures ?ill occur at t.e maIimum service
rate. ,.e cumulative departures &rom t.e !ueue ?ill proceed at t.e maIimum service rate
o& I JcustomersJ per unit o& time so t.at t.e slope o& 1MtN is I during t.is period. ,.e
cumulative departure &unction 1MtN can be readily constructed grap.ically by running a
ruler ?it. a slope o& I along t.e cumulative arrival &unction 2MtN. 2s soon as t.e &unction
2MtN climbs above t.e ruler a !ueue begins to &orm. ,.e maIimum service rate ?ill
continue until t.e !ueue disappears ?.ic. is represented by t.e convergence o& t.e
cumulative arrival and departure &unctions 2MtN and 1MtN.
Ait. t.e cumulative arrivals and cumulative departure &unctions represented grap.ically
a variety o& service indicators can be readily obtained as s.o?n in Kigure 4<#. Let 2HMtN
and 1HMtN denote t.e derivatives o& 2MtN and 1MtN ?it. respect to t respectively. Kor + t
t
i
in ?.ic. 2HMtN I t.ere is no !ueue. 2t t ] t
i
?.en 2HMtN \ 1HMtN a !ueue is &ormed.
,.en 1HMtN ] I in t.e interval t
i
t t
0
. 2s 2HMtN continues to increase ?it. increasing t
t.e !ueue becomes longer since t.e service rate 1HMtN ] I cannot catc. up ?it. t.e
arrivals. /o?ever ?.en again 2HMtN 1HMtN as t increases t.e !ueue becomes s.orter
until it reac.es + at t ] t
0
. 2t any given time t t.e !ueue lengt. is
4.1'
Kor eIample suppose a !ueue begins to &orm at time t
i
and is dispersed by time t
0
. ,.e
maIimum number o& customers ?aiting or !ueue lengt. is represented by t.e maIimum
di&&erence bet?een t.e cumulative arrival and cumulative departure &unctions bet?een t
i
and t
0
i.e. t.e maIimum value o& LMtN. ,.e total ?aiting time &or service is indicated by
t.e total area bet?een t.e cumulative arrival and cumulative departure &unctions.
6enerally t.e arrival rates 2
t
] 1 2 . . . n periods o& a process as ?ell as t.e
maIimum service rate I are 0no?n. ,.en t.e cumulative arrival &unction and t.e
cumulative departure &unction can be constructed systematically toget.er ?it. ot.er
pertinent !uantities as &ollo?sD
1. ;tarting ?it. t.e initial conditions 1Mt<1N]+ and LMt<1N]+ at t]1 &ind t.e actual service
rate at t]1D
4.1)
2. ;tarting ?it. 2Mt<1N]+ at t]1 &ind t.e cumulative arrival &unction &or t]23. . .n
accordinglyD
4.2+
3. (ompute t.e !ueue lengt. &or t]12 . . .n.
4.21
4. (ompute 1
t
&or t]23. . .n a&ter LMt<1N is &ound &irst &or eac. tD
4.22
". $& 2HMtN \ I &ind t.e cumulative departure &unction in t.e time period bet?een t
i
?.ere
a !ueue is &ormed and t
0
?.ere t.e !ueue dissipatesD
4.23
#. (ompute t.e ?aiting time ? &or t.e arrivals ?.ic. are ?aiting &or service in interval
tD
4.24
%. (ompute t.e total ?aiting time A over t.e time period bet?een t
i
and t
0
.
4.2"
'. (ompute t.e average ?aiting time ? &or arrivals ?.ic. are ?aiting &or service in t.e
process.
4.2#
,.is simple deterministic model .as a number o& implications &or operations planning.
Kirst an increase in t.e maIimum service rate ?ill result in reductions in ?aiting time
and t.e maIimum !ueue lengt.. ;uc. increases mig.t be obtained by speeding up t.e
service rate suc. as introducing s.orter inspection procedures or installing &aster cranes
on a site. ;econd altering t.e pattern o& cumulative arrivals can result in c.anges in total
?aiting time and in t.e maIimum !ueue lengt.. $n particular i& t.e maIimum arrival rate
never eIceeds t.e maIimum service rate no !ueue ?ill &orm or i& t.e arrival rate al?ays
eIceeds t.e maIimum service rate t.e bottlenec0 cannot be dispersed. :ot. cases are
s.o?n in Kigure 4<%.
(igure -)1* (ases o& 5o Lueue and *ermanent :ottlenec0
2 practical means to alter t.e arrival &unction and obtain t.ese bene&its is to inaugurate a
reservation system &or customers. Even ?it.out dra?ing a grap. suc. as Kigure 4<# good
operations planners s.ould consider t.e e&&ects o& di&&erent operation or service rates on
t.e &lo? o& ?or0. (learly service rates less t.an t.e eIpected arrival rate o& ?or0 ?ill
result in resource bottlenec0s on a Bob.
Single2Server ,it! Random rrivals and Constant Service Rate
;uppose t.at arrivals o& JcustomersJ to a !ueue are not deterministic or 0no?n as in
Kigure 4<#. $n particular suppose t.at JcustomersJ suc. as Boints are completed or crane
loads arrive at random intervals. A.at are t.e implications &or t.e smoot. &lo? o& ?or0X
Un&ortunately bottlenec0s and !ueues may arise in t.is situation even i& t.e maIimum
service rate is larger t.an t.e average or eIpected arrival rate o& customers. ,.is occurs
because random arrivals ?ill o&ten bunc. toget.er t.ereby temporarily eIceeding t.e
capacity o& t.e system. A.ile t.e average arrival rate may not c.ange over time
temporary resource s.ortages can occur in t.is circumstance.
Let ? be t.e average ?aiting time a be t.e average arrival rate o& customers and I be t.e
deterministic constant service rate Min customers per unit o& timeN. ,.en t.e eIpected
average time &or a customer in t.is situation is given byD R14S
4.2%
$& t.e average utilization rate o& t.e service is de&ined as t.e ratio o& t.e average arrival
rate and t.e constant service rate i.e.
4.2'
,.en E!. M4.2%N becomesD
4.2)
$n t.is e!uation t.e ratio u o& arrival rate to service rate is very importantD i& t.e average
arrival rate approac.es t.e service rate t.e ?aiting time can be very long. $& a I t.en
t.e !ueue eIpands inde&initely. 3esource bottlenec0s ?ill occur ?it. random arrivals
unless a measure o& eItra service capacity is available to accommodate sudden bunc.es
in t.e arrival stream. Kigure 4<' illustrates t.e ?aiting time resulting &rom di&&erent
combinations o& arrival rates and service times.
(igure -)3* $llustrative Aaiting ,imes &or 1i&&erent 2verage 2rrival 3ates and ;ervice
,imes
&ultiple Servers
:ot. o& t.e simple models o& service per&ormance described above are limited to single
servers. $n operations planning it is commonly t.e case t.at numerous operators are
available and numerous stages o& operations eIist. $n t.ese circumstances a planner
typically attempts to matc. t.e service rates occurring at di&&erent stages in t.e process.
Kor eIample construction o& a .ig. rise building involves a series o& operations on eac.
&loor including erection o& structural elements pouring or assembling a &loor
construction o& ?alls installation o& /82( M/eating ventilating and air conditioningN
e!uipment installation o& plumbing and electric ?iring etc. 2 smoot. construction
process ?ould .ave eac. o& t.ese various activities occurring at di&&erent &loors at t.e
same time ?it.out large time gaps bet?een activities on any particular &loor. ,.us &loors
?ould be installed soon a&ter erection o& structural elements ?alls ?ould &ollo?
subse!uently and so on. Krom t.e standpoint o& a !ueueing system t.e planning problem
is to insure t.at t.e productivity or service rate per &loor o& t.ese di&&erent activities are
approIimately e!ual so t.at one cre? is not continually ?aiting on t.e completion o& a
preceding activity or inter&ering ?it. a &ollo?ing activity. $n t.e realm o& manu&acturing
systems creating t.is balance among operations is called assem)ly line balancing.
(igure -)4* 2rrivals and ;ervices o& (rane Loads ?it. a (rane :rea0do?n
&9ample -)1.* &ffect of a crane >rea:down
;uppose t.at loads &or a crane are arriving at a steady rate o& one every ten minutes. ,.e
crane .as t.e capacity to .andle one load every &ive minutes. ;uppose &urt.er t.at t.e
crane brea0s do?n &or ninety minutes. /o? many loads are delayed ?.at is t.e total
delay and .o? long ?ill be re!uired be&ore t.e crane can catc. up ?it. t.e bac0log o&
loadsX
,.e cumulative arrival and service &unctions are grap.ed in Kigure 4<). ;tarting ?it. t.e
brea0do?n at time zero nine loads arrive during t.e ninety minute repair time. Krom
Kigure 4<) an additional nine loads arrive be&ore t.e entire !ueue is served.
2lgebraically t.e re!uired time &or service t can be calculated by noted t.at t.e number
o& arrivals must e!ual t.e number o& loads served. ,.usD
2 !ueue is &ormed at t ] + because o& t.e brea0do?n but it dissipates at 2MtN ] 1
2
MtN. Let
&rom ?.ic. ?e obtain t ] 1'+ min. /ence
,.e total ?aiting time A can be calculated as t.e area bet?een t.e cumulative arrival and
service &unctions in Kigure 4<). 2lgebraically t.is is conveniently calculated as t.e
di&&erence in t.e areas o& t?o trianglesD
/o* the aerage delay per load is w J 315K13 J -. minutes.
&9ample -)10* 7aiting time with random arrials
;uppose t.at material loads to be inspected arrive randomly but ?it. an average o& "
arrivals per .our. Eac. load re!uires ten minutes &or an inspection so an inspector can
.andle siI loads per .our. $nspections must be completed be&ore t.e material can be
unloaded &rom a truc0. ,.e cost per .our o& .olding a material load in ?aiting is G3+
representing t.e cost o& a driver and a truc0. $n t.is eIample t.e arrival rate a e!uals "
arrivals per .our and t.e service rate I e!uals # material loads per .our. ,.en t.e
average ?aiting time o& any material load &or u ] "U# isD
2t a resource cost o& G3+.++ per .our t.is ?aiting ?ould represent a cost o& M3+NM+.4NM"N
] G#+.++ per .our on t.e proBect.
$n contrast i& t.e possible service rate is I ] 1+ material loads per .our t.en t.e eIpected
?aiting time o& any material load &or u ] "U1+ ] +." isD
which has only a cost of D+5ED5.5.ED.E J L1..5 per hour.
&9ample -)11* ;elay of lift loads on a >uilding site
;uppose t.at a single crane is available on a building site and t.at eac. li&t re!uires t.ree
minutes including t.e time &or attac.ing loads. ;uppose &urt.er t.at t.e cumulative
arrivals o& li&t loads at di&&erent time periods are as &ollo?sD
#D++ < %D++ 24 4U.r
%D++ < 'D++ 24 1"U.r
'D++ < 11D++ 24 2"U.r
11D++ < 12D++ 24 "U.r
12D++ < 1#D++ *4 'U.r
1#D++ < 1'D++ *4 4U.r
1'D++ *4 < #D++ 24 +U.r
Using t.e above in&ormation o& arrival and service rates
1. Kind t.e cumulative arrivals and cumulative number o& loads served as a &unction
o& time beginning ?it. #D++ 24.
2. Estimate t.e maIimum !ueue lengt. o& loads ?aiting &or service. A.at time does
t.e maIimum !ueue occurX
3. Estimate t.e total ?aiting time &or loads.
4. 6rap. t.e cumulative arrival and departure &unctions.
,.e maIimum service rate I ] #+ minU3 min per li&t ] 2+ li&ts per minute. ,.e detailed
computation can be carried out in t.e ,able 4<2 and t.e grap. o& 2MtN and 1MtN is given in
Kigure 4<1+.
Ta>le -)! Computation of queue length and waiting time
*eriod
2rrival
rate
(umulative
arrivals
"<,= Lueue
1eparture
rate
(umulative
departures
&<,=
Aaiting
time
#D++ < %D++ 4 4 + 4 4 +
%D++ < 'D++ 1" 1) + 1" 1) +
'D++ < )D++ 2" 44 " 2+ 3) "
)D++ < 1+D++ 2" #) 1+ 2+ ") 1+
1+D++ < 11D++ 2" )4 1" 2+ %) 1"
11D++ < 12D++ " )) + 2+ )) +
12D++ ` 13D++ ' 1+% + ' 1+% +
13D++ ` 14D++ ' 11" + ' 11" +
14D++ ` 1"D++ ' 123 + ' 123 +
1"D++ ` 1#D++ ' 131 + ' 131 +
1#D++ ` 1%D++ 4 13" + 4 13" +
1%D++ < 1'D++ 4 13) + 4 13) +
1'D++ <1)D++ + 13) + + 13) +
1)D++< 2+D++ + 13) + + 13) +
,otal ?aiting time ] 3+
4aIimum !ueue ] 1"
(igure -)15* 1elay o& Li&t Loads on a :uilding ;ite
-.1- 2eferences
1. :ourdon (.(. and 3.A. Levitt 0nion and *pen #hop $onstruction LeIington
:oo0s 1.(. /eat. and (o. LeIington 42 1)'+.
2. $aterpillar !erformance (and)ook% 1'E_Mt.N Edition (aterpillar $nc. *eoria
$L 1)'%.
3. (ordell 3./. J(onstruction *roductivity 4anagementJ $ost Engineering 8ol.
2' 5o. 2 Kebruary 1)'# pp. 14<23.
4. Lange P.E. and 1.L. 4ills ,he $onstruction -ndustry LeIington :oo0s 1.(.
/eat. and (o. LeIington 42 1)%).
". 5unnally ;.A. $onstruction 'ethods and 'anagement *rentice</all
Engle?oood (li&&s 5P 2nd Ed. 1)'%.
#. *euri&oy 3.L. $onstruction !lanning% E9uipment and 'ethods% 2nd Edition
4c6ra?</ill 5e? 9or0 1)%+.
%. ,ersine 3.P. !rinciples of -nventory and 'aterials 'anagement% 5ort. /olland
5e? 9or0 1)'2.
-.1. Pro>lems
1. Using t.e relations.ip bet?een t.e productivity indeI and Bob size in EIample 4<
1 determine t.e labor productivity &or a ne? Bob re!uiring 3"++++ labor .ours
under ot.er?ise t.e same set o& ?or0 conditions.
2. ,.e potential labor .ours available &or a large energy compleI ?ere &ound to be
".4 million .ours. ,.e non<productive activities eIpressed in t.ousands o& labor
.ours ?ereD
1. 3#+ &or .olidays and stri0es
2. 11"2 &or absentees
3. %'" &or temporary stoppage
4. 1+'4 &or indirect labor
1etermine t.e productive labor yield a&ter t.e above &actors are ta0en into
consideration.
3. Labor productivity at Bob site is 0no?n to decrease ?it. overtime ?or0. Let I be
t.e percentage o& overtime over normal ?or0 ?ee0. $& I is eIpressed in decimals
t.e productivity indeI $ as a &unction o& t.e percentage o& overtime is &ound to beD
4. Kind t.e value o& t.e indeI $ &or I ] + +.1 +.2 +.3 +.4 and +." and plot t.e
relations.ip in a grap..
". Labor productivity &or a compleI proBect is 0no?n to increase gradually in t.e
&irst "+++++ labor .ours because o& t.e learning e&&ects. Let I be t.e number o&
1+++++ labor .ours. ,.e labor productivity indeI $ is &ound to be a &unction o& I
as &ollo?sD
#. Kind t.e value o& t.e indeI $ &or I ] + 1 2 3 4 and " and plot t.e relations.ip in
a grap..
%. ,.e probabilities &or di&&erent delivery times o& an item are given in t.e table
belo?. Kind t.e eIpected delivery date o& t.e item. 2lso &ind t.e lead time
re!uired to provide an eIpected delivery date one day less t.an t.e desired
delivery date.
t p<t=
!ra, tb
12 +.+" +.+"
13 +.1+ +.1"
14 +.2" +.4+
1" +.3" +.%"
1# +.1" +.)+
1% +.1+ 1.++
'. 2 po?er s.ovel ?it. a dipper o& t?o cubic yard capacity .as a standard operating
cycle time o& '+ seconds. ,.e eIcavated material ?.ic. .as a s?ell &actor o& 1.+"
?ill be disposed by a dump truc0 ?it. an ' cubic yard capacity at a dump site #
miles a?ay. ,.e average speed o& t.e dump truc0 is 3+ mp. and t.e dumping
time is 4+ seconds. Kind t.e daily standard production rates o& t.e po?er s.ovel
and t.e dump truc0 i& bot. are operated ' .ours per day. 1etermine also t.e
number o& truc0s needed daily to dispose o& t.e eIcavated material.
). ,.e po?er s.ovel in *roblem *# .as a daily standard production rate o& %2+ cubic
yards. 1etermine t.e Bob site productivity and t.e actual cycle time o& t.is s.ovel
under t.e ?or0 conditions at t.e site t.at a&&ect t.e productivity as s.o?n belo?D
7or: conditions at site (actors
:ul0 composition +.)%2
;oil properties and ?ater content +.)#+
E!uipment idle time &or brea0s +.%"+
4anagement ine&&iciency +.%"+
1+. :ased on t.e in&ormation given &or *roblems *4<# and *4<% &ind t.e Bob site
productivity o& a dump truc0 assuming t.at t.e only &actors a&&ecting ?or0
conditions are +.'" &or e!uipment idle time and +.'+ &or management e&&iciency.
2lso &ind t.e number o& dump truc0s re!uired.
11. 2 *o?er s.ovel ?it. a dipper o& 1." cubic yard capacity .as a standard operating
cycle time o& #+ seconds. ,.e eIcavated material ?.ic. .as a s?ell &actor o& 1.+'
?ill be disposed by a dump truc0 ?it. a %." cubic yard capacity at a dumpsite "
miles a?ay. ,.e average speed o& a dump truc0 is 2" mp. and t.e dumping time
is %" seconds. :ot. t.e po?er s.ovel and t.e dump truc0 are operated ' .ours per
day.
1. Kind t.e daily standard production rate o& t.e po?er s.ovel.
2. Kind t.e daily standard production rate o& t.e dump truc0 and number o&
truc0s re!uired.
3. $& t.e ?or0 conditions at t.e site t.at a&&ect t.e productivity o& t.e s.ovel
can be represented by &our &actors K
1
] +.)4+ K
2
] +.)"2 K
3
] +.'"+ and
K
4
] +.%"+ determine t.e Bob<site productivity and t.e actual cycle time.
4. $& t.e ?or0 conditions at t.e site a&&ect t.e productivity o& t.e dump truc0
can be represented by t.ree &actors K
1
] +.)"2 K
2
] +.%++ and K
3
] +.%"+
determine t.e Bob site productivity o& t.e dump truc0 and t.e number o&
dump truc0s re!uired.
12. ;uppose t.at a single piece o& e!uipment is available on a site &or testing Boints.
Kurt.er suppose t.at eac. Boint .as to be tested and certi&ied be&ore ?or0 can
proceed. Points are completed and ready &or testing at random intervals during a
s.i&t. Eac. test re!uires an average o& ten minutes. A.at is t.e average utilization
o& t.e testing e!uipment and t.e average ?ait o& a completed Boint &or testing i&
t.e number o& Boints completed is MaN &ive per .our or MbN t.ree per .our.
13. ;uppose t.at t.e steel plates to be inspected are arriving steadily at a rate o& one
every t?elve minutes. Eac. inspection re!uires siIteen minutes but t?o
inspectors are available so t.e inspection service rate is one every eig.t minutes.
;uppose one inspector ta0es a brea0 &or siIty minutes. A.at is t.e resulting delay
in t.e arriving piecesX A.at is t.e average delay among t.e pieces t.at .ave to
?aitX
14. ;uppose t.at t.ree mac.ines are available in a &abrication s.ip &or testing ?elded
Boints o& structural members so t.at t.e testing service rate o& t.e t.ree mac.ines
is one in every 2+ minutes. /o?ever one o& t.e t.ree mac.ines is s.ut do?n &or
)+ minutes ?.en t.e ?elded Boints to be tested arrive at a rate o& one in every 2"
minutes. A.at is t.e total delay &or t.e testing service o& t.e arriving BointsX A.at
is t.e average delayX ;0etc. t.e cumulative arrivals and services versus time.
1". ;olve EIample 4<1% i& eac. li&t re!uires " minutes instead o& 3 minutes.
1#. ;olve EIample 4<1% i& eac. li&t re!uires # minutes instead o& 3 minutes
1%. ;uppose t.at up to 12 customers can be served per .our in an automated
inspection process. A.at is t.e total ?aiting time and maIimum !ueue ?it.
arrival rates &or bot. cases MaN and MbN belo?D
DaE D>E
#<%D++ am + +
%<'D++ 2" 1+
'<)D++ 2" 1+
)<1+D++ am 2" 1"
1+<11D++ am 2" 1"
11<12D++ am 1+ 1+
12<1D++ pm ' 1"
1<2D++ pm + 1"
2<3D++ pm + 1+
3<4D++ pm + 1+
4<"D++ pm + 1+
2&ter " pm + +
,otal number o& arrivals 11' 12+
1'. Kor t.e list o& labor c.aracteristic !ualities in ;ection 4.3 Mbeginning ?it. Luality
o& Aor0 and ending ?it. 1iversityN rate your o?n Bob per&ormance on t.e t.ree
point scale given.
-.10 (ootnotes
1. 4c(ulloug. 1avid ,he !ath /etween the #eas ;imon and ;c.uster 1)%% pg. "31.
2. 3ose&ielde ;teven and 1aniel Luinn 4ills J$s (onstruction ,ec.nologically
;tagnantXJ in Lange Pulian E. and 1aniel Luinn 4ills ,he $onstruction -ndustry
LeIington :oo0s 1)%) pg. '3.
3. ,.is eIample ?as adapted ?it. permission &rom an unpublis.ed paper J4anaging
4ega *roBectsJ presented by 6.3. 1esnoyers at t.e *roBect 4anagement ;ymposium
sponsored by t.e EIIon 3esearc. and Engineering (ompany Klor.am *ar0 5P
5ovember 12 1)'+.
4. ;ee 3.L. ,uc0er J*er&ection o& t.e :uggy A.ipJ ,.e (onstruction 2dvancement
2ddress 2;(E :oston 42 Oct. 2) 1)'#.
". Kor more detailed discussion see 1.6. 4illsD JLabor 3elations and (ollective
:argainingJ M(.apter 4N in ,he $onstruction -ndustry Mby P.E. Lang and 1.L. 4illsN
LeIington :oo0s 1.(. /eat. and (o. LeIington 42 1)%).
#. ,.is eIample ?as adapted &rom ;tu0.art 6. and :ell L.(. J(osts and :ene&its o&
4aterials 4anagement ;ystemsJ "#$E 2ournal of $onstruction Engineering and
'anagement% 8ol. 113 5o. 2 Pune 1)'% pp. 222<234.
%. ,.e in&ormation &or t.is eIample ?as provided by EIIon *ipeline (ompany /ouston
,eIas ?it. permission &rom t.e 2lyes0a *ipeline ;ervice (o. 2nc.orage 2las0a.
'. ,.is eIample ?as adapted &rom 2.E. Qerridge J/o? to 1evelop a *roBect ;c.eduleJ
in 2.E. Qerridge and (. /. 8ervalin Meds.N Engineering and $onstruction !roject
'anagement 6ul& *ublis.ing (ompany /ouston 1)'#.
). Kor &urt.er details on e!uipment c.aracteristics see &or eIample ;.A. 5unnally
$onstruction 'ethods and 'anagement ;econd Edition *rentice</all 1)'#
1+. ;ee *aulson (. J2utomation and 3obotics &or (onstructionJ "#$E 2ournal of
$onstruction Engineering and 'anagement 8ol. 111 5o. (O<3 1)'" pp. 1)+<2+%.
11. ,.is eIample is adapted &rom Kred 4oavenzade. J(onstructionHs /ig.<,ec.nology
3evolutionJ ,echnology Review% October 1)'" pg. 32.
12. ,.is and t.e &ollo?ing eIamples in t.is section .ave been adapted &rom E. :aracco<
4iller and (.,. /endric0son !lanning for $onstruction% ,ec.nical 3eport 5o. 3<'%<
1#2 1epartment o& (ivil Engineering (arnegie 4ellon University *ittsburg. *2 1)'%.
13. ,.is model used t.e $5;$6/, simulation language and ?as described in :.(.
*aulson A.,. (.an and (.(. Qoo J(onstruction Operations ;imulation by
4icrocomputerJ "#$E 2ournal of $onstruction Engineering and 'anagement 8ol.
113 5o. (O<2 Pune 1)'% pp. 3+2<314.
14. $n t.e literature o& !ueueing t.eory t.is &ormula represents an 4U1U1 !ueue meaning
t.at t.e arrival process is 4ar0ovian or random t.e service time is &iIed only one server
eIists and t.e system is in Jsteady stateJ implying t.at t.e service time and average
arrival rate are constant. 2ltering t.ese assumptions ?ould re!uire c.anges in t.e ?aiting
time &ormulaO &or eIample i& service times ?ere also random t.e ?aiting time &ormula
?ould not .ave t.e 2 s.o?n in t.e denominator o& E!. M4.2%N. Kor more details on
!ueueing systems see 5e?ell 6.K. "pplications of Queueing ,heory% (.apman and
/all London 1)'2.
.. Cost &stimation
..1 Costs Associated with Constructed (acilities
,.e costs o& a constructed &acility to t.e o?ner include bot. t.e initial capital cost and t.e
subse!uent operation and maintenance costs. Eac. o& t.ese maBor cost categories consists
o& a number o& cost components.
,.e capital cost &or a construction proBect includes t.e eIpenses related to t.e initial
establis.ment o& t.e &acilityD
Land ac!uisition including assembly .olding and improvement
*lanning and &easibility studies
2rc.itectural and engineering design
(onstruction including materials e!uipment and labor
Kield supervision o& construction
(onstruction &inancing
$nsurance and taIes during construction
O?nerHs general o&&ice over.ead
E!uipment and &urnis.ings not included in construction
$nspection and testing
,.e operation and maintenance cost in subse!uent years over t.e proBect li&e cycle
includes t.e &ollo?ing eIpensesD
Land rent i& applicable
Operating sta&&
Labor and material &or maintenance and repairs
*eriodic renovations
$nsurance and taIes
Kinancing costs
Utilities
O?nerHs ot.er eIpenses
,.e magnitude o& eac. o& t.ese cost components depends on t.e nature size and location
o& t.e proBect as ?ell as t.e management organization among many considerations. ,.e
o?ner is interested in ac.ieving t.e lo?est possible overall proBect cost t.at is consistent
?it. its investment obBectives.
$t is important &or design pro&essionals and construction managers to realize t.at ?.ile
t.e construction cost may be t.e single largest component o& t.e capital cost ot.er cost
components are not insigni&icant. Kor eIample land ac!uisition costs are a maBor
eIpenditure &or building construction in .ig.<density urban areas and construction
&inancing costs can reac. t.e same order o& magnitude as t.e construction cost in large
proBects suc. as t.e construction o& nuclear po?er plants.
Krom t.e o?nerHs perspective it is e!ually important to estimate t.e corresponding
operation and maintenance cost o& eac. alternative &or a proposed &acility in order to
analyze t.e li&e cycle costs. ,.e large eIpenditures needed &or &acility maintenance
especially &or publicly o?ned in&rastructure are reminders o& t.e neglect in t.e past to
consider &ully t.e implications o& operation and maintenance cost in t.e design stage.
$n most construction budgets t.ere is an allo?ance &or contingencies or uneIpected costs
occurring during construction. ,.is contingency amount may be included ?it.in eac.
cost item or be included in a single category o& construction contingency. ,.e amount o&
contingency is based on .istorical eIperience and t.e eIpected di&&iculty o& a particular
construction proBect. Kor eIample one construction &irm ma0es estimates o& t.e eIpected
cost in &ive di&&erent areasD
1esign development c.anges
;c.edule adBustments
6eneral administration c.anges Msuc. as ?age ratesN
1i&&ering site conditions &or t.ose eIpected and
,.ird party re!uirements imposed during construction suc. as ne? permits.
(ontingent amounts not spent &or construction can be released near t.e end o&
construction to t.e o?ner or to add additional proBect elements.
$n t.is c.apter ?e s.all &ocus on t.e estimation o& construction cost ?it. only occasional
re&erence to ot.er cost components. $n (.apter # ?e s.all deal ?it. t.e economic
evaluation o& a constructed &acility on t.e basis o& bot. t.e capital cost and t.e operation
and maintenance cost in t.e li&e cycle o& t.e &acility. $t is at t.is stage t.at tradeo&&s
bet?een operating and capital costs can be analyzed.
&9ample .)1* &nergy pro%ect resource demands R1S
,.e resources demands &or t.ree types o& maBor energy proBects investigated during t.e
energy crisis in t.e 1)%+Hs are s.o?n in ,able "<1. ,.ese proBects areD M1N an oil s.ale
proBect ?it. a capacity o& "++++ barrels o& oil product per dayO M2N a coal gasi&ication
proBect t.at ma0es gas ?it. a .eating value o& 32+ billions o& :ritis. t.ermal units per
day or e!uivalent to about "++++ barrels o& oil product per dayO and M3N a tar sand
proBect ?it. a capacity o& 1"++++ barrels o& oil product per day.
Kor eac. proBect t.e cost in billions o& dollars t.e engineering manpo?er re!uirement
&or basic design in t.ousands o& .ours t.e engineering manpo?er re!uirement &or
detailed engineering in millions o& .ours t.e s0illed labor re!uirement &or construction in
millions o& .ours and t.e material re!uirement in billions o& dollars are s.o?n in ,able "<
1. ,o build several proBects o& suc. an order o& magnitude concurrently could drive up t.e
costs and strain t.e availability o& all resources re!uired to complete t.e proBects.
(onse!uently cost estimation o&ten represents an eIercise in pro&essional Budgment
instead o& merely compiling a bill o& !uantities and collecting cost data to reac. a total
estimate mec.anically.
TA<"& .)1 3esource 3e!uirements o& ;ome 4aBor Energy *roBects
Oil s.ale
M"++++
barrelsUdayN
(oal gasi&ication
M32+ billions
:,UUdayN
,ar ;ands
M1"++++
barrelsUdayN
(ost
MG billionN
2." 4 ' to 1+
:asic design
M,.ousands o&
.oursN
'+ 2++ 1++
1etailed
engineering
M4illions o&
.oursN
3 to 4 4 to " # to '
(onstruction
M4illions o&
.oursN
2+ 3+ 4+
4aterials
MG billionN
1 2 2."
;ourceD EIIon 3esearc. and Engineering (ompany Klor.am *ar0 5P
..! Approaches to Cost &stimation
(ost estimating is one o& t.e most important steps in proBect management. 2 cost
estimate establis.es t.e base line o& t.e proBect cost at di&&erent stages o& development o&
t.e proBect. 2 cost estimate at a given stage o& proBect development represents a
prediction provided by t.e cost engineer or estimator on t.e basis o& available data.
2ccording to t.e 2merican 2ssociation o& (ost Engineers cost engineering is de&ined as
t.at area o& engineering practice ?.ere engineering Budgment and eIperience are utilized
in t.e application o& scienti&ic principles and tec.ni!ues to t.e problem o& cost
estimation cost control and pro&itability.
8irtually all cost estimation is per&ormed according to one or some combination o& t.e
&ollo?ing basic approac.esD
Production function. $n microeconomics t.e relations.ip bet?een t.e output o& a
process and t.e necessary resources is re&erred to as t.e production &unction. $n
construction t.e production &unction may be eIpressed by t.e relations.ip bet?een t.e
volume o& construction and a &actor o& production suc. as labor or capital. 2 production
&unction relates t.e amount or volume o& output to t.e various inputs o& labor material
and e!uipment. Kor eIample t.e amount o& output L may be derived as a &unction o&
various input &actors I
1
I
2
... I
n
by means o& mat.ematical andUor statistical met.ods.
,.us &or a speci&ied level o& output ?e may attempt to &ind a set o& values &or t.e input
&actors so as to minimize t.e production cost. ,.e relations.ip bet?een t.e sizes o& a
building proBect MeIpressed in s!uare &eetN to t.e input labor MeIpressed in labor .ours per
s!uare &ootN is an eIample o& a production &unction &or construction. ;everal suc.
production &unctions are s.o?n in Kigure 3<3 o& (.apter 3.
&mpirical cost inference. Empirical estimation o& cost &unctions re!uires statistical
tec.ni!ues ?.ic. relate t.e cost o& constructing or operating a &acility to a &e? important
c.aracteristics or attributes o& t.e system. ,.e role o& statistical in&erence is to estimate
t.e best parameter values or constants in an assumed cost &unction. Usually t.is is
accomplis.ed by means o& regression analysis tec.ni!ues.
=nit costs for >ill of quantities. 2 unit cost is assigned to eac. o& t.e &acility
components or tas0s as represented by t.e bill o& !uantities. ,.e total cost is t.e
summation o& t.e products o& t.e !uantities multiplied by t.e corresponding unit costs.
,.e unit cost met.od is straig.t&or?ard in principle but !uite laborious in application.
,.e initial step is to brea0 do?n or disaggregate a process into a number o& tas0s.
(ollectively t.ese tas0s must be completed &or t.e construction o& a &acility. Once t.ese
tas0s are de&ined and !uantities representing t.ese tas0s are assessed a unit cost is
assigned to eac. and t.en t.e total cost is determined by summing t.e costs incurred in
eac. tas0. ,.e level o& detail in decomposing into tas0s ?ill vary considerably &rom one
estimate to anot.er.
Allocation of %oint costs. 2llocations o& cost &rom eIisting accounts may be used to
develop a cost &unction o& an operation. ,.e basic idea in t.is met.od is t.at eac.
eIpenditure item can be assigned to particular c.aracteristics o& t.e operation. $deally t.e
allocation o& Boint costs s.ould be causally related to t.e category o& basic costs in an
allocation process. $n many instances .o?ever a causal relations.ip bet?een t.e
allocation &actor and t.e cost item cannot be identi&ied or may not eIist. Kor eIample in
construction proBects t.e accounts &or basic costs may be classi&ied according to M1N
labor M2N material M3N construction e!uipment M4N construction supervision and M"N
general o&&ice over.ead. ,.ese basic costs may t.en be allocated proportionally to
various tas0s ?.ic. are subdivisions o& a proBect.

..+ Types of Construction Cost &stimates
(onstruction cost constitutes only a &raction t.oug. a substantial &raction o& t.e total
proBect cost. /o?ever it is t.e part o& t.e cost under t.e control o& t.e construction
proBect manager. ,.e re!uired levels o& accuracy o& construction cost estimates vary at
di&&erent stages o& proBect development ranging &rom ball par0 &igures in t.e early stage
to &airly reliable &igures &or budget control prior to construction. ;ince design decisions
made at t.e beginning stage o& a proBect li&e cycle are more tentative t.an t.ose made at a
later stage t.e cost estimates made at t.e earlier stage are eIpected to be less accurate.
6enerally t.e accuracy o& a cost estimate ?ill re&lect t.e in&ormation available at t.e
time o& estimation.
(onstruction cost estimates may be vie?ed &rom di&&erent perspectives because o&
di&&erent institutional re!uirements. $n spite o& t.e many types o& cost estimates used at
di&&erent stages o& a proBect cost estimates can best be classi&ied into t.ree maBor
categories according to t.eir &unctions. 2 construction cost estimate serves one o& t.e
t.ree basic &unctionsD design bid and control. Kor establis.ing t.e &inancing o& a proBect
eit.er a design estimate or a bid estimate is used.
1. ;esign &stimates. Kor t.e o?ner or its designated design pro&essionals t.e types
o& cost estimates encountered run parallel ?it. t.e planning and design as
&ollo?sD
o ;creening estimates Mor order o& magnitude estimatesN
o *reliminary estimates Mor conceptual estimatesN
o 1etailed estimates Mor de&initive estimatesN
o EngineerHs estimates based on plans and speci&ications
Kor eac. o& t.ese di&&erent estimates t.e amount o& design in&ormation available
typically increases.
2. <id &stimates. Kor t.e contractor a bid estimate submitted to t.e o?ner eit.er
&or competitive bidding or negotiation consists o& direct construction cost
including &ield supervision plus a mar0up to cover general over.ead and pro&its.
,.e direct cost o& construction &or bid estimates is usually derived &rom a
combination o& t.e &ollo?ing approac.es.
o ;ubcontractor !uotations
o Luantity ta0eo&&s
o (onstruction procedures.
3. +. Control &stimates. Kor monitoring t.e proBect during construction a control
estimate is derived &rom available in&ormation to establis.D
o :udget estimate &or &inancing
o :udgeted cost a&ter contracting but prior to construction
o Estimated cost to completion during t.e progress o& construction.
$esign Estimates
$n t.e planning and design stages o& a proBect various design estimates re&lect t.e
progress o& t.e design. 2t t.e very early stage t.e screening estimate or order of
magnitude estimate is usually made be&ore t.e &acility is designed and must t.ere&ore
rely on t.e cost data o& similar &acilities built in t.e past. 2 preliminary estimate or
conceptual estimate is based on t.e conceptual design o& t.e &acility at t.e state ?.en t.e
basic tec.nologies &or t.e design are 0no?n. ,.e detailed estimate or definitive estimate
is made ?.en t.e scope o& ?or0 is clearly de&ined and t.e detailed design is in progress
so t.at t.e essential &eatures o& t.e &acility are identi&iable. ,.e engineer>s estimate is
based on t.e completed plans and speci&ications ?.en t.ey are ready &or t.e o?ner to
solicit bids &rom construction contractors. $n preparing t.ese estimates t.e design
pro&essional ?ill include eIpected amounts &or contractorsH over.ead and pro&its.
,.e costs associated ?it. a &acility may be decomposed into a .ierarc.y o& levels t.at are
appropriate &or t.e purpose o& cost estimation. ,.e level o& detail in decomposing t.e
&acility into tas0s depends on t.e type o& cost estimate to be prepared. Kor conceptual
estimates &or eIample t.e level o& detail in de&ining tas0s is !uite coarseO &or detailed
estimates t.e level o& detail can be !uite &ine.
2s an eIample consider t.e cost estimates &or a proposed bridge across a river. 2
screening estimate is made &or eac. o& t.e potential alternatives suc. as a tied arc.
bridge or a cantilever truss bridge. 2s t.e bridge type is selected e.g. t.e tec.nology is
c.osen to be a tied arc. bridge instead o& some ne? bridge &orm a preliminary estimate
is made on t.e basis o& t.e layout o& t.e selected bridge &orm on t.e basis o& t.e
preliminary or conceptual design. A.en t.e detailed design .as progressed to a point
?.en t.e essential details are 0no?n a detailed estimate is made on t.e basis o& t.e ?ell
de&ined scope o& t.e proBect. A.en t.e detailed plans and speci&ications are completed
an engineerHs estimate can be made on t.e basis o& items and !uantities o& ?or0.
Bid Estimates
,.e contractorHs bid estimates o&ten re&lect t.e desire o& t.e contractor to secure t.e Bob as
?ell as t.e estimating tools at its disposal. ;ome contractors .ave ?ell establis.ed cost
estimating procedures ?.ile ot.ers do not. ;ince only t.e lo?est bidder ?ill be t.e
?inner o& t.e contract in most bidding contests any e&&ort devoted to cost estimating is a
loss to t.e contractor ?.o is not a success&ul bidder. (onse!uently t.e contractor may
put in t.e least amount o& possible e&&ort &or ma0ing a cost estimate i& it believes t.at its
c.ance o& success is not .ig..
$& a general contractor intends to use subcontractors in t.e construction o& a &acility it
may solicit price !uotations &or various tas0s to be subcontracted to specialty
subcontractors. ,.us t.e general subcontractor ?ill s.i&t t.e burden o& cost estimating to
subcontractors. $& all or part o& t.e construction is to be underta0en by t.e general
contractor a bid estimate may be prepared on t.e basis o& t.e !uantity ta0eo&&s &rom t.e
plans provided by t.e o?ner or on t.e basis o& t.e construction procedures devised by t.e
contractor &or implementing t.e proBect. Kor eIample t.e cost o& a &ooting o& a certain
type and size may be &ound in commercial publications on cost data ?.ic. can be used to
&acilitate cost estimates &rom !uantity ta0eo&&s. /o?ever t.e contractor may ?ant to
assess t.e actual cost o& construction by considering t.e actual construction procedures to
be used and t.e associated costs i& t.e proBect is deemed to be di&&erent &rom typical
designs. /ence items suc. as labor material and e!uipment needed to per&orm various
tas0s may be used as parameters &or t.e cost estimates.
Control Estimates
:ot. t.e o?ner and t.e contractor must adopt some base line &or cost control during t.e
construction. Kor t.e o?ner a )udget estimate must be adopted early enoug. &or planning
long term &inancing o& t.e &acility. (onse!uently t.e detailed estimate is o&ten used as
t.e budget estimate since it is su&&icient de&initive to re&lect t.e proBect scope and is
available long be&ore t.e engineerHs estimate. 2s t.e ?or0 progresses t.e budgeted cost
must be revised periodically to re&lect t.e estimated cost to completion. 2 revised
estimated cost is necessary eit.er because o& c.ange orders initiated by t.e o?ner or due
to uneIpected cost overruns or savings.
Kor t.e contractor t.e bid estimate is usually regarded as t.e budget estimate ?.ic. ?ill
be used &or control purposes as ?ell as &or planning construction &inancing. ,.e budgeted
cost s.ould also be updated periodically to re&lect t.e estimated cost to completion as
?ell as to insure ade!uate cas. &lo?s &or t.e completion o& t.e proBect.
&9ample .)!* /creening estimate of a grouting seal >eneath a landfill R2S
One o& t.e met.ods o& isolating a land&ill &rom ground?ater is to create a bo?l<s.aped
bottom seal beneat. t.e site as s.o?n in Kigure "<+. ,.e seal is constructed by pumping
or pressure<inBecting grout under t.e eIisting land&ill. /oles are bored at regular intervals
t.roug.out t.e land&ill &or t.is purpose and t.e grout tubes are eItended &rom t.e sur&ace
to t.e bottom o& t.e land&ill. 2 layer o& soil at a minimum o& " &t. t.ic0 is le&t bet?een t.e
grouted material and t.e land&ill contents to allo? &or irregularities in t.e bottom o& t.e
land&ill. ,.e grout liner can be bet?een 4 and # &eet t.ic0. 2 typical material ?ould be
*ortland cement grout pumped under pressure t.roug. tubes to &ill voids in t.e soil. ,.is
grout ?ould t.en .arden into a permanent impermeable liner.
(igure .)1* 6rout :ottom ;eal Liner at a Land&ill
,.e ?or0 items in t.is proBect include M1N drilling eIploratory bore .oles at "+ &t intervals
&or grout tubes and M2N pumping grout into t.e voids o& a soil layer bet?een 4 and # &t
t.ic0. ,.e !uantities &or t.ese t?o items are estimated on t.e basis o& t.e land&ill areaD
' acres ] M'NM43"#+ &t
2
UacreN ] 34'4'+ &t
2
M2s an approIimation use 3#++++ &t
2
to account &or t.e bo?l s.apeN
,.e number o& bore .oles in a "+ &t by "+ &t grid pattern covering 3#++++ &t
2
is given byD
,.e average dept. o& t.e bore .oles is estimated to be 2+ &t. /ence t.e total amount o&
drilling is M144NM2+N ] 2''+ &t.
,.e volume o& t.e soil layer &or grouting is estimated to beD
&or a 4 &t layer volume ] M4 &tNM3#++++ &t
2
N ] 144++++ &t
3
&or a # &t layer volume ] M#
&tNM3#++++ &t
2
N ] 21#++++ &t
3
$t is estimated &rom soil tests t.at t.e voids in t.e soil layer are bet?een 2+V and 3+V o&
t.e total volume. ,.us &or a 4 &t soil layerD
grouting in 2+V voids ] M2+VNM144++++N ] 2''+++ &t
3
grouting in 3+ V voids ] M3+VN
M144++++N ] 432+++ &t
3
and &or a # &t soil layerD
grouting in 2+V voids ] M2+VNM21#++++N ] 432+++ &t
3
grouting in 3+V voids ] M3+VN
M21#++++N ] #4'+++ &t
3
,.e unit cost &or drilling eIploratory bore .oles is estimated to be bet?een G3 and G1+
per &oot Min 1)%' dollarsN including all eIpenses. ,.us t.e total cost o& boring ?ill be
bet?een M2''+NM3N ] G '#4+ and M2''+NM1+N ] G2''++. ,.e unit cost o& *ortland
cement grout pumped into place is bet?een G4 and G1+ per cubic &oot including over.ead
and pro&it. $n addition to t.e variation in t.e unit cost t.e total cost o& t.e bottom seal
?ill depend upon t.e t.ic0ness o& t.e soil layer grouted and t.e proportion o& voids in t.e
soil. ,.at isD
&or a 4 &t layer ?it. 2+V voids grouting cost ] G11"2+++ to G2''++++
&or a 4 &t layer ?it. 3+V voids grouting cost ] G1%2'+++ to G432++++
&or a # &t layer ?it. 2+V voids grouting cost ] G1%2'+++ to G432++++
&or a # &t layer ?it. 3+V voids grouting cost ] G2")2+++ to G#4'++++
,.e total cost o& drilling bore .oles is so small in comparison ?it. t.e cost o& grouting
t.at t.e &ormer can be omitted in t.e screening estimate. Kurt.ermore t.e range o& unit
cost varies greatly ?it. soil c.aracteristics and t.e engineer must eIercise Budgment in
narro?ing t.e range o& t.e total cost. 2lternatively additional soil tests can be used to
better estimate t.e unit cost o& pumping grout and t.e proportion o& voids in t.e soil.
;uppose t.at in addition to ignoring t.e cost o& bore .oles an average value o& a " &t soil
layer ?it. 2"V voids is used toget.er ?it. a unit cost o& G % per cubic &oot o& *ortland
cement grouting. $n t.is case t.e total proBect cost is estimated to beD
M" &tNM3#++++ &t
2
NM2"VNMG%U&t
3
N ] G31"++++
2n important point to note is t.at t.is screening estimate is based to a large degree on
engineering Budgment o& t.e soil c.aracteristics and t.e range o& t.e actual cost may vary
&rom G 11"2+++ to G #4'++++ even t.oug. t.e probabilities o& .aving actual costs at
t.e eItremes are not very .ig..
&9ample .)+* &9ample of engineer's estimate and contractors' >idsR3S
,.e engineerHs estimate &or a proBect involving 14 miles o& $nterstate %+ road?ay in Uta.
?as G2+)"+'"). :ids ?ere submitted on 4arc. 1+ 1)'% &or completing t.e proBect
?it.in 32+ ?or0ing days. ,.e t.ree lo? bidders ?ereD

1. :all :all W :rosame $nc. 1anville (2 G1412)%)'
2. 5ational *roBects $nc. *.oeniI 23 G1"3'1%')
3. Qie?it Aestern (o. 4urray Uta. G1'14#%14
$t ?as astounding t.at t.e ?inning bid ?as 32V belo? t.e engineerHs estimate. Even t.e
t.ird lo?est bidder ?as 13V belo? t.e engineerHs estimate &or t.is proBect. ,.e disparity
in pricing can be attributed eit.er to t.e very conservative estimate o& t.e engineer in t.e
Uta. 1epartment o& ,ransportation or to area contractors ?.o are .ungrier t.an usual to
?in Bobs.
,.e unit prices &or di&&erent items o& ?or0 submitted &or t.is proBect by M1N :all :all W
:rosame $nc. and M2N 5ational *roBects $nc. are s.o?n in ,able "<2. ,.e similarity o&
t.eir unit prices &or some items and t.e disparity in ot.ers submitted by t.e t?o
contractors can be noted.
TA<"& .)!* Unit *rices in ,?o (ontractorsH :ids &or 3oad?ay (onstruction
$tems Unit Luantity
Unit price
1 2
4obilization ls 1 11"+++ "#)""4
3emoval berm l& '+2+ 1.++ 1."+
Kinis. subgrade sy 12+%"++ +."+ +.3+
;ur&ace ditc.es l& "2" 2.++ 1.++
EIcavation structures cy %+++ 3.++ ".++
:ase course untreated 3U4HH ton 3#22++ 4."+ ".++
Lean concrete 4HH t.ic0 sy '2+31+ 3.1+ 3.++
*(( pavement 1+HH t.ic0 sy %#+1+ 1+.)+ 12.++
(oncrete ci 22 M2EN ls 1 2+++++ 1)++++
;mall structure cy "+ "++ 4%"
:arrier *recast l& %)2+ 1".++ 1#.++
Klat?or0 4HH t.ic0 sy %41+ 1+.++ '.++
1+HH t.ic0 sy 4241 2+.++ 2%.++
;lope protection sy 21+4 2".++ 3+.++
4etal end section 1"HH ea 3) 1++ 12"
1'HH ea 3 1"+ 2++
*ost rig.t<o&<?ay modi&ication l& 4%++ 3.++ 2."+
;alvage and relay pipe l& 1#'+ ".++ 12.++
Loose riprap cy 32 4+.++ 3+.++
:raced posts ea "4 1++ 11+
1elineators type $ lb 133+ 12.++ 12.++
type $$ ea 14+ 1".++ 12.++
(onstructive signs &iIed s& "2#++ +.1+ +.4+
:arricades type $$$ l& 2)"++ +.2+ +.2+
Aarning lig.ts day #3++ +.1+ +."+
*avement mar0ing epoIy material
TA<"& .)!* Unit *rices in ,?o (ontractorsH :ids &or 3oad?ay (onstruction
$tems Unit Luantity
Unit price
:lac0 gal 4%" )+.++ 1++
9ello? gal %4+ )+.++ '+.++
A.ite gal )'" )+.++ %+.++
*lo?able one<?ay ?.ite ea 342 "+.++ 2+.++
,opsoil contractor &urnis.ed cy 2#+ 1+.++ #.++
;eedling met.od 2 acr 1+3 1"+ 2++
EIcelsior blan0et sy "++ 2.++ 2.++
(orrugated metal pipe 1'HH l& "'+ 2+.++ 1'.++
*olyet.ylene pipe 12HH l& 22"+ 1".++ 13.++
(atc. basin grate and &rame ea 3" 3"+ 2'+
E!ual opportunity training .r 1'+++ +.'+ +.'+
6ranular bac0&ill borro? cy 2%4 1+.++ 1#.++
1rill caisson 2HI#HH l& %22 1++ '+.++
Klagging .r 2++++ '.2" 12."+
*restressed concrete member
type $8 141HI4HH ea % 12+++ 1#.++
132HI4HH ea # 11+++ 14.++
3ein&orced steel lb #3++ +.#+ +."+
EpoIy coated lb 122241 +."" +."+
;tructural steel ls 1 "+++ 1#++
;ign covering s& 1# 1+.++ 4.++
type (<2 ?ood post s& )' 1".++ 1%.++
24HH ea 3 1++ 4++
3+HH ea 2 1++ 1#+
4'HH ea 11 2++ 3++
2uIiliary s& #1 1".++ 12.++
;teel post 4'HHI#+HH ea 11 "++ %++
type 3 ?ood post s& ##) 1".++ 1).++
24HH ea 23 1++ 12"
3+HH ea 1 1++ 1"+
3#HH ea 12 1"+ 1'+
TA<"& .)!* Unit *rices in ,?o (ontractorsH :ids &or 3oad?ay (onstruction
$tems Unit Luantity
Unit price
42HHI#+HH ea ' 1"+ 22+
4'HH ea % 2++ 2%+
2uIiliary s& 13" 1".++ 13.++
;teel post s& 1#1+ 4+.++ 3".++
12HHI3#HH ea 2' 1++ 1"+
Koundation concrete ea #+ 3++ #"+
:arricade 4'HHI42HH ea 4+ 1++ 1++
Aood post road closed l& 1++ 3+.++ 3#.++

..- &ffects of /cale on Construction Cost
;creening cost estimates are o&ten based on a single variable representing t.e capacity or
some p.ysical measure o& t.e design suc. as &loor area in buildings lengt. o& .ig.?ays
t.e volume o& storage bins and production volumes o& processing plants. (osts do not
al?ays vary linearly ?it. respect to di&&erent &acility sizes. ,ypically scale economies or
diseconomies eIist. $& t.e average cost per unit o& capacity is declining t.en scale
economies eIist. (onversely scale diseconomies eIist i& average costs increase ?it.
greater size. Empirical data are soug.t to establis. t.e economies o& scale &or various
types o& &acility i& t.ey eIist in order to ta0e advantage o& lo?er costs per unit o&
capacity.
Let I be a variable representing t.e &acility capacity and y be t.e resulting construction
cost. ,.en a linear cost relations.ip can be eIpressed in t.e &ormD
".1
?.ere a and b are positive constants to be determined on t.e basis o& .istorical data.
5ote t.at in E!uation M".1N a &iIed cost o& y ] a at I ] + is implied as s.o?n in Kigure "<
2. $n general t.is relations.ip is applicable only in a certain range o& t.e variable I suc.
as bet?een I ] c and I ] d. $& t.e values o& y corresponding to I ] c and I ] d are 0no?n
t.en t.e cost o& a &acility corresponding to any I ?it.in t.e speci&ied range may be
obtained by linear interpolation. Kor eIample t.e construction cost o& a sc.ool building
can be estimated on t.e basis o& a linear relations.ip bet?een cost and &loor area i& t.e
unit cost per s!uare &oot o& &loor area is 0no?n &or sc.ool buildings ?it.in certain limits
o& size.
(igure .)!* Linear (ost 3elations.ip ?it. Economies o& ;cale
2 nonlinear cost relations.ip bet?een t.e &acility capacity I and construction cost y can
o&ten be represented in t.e &ormD
".2
?.ere a and b are positive constants to be determined on t.e basis o& .istorical data. Kor +
[ b [ 1 E!uation M".2N represents t.e case o& increasing returns to scale and &or b Ogt 1
t.e relations.ip becomes t.e case o& decreasing returns to scale as s.o?n in Kigure "<3.
,a0ing t.e logarit.m o& bot. sides t.is e!uation a linear relations.ip can be obtained as
&ollo?sD
(igure .)+* 5onlinear (ost 3elations.ip ?it. increasing or 1ecreasing Economies o&
;cale
".3
2lt.oug. no &iIed cost is implied in E!.M".2N t.e e!uation is usually applicable only &or a
certain range o& I. ,.e same limitation applies to E!.M".3N. 2 nonlinear cost relations.ip
o&ten used in estimating t.e cost o& a ne? industrial processing plant &rom t.e 0no?n cost
o& an eIisting &acility o& a di&&erent size is 0no?n as t.e e:ponential rule. Let y
n
be t.e
0no?n cost o& an eIisting &acility ?it. capacity L
n
and y be t.e estimated cost o& t.e
ne? &acility ?.ic. .as a capacity L. ,.en &rom t.e empirical data it can be assumed
t.atD
".4
?.ere m usually varies &rom +." to +.) depending on a speci&ic type o& &acility. 2 value
o& m ] +.# is o&ten used &or c.emical processing plants. ,.e eIponential rule can be
reduced to a linear relations.ip i& t.e logarit.m o& E!uation M".4N is usedD
"."
orD
".#
,.e eIponential rule can be applied to estimate t.e total cost o& a complete &acility or t.e
cost o& some particular component o& a &acility.
&9ample .)-* ;etermination of m for the e9ponential rule
(igure .)-* Log<Log ;cale 6rap. o& EIponential 3ule EIample
,.e empirical cost data &rom a number o& se?age treatment plants are plotted on a log<
log scale &or lnMLUL
n
N and lnMyUy
n
N and a linear relations.ip bet?een t.ese logarit.mic
ratios is s.o?n in Kigure "<4. Kor MLUL
n
N ] 1 or lnMLUL
n
N ] + lnMyUy
n
N ] +O and &or LUL
n
]
2 or lnMLUL
n
N ] +.3+1 lnMyUy
n
N ] +.1%#". ;ince m is t.e slope o& t.e line in t.e &igure it
can be determined &rom t.e geometric relation as &ollo?sD
Kor lnMyUy
n
N ] +.1%#" yUy
n
] 1." ?.ile t.e corresponding value o& LUL
n
is 2. $n ?ords
&or m ] +."'" t.e cost o& a plant increases only 1." times ?.en t.e capacity is doubled.
&9ample .).* Cost e9ponents for water and wastewater treatment plantsR4S
,.e magnitude o& t.e cost eIponent m in t.e eIponential rule provides a simple measure
o& t.e economy o& scale associated ?it. building eItra capacity &or &uture gro?t. and
system reliability &or t.e present in t.e design o& treatment plants. A.en m is small t.ere
is considerable incentive to provide eItra capacity since scale economies eIist as
illustrated in Kigure "<3. A.en m is close to 1 t.e cost is directly proportional to t.e
design capacity. ,.e value o& m tends to increase as t.e number o& duplicate units in a
system increases. ,.e values o& m &or several types o& treatment plants ?it. di&&erent
plant components derived &rom statistical correlation o& actual construction costs are
s.o?n in ,able "<3.
TA<"& .)+ Estimated 8alues o& (ost EIponents &or Aater ,reatment *lants
,reatment plant
type
EIponent
m
(apacity range
Mmillions o& gallons per dayN
1. Aater treatment +.#% 1<1++
2. Aaste treatment
*rimary ?it. digestion MsmallN +."" +.1<1+
*rimary ?it. digestion MlargeN +.%" +.%<1++
,ric0ling &ilter +.#+ +.1<2+
2ctivated sludge +.%% +.1<1++
;tabilization ponds +."% +.1<1++
;ourceD 1ata are collected &rom various sources by *.4. :ert.oueI. ;ee t.e re&erences in
.is article &or t.e primary sources.
&9ample .)0* /ome Aistorical Cost ;ata for the &9ponential 2ule
,.e eIponential rule as represented by E!uation M".4N can be eIpressed in a di&&erent
&orm asD
?.ere
$& m and Q are 0no?n &or a given type o& &acility t.en t.e cost y &or a proposed ne?
&acility o& speci&ied capacity L can be readily computed.
TA<"& .)- (ost Kactors o& *rocessing Units &or ,reatment *lants
*rocessing
unit
Unit o&
capacity
Q 8alue
M1)#' GN
m
value
1. Li!uid processing
Oil separation mgd "'+++ +.'4
/ydroclone degritter mgd 3'2+ +.3"
*rimary sedimentation &t
2
3)) +.#+
Kurial clari&ier &t
2
%++ +."%
;ludge aeration basin mil. gal. 1%++++ +."+
,ic0ling &ilter &t
2
21+++ +.%1
2erated lagoon basin mil. gal. 4#+++ +.#%
E!ualization mil. gal. %2+++ +."2
5eutralization mgd #++++ +.%+
2. ;ludge .andling
1igestion &t
3
#%"++ +.")
8acuum &ilter &t
2
)3#+ +.'4
(entri&uge
lb dry
solidsU.r
31' +.'1
;ourceD 1ata are collected &rom various sources by *.4. :ert.oueI. ;ee t.e re&erences in
.is article &or t.e primary sources.
,.e estimated values o& Q and m &or various ?ater and se?age treatment plant
components are s.o?n in ,able "<4. ,.e Q values are based on 1)#' dollars. ,.e range
o& data &rom ?.ic. t.e Q and m values are derived in t.e primary sources s.ould be
observed in order to use t.em in ma0ing cost estimates.
2s an eIample ta0e Q ] G3)) and m ] +.#+ &or a primary sedimentation component in
,able "<4. Kor a proposed ne? plant ?it. t.e primary sedimentation process .aving a
capacity o& 1"+++ s!. &t. t.e estimated cost Min 1)#' dollarsN isD
y ] MG3))NcM1"+++N
+.#+
] G12'+++.++
... =nit Cost ,ethod of &stimation
$& t.e design tec.nology &or a &acility .as been speci&ied t.e proBect can be decomposed
into elements at various levels o& detail &or t.e purpose o& cost estimation. ,.e unit cost
&or eac. element in t.e bill o& !uantities must be assessed in order to compute t.e total
construction cost. ,.is concept is applicable to bot. design estimates and bid estimates
alt.oug. di&&erent elements may be selected in t.e decomposition.
Kor design estimates t.e unit cost met.od is commonly used ?.en t.e proBect is
decomposed into elements at various levels o& a .ierarc.y as &ollo?sD
1. Preliminary &stimates. ,.e proBect is decomposed into maBor structural systems
or production e!uipment items e.g. t.e entire &loor o& a building or a cooling
system &or a processing plant.
2. ;etailed &stimates. ,.e proBect is decomposed into components o& various maBor
systems i.e. a single &loor panel &or a building or a .eat eIc.anger &or a cooling
system.
3. &ngineer's &stimates. ,.e proBect is decomposed into detailed items o& various
components as ?arranted by t.e available cost data. EIamples o& detailed items
are slabs and beams in a &loor panel or t.e piping and connections &or a .eat
eIc.anger.
Kor bid estimates t.e unit cost met.od can also be applied even t.oug. t.e contractor
may c.oose to decompose t.e proBect into di&&erent levels in a .ierarc.y as &ollo?sD
1. /u>contractor Iuotations. ,.e decomposition o& a proBect into subcontractor
items &or !uotation involves a minimum amount o& ?or0 &or t.e general
contractor. /o?ever t.e accuracy o& t.e resulting estimate depends on t.e
reliability o& t.e subcontractors since t.e general contractor selects one among
several contractor !uotations submitted &or eac. item o& subcontracted ?or0.
2. Iuantity Ta:eoffs. ,.e decomposition o& a proBect into items o& !uantities t.at
are measured Mor taken offN &rom t.e engineerHs plan ?ill result in a procedure
similar to t.at adopted &or a detailed estimate or an engineerHs estimate by t.e
design pro&essional. ,.e levels o& detail may vary according to t.e desire o& t.e
general contractor and t.e availability o& cost data.
3. Construction Procedures. $& t.e construction procedure o& a proposed proBect is
used as t.e basis o& a cost estimate t.e proBect may be decomposed into items
suc. as labor material and e!uipment needed to per&orm various tas0s in t.e
proBects.
Simple 3nit Cost Formula
;uppose t.at a proBect is decomposed into n elements &or cost estimation. Let L
i
be t.e
!uantity o& t.e i
t.
element and u
i
be t.e corresponding unit cost. ,.en t.e total cost o& t.e
proBect is given byD

".%
?.ere n is t.e number o& units. :ased on c.aracteristics o& t.e construction site t.e
tec.nology employed or t.e management o& t.e construction process t.e estimated unit
cost u
i
&or eac. element may be adBusted.
Factored Estimate Formula
2 special application o& t.e unit cost met.od is t.e J&actored estimateJ commonly used in
process industries. Usually an industrial process re!uires several maBor e!uipment
components suc. as &urnaces to?ers drums and pump in a c.emical processing plant
plus ancillary items suc. as piping valves and electrical elements. ,.e total cost o& a
proBect is dominated by t.e costs o& purc.asing and installing t.e maBor e!uipment
components and t.eir ancillary items. Let (
i
be t.e purc.ase cost o& a maBor e!uipment
component i and &
i
be a &actor accounting &or t.e cost o& ancillary items needed &or t.e
installation o& t.is e!uipment component i. ,.en t.e total cost o& a proBect is estimated
byD
".'
?.ere n is t.e number o& maBor e!uipment components included in t.e proBect. ,.e
&actored met.od is essentially based on t.e principle o& computing t.e cost o& ancillary
items suc. as piping and valves as a &raction or a multiple o& t.e costs o& t.e maBor
e!uipment items. ,.e value o& (
i
may be obtained by applying t.e eIponential rule so t.e
use o& E!uation M".'N may involve a combination o& cost estimation met.ods.
Formula Based on )a*or5 &aterial and E"uipment
(onsider t.e simple case &or ?.ic. costs o& labor material and e!uipment are assigned to
all tas0s. ;uppose t.at a proBect is decomposed into n tas0s. Let L
i
be t.e !uantity o&
?or0 &or tas0 i 4
i
be t.e unit material cost o& tas0 i E
i
be t.e unit e!uipment rate &or tas0
i L
i
be t.e units o& labor re!uired per unit o& L
i
and A
i
be t.e ?age rate associated ?it.
L
i
. $n t.is case t.e total cost y isD
".)
5ote t.at A
i
L
i
yields t.e labor cost per unit o& L
i
or t.e labor unit cost o& tas0 i.
(onse!uently t.e units &or all terms in E!uation M".)N are consistent.
&9ample .)1* ;ecomposition of a >uilding foundation into design and construction
elements.
,.e concept o& decomposition is illustrated by t.e eIample o& estimating t.e costs o& a
building &oundation eIcluding eIcavation as s.o?n in ,able "<" in ?.ic. t.e
decomposed design elements are s.o?n on .orizontal lines and t.e decomposed contract
elements are s.o?n in vertical columns. Kor a design estimate t.e decomposition o& t.e
proBect into &ootings &oundation ?alls and elevator pit is pre&erred since t.e designer can
easily 0eep trac0 o& t.ese design elementsO .o?ever &or a bid estimate t.e
decomposition o& t.e proBect into &orm?or0 rein&orcing bars and concrete may be
pre&erred since t.e contractor can get !uotations o& suc. contract items more
conveniently &rom specialty subcontractors.
TA<"& .). $llustrative 1ecomposition o& :uilding
Koundation (osts
1esign
elements
(ontract elements
Korm?or0 3ebars (oncrete ,otal cost
Kootings G"+++ G1++++ G13+++ G2'+++
Koundation ?alls 1"+++ 1'+++ 2'+++ #1+++
Elevator pit )+++ 1"+++ 1#+++ 4++++
,otal cost G2)+++ G43+++ G"%+++ G12)+++
&9ample .)3* Cost estimate using la>or, material and equipment rates.
Kor t.e given !uantities o& ?or0 L
i
&or t.e concrete &oundation o& a building and t.e
labor material and e!uipment rates in ,able "<# t.e cost estimate is computed on t.e
basis o& E!uation M".)N. ,.e result is tabulated in t.e last column o& t.e same table.
TA<"& .)0 $llustrative (ost Estimate Using Labor 4aterial and E!uipment 3ates
1escription
Luantity
L
i
4aterial
unit cost
4
i
E!uipment
unit cost
E
i
Aage
rate
A
i
Labor
input
L
i
Labor
unit cost
A
i
L
i
1irect
cost
9
i
Korm?or0 12+++ &t
2
G+.4U&t
2
G+.'U&t
2
G1"U.r +.2 .rU&t
2
G3.+U&t
2
G"+4++
3ebars 4+++ lb +.2Ulb +.3Ulb 1"U.r +.+4 .rUlb +.#Ulb 444+
(oncrete "++ yd
3
".+Uyd
3
"+Uyd
3
1"U.r +.' .rUyd
3
12.+Uyd
3
33"++
,otal G''3++
..0 ,ethods for Allocation of Foint Costs
,.e principle o& allocating Boint costs to various elements in a proBect is o&ten used in cost
estimating. :ecause o& t.e di&&iculty in establis.ing casual relations.ip bet?een eac.
element and its associated cost t.e Boint costs are o&ten prorated in proportion to t.e basic
costs &or various elements.
One common application is &ound in t.e allocation o& &ield supervision cost among t.e
basic costs o& various elements based on labor material and e!uipment costs and t.e
allocation o& t.e general over.ead cost to various elements according to t.e basic and
&ield supervision cost. ;uppose t.at a proBect is decomposed into n tas0s. Let y be t.e
total basic cost &or t.e proBect and y
i
be t.e total basic cost &or tas0 i. $& K is t.e total &ield
supervision cost and K
i
is t.e proration o& t.at cost to tas0 i t.en a typical proportional
allocation isD
".1+
;imilarly let z be t.e total direct &ield cost ?.ic. includes t.e total basic cost and t.e
&ield supervision cost o& t.e proBect and z
i
be t.e direct &ield cost &or tas0 i. $& 6 is t.e
general o&&ice over.ead &or proration to all tas0s and 6
i
is t.e s.are &or tas0 i t.en
".11
Kinally let ? be t.e grand total cost o& t.e proBect ?.ic. includes t.e direct &ield cost and
t.e general o&&ice over.ead cost c.arged to t.e proBect and ?
i
be t.at attributable tas0 i.
,.en
".12
and
".13
&9ample .)4* Prorated costs for field superision and office oerhead
$& t.e &ield supervision cost is G1324" &or t.e proBect in ,able "<# MEIample "<'N ?it. a
total direct cost o& G''3++ &ind t.e prorated &ield supervision costs &or various elements
o& t.e proBect. Kurt.ermore i& t.e general o&&ice over.ead c.arged to t.e proBect is 4V o&
t.e direct &ield cost ?.ic. is t.e sum o& basic costs and &ield supervision cost &ind t.e
prorated general o&&ice over.ead costs &or various elements o& t.e proBect.
Kor t.e proBect y ] G''3++ and K ] G1324". /enceD
z ] 1324" _ ''3++ ] G1+1"4"
6 ] M+.+4NM1+1"4"N ] G4+#2
? ] 1+1"4" _ 4+#2 ] G1+"#+%
,.e results o& t.e proration o& costs to various elements are s.o?n in ,able "<%.
TA<"& .)1 *roration o& Kield ;upervision and O&&ice Over.ead (osts
1escription
:asic cost
y
i
2llocated
&ield supervision cost
K
i
,otal
&ield cost
z
i
2llocated
over.ead cost
6
i
,otal cost
L
i
Korm?or0 G"+4++ G%"#+ G"%)#+ G231) G#+2%)
3ebars 44++ ##+ "+#+ 2+2 "2#2
(oncrete 33"++ "+2" 3'"2" 1"41 4++##
,otal G''3++ G1324" G1+1"4" G4+#2 G1+"#+%
&9ample .)15* A standard cost report for allocating oerhead
,.e reliance on labor eIpenses as a means o& allocating over.ead burdens in typical
management accounting systems can be illustrated by t.e eIample o& a particular
productHs standard cost s.eet. R"S ,able "<' is an actual productHs standard cost s.eet o& a
company &ollo?ing t.e procedure o& using over.ead burden rates assessed per direct
labor .our. ,.e material and labor costs &or manu&acturing a type o& valve ?as estimated
&rom engineering studies and &rom current material and labor prices. ,.ese amounts are
summarized in (olumns 2 and 3 o& ,able "<'. ,.e over.ead costs s.o?n in (olumn 4 o&
,able "<' ?ere obtained by allocating t.e eIpenses o& several departments to t.e various
products manu&actured in t.ese departments in proportion to t.e labor cost. 2s s.o?n in
t.e last line o& t.e table t.e material cost represents 2)V o& t.e total cost ?.ile labor
costs are 11V o& t.e total cost. ,.e allocated over.ead cost constitutes #+V o& t.e total
cost. Even t.oug. material costs eIceed labor costs only t.e labor costs are used in
allocating over.ead. 2lt.oug. t.is type o& allocation met.od is common in industry t.e
arbitrary allocation o& Boint costs introduces unintended cross subsidies among products
and may produce adverse conse!uences on sales and pro&its. Kor eIample a particular
type o& part may incur &e? over.ead eIpenses in practice but t.is p.enomenon ?ould
not be re&lected in t.e standard cost report.
TA<"& .)3 ;tandard (ost 3eport &or a ,ype o& 8alve
M1N 4aterial M2N Labor M3N Over.ead M4N ,otal
cost cost cost cost
*urc.ased part G1.1)'+ G1.1)'+
Operation
1rill &ace tap M2N G+.+43' G+.24+4 G+.2'42
1egrease +.++31 +.+33% +.+3#'
3emove burs +.+"%% +.3241 +.3'1'
,otal cost t.is item 1.1)'+ +.1+4# +.")'2 1.)++'
Ot.er subassemblies +.3"23 +.2))4 1.'"1) 2.4%##
,otal cost
subassemblies
1."233 +.4+4+ 2.4"+1 4.3%%3
2ssemble and test +.14#) +.4)'% +.#4"#
*ac0 ?it.out paper +.+234 +.134) +.1"'3
,otal cost t.is item G1."233 G+."%43 G3.+'3% G".1'13
(ost component V 2)V 11V #+V 1++V
;ourceD /. ,. Po.nson and 3. ;. Qaplan Relevance lost3 ,he Rise and 7all of
'anagement "ccounting /arvard :usiness ;c.ool *ress :oston. 3eprinted
?it. permission.
..1 Aistorical Cost ;ata
*reparing cost estimates normally re!uires t.e use o& .istorical data on construction
costs. /istorical cost data ?ill be use&ul &or cost estimation only i& t.ey are collected and
organized in a ?ay t.at is compatible ?it. &uture applications. Organizations ?.ic. are
engaged in cost estimation continually s.ould 0eep a &ile &or t.eir o?n use. ,.e
in&ormation must be updated ?it. respect to c.anges t.at ?ill inevitably occur. ,.e
&ormat o& cost data suc. as unit costs &or various items s.ould be organized according to
t.e current standard o& usage in t.e organization.
(onstruction cost data are publis.ed in various &orms by a number o& organizations.
,.ese publications are use&ul as re&erences &or comparison. :asically t.e &ollo?ing types
o& in&ormation are availableD
(atalogs o& vendorsH data on important &eatures and speci&ications relating to t.eir
products &or ?.ic. cost !uotations are eit.er publis.ed or can be obtained. 2
maBor source o& vendorsH in&ormation &or building products is #weets> $atalog
publis.ed by 4c6ra?</ill $n&ormation ;ystems (ompany.
*eriodicals containing construction cost data and indices. One source o& suc.
in&ormation is ENR t.e 4c6ra?</ill (onstruction Aee0ly ?.ic. contains
eItensive cost data including !uarterly cost reports. $ost Engineering a Bournal o&
t.e 2merican ;ociety o& (ost Engineers also publis.es use&ul cost data
periodically.
(ommercial cost re&erence manuals &or estimating guides. 2n eIample is t.e
/uilding $onstruction $ost &ata publis.ed annually by 3.;. 4eans (ompany
$nc. ?.ic. contains unit prices on building construction items. &odge 'anual for
/uilding $onstruction publis.ed by 4c6ra?</ill provides similar in&ormation.
1igests o& actual proBect costs. ,.e &odge &igest of /uilding $osts and
#pecifications provides descriptions o& design &eatures and costs o& actual proBects
by building type. Once a ?ee0 ENR publis.es t.e bid prices o& a proBect c.osen
&rom all types o& construction proBects.
/istorical cost data must be used cautiously. (.anges in relative prices may .ave
substantial impacts on construction costs ?.ic. .ave increased in relative price.
Un&ortunately systematic c.anges over a long period o& time &or suc. &actors are di&&icult
to predict. Errors in analysis also serve to introduce uncertainty into cost estimates. $t is
di&&icult o& course to &oresee all t.e problems ?.ic. may occur in construction and
operation o& &acilities. ,.ere is some evidence t.at estimates o& construction and
operating costs .ave tended to persistently understate t.e actual costs. ,.is is due to t.e
e&&ects o& greater t.an anticipated increases in costs c.anges in design during t.e
construction process or over optimism.
;ince t.e &uture prices o& constructed &acilities are in&luenced by many uncertain &actors
it is important to recognize t.at t.is ris0 must be borne to some degree by all parties
involved i.e. t.e o?ner t.e design pro&essionals t.e construction contractors and t.e
&inancing institution. $t is to t.e best interest o& all parties t.at t.e ris0 s.aring sc.eme
implicit in t.e designUconstruct process adopted by t.e o?ner is &ully understood by all.
A.en in&lation adBustment provisions .ave very di&&erent ris0 implications to various
parties t.e price level c.anges ?ill also be treated di&&erently &or various situations
..3 Cost $ndices
;ince .istorical cost data are o&ten used in ma0ing cost estimates it is important to note
t.e price level c.anges over time. ,rends in price c.anges can also serve as a basis &or
&orecasting &uture costs. ,.e input price indices o& labor andUor material re&lect t.e price
level c.anges o& suc. input components o& constructionO t.e output price indices ?.ere
available re&lect t.e price level c.anges o& t.e completed &acilities t.us to some degree
also measuring t.e productivity o& construction.
2 price indeI is a ?eig.ted aggregate measure o& constant !uantities o& goods and
services selected &or t.e pac0age. ,.e price indeI at a subse!uent year represents a
proportionate c.ange in t.e same ?eig.ted aggregate measure because o& c.anges in
prices. Let l
t
be t.e price indeI in year t and l
t_1
be t.e price indeI in t.e &ollo?ing year
t_1. ,.en t.e percent c.ange in price indeI &or year t_1 isD
".14
or
".1"
$& t.e price indeI at t.e base year t]+ is set at a value o& 1++ t.en t.e price indices l
1

l
2
...l
n
&or t.e subse!uent years t]12...n can be computed successively &rom c.anges in t.e
total price c.arged &or t.e pac0age o& goods measured in t.e indeI.
,.e best<0no?n indicators o& general price c.anges are t.e 6ross 1omestic *roduct
M61*N de&lators compiled periodically by t.e U.;. 1epartment o& (ommerce and t.e
consumer price indeI M(*$N compiled periodically by t.e U.;. 1epartment o& Labor.
,.ey are ?idely used as broad gauges o& t.e c.anges in production costs and in consumer
prices &or essential goods and services. ;pecial price indices related to construction are
also collected by industry sources since some input &actors &or construction and t.e
outputs &rom construction may disproportionately outpace or &all be.ind t.e general price
indices. EIamples o& special price indices &or construction input &actors are t.e ?.olesale
:uilding 4aterial *rice and :uilding ,rades Union Aages bot. compiled by t.e U.;.
1epartment o& Labor. $n addition t.e construction cost indeI and t.e building cost indeI
are reported periodically in t.e Engineering News-Record <ENR=. :ot. E53 cost indices
measure t.e e&&ects o& ?age rate and material price trends but t.ey are not adBusted &or
productivity e&&iciency competitive conditions or tec.nology c.anges. (onse!uently
all t.ese indices measure only t.e price c.anges o& respective construction input factors
as represented by constant !uantities o& material andUor labor. On t.e ot.er .and t.e
price indices o& various types o& completed &acilities re&lect t.e price c.anges o&
construction output including all pertinent &actors in t.e construction process. ,.e
building construction output indices compiled by ,urner (onstruction (ompany and
/andy<A.itman Utilities are compiled in t.e U.;. #tatistical ")stracts publis.ed eac.
year.
Kigure "<% and ,able "<) s.o? a variety o& United ;tates indices including t.e 6ross
5ational *roduct M65*N price de&lator t.e E53 building indeI t.e /andy A.itman
Utilities :uildings and t.e ,urner (onstruction (ompany :uilding (ost $ndeI &rom
1)%+ to 1))' using 1))2 as t.e base year ?it. an indeI o& 1++.
TA<"& .)4 ;ummary o& $nput and Output *rice $ndices 1)%+<1))'
9ear 1)%+ 1)%" 1)'+ 1)'" 1))+ 1))3 1))4 1))" 1))# 1))% 1))'
,urner (onstruction <
:uildings 2' 44 #1 '3 )' 1+2 1+" 1+) 112 11% 122
E53 < :uildings 2' 44 #'." '".% )".4 1+".% 1+).' 1+).' 113 11'.% 11).%
U; (ensus <
(omposite 2' 44 #'.# '2.) )'." 1+3.% 1+' 112." 11" 11'.% 122
/andy<A.itman
*ublic Utility 31 "4 %' )+ 1+1 1+" 112 11" 11' 122 123
65* 1e&lator 3" 4) %+ )2 )4 1+3 1+" 1+' 11+ 113 114
5oteD $ndeI ] 1++ in base year o& 1))2.


(igure .)1 ,rends &or U; price indices.
(igure .)3 *rice and cost indices &or construction.
;ince construction costs vary in di&&erent regions o& t.e United ;tates and in all parts o&
t.e ?orld locational indices s.o?ing t.e construction cost at a speci&ic location relative
to t.e national trend are use&ul &or cost estimation. E53 publis.es periodically t.e indices
o& local construction costs at t.e maBor cities in di&&erent regions o& t.e United ;tates as
percentages o& local to national costs.
A.en t.e in&lation rate is relatively small i.e. less t.an 1+V it is convenient to select a
single price indeI to measure t.e in&lationary conditions in construction and t.us to deal
only ?it. a single set o& price c.ange rates in &orecasting. Let B
t
be t.e price c.ange rate
in year t_1 over t.e price in year t. $& t.e base year is denoted as year + Mt]+N t.en t.e
price c.ange rates at years 12...t are B
1
B
2
...B
t
respectively. Let 2
t
be t.e cost in year t
eIpressed in base<year dollars and 2
t
H be t.e cost in year t eIpressed in t.en<current
dollars. ,.enD
".1#
(onversely
".1%
$& t.e prices o& certain 0ey items a&&ecting t.e estimates o& &uture bene&its and costs are
eIpected to escalate &aster t.an t.e general price levels it may become necessary to
consider t.e di&&erential price c.anges over and above t.e general in&lation rate. Kor
eIample during t.e period bet?een 1)%3 t.roug. 1)%) it ?as customary to assume t.at
&uel costs ?ould escalate &aster t.an t.e general price levels. Ait. .indsig.t in 1)'3 t.e
assumption &or estimating costs over many years ?ould .ave been di&&erent. :ecause o&
t.e uncertainty in t.e &uture t.e use o& di&&erential in&lation rates &or special items s.ould
be Budicious.
Kuture &orecasts o& costs ?ill be uncertainD t.e actual eIpenses may be muc. lo?er or
muc. .ig.er t.an t.ose &orecasted. ,.is uncertainty arises &rom tec.nological c.anges
c.anges in relative prices inaccurate &orecasts o& underlying socioeconomic conditions
analytical errors and ot.er &actors. Kor t.e purpose o& &orecasting it is o&ten su&&icient to
proBect t.e trend o& &uture prices by using a constant rate B &or price c.anges in eac. year
over a period o& t years t.en
".1'
and
".1)
Estimation o& t.e &uture rate increase B is not at all straig.t&or?ard. 2 simple eIpedient is
to assume t.at &uture in&lation ?ill continue at t.e rate o& t.e previous periodD
".2+
2 longer term perspective mig.t use t.e average increase over a .orizon o& n past
periodsD
".21
4ore sop.isticated &orecasting models to predict &uture cost increases include corrections
&or items suc. as economic cycles and tec.nology c.anges.
&9ample .)1!* Changes in highway and >uilding costs
,able "<1+ s.o?s t.e c.ange o& standard .ig.?ay costs &rom 1)4+ to 1))+ and ,able "<
11 s.o?s t.e c.ange o& residential building costs &rom 1)%+ to 1))+. $n eac. case t.e
rate o& cost increase ?as substantially above t.e rate o& in&lation in t.e decade o& t.e
1)%+s.. $ndeed t.e real cost increase bet?een 1)%+ and 1)'+ ?as in eIcess o& t.ree
percent per year in bot. cases. /o?ever t.ese data also s.o? some cause &or optimism.
Kor t.e case o& t.e standard .ig.?ay real cost decreases too0 place in t.e period &rom
l)%+ to l))+. Un&ortunately comparable indices o& outputs are not being compiled on a
nation?ide basis &or ot.er types o& construction.
TA<"& .)15 (omparison o& ;tandard /ig.?ay (osts 1)4+<1))+
9ear
;tandard
.ig.?ay cost
M1)%2]1++N
*rice de&lator
M1)%2]1++N
;tandard .ig.?ay
real cost
M1)%2]1++N
*ercentage
c.ange
per year
1)4+ 2# 2) )+
1)"+ 4' "4 ') <+.1V
1)#+ "' #) '4 <+.#V
1)%+ )1 )2 )) _1.'V
1)'+ 2"" 1%) 143 _4.4V
1))+ 2'4 24% 11" <2.'V
;ourceD #tatistical ")stract of the 0nited #tates4 61* de&lator is used &or t.e price
de&lator indeI.

TA<"& .)11 (omparison o& 3esidential :uilding (osts 1)%+<1))+
year
;tandard
residence cost
M1)%2]1++N
*rice de&lator
M1)%2]1++N
;tandard residence
real cost
M1)%2]1++N
*ercentage
c.ange
per year
1)%+ %% )2 %4
1)'+ 2+3 1%) )) _3.4V
1))+ 2'% 24% 11# _1.%V
;ourceD #tatistical ")stract of the 0nited #tates4 65* de&lator is used &or t.e price
de&lator indeI.

..4 Applications of Cost $ndices to &stimating
$n t.e screening estimate o& a ne? &acility a single parameter is o&ten used to describe a
cost &unction. Kor eIample t.e cost o& a po?er plant is a &unction o& electricity
generating capacity eIpressed in mega?atts or t.e cost o& a se?age treatment plant as a
&unction o& ?aste &lo? eIpressed in million gallons per day.
,.e general conditions &or t.e application o& t.e single parameter cost &unction &or
screening estimates areD
1. EIclude special local conditions in .istorical data
2. 1etermine ne? &acility cost on basis o& speci&ied size or capacity Musing t.e
met.ods described in ;ections ".3 to ".#N
3. 2dBust &or in&lation indeI
4. 2dBust &or local indeI o& construction costs
". 2dBust &or di&&erent regulatory constraints
#. 2dBust &or local &actors &or t.e ne? &acility
;ome o& t.ese adBustments may be done using compiled indices ?.ereas ot.ers may
re!uire &ield investigation and considerable pro&essional Budgment to re&lect di&&erences
bet?een a given proBect and standard proBects per&ormed in t.e past.
&9ample .)1+* /creening estimate for a refinery
,.e total construction cost o& a re&inery ?it. a production capacity o& 2+++++ bblUday in
6ary $ndiana completed in 2++1 ?as G1++ million. $t is proposed t.at a similar re&inery
?it. a production capacity o& 3+++++ bblUday be built in Los 2ngeles (ali&ornia &or
completion in 2++3. Kor t.e additional in&ormation given belo? ma0e an order o&
magnitude estimate o& t.e cost o& t.e proposed plant.
1. $n t.e total construction cost &or t.e 6ary $ndiana plant t.ere ?as an item o& G"
million &or site preparation ?.ic. is not typical &or ot.er plants.
2. ,.e variation o& sizes o& t.e re&ineries can be approIimated by t.e eIponential
rule E!uation M".4N ?it. m ] +.#.
3. ,.e in&lation rate is eIpected to be 'V per year &rom 1))) to 2++3.
4. ,.e location indeI ?as +.)2 &or 6ary $ndiana and 1.14 &or Los 2ngeles in 1))).
,.ese indices are deemed to be appropriate &or adBusting t.e costs bet?een t.ese
t?o cities.
". 5e? air pollution e!uipment &or t.e L2 plant costs G% million in 2++3 dollars Mnot
re!uired in t.e 6ary plantN.
#. ,.e contingency cost due to inclement ?eat.er delay ?ill be reduced by t.e
amount o& 1V o& total construction cost because o& t.e &avorable climate in L2
Mcompared to 6aryN.
On t.e basis o& t.e above conditions t.e estimate &or t.e ne? proBect may be obtained as
&ollo?sD
1. ,ypical cost eIcluding special item at 6ary $5 is
G1++ million < G" million ] G )" million
2. 2dBustment &or capacity based on t.e eIponential la? yields
MG)"NM3+++++U2+++++N
+.#
] M)"NM1."N
+.#
] G121.2 million
3. 2dBustment &or in&lation leads to t.e cost in 2++3 dollars as
MG121.2NM1.+'N
4
] G1#4.# million
4. 2dBustment &or location indeI gives
MG1#4.#NM1.14U+.)2N ] G2+4.# million
". 2dBustment &or ne? pollution e!uipment at t.e L2 plant gives
G2+4.# _ G% ] G211.# million
#. 3eduction in contingency cost yields
MG211.#NM1<+.+1N ] G2+)." million
;ince t.ere is no adBustment &or t.e cost o& construction &inancing t.e order o& magnitude
estimate &or t.e ne? proBect is G2+)." million.
&9ample .)1-* Conceptual estimate for a chemical processing plant
$n ma0ing a preliminary estimate o& a c.emical processing plant several maBor types o&
e!uipment are t.e most signi&icant parameters in a&&ecting t.e installation cost. ,.e cost
o& piping and ot.er ancillary items &or eac. type o& e!uipment can o&ten be eIpressed as a
percentage o& t.at type o& e!uipment &or a given capacity. ,.e standard costs &or t.e
maBor e!uipment types &or t?o plants ?it. di&&erent daily production capacities are as
s.o?n in ,able "<12. $t .as been establis.ed t.at t.e installation cost o& all e!uipment &or
a plant ?it. daily production capacity bet?een 1+++++ bbl and 4+++++ bbl can best be
estimated by using linear interpolation o& t.e standard data.
TA<"& .)1! (ost 1ata &or E!uipment and 2ncillary $tems
E!uipment
type
E!uipment (ost MG1+++N
(ost o& ancillary items
as V o& e!uipment cost MG1+++N
1+++++ bbl 4+++++ bbl 1+++++ bbl 4+++++ bbl
Kurnace 3+++ 1++++ 4+V 3+V
,o?er 2+++ #+++ 4"V 3"V
1rum 1"++ "+++ "+V 4+V
*ump etc. 1+++ 4+++ #+V "+V
2 ne? c.emical processing plant ?it. a daily production capacity o& 2+++++ bbl is to be
constructed in 4emp.is ,5 in &our years. 1etermine t.e total preliminary cost estimate
o& t.e plant including t.e building and t.e e!uipment on t.e &ollo?ing basisD
1. ,.e installation cost &or e!uipment ?as based on linear interpolation &rom ,able
"<12 and adBusted &or in&lation &or t.e intervening &our years. Ae eIpect in&lation
in t.e &our years to be similar to t.e period 1))+<1))4 and ?e ?ill use t.e 65*
1e&lator indeI.
2. ,.e location indeI &or e!uipment installation is +.)" &or 4emp.is ,5 in
comparison ?it. t.e standard cost.
3. 2n additional cost o& G"+++++ ?as re!uired &or t.e local conditions in 4emp.is
,5.
,.e solution o& t.is problem can be carried out according to t.e steps as outlined in t.e
problem statementD
,.e costs o& t.e e!uipment and ancillary items &or a plant ?it. a capacity o&
2+++++ bbl can be estimated by linear interpolation o& t.e data in ,able "<12 and
t.e results are s.o?n in ,able "<13.
TA<"& .)1+ 3esults o& Linear $nterpolation &or an Estimation EIample
E!uipment
type
E!uipment (ost
Min G1+++N
*ercentage &or
ancillary items
Kurnace
G3+++ _ M1U3NMG1++++<G3+++N ]
G"333
4+V < M1U3NM4+V<3+VN ]
3%V
,o?er
G2+++ _ M1U3NMG#+++<G2+++N ]
G3333
4"V < M1U3NM4"V<3"VN ]
42V
1rum
G1"++ _ M1U3NMG"+++<G1"++N ]
G2##%
"+V < M1U3NM"+V<4+VN ]
4%V
*umps etc.
G1+++ _ M1U3NMG4+++<G1+++N ]
G2+++
#+V < M1U3NM#+V<"+VN ]
"%V
1. /ence t.e total proBect cost in t.ousands o& current dollars is given by E!uation
M".'N asD
2. MG"333NM1.3%N _ MG3333NM1.42N _MG2##%NM1.4%N _ MG2+++NM1."%N ]
] G23+% _ G4%33 _ G3)2+ _ G314+ ] G 1)+++
3. ,.e corresponding cost in t.ousands o& &our year in t.e &uture dollars using
E!uation M".1#N and ,able "<) isD
MG1)1++NM1+"U)4N ] G2133"
4. ,.e total cost o& t.e proBect a&ter adBustment &or location is
M+.)"NMG2133"+++N _ G"+++++ G2+'+++++

..15 &stimate <ased on &ngineer's "ist of Iuantities
,.e engineerHs estimate is based on a list o& items and t.e associated !uantities &rom
?.ic. t.e total construction cost is derived. ,.is same list is also made available to t.e
bidders i& unit prices o& t.e items on t.e list are also solicited &rom t.e bidders. ,.us t.e
itemized costs submitted by t.e ?inning contractor may be used as t.e starting point &or
budget control.
$n general t.e progress payments to t.e contractor are based on t.e units o& ?or0
completed and t.e corresponding unit prices o& t.e ?or0 items on t.e list. /ence t.e
estimate based on t.e engineersH list o& !uantities &or various ?or0 items essentially
de&ines t.e level o& detail to ?.ic. subse!uent measures o& progress &or t.e proBect ?ill
be made.
&9ample .)1.* <id estimate >ased on engineer's list of quantities
Using t.e unit prices in t.e bid o& contractor 1 &or t.e !uantities speci&ied by t.e engineer
in ,able "<2 MEIample "<3N ?e can compute t.e total bid price o& contractor 1 &or t.e
road?ay proBect. ,.e itemized costs &or various ?or0 items as ?ell as t.e total bid price
are s.o?n in ,able "<14.
TA<"& .)1-* :id *rice o& (ontractor 1 in a /ig.?ay *roBect
$tems Unit Luantity Unit price $tem cost
4obilization ls 1 11"+++ 11"+++
3emoval berm l& '+2+ 1.++ '.+2+
Kinis. subgrade sy 12+%"++ +."+ #+3%"+
;ur&ace ditc.es l& "2" 2.++ 1+"+
EIcavation structures cy %+++ 3.++ 21+++
:ase course untreated 3U4HH ton 3#22++ 4."+ 1#2))++
Lean concrete 4HH t.ic0 sy '2+31+ 3.1+ 2"42)#1
*(( pavement 1+HH t.ic0 sy %#+1+ 1+.)+ %#)""+)
(oncrete ci 22 M2EN ls 1 2+++++ 2+++++
;mall structure cy "+ "++ 2"+++
:arrier *recast l& %)2+ 1".++ 11''++
Klat?or0 4HH t.ic0 sy %41+ 1+.++ %41++
1+HH t.ic0 sy 4241 2+.++ '4'2+
;lope protection sy 21+4 2".++ "2#++
4etal end section 1"HH ea 3) 1++ 3)++
1'HH ea 3 1"+ 4"+
*ost rig.t<o&<?ay modi&ication l& 4%++ 3.++ 141++
;alvage and relay pipe l& 1#'+ ".++ '4++
TA<"& .)1-* :id *rice o& (ontractor 1 in a /ig.?ay *roBect
$tems Unit Luantity Unit price $tem cost
Loose riprap cy 32 4+.++ 12'+
:raced posts ea "4 1++ "4++
1elineators type $ lb 133+ 12.++ 1")#+
type $$ ea 14+ 1".++ 21++
(onstructive signs &iIed s& "2#++ +.1+ "2#+
:arricades type $$$ l& 2)"++ +.2+ ")++
Aarning lig.ts day #3++ +.1+ #3+
*avement mar0ing epoIy material
:lac0 gal 4%" )+.++ 42%"+
9ello? gal %4+ )+.++ ###++
A.ite gal )'" )+.++ ''#"+
*lo?able one<?ay ?.ite ea 342 "+.++ 1%1++
,opsoil contractor &urnis.ed cy 2#+ 1+.++ 2#++
;eedling met.od 2 acr 1+3 1"+ 1"4"+
EIcelsior blan0et sy "++ 2.++ 1+++
(orrugated metal pipe 1'HH l& "'+ 2+.++ 11#++
*olyet.ylene pipe 12HH l& 22"+ 1".++ 33%"+
(atc. basin grate and &rame ea 3" 3"+ 122"+
E!ual opportunity training .r 1'+++ +.'+ 144++
6ranular bac0&ill borro? cy 2%4 1+.++ 2%4+
1rill caisson 2HI#HH l& %22 1++ %22++
Klagging .r 2++++ '.2" 1#"+++
*restressed concrete member
type $8 141HI4HH ea % 12+++ '4+++
132HI4HH ea # 11+++ ##+++
3ein&orced steel lb #3++ +.#+ 3%'+
EpoIy coated lb 122241 +."" #%232.""
;tructural steel ls 1 "+++ "+++
;ign covering s& 1# 1+.++ 1#+
type (<2 ?ood post s& )' 1".++ 14%+
24HH ea 3 1++ 3++
TA<"& .)1-* :id *rice o& (ontractor 1 in a /ig.?ay *roBect
$tems Unit Luantity Unit price $tem cost
3+HH ea 2 1++ 2++
4'HH ea 11 2++ 22++
2uIiliary s& #1 1".++ )1"
;teel post 4'HHI#+HH ea 11 "++ ""++
type 3 ?ood post s& ##) 1".++ 1++3"
24HH ea 23 1++ 23++
3+HH ea 1 1++ 1++
3#HH ea 12 1"+ 1'++
42HHI#+HH ea ' 1"+ 12++
4'HH ea % 2++ 14++
2uIiliary s& 13" 1".++ 2+2"
;teel post s& 1#1+ 4+.++ #44++
12HHI3#HH ea 2' 1++ 2'++
Koundation concrete ea #+ 3++ 1'+++
:arricade 4'HHI42HH ea 4+ 1++ 4+++
Aood post road closed l& 1++ 3+.++ 3+++
Total L1-,1!4,141...
..11 Allocation of Construction Costs Oer Time
;ince construction costs are incurred over t.e entire construction p.ase o& a proBect it is
o&ten necessary to determine t.e amounts to be spent in various periods to derive t.e cas.
&lo? pro&ile especially &or large proBects ?it. long durations. (onse!uently it is
important to eIamine t.e percentage o& ?or0 eIpected to be completed at various time
periods to ?.ic. t.e costs ?ould be c.arged. 4ore accurate estimates may be
accomplis.ed once t.e proBect is sc.eduled as described in (.apter 1+ but some roug.
estimate o& t.e cas. &lo? may be re!uired prior to t.is time.
(onsider t.e basic problem in determining t.e percentage o& ?or0 completed during
construction. One common met.od o& estimating percentage o& completion is based on
t.e amount o& money spent relative to t.e total amount budgeted &or t.e entire proBect.
,.is met.od .as t.e obvious dra?bac0 in assuming t.at t.e amount o& money spent .as
been used e&&iciently &or production. 2 more reliable met.od is based on t.e concept o&
value of work completed ?.ic. is de&ined as t.e product o& t.e budgeted labor .ours per
unit o& production and t.e actual number o& production units completed and is eIpressed
in budgeted labor .ours &or t.e ?or0 completed. ,.en t.e percentage o& completion at
any stage is t.e ratio o& t.e value o& ?or0 completed to date and t.e value o& ?or0 to be
completed &or t.e entire proBect. 3egardless o& t.e met.od o& measurement it is
in&ormative to understand t.e trend o& ?or0 progress during construction &or evaluation
and control.
$n general t.e ?or0 on a construction proBect progresses gradually &rom t.e time o&
mobilization until it reac.es a plateauO t.en t.e ?or0 slo?s do?n gradually and &inally
stops at t.e time o& completion. ,.e rate o& ?or0 done during various time periods
MeIpressed in t.e percentage o& proBect cost per unit timeN is s.o?n sc.ematically in
Kigure "<) in ?.ic. ten time periods .ave been assumed. ,.e solid line 2 represents t.e
case in ?.ic. t.e rate o& ?or0 is zero at time t ] + and increases linearly to 12."V o&
proBect cost at t ] 2 ?.ile t.e rate begins to decrease &rom 12."V at t ] ' to +V at t ] 1+.
,.e dotted line : represents t.e case o& rapid mobilization by reac.ing 12."V o& proBect
cost at t ] 1 ?.ile beginning to decrease &rom 12."V at t ] % to +V at t ] 1+. ,.e das.
line ( represents t.e case o& slo? mobilization by reac.ing 12."V o& proBect cost at t ] 3
?.ile beginning to decrease &rom 12."V at t ] ) to +V at t ] 1+.
(igure .)4* 3ate o& Aor0 *rogress over *roBect ,ime
,.e value o& ?or0 completed at a given time MeIpressed as a cumulative percentage o&
proBect costN is s.o?n sc.ematically in Kigure "<1+. $n eac. case M2 : or (N t.e value o&
?or0 completed can be represented by an J;<s.apedJ curve. ,.e e&&ects o& rapid
mobilization and slo? mobilization are indicated by t.e positions o& curves : and (
relative to curve 2 respectively.
(igure .)15* 8alue o& Aor0 (ompleted over *roBect ,ime
A.ile t.e curves s.o?n in Kigures "<) and "<1+ represent .ig.ly idealized cases t.ey do
suggest t.e latitude &or adBusting t.e sc.edules &or various activities in a proBect. A.ile
t.e rate o& ?or0 progress may be c.anged !uite drastically ?it.in a single period suc. as
t.e c.ange &rom rapid mobilization to a slo? mobilization in periods 1 2 and 3 in Kigure
"<) t.e e&&ect on t.e value o& ?or0 completed over time ?ill diminis. in signi&icance as
indicated by t.e cumulative percentages &or later periods in Kigure "<1+. ,.us
adBustment o& t.e sc.eduling o& some activities may improve t.e utilization o& labor
material and e!uipment and any delay caused by suc. adBustments &or individual
activities is not li0ely to cause problems &or t.e eventual progress to?ard t.e completion
o& a proBect.
$n addition to t.e speed o& resource mobilization anot.er important consideration is t.e
overall duration o& a proBect and t.e amount o& resources applied. 8arious strategies may
be applied to s.orten t.e overall duration o& a proBect suc. as overlapping design and
construction activities Mas described in (.apter 2N or increasing t.e pea0 amounts o& labor
and e!uipment ?or0ing on a site. /o?ever spatial managerial and tec.nical &actors ?ill
typically place a minimum limit on t.e proBect duration or cause costs to escalate ?it.
s.orter durations.
&9ample .)10* Calculation of 'alue of 7or: Completed
Krom t.e area o& ?or0 progress in Kigure "<) t.e value o& ?or0 completed at any point in
Kigure "<1+ can be derived by noting t.e area under t.e curve up to t.at point in Kigure "<
). ,.e result &or t ] + t.roug. t ] 1+ is s.o?n in ,able "<1" and plotted in Kigure "<1+.
TA<"& .)1. (alculation o& 8alue o& Aor0 (ompleted
,ime (ase 2 (ase : (ase (
+ + + +
1 3.1V #.2V 2.1V
2 12." 1'.% '.3
3 2".+ 31.2 1'.'
4 3%." 43.% 31.3
" "+.+ "#.2 43.'
# #2." #'.% "#.3
% %".+ '1.2 #'.'
' '%." )1.% '1.)
) )#.) )%.) )3.'
1+ 1++.+ 1++.+ 1++.+
..1! Computer Aided Cost &stimation
5umerous computer aided cost estimation so&t?are systems are no? available. ,.ese
range in sop.istication &rom simple spreads.eet calculation so&t?are to integrated
systems involving design and price negotiation over t.e $nternet. A.ile t.is so&t?are
involves costs &or purc.ase maintenance training and computer .ard?are some
signi&icant e&&iciencies o&ten result. $n particular cost estimates may be prepared more
rapidly and ?it. less e&&ort.
;ome o& t.e common &eatures o& computer aided cost estimation so&t?are includeD
1atabases &or unit cost items suc. as ?or0er ?age rates e!uipment rental or
material prices. ,.ese databases can be used &or any cost estimate re!uired. $&
t.ese rates c.ange cost estimates can be rapidly re<computed a&ter t.e databases
are updated.
1atabases o& eIpected productivity &or di&&erent components types e!uipment
and construction processes.
$mport utilities &rom computer aided design so&t?are &or automatic !uantity<ta0e<
o&& o& components. 2lternatively special user inter&aces may eIist to enter
geometric descriptions o& components to allo? automatic !uantity<ta0e<o&&.
EIport utilities to send estimates to cost control and sc.eduling so&t?are. ,.is is
very .elp&ul to begin t.e management o& costs during construction.
8ersion control to allo? simulation o& di&&erent construction processes or design
c.anges &or t.e purpose o& trac0ing c.anges in eIpected costs.
*rovisions &or manual revie? over<ride and editing o& any cost element resulting
&rom t.e cost estimation system
KleIible reporting &ormats including provisions &or electronic reporting rat.er
t.an simply printing cost estimates on paper.
2rc.ives o& past proBects to allo? rapid cost<estimate updating or modi&ication &or
similar designs.
2 typical process &or developing a cost estimate using one o& t.ese systems ?ould
includeD
1. $& a similar design .as already been estimated or eIists in t.e company arc.ive
t.e old proBect in&ormation is retrieved.
2. 2 cost engineer modi&ies adds or deletes components in t.e proBect in&ormation
set. $& a similar proBect eIists many o& t.e components may .ave &e? or no
updates t.ereby saving time.
3. 2 cost estimate is calculated using t.e unit cost met.od o& estimation.
*roductivities and unit prices are retrieved &rom t.e system databases. ,.us t.e
latest price in&ormation is used &or t.e cost estimate.
4. ,.e cost estimation is summarized and revie?ed &or any errors.
..1+ &stimation of Operating Costs
$n order to analyze t.e li&e cycle costs o& a proposed &acility it is necessary to estimate
t.e operation and maintenance costs over time a&ter t.e start up o& t.e &acility. ,.e stream
o& operating costs over t.e li&e o& t.e &acility depends upon subse!uent maintenance
policies and &acility use. $n particular t.e magnitude o& routine maintenance costs ?ill be
reduced i& t.e &acility undergoes periodic repairs and re.abilitation at periodic intervals.
;ince t.e tradeo&& bet?een t.e capital cost and t.e operating cost is an essential part o&
t.e economic evaluation o& a &acility t.e operating cost is vie?ed not as a separate entity
but as a part o& t.e larger parcel o& li&e cycle cost at t.e planning and design stage. ,.e
tec.ni!ues o& estimating li&e cycle costs are similar to t.ose used &or estimating capital
costs including empirical cost &unctions and t.e unit cost met.od o& estimating t.e labor
material and e!uipment costs. /o?ever it is t.e interaction o& t.e operating and capital
costs ?.ic. deserve special attention.
2s suggested earlier in t.e discussion o& t.e eIponential rule &or estimating t.e value o&
t.e cost eIponent may in&luence t.e decision ?.et.er eItra capacity s.ould be built to
accommodate &uture gro?t.. ;imilarly t.e economy o& scale may also in&luence t.e
decision on re.abilitation at a given time. 2s t.e re.abilitation ?or0 becomes eItensive
it becomes a capital proBect ?it. all t.e implications o& its o?n li&e cycle. /ence t.e cost
estimation o& a re.abilitation proBect may also involve capital and operating costs.
A.ile de&erring t.e discussion o& t.e economic evaluation o& constructed &acilities to
(.apter # it is su&&icient to point out t.at t.e stream o& operating costs over time
represents a series o& costs at di&&erent time periods ?.ic. .ave di&&erent values ?it.
respect to t.e present. (onse!uently t.e cost data at di&&erent time periods must be
converted to a common base line i& meaning&ul comparison is desired.
&9ample .)11* ,aintenance cost on a roadway R#S
4aintenance costs &or constructed road?ays tend to increase ?it. bot. age and use o& t.e
&acility. 2s an eIample t.e &ollo?ing empirical model ?as estimated &or maintenance
eIpenditures on sections o& t.e O.io ,urnpi0eD
( ] ")# _ +.++1) 8 _ 21.% 2
?.ere ( is t.e annual cost o& routine maintenance per lane<mile Min 1)#% dollarsN 8 is
t.e volume o& tra&&ic on t.e road?ay Mmeasured in e!uivalent standard aIle loads E;2L
so t.at a .eavy truc0 is represented as e!uivalent to many automobilesN and 2 is t.e age
o& t.e pavement in years since t.e last resur&acing. 2ccording to t.is model routine
maintenance costs ?ill increase eac. year as t.e pavement service deteriorates. $n
addition maintenance costs increase ?it. additional pavement stress due to increased
tra&&ic or to .eavier aIle loads as re&lected in t.e variable 8.
Kor eIample &or 8 ] "++3++ E;2L and 2 ] " years t.e annual cost o& routine
maintenance per lane<mile is estimated to beD
( ] ")# _ M+.++1)NM"++3++N _ M21.%NM"N
] ")# _ )"+." _ 1+'." ] 1#"" Min 1)#% dollarsN
&9ample .)13* Time stream of costs oer the life of a roadway R%S
,.e time stream o& costs over t.e li&e o& a road?ay depends upon t.e intervals at ?.ic.
re.abilitation is carried out. $& t.e re.abilitation strategy and t.e tra&&ic are 0no?n t.e
time stream o& costs can be estimated.
Using a li&e cycle model ?.ic. predicts t.e economic li&e o& .ig.?ay pavement on t.e
basis o& t.e e&&ects o& tra&&ic and ot.er &actors an optimal sc.edule &or re.abilitation can
be developed. Kor eIample a time stream o& costs and resur&acing proBects &or one
pavement section is s.o?n in Kigure "<11. 2s described in t.e previous eIample t.e
routine maintenance costs increase as t.e pavement ages but decline a&ter eac. ne?
resur&acing. 2s t.e pavement continues to age resur&acing becomes more &re!uent until
t.e road?ay is completely reconstructed at t.e end o& 3" years.
(igure .)11* ,ime ;tream o& (osts over t.e Li&e o& a /ig.?ay *avement
..1- 2eferences
1. 2.uBa /.5. and A.P. (ampbell Estimating3 7rom $oncept to $ompletion
*rentice</all $nc. Engle?ood (li&&s 5P 1)'%.
2. (lar0 K.1. and 2.:. Lorenzoni "pplied $ost Engineering 4arcel 1e00er $nc.
5e? 9or0 1)%'.
3. (lar0 P.E. #tructural $oncrete $ost Estimating 4c6ra?</ill $nc. 5e? 9or0
1)'3.
4. 1ie0mann P.3. J*robabilistic EstimatingD 4at.ematics and 2pplicationsJ "#$E
2ournal of $onstruction Engineering and 'anagement 8ol. 1+) 1)'3 pp. 2)%<
3+'.
". /ump.reys Q.Q. Med.N !roject and $ost Engineers> (and)ook Msponsored by
2merican 2ssociation o& (ost EngineersN 2nd Ed. 4arcel 1e00er $nc. 5e?
9or0 1)'4.
#. 4aevis 2.(. J(onstruction (ost (ontrol by t.e O?nersJ "#$E 2ournal of the
$onstruction &ivision 8ol. 1+# 1)'+ pp. 43"<44#.
%. Ao.l 4. and (. /endric0son ,ransportation -nvestment and !ricing !rinciples%
Po.n Ailey W ;ons 5e? 9or0 1)'4.
..1. Pro>lems
1. ;uppose t.at t.e grouting met.od described in EIample "<2 is used to provide a
grouting seal beneat. anot.er land&ill o& 12 acres. ,.e grout line is eIpected to be
bet?een 4." and "." &eet t.ic0ness. ,.e voids in t.e soil layer are bet?een 2"V to
3"V. Using t.e same unit cost data Min 1)%' dollarsN &ind t.e range o& costs in a
screening estimate &or t.e grouting proBect.
2. ,o avoid submerging part o& U.;. 3oute 4+ sout. and east o& ;alt La0e (ity due
to t.e construction o& t.e Pardinal 1am and 3eservoir 22 miles o& .ig.?ay ?ere
relocated to t.e ?est around t.e site o& t.e &uture reservoir. ,.ree separate
contracts ?ere let including one covering 1+ miles o& t.e ?or0 ?.ic. .ad an
engineerHs estimate o& G34+)""4". ,.e bids ?ere submitted on Puly 21 1)'% and
t.e completion date o& t.e proBect under t.e contract ?as 2ugust 1" 1)'). M;ee
ENR October ' 1)'% p. 34N. ,.e t.ree lo?est bids ?ereD
1N A.A. (lyde W (o. ;pringville Uta. G213'4)1)
2N ;letten (onstruction company 6reat Kalls 4ontana
3N 6ilbert Aestern (orporation ;alt La0e city Uta.
G2#%+1+1'
G3+')#2+3
3. Kind t.e percentage o& eac. o& t.ese bidders belo? t.e engineerHs cost estimate.
4. $n ma0ing a screening estimate o& an industrial plant &or t.e production o&
batteries an empirical &ormula based on data o& a similar buildings completed
be&ore 1)'% ?as proposedD
( ] M1#+++NML _ "++++N
1U2
?.ere L is t.e daily production capacity o& batteries and ( is t.e cost o& t.e
building in 1)'% dollars. $& a similar plant is planned &or a daily production
capacity o& 2+++++ batteries &ind t.e screening estimate o& t.e building in 1)'%
dollars.
". Kor t.e cost &actor Q ] G4#+++ Min 1)#' dollarsN and m ] +.#% &or an aerated
lagoon basin o& a ?ater treatment plant in ,able "<4 MEIample "<#N &ind t.e
estimated cost o& a proposed ne? plant ?it. a similar treatment process .aving a
capacity o& 4'+ million gallons Min 1)#' dollarsN. $& anot.er ne? plant ?as
estimated to cost G1#++++ by using t.e same eIponential rule ?.at ?ould be t.e
proposed capacity o& t.at plantX
#. Using t.e cost data in Kigure "<" MEIample "<11N &ind t.e total cost including
over.ead and pro&it o& eIcavating )++++ cuyd. o& bul0 material using a bac0.oe
o& 1." cuyd. capacity &or a detailed estimate. 2ssume t.at t.e eIcavated material
?ill be loaded onto truc0s &or disposal.
%. ,.e basic costs Mlabor material and e!uipmentN &or various elements o& a
construction proBect are given as &ollo?sD
EIcavation
;ubgrade
:ase course
(oncrete pavement
,otal
G24++++
G1+++++
G42++++
G#4++++
G14+++++
'. 2ssuming t.at &ield supervision cost is 1+V o& t.e basic cost and t.e general
o&&ice over.ead is "V o& t.e direct costs Msum o& t.e basic costs and &ield
supervision costN &ind t.e prorated &ield supervision costs general o&&ice
over.ead costs and total costs &or t.e various elements o& t.e proBect.
). $n ma0ing a preliminary estimate o& a c.emical processing plant several maBor
types o& e!uipment are t.e most signi&icant components in a&&ecting t.e
installation cost. ,.e cost o& piping and ot.er ancillary items &or eac. type o&
e!uipment can o&ten be eIpressed as a percentage o& t.at type o& e!uipment &or a
given capacity. ,.e standard costs &or t.e maBor e!uipment types &or t?o plants
?it. di&&erent daily production capacities are as s.o?n in ,able "<1#. $t .as been
establis.ed t.at t.e installation cost o& all e!uipment &or a plant ?it. daily
production capacity bet?een 1"++++ bbl and #+++++ bbl can best be estimated
by using liner interpolation o& t.e standard data. 2 ne? c.emical processing plant
?it. a daily production capacity o& 4+++++ bbl is being planned. 2ssuming t.at
all ot.er &actors remain t.e same estimate t.e cost o& t.e ne? plant.
Ta>le .)10
E!uipment type
E!uipment cost MG1+++N Kactor &or ancillary items
1"++++ bbl #+++++ bbl 1"++++ bbl #+++++ bbl
Kurnace
,o?er
1rum
*umps etc.
G3+++
2+++
1"++
1+++
G1++++
#+++
"+++
4+++
+.32
+.42
+.42
+."4
+.24
+.3#
+.32
+.42
1+. ,.e total construction cost o& a re&inery ?it. a production capacity o& 1+++++
bblUday in (aracas 8enezuela completed in 1)%% ?as G4+ million. $t ?as
proposed t.at a similar re&inery ?it. a production capacity o& G1#++++ bblUday be
built in 5e? Orleans L2 &or completion in 1)'+. Kor t.e additional in&ormation
given belo? ma0e a screening estimate o& t.e cost o& t.e proposed plant.
1. $n t.e total construction cost &or t.e (aracus 8enezuela plant t.ere ?as
an item o& G2 million &or site preparation and travel ?.ic. is not typical
&or similar plants.
2. ,.e variation o& sizes o& t.e re&ineries can be approIimated by t.e
eIponential la? ?it. m ] +.#.
3. ,.e in&lation rate in U.;. dollars ?as approIimately )V per year &rom
1)%% to 1)'+.
4. 2n adBustment &actor o& 1.4+ ?as suggested &or t.e proBect to account &or
t.e increase o& labor cost &rom (aracas 8enezuela to 5e? Orleans L2.
". 5e? air pollution e!uipment &or t.e 5e? Orleans L2 plant cost G4
million in 1)'+ dollars Mnot re!uired &or t.e (aracas plantN.
#. ,.e site condition at 5e? Orleans re!uired special piling &oundation
?.ic. cost G2 million in 1)'+ dollars.
11. ,.e total cost o& a se?age treatment plant ?it. a capacity o& "+ million gallons
per day completed 1)'1 &or a ne? to?n in (olorado ?as G4." million. $t ?as
proposed t.at a similar treatment plant ?it. a capacity o& '+ million gallons per
day be built in anot.er to?n in 5e? Persey &or completion in 1)'". Kor additional
in&ormation given belo? ma0e a screening estimate o& t.e cost o& t.e proposed
plant.
1. $n t.e total construction cost in (olorado an item o& G3+++++ &or site
preparation is not typical &or similar plants.
2. ,.e variation o& sizes &or t.is type o& treatment plants can be
approIimated by t.e eIponential la? ?it. m ] +.".
3. ,.e in&lation rate ?as approIimately "V per year &rom 1)'1 to 1)'".
4. ,.e locational indices o& (olorado and 5e? Persey areas are +.)" and
1.1+ respectively against t.e national average o& 1.++.
". ,.e installation o& a special e!uipment to satis&y t.e ne? environmental
standard cost an eItra G2+++++ in 1)'" dollar &or t.e 5e? Persey plant.
#. ,.e site condition in 5e? Persey re!uired special &oundation ?.ic. cost
G"++++ in 1)'" dollars.
12. Using t.e ENR building cost indeI estimate t.e 1)'" cost o& t.e grouting seal on
a land&ill described in EIample "<2 including t.e most li0ely estimate and t.e
range o& possible cost.
13. Using t.e unit prices in t.e bid o& contractor 2 &or t.e !uantities speci&ied by t.e
engineer in ,able "<2 MEIample "<3N compute t.e total bid price o& contractor 2
&or t.e road?ay proBect including t.e eIpenditure on eac. item o& ?or0.
14. ,.e rate o& ?or0 progress in percent o& completion per period o& a construction
proBect is s.o?n in Kigure "<12 in ?.ic. 13 time periods .ave been assumed. ,.e
cases 2 : and ( represent t.e normal mobilization time rapid mobilization and
slo? mobilization &or t.e proBect respectively. (alculate t.e value o& ?or0
completed in cumulative percentage &or periods 1 t.roug. 13 &or eac. o& t.e cases
2 : and (. 2lso plot t.e volume o& ?or0 completed versus time &or t.ese cases.
(igure .)1!
1". ,.e rate o& ?or0 progress in percent o& completion per period o& a construction
proBect is s.o?n in Kigure "<13 in ?.ic. 1+ time periods .ave been assumed. ,.e
cases 2 : and ( represent t.e rapid mobilization time normal mobilization and
slo? mobilization &or t.e proBect respectively. (alculate t.e value o& ?or0
completed in cumulative percentage &or periods 1 t.roug. 1+ &or eac. o& t.e cases
2 : and (. 2lso plot t.e volume o& ?or0 completed versus time &or t.ese cases.
(igure .)1+
1#. ;uppose t.at t.e empirical model &or estimating annual cost o& routine
maintenance in EIample "<1% is applicable to sections o& t.e *ennsylvania
,urnpi0e in 1)'" i& t.e ENR building cost indeI is applied to in&late t.e 1)#%
dollars. Estimate t.e annual cost o& maintenance per lane<mile o& t.e turnpi0e &or
?.ic. t.e tra&&ic volume on t.e road?ay is %"++++ E;2L and t.e age o& t.e
pavement is 4 years in 1)'".
1%. ,.e initial construction cost &or an electric ro?er line is 0no?n to be a &unction o&
t.e cross<sectional area 2 Min cm
2
N and t.e lengt. L Min 0ilometersN. Let (
1
be t.e
unit cost o& construction Min dollars per cm
3
N. ,.en t.e initial construction cost *
Min dollarsN is given by
! ? $
1
".<1
@
=
,.e annual operating cost o& t.e po?er line is assumed to be measured by t.e
po?er loss. ,.e po?er loss ; Min 0?.N is 0no?n to be
?.ere P is t.e electric current in amperes 3 is t.e resistivity in o.m<centimeters.
Let (
2
be t.e unit operating cost Min dollars per 0?.N. ,.en t.e annual operating
cost U Min dollarsN is given by
;uppose t.at t.e po?er line is eIpected to last n years and t.e li&e cycle cost , o&
t.e po?er line is e!ual toD
, ] * _ UQ
?.ere Q is a discount &actor depending on t.e use&ul li&e cycle n and t.e discount
rate i Mto be eIplained in (.apter #N. $n designing t.e po?er line all !uantities are
assumed to be 0no?n eIcept 2 ?.ic. is to be determined. $& t.e o?ner ?ants to
minimize t.e li&e cycle cost &ind t.e best cross<sectional area 2 in terms o& t.e
0no?n !uantities.
..10 (ootnotes
1. ,.is eIample ?as adapted ?it. permission &rom a paper JKorecasting $ndustry
3esourcesJ presented by 2.3. (rosby at t.e $nstitution o& (.emical Engineers in
London 5ovember 4 1)'1.
2. ,.is eIample is adapted &rom a cost estimate in 2.L. ,olman 2.*. :allestero A.A.
:ec0 and 6./. Emric. 5uidance 'anual for 'inimi+ing !ollution from 1aste &isposal
#ites% 4unicipal Environmental 3esearc. Laboratory U.;. Environmental *rotection
2gency (incinatti O.io 1)%'.
3. ;ee JUta. $nterstate Korges OnJ ENR Puly 2 1)'% p. 3).
4. ,.is and t.e neIt eIample .ave been adapted &rom *.4. :ert.oueI JEvaluating
Economy o& ;caleJ 2ournal of the 1ater !ollution $ontrol 7ederation 8ol. 44 5o. 11
5ovember 1)%2 pp. 2111<211'.
". ;ee /.,. Po.nson and 3.;. Qaplan Relevance .ost3 ,he Rise and 7all of 'anagement
"ccounting% /arvard :usiness ;c.ool *ress :oston 42 1)'% p. 1'".
#. ,.is eIample is adapted &rom 4c5eil ;. and (. /endric0son J2 ;tatistical 4odel o&
*avement 4aintenance EIpenditureJ ,ransportation Research Record 5o. '4# 1)'2
pp. %1<%#.
%. ,.is eIample is adapted &rom ;. 4c5eil ,hree #tatistical 'odels of Road
'anagement /ased on ,urnpike &ata% 4.;. ,.esis (arnegie<4ellon University
*ittsburg. *2 1)'1.
0. &conomic &aluation of (acility
$nestments
0.1 Pro%ect "ife Cycle and &conomic (easi>ility
Kacility investment decisions represent maBor commitments o& corporate resources and
.ave serious conse!uences on t.e pro&itability and &inancial stability o& a corporation. $n
t.e public sector suc. decisions also a&&ect t.e viability o& &acility investment programs
and t.e credibility o& t.e agency in c.arge o& t.e programs. $t is important to evaluate
&acilities rationally ?it. regard to bot. t.e economic &easibility o& individual proBects and
t.e relative net bene&its o& alternative and mutually eIclusive proBects.
,.is c.apter ?ill present an overvie? o& t.e decision process &or economic evaluation o&
&acilities ?it. regard to t.e proBect li&e cycle. ,.e cycle begins ?it. t.e initial conception
o& t.e proBect and continues t.oug. planning design procurement construction start<up
operation and maintenance. $t ends ?it. t.e disposal o& a &acility ?.en it is no longer
productive or use&ul. Kour maBor aspects o& economic evaluation ?ill be eIaminedD
1. ,.e basic concepts o& &acility investment evaluation including time pre&erence
&or consumption opportunity cost minimum attractive rate o& return cas. &lo?s
over t.e planning .orizon and pro&it measures.
2. 4et.ods o& economic evaluation including t.e net present value met.od t.e
e!uivalent uni&orm annual value met.od t.e bene&it<cost ratio met.od and t.e
internal rate o& return met.od.
3. Kactors a&&ecting cas. &lo?s including depreciation and taI e&&ects price level
c.anges and treatment o& ris0 and uncertainty.
4. E&&ects o& di&&erent met.ods o& &inancing on t.e selection o& proBects including
types o& &inancing and ris0 public policies on regulation and subsidies t.e e&&ects
o& proBect &inancial planning and t.e interaction bet?een operational and
&inancial planning.
$n setting out t.e engineering economic analysis met.ods &or &acility investments it is
important to emp.asize t.at not all &acility impacts can be easily estimated in dollar
amounts. Kor eIample &irms may c.oose to minimize environmental impacts o&
construction or &acilities in pursuit o& a Jtriple bottom lineDJ economic environmental and
social. :y reducing environmental impacts t.e &irm may reap bene&its &rom an improved
reputation and a more satis&ied ?or0&orce. 5evert.eless a rigorous economic evaluation
can aid in ma0ing decisions &or bot. !uanti&iable and !ualitative &acility impacts.
$t is important to distinguis. bet?een t.e economic evaluation o& alternative p.ysical
&acilities and t.e evaluation o& alternative &inancing plans &or a proBect. ,.e &ormer re&ers
to t.e evaluation o& t.e cas. &lo? representing t.e bene&its and costs associated ?it. t.e
ac!uisition and operation o& t.e &acility and t.is cas. &lo? over t.e planning .orizon is
re&erred to as t.e economic cash flow or t.e operating cash flow. ,.e latter re&ers to t.e
evaluation o& t.e cas. &lo? representing t.e incomes and eIpenditures as a result o&
adopting a speci&ic &inancing plan &or &unding t.e proBect and t.is cas. &lo? over t.e
planning .orizon is re&erred to as t.e financial cash flow4 $n general economic evaluation
and &inancial evaluation are carried out by di&&erent groups in an organization since
economic evaluation is related to design construction operations and maintenance o& t.e
&acility ?.ile &inancial evaluations re!uire 0no?ledge o& &inancial assets suc. as e!uities
bonds notes and mortgages. ,.e separation o& economic evaluation and &inancial
evaluation does not necessarily mean one s.ould ignore t.e interaction o& di&&erent
designs and &inancing re!uirements over time ?.ic. may in&luence t.e relative
desirability o& speci&ic designU&inancing combinations. 2ll suc. combinations can be duly
considered. $n practice .o?ever t.e division o& labor among t?o groups o& specialists
generally leads to se!uential decisions ?it.out ade!uate communication &or analyzing t.e
interaction o& various designU&inancing combinations because o& t.e timing o& separate
analyses.
2s long as t.e signi&icance o& t.e interaction o& designU&inancing combinations is
understood it is convenient &irst to consider t.e economic evaluation and &inancial
evaluation separately and t.en combine t.e results o& bot. evaluations to reac. a &inal
conclusion. (onse!uently t.is c.apter is devoted primarily to t.e economic evaluation o&
alternative p.ysical &acilities ?.ile t.e e&&ects o& a variety o& &inancing mec.anisms ?ill
be treated in t.e neIt c.apter. ;ince t.e met.ods o& analyzing economic cas. &lo?s are
e!ually applicable to t.e analysis o& &inancial cas. &lo?s t.e techni9ues &or evaluating
&inancing plans and t.e combined e&&ects o& economic and &inancial cas. &lo?s &or
proBect selection are also included in t.is c.apter.
0.! <asic Concepts of &conomic &aluation
2 systematic approac. &or economic evaluation o& &acilities consists o& t.e &ollo?ing
maBor stepsD
1. 6enerate a set o& proBects or purc.ases &or investment consideration.
2. Establis. t.e planning .orizon &or economic analysis.
3. Estimate t.e cas. &lo? pro&ile &or eac. proBect.
4. ;peci&y t.e minimum attractive rate o& return M4233N.
". Establis. t.e criterion &or accepting or reBecting a proposal or &or selecting t.e
best among a group o& mutually eIclusive proposals on t.e basis o& t.e obBective
o& t.e investment.
#. *er&orm sensitivity or uncertainty analysis.
%. 2ccept or reBect a proposal on t.e basis o& t.e establis.ed criterion.
$t is important to emp.asize t.at many assumptions and policies some implicit and some
eIplicit are introduced in economic evaluation by t.e decision ma0er. ,.e decision
ma0ing process ?ill be in&luenced by t.e subBective Budgment o& t.e management as
muc. as by t.e result o& systematic analysis.
,.e period o& time to ?.ic. t.e management o& a &irm or agency ?is.es to loo0 a.ead is
re&erred to as t.e planning hori+on. ;ince t.e &uture is uncertain t.e period o& time
selected is limited by t.e ability to &orecast ?it. some degree o& accuracy. Kor capital
investment t.e selection o& t.e planning .orizon is o&ten in&luenced by t.e use&ul li&e o&
&acilities since t.e disposal o& usable assets once ac!uired generally involves su&&ering
&inancial losses.
$n economic evaluations proBect alternatives are represented by t.eir cas. &lo? pro&iles
over t.e n years or periods in t.e planning .orizon. ,.us t.e interest periods are
normally assumed to be in years t ] +12 ...n ?it. t ] + representing t.e present time.
Let :
tI
be t.e annual bene&it at t.e end o& year t &or a investment proBect I ?.ere I ] 1 2
... re&er to proBects 5o. 1 5o. 2 etc. respectively. Let (
tI
be t.e annual cost at t.e end o&
year t &or t.e same investment proBect I. ,.e net annual cas. &lo? is de&ined as t.e
annual bene&it in eIcess o& t.e annual cost and is denoted by 2
tI
at t.e end o& year t &or
an investment proBect I. ,.en &or t ] +1 . . . nD
#.1
?.ere 2
tI
is positive negative or zero depends on t.e values o& :
tI
and (
tI
bot. o&
?.ic. are de&ined as positive !uantities.
Once t.e management .as committed &unds to a speci&ic proBect it must &orego ot.er
investment opportunities ?.ic. mig.t .ave been underta0en by using t.e same &unds.
,.e opportunity cost re&lects t.e return t.at can be earned &rom t.e best alternative
investment opportunity &oregone. ,.e &oregone opportunities may include not only
capital proBects but also &inancial investments or ot.er socially desirable programs.
4anagement s.ould invest in a proposed proBect only i& it ?ill yield a return at least e!ual
to t.e minimum attractive rate o& return M4233N &rom &oregone opportunities as
envisioned by t.e organization.
$n general t.e 4233 speci&ied by t.e top management in a private &irm re&lects t.e
opportunity cost of capital o& t.e &irm t.e mar0et interest rates &or lending and
borro?ing and t.e ris0s associated ?it. investment opportunities. Kor public proBects
t.e 4233 is speci&ied by a government agency suc. as t.e O&&ice o& 4anagement and
:udget or t.e (ongress o& t.e United ;tates. ,.e public 4233 t.us speci&ied re&lects
social and economic ?el&are considerations and is re&erred to as t.e social rate of
discount.
3egardless o& .o? t.e 4233 is determined by an organization t.e 4233 speci&ied &or
t.e economic evaluation o& investment proposals is critically important in determining
?.et.er any investment proposal is ?ort.?.ile &rom t.e standpoint o& t.e organization.
;ince t.e 4233 o& an organization o&ten cannot be determined accurately it is advisable
to use several values o& t.e 4233 to assess t.e sensitivity o& t.e potential o& t.e proBect
to variations o& t.e 4233 value.
0.+ Costs and <enefits of a Constructed (acility
,.e basic principle in assessing t.e economic costs and bene&its o& ne? &acility
investments is to &ind t.e aggregate o& individual c.anges in t.e ?el&are o& all parties
a&&ected by t.e proposed proBects. ,.e c.anges in ?el&are are generally measured in
monetary terms but t.ere are eIceptions since some e&&ects cannot be measured directly
by cas. receipts and disbursements. EIamples include t.e value o& .uman lives saved
t.roug. sa&ety improvements or t.e cost o& environmental degradation. ,.e di&&iculties in
estimating &uture costs and bene&its lie not only in uncertainties and reliability o&
measurement but also on t.e social costs and bene&its generated as side e&&ects.
Kurt.ermore proceeds and eIpenditures related to &inancial transactions suc. as interest
and subsidies must also be considered by private &irms and by public agencies.
,o obtain an accurate estimate o& costs in t.e cas. &lo? pro&ile &or t.e ac!uisition and
operation o& a proBect it is necessary to speci&y t.e resources re!uired to construct and
operate t.e proposed p.ysical &acility given t.e available tec.nology and operating
policy. ,ypically eac. o& t.e labor and material resources re!uired by t.e &acility is
multiplied by its price and t.e products are t.en summed to obtain t.e total costs. *rivate
corporations generally ignore eIternal social costs unless re!uired by la? to do so. $n t.e
public sector eIternalities o&ten must be properly accounted &or. 2n eIample is t.e cost
o& property damage caused by air pollution &rom a ne? plant. $n any case t.e
measurement o& eIternal costs is eItremely di&&icult and some?.at subBective &or lac0 o&
a mar0et mec.anism to provide even approIimate ans?ers to t.e appropriate value.
$n t.e private sector t.e bene&its derived &rom a &acility investment are o&ten measured
by t.e revenues generated &rom t.e operation o& t.e &acility. 3evenues are estimated by
t.e total o& price times !uantity purc.ased. ,.e depreciation allo?ances and taIes on
revenues must be deducted according to t.e prevailing taI la?s. $n t.e public sector
income may also be accrued to a public agency &rom t.e operation o& t.e &acility.
/o?ever several ot.er categories o& bene&its may also be included in t.e evaluation o&
public proBects. Kirst private bene&its can be received by users o& a &acility or service in
eIcess o& costs suc. as user c.arges or price c.arged. 2&ter all individuals only use a
service or &acility i& t.eir private bene&it eIceeds t.eir cost. ,.ese private bene&its or
consumer surplus represent a direct bene&it to members o& t.e public. $n many public
proBects it is di&&icult impossible or impractical to c.arge &or services received so direct
revenues e!ual zero and all user bene&its appear as consumers surplus. EIamples are a
par0 or road?ays &or ?.ic. entrance is &ree. 2s a second special category o& public
bene&it t.ere may be eIternal or secondary bene&iciaries o& public proBects suc. as ne?
Bobs created and pro&its to private suppliers. Estimating t.ese secondary bene&its is
eItremely di&&icult since resources devoted to public proBects mig.t simply be displaced
&rom private employment and t.us represents no net bene&it.
0.- $nterest 2ates and the Costs of Capital
(onstructed &acilities are in.erently long<term investments ?it. a de&erred pay<o&&. ,.e
cost o& capital or 4233 depends on t.e real interest rate Mi.e. mar0et interest rate less
t.e in&lation rateN over t.e period o& investment. 2s t.e cost o& capital rises it becomes
less and less attractive to invest in a large &acility because o& t.e opportunities &oregone
over a long period o& time.
$n Kigure #<1 t.e c.anges in t.e cost o& capital &rom 1)%4 to 2++2 are illustrated. ,.is
&igure presents t.e mar0et interest rate on s.ort and long term U; treasury borro?ing
and t.e corresponding real interest rate over t.is period. ,.e real interest rate is
calculated as t.e mar0et interest rate less t.e general rate o& in&lation. ,.e real interest
rates .ave varied substantially ranging &rom )V to <%V. ,.e eIceptional nature o& t.e
1)'+ to 1)'" years is dramatically evidentD t.e real rate o& interest reac.ed remar0ably
.ig. .istoric levels.
(igure 0)1 5ominal and 3eal $nterest 3ates on U.;. :onds
Ait. t.ese volatile interest rates interest c.arges and t.e ultimate cost o& proBects are
uncertain. Organizations and institutional arrangements capable o& dealing ?it. t.is
uncertainty and able to respond to interest rate c.anges e&&ectively ?ould be !uite
valuable. Kor eIample ban0s o&&er bot. &iIed rate and variable rate mortgages. 2n o?ner
?.o ?ants to limit its o?n ris0 may c.oose to ta0e a &iIed rate mortgage even t.oug. t.e
ultimate interest c.arges may be .ig.er. On t.e ot.er .and an o?ner ?.o c.ooses a
variable rate mortgage ?ill .ave to adBust its annual interest c.arges according to t.e
mar0et interest rates.
$n economic evaluation a constant value o& 4233 over t.e planning .orizon is o&ten
used to simpli&y t.e calculations. ,.e use o& a constant value &or 4233 is Busti&ied on
t.e ground o& long<term average o& t.e cost o& capital over t.e period o& investment. $&
t.e bene&its and costs over time are eIpressed in constant dollars t.e constant value &or
4233 represents t.e average real interest rate anticipated over t.e planning .orizonO i&
t.e bene&its and costs over time are eIpressed in t.en<current dollars t.e constant value
&or 4233 re&lects t.e average mar0et interest rate anticipated over t.e planning .orizon.
0.. $nestment Profit ,easures
2 profit measure is de&ined as an indicator o& t.e desirability o& a proBect &rom t.e
standpoint o& a decision ma0er. 2 pro&it measure may or may not be used as t.e basis &or
proBect selection. ;ince various pro&it measures are used by decision ma0ers &or di&&erent
purposes t.e advantages and restrictions &or using t.ese pro&it measures s.ould be &ully
understood.
,.ere are several pro&it measures t.at are commonly used by decision ma0ers in bot.
private corporations and public agencies. Eac. o& t.ese measures is intended to be an
indicator o& pro&it or net bene&it &or a proBect under consideration. ;ome o& t.ese
measures indicate t.e size o& t.e pro&it at a speci&ic point in timeO ot.ers give t.e rate o&
return per period ?.en t.e capital is in use or ?.en reinvestments o& t.e early pro&its are
also included. $& a decision ma0er understands clearly t.e meaning o& t.e various pro&it
measures &or a given proBect t.ere is no reason ?.y one cannot use all o& t.em &or t.e
restrictive purposes &or ?.ic. t.ey are appropriate. Ait. t.e availability o& computer
based analysis and commercial so&t?are it ta0es only a &e? seconds to compute t.ese
pro&it measures. /o?ever it is important to de&ine t.ese measures preciselyD
1. Met (uture 'alue and Met Present 'alue. A.en an organization ma0es an
investment t.e decision ma0er loo0s &or?ard to t.e gain over a planning .orizon against
?.at mig.t be gained i& t.e money ?ere invested else?.ere. 2 minimum attractive rate
o& return M4233N is adopted to re&lect t.is opportunity cost o& capital. ,.e 4233 is
used &or compounding t.e estimated cas. &lo?s to t.e end o& t.e planning .orizon or &or
discounting t.e cas. &lo? to t.e present. ,.e pro&itability is measured by t.e net &uture
value M5K8N ?.ic. is t.e net return at t.e end o& t.e planning .orizon above ?.at mig.t
.ave been gained by investing else?.ere at t.e 4233. ,.e net present value M5*8N o&
t.e estimated cas. &lo?s over t.e planning .orizon is t.e discounted value o& t.e 5K8 to
t.e present. 2 positive 5*8 &or a proBect indicates t.e present value o& t.e net gain
corresponding to t.e proBect cas. &lo?s.
!. &quialent =niform Annual Met 'alue. ,.e e!uivalent uni&orm annual net value
M5U8N is a constant stream o& bene&its less costs at e!ually spaced time periods over t.e
intended planning .orizon o& a proBect. ,.is value can be calculated as t.e net present
value multiplied by an appropriate Jcapital recovery &actor.J $t is a measure o& t.e net
return o& a proBect on an annualized or amortized basis. ,.e e!uivalent uni&orm annual
cost MEU2(N can be obtained by multiplying t.e present value o& costs by an appropriate
capital recovery &actor. ,.e use o& EU2( alone presupposes t.at t.e discounted bene&its
o& all potential proBects over t.e planning .orizon are identical and t.ere&ore only t.e
discounted costs o& various proBects need be considered. ,.ere&ore t.e EU2( is an
indicator o& t.e negative attribute o& a proBect ?.ic. s.ould be minimized.
+. <enefit Cost 2atio. ,.e bene&it<cost ratio M:(3N de&ined as t.e ratio o& discounted
bene&its to t.e discounted costs at t.e same point in time is a pro&itability indeI based on
discounted bene&its per unit o& discounted costs o& a proBect. $t is sometimes re&erred to as
t.e savings<to<investment ratio M;$3N ?.en t.e bene&its are derived &rom t.e reduction o&
undesirable e&&ects. $ts use also re!uires t.e c.oice o& a planning .orizon and a 4233.
;ince some savings may be interpreted as a negative cost to be deducted &rom t.e
denominator or as a positive bene&it to be added to t.e numerator o& t.e ratio t.e :(3 or
;$3 is not an absolute numerical measure. /o?ever i& t.e ratio o& t.e present value o&
bene&it to t.e present value o& cost eIceeds one t.e proBect is pro&itable irrespective o&
di&&erent interpretations o& suc. bene&its or costs.
-. $nternal 2ate of 2eturn. ,.e internal rate o& return M$33N is de&ined as t.e discount
rate ?.ic. sets t.e net present value o& a series o& cas. &lo?s over t.e planning .orizon
e!ual to zero. $t is used as a pro&it measure since it .as been identi&ied as t.e Jmarginal
e&&iciency o& capitalJ or t.e Jrate o& return over costJ. ,.e $33 gives t.e return o& an
investment when the capital is in use as i& t.e investment consists o& a single outlay at t.e
beginning and generates a stream o& net bene&its a&ter?ards. /o?ever t.e $33 does not
ta0e into consideration t.e reinvestment opportunities related to t.e timing and intensity
o& t.e outlays and returns at t.e intermediate points over t.e planning .orizon. Kor cas.
&lo?s ?it. t?o or more sign reversals o& t.e cas. &lo?s in any period t.ere may eIist
multiple values o& $33O in suc. cases t.e multiple values are subBect to various
interpretations.
.. Ad%usted $nternal 2ate of 2eturn. $& t.e &inancing and reinvestment policies are
incorporated into t.e evaluation o& a proBect an adBusted internal rate o& return M2$33N
?.ic. re&lects suc. policies may be a use&ul indicator o& pro&itability under restricted
circumstances. :ecause o& t.e compleIity o& &inancing and reinvestment policies used by
an organization over t.e li&e o& a proBect t.e 2$33 seldom can re&lect t.e reality o&
actual cas. &lo?s. /o?ever it o&&ers an approIimate value o& t.e yield on an investment
&or ?.ic. t?o or more sign reversals in t.e cas. &lo?s ?ould result in multiple values o&
$33. ,.e adBusted internal rate o& return is usually calculated as t.e internal rate o& return
on t.e proBect cas. &lo? modi&ied so t.at all costs are discounted to t.e present and all
bene&its are compounded to t.e end o& t.e planning .orizon.
0. 2eturn on $nestment. A.en an accountant reports income in eac. year o& a multi<
year proBect t.e stream o& cas. &lo?s must be bro0en up into annual rates o& return &or
t.ose years. ,.e return on investment M3O$N as used by accountants usually means t.e
accountantHs rate o& return &or eac. year o& t.e proBect duration based on t.e ratio o& t.e
income Mrevenue less depreciationN &or eac. year and t.e undepreciated asset value
MinvestmentN &or t.at same year. /ence t.e 3O$ is di&&erent &rom year to year ?it. a
very lo? value at t.e early years and a .ig. value in t.e later years o& t.e proBect.
1. Pay>ac: Period. ,.e paybac0 period M*:*N re&ers to t.e lengt. o& time ?it.in ?.ic.
t.e bene&its received &rom an investment can repay t.e costs incurred during t.e time in
!uestion ?.ile ignoring t.e remaining time periods in t.e planning .orizon. Even t.e
discounted paybac0 period indicating t.e Jcapital recovery periodJ does not re&lect t.e
magnitude or direction o& t.e cas. &lo?s in t.e remaining periods. /o?ever i& a proBect
is &ound to be pro&itable by ot.er measures t.e paybac0 period can be used as a
secondary measure o& t.e &inancing re!uirements &or a proBect.
0.0 ,ethods of &conomic &aluation
,.e obBective o& &acility investment in t.e private sector is generally understood to be
pro&it maIimization ?it.in a speci&ic time &rame. ;imilarly t.e obBective in t.e public
sector is t.e maIimization o& net social bene&it ?.ic. is analogous to pro&it maIimization
in private organizations. 6iven t.is obBective a met.od o& economic analysis ?ill be
Budged by t.e reliability and ease ?it. ?.ic. a correct conclusion may be reac.ed in
proBect selection.
,.e basic principle underlying t.e decision &or accepting and selecting investment
proBects is t.at i& an organization can lend or borro? as muc. money as it ?is.es at t.e
4233 t.e goal o& pro&it maIimization is best served by accepting all independent
proBects ?.ose net present values based on t.e speci&ied 4233 are nonnegative or by
selecting t.e proBect ?it. t.e maIimum nonnegative net present value among a set o&
mutually eIclusive proposals. ,.e net present value criterion re&lects t.is principle and is
most straig.t&or?ard and unambiguous ?.en t.ere is no budget constraint. 8arious
met.ods o& economic evaluation ?.en properly applied ?ill produce t.e same result i&
t.e net present value criterion is used as t.e basis &or decision. Kor convenience o&
computation a set o& tables &or t.e various compound interest &actors is given in
2ppendiI 2.
+et Present 6alue &et!od
Let :*8
I
be t.e present value o& bene&its o& a proBect I and (*8
I
be t.e present value o&
costs o& t.e proBect I. ,.en &or 4233 ] i over a planning .orizon o& n years
#.2
#.3
?.ere t.e symbol M*dKitN is a discount &actor e!ual to M1_iN
<t
and reads as &ollo?sD J,o
&ind t.e present value * given t.e &uture value K]1 discounted at an annual discount rate
i over a period o& t years.J A.en t.e bene&it or cost in year t is multiplied by t.is &actor
t.e present value is obtained. ,.en t.e net present value o& t.e proBect I is calculated asD
#.4
or
#."
$& t.ere is no budget constraint t.en all independent proBects .aving net present values
greater t.an or e!ual to zero are acceptable. ,.at is proBect I is acceptable as long as
#.#
Kor mutually eIclusive proposals MI ] 12...mN a proposal B s.ould be selected i& it .as
t.e maIimum nonnegative net present value among all m proposals i.e.
#.%
provided t.at 5*8
B
+.
+et Future 6alue &et!od
;ince t.e cas. &lo? pro&ile o& an investment can be represented by its e!uivalent value at
any speci&ied re&erence point in time t.e net &uture value M5K8
I
N o& a series o& cas. &lo?s
2
tI
M&or t]+12...nN &or proBect I is as good a measure o& economic potential as t.e net
present value. E!uivalent &uture values are obtained by multiplying a present value by t.e
compound interest &actor MKd*inN ?.ic. is M1_iN
n
. ;peci&ically
#.'
(onse!uently i& 5*8
I
+ it &ollo?s t.at 5K8
I
+ and vice versa.
+et E"uivalent 3niform nnual 6alue &et!od
,.e net e9uivalent uniform annual value M5U8
I
N re&ers to a uni&orm series over a
planning .orizon o& n years ?.ose net present value is t.at o& a series o& cas. &lo? 2
tI
M&or t] 12...nN representing proBect I. ,.at is
#.)
?.ere t.e symbol MUd*inN is re&erred to as t.e capital recovery factor and reads as
&ollo?sD J,o &ind t.e e!uivalent annual uni&orm amount U given t.e present value *]1
discounted at an annual discount rate i over a period o& t years.J /ence i& 5*8
I
+ it
&ollo?s t.at 5U8
I
+ and vice versa.
Benefit2Cost Ratio &et!od
,.e bene&it<cost ratio met.od is not as straig.t&or?ard and unambiguous as t.e net
present value met.od but i& applied correctly ?ill produce t.e same results as t.e net
present value met.od. A.ile t.is met.od is o&ten used in t.e evaluation o& public
proBects t.e results may be misleading i& proper care is not eIercised in its application to
mutually eIclusive proposals.
,.e )enefit-cost ratio is de&ined as t.e ratio o& t.e discounted bene&its to t.e discounted
cost at t.e same point in time. $n vie? o& E!s. M#.4N and M#.#N it &ollo?s t.at t.e criterion
&or accepting an independent proBect on t.e basis o& t.e bene&it<cost ratio is ?.et.er or
not t.e bene&it<cost ratio is greater t.an or e!ual to oneD
#.1+
/o?ever a proBect ?it. t.e maIimum bene&it<cost ratio among a group o& mutually
e:clusive proposals generally does not necessarily lead to t.e maIimum net bene&it.
(onse!uently it is necessary to per&orm incremental analysis t.roug. pair?ise
comparisons o& suc. proposals in selecting t.e best in t.e group. $n e&&ect pair?ise
comparisons are used to determine i& incremental increases in costs bet?een proBects
yields larger incremental increases in bene&its. ,.is approac. is not recommended &or use
in selecting t.e best among mutually eIclusive proposals.
Internal Rate of Return &et!od
,.e term internal rate of return method .as been used by di&&erent analysts to mean
some?.at di&&erent procedures &or economic evaluation. ,.e met.od is o&ten
misunderstood and misused and its popularity among analysts in t.e private sector is
undeserved even ?.en t.e met.od is de&ined and interpreted in t.e most &avorable lig.t.
,.e met.od is usually applied by comparing t.e 4233 to t.e internal rate o& return
valueMsN &or a proBect or a set o& proBects.
2 maBor di&&iculty in applying t.e internal rate o& return met.od to economic evaluation
is t.e possible eIistence o& multiple values o& $33 ?.en t.ere are t?o or more c.anges o&
sign in t.e cas. &lo? pro&ile 2
tI
M&or t]+12...nN. A.en t.at .appens t.e met.od is
generally not applicable eit.er in determining t.e acceptance o& independent proBects or
&or selection o& t.e best among a group o& mutually eIclusive proposals unless a set o&
?ell de&ined decision rules are introduced &or incremental analysis. $n any case no
advantage is gained by using t.is met.od since t.e procedure is cumbersome even i& t.e
met.od is correctly applied. ,.is met.od is not recommended &or use eit.er in accepting
independent proBects or in selecting t.e best among mutually eIclusive proposals.
&9ample 0)1* &aluation of (our $ndependent Pro%ects
,.e cas. &lo? pro&iles o& &our independent proBects are s.o?n in ,able #<1. Using a
4233 o& 2+V determine t.e acceptability o& eac. o& t.e proBects on t.e basis o& t.e net
present value criterion &or accepting independent proBects.
TA<"& 0)1 (as. Klo? *ro&iles o& Kour $ndependent *roBects Min G
millionN
t 2
t1
2
t2
2
t3
2
t4
+
1
2
3
4
"
<%%.+
+
+
+
+
23".+
<%".3
2'.+
2'.+
2'.+
2'.+
2'.+
<3).)
2'.+
2'.+
2'.+
2'.+
<'+.+
1'.+
1+.+
<4+.+
<#+.+
3+.+
"+.+
Using i ] 2+V ?e can compute 5*8 &or I ] 1 2 3 and 4 &rom E!. M#."N. ,.en t.e
acceptability o& eac. proBect can be determined &rom E!. M#.#N. ,.us
R5*8
1
S
2+V
] <%% _ M23"NM*dK 2+V "N ] <%% _ )4.4 ] 1%.4
R5*8
2
S
2+V
] <%".3 _ M2'NM*dU 2+V "N ] <%".3 _ '3.% ] '.4
R5*8
3
S
2+V
] <3).) _ M2'NM*dU 2+V 4N < M'+NM*dK 2+V "N
] <3).) _ %2." < 32.2 ] +.4
R5*8
4
S
2+V
] 1' _ M1+NM*dK 2+V 1N < M4+NM*dK 2+V 2N
< M#+NM*dK 2+V 3N _ M3+NM*dK 2+V 4N _ M"+NM*dK 2+V "N
] 1' _ '.3 < 2%.' < 34.% _ 14." _ 2+.1 ] <1.#
/ence t.e &irst t.ree independent proBects are acceptable but t.e last proBect s.ould be
reBected.
$t is interesting to note t.at i& t.e &our proBects are mutually eIclusive t.e net present
value met.od can still be used to evaluate t.e proBects and according to E!. M#.%N t.e
proBect MI ] 1N ?.ic. .as t.e .ig.est positive 5*8 s.ould be selected. ,.e use o& t.e net
e!uivalent uni&orm annual value or t.e net &uture value met.od ?ill lead to t.e same
conclusion. /o?ever t.e proBect ?it. t.e .ig.est bene&it<cost ratio is not necessarily t.e
best c.oice among a group o& mutually eIclusive alternatives. Kurt.ermore t.e
conventional internal rate o& return met.od cannot be used to ma0e a meaning&ul
evaluation o& t.ese proBects as t.e $33 &or bot. I]1 and I]2 are &ound to be 2"V ?.ile
multiple values o& $33 eIist &or bot. t.e I]3 and I]4 alternatives.
0.1 ;epreciation and Ta9 &ffects
Kor private corporations t.e cas. &lo? pro&ile o& a proBect is a&&ected by t.e amount o&
taIation. $n t.e conteIt o& taI liability depreciation is t.e amount allo?ed as a deduction
due to capital eIpenses in computing taIable income and .ence income taI in any year.
,.us depreciation results in a reduction in taI liabilities.
$t is important to di&&erentiate bet?een t.e estimated use&ul li&e used in depreciation
computations and t.e actual use&ul li&e o& a &acility. ,.e &ormer is o&ten an arbitrary
lengt. o& time speci&ied in t.e regulations o& t.e U.;. $nternal 3evenue ;ervice or a
comparable organization. ,.e depreciation allo?ance is a boo00eeping entry t.at does
not involve an outlay o& cas. but represents a systematic allocation o& t.e cost o& a
p.ysical &acility over time.
,.ere are various met.ods o& computing depreciation ?.ic. are acceptable to t.e U.;.
$nternal 3evenue ;ervice. ,.e di&&erent met.ods o& computing depreciation .ave
di&&erent e&&ects on t.e streams o& annual depreciation c.arges and .ence on t.e stream
o& taIable income and taIes paid. Let * be t.e cost o& an asset ; its estimated salvage
value and 5 t.e estimated use&ul li&e Mdepreciable li&eN in years. Kurt.ermore let 1
t
denote t.e depreciation amount in year t ,
t
denote t.e accumulated depreciation up to
year t and :
t
denote t.e boo0 value o& t.e asset at t.e end o& year t ?.ere t]12... or n
re&ers to t.e particular year under consideration. ,.en
#.11
and
#.12
,.e depreciation met.ods most commonly used to compute 1
t
and :
t
are t.e straig.t line
met.od sum<o&<t.e<yearsH<digits met.ods and t.e double declining balanced met.od.
,.e U.;. $nternal 3evenue ;ervice provides tables o& acceptable depreciable sc.edules
using t.ese met.ods. Under straig.t line depreciation t.e net depreciable value resulting
&rom t.e cost o& t.e &acility less salvage value is allocated uni&ormly to eac. year o& t.e
estimated use&ul li&e. Under t.e sum<o&<t.e<yearHs<digits M;O91N met.od t.e annual
depreciation allo?ance is obtained by multiplying t.e net depreciable value multiplied by
a &raction ?.ic. .as as its numerator t.e number o& years o& remaining use&ul li&e and its
denominator t.e sum o& all t.e digits &rom 1 to n. ,.e annual depreciation allo?ance
under t.e double declining balance met.od is obtained by multiplying t.e boo0 value o&
t.e previous year by a constant depreciation rate 2Un.
,o consider taI e&&ects in proBect evaluation t.e most direct approac. is to estimate t.e
a&ter<taI cas. &lo? and t.en apply an evaluation met.od suc. as t.e net present value
met.od. ;ince proBects are o&ten &inanced by internal &unds representing t.e overall
e!uity<debt miI o& t.e entire corporation t.e deductibility o& interest on debt may be
considered on a corporate<?ide basis. Kor speci&ic proBect &inancing &rom internal &unds
let after-ta: cas. &lo? in year t be 9
t
. ,.en &or t]+12...n
#.13
?.ere 2
t
is t.e net revenue be&ore taI in year t 1
t
is t.e depreciation allo?able &or year t
and ^
t
is t.e marginal corporate income taI rate in year t.
:esides corporate income taIes t.ere are ot.er provisions in t.e &ederal income taI la?s
t.at a&&ect &acility investments suc. as taI credits &or lo?<income .ousing. ;ince t.e taI
la?s are revised periodically t.e estimation o& taI liability in t.e &uture can only be
approIimate.
&9ample 0)!* &ffects of Ta9es on $nestment
2 company plans to invest G""+++ in a piece o& e!uipment ?.ic. is eIpected to produce
uni&orm annual net revenue be&ore taI o& G1"+++ over t.e neIt &ive years. ,.e
e!uipment .as a salvage value o& G"+++ at t.e end o& " years and t.e depreciation
allo?ance is computed on t.e basis o& t.e straig.t line depreciation met.od. ,.e marginal
income taI rate &or t.is company is 34V and t.ere is no eIpectation o& in&lation. $& t.e
a&ter<taI 4233 speci&ied by t.e company is 'V determine ?.et.er t.e proposed
investment is ?ort.?.ile assuming t.at t.e investment ?ill be &inanced by internal
&unds.
Using E!uations M#.11N and M#.13N t.e a&ter<taI cas. &lo? can be computed as s.o?n in
,able #<2. ,.en t.e net present value discounted at 'V is obtained &rom E!uation M#."N
as &ollo?sD
,.e positive result indicates t.at t.e proBect is ?ort.?.ile.
TA<"& 0)! 2&ter<,aI (as. Klo? (omputation
9ear
t
:e&ore<taI
(as. Klo?
2
t
;traig.t<line
1epreciation
1
t
,aIable
$ncome
2
t
<1
t
$ncome
,aI
^
t
M2
t
<1
t
N
2&ter<,aI
(as.<Klo?
9
t
+
1<" eac.
" only
< G""+++
_ G1"+++
_ G"+++
G1++++ G"+++ G1%++
< G""+++
_ G133++
_ G"+++
0.3 Price "eel Changes* $nflation and ;eflation
$n t.e economic evaluation o& investment proposals t?o approac.es may be used to
re&lect t.e e&&ects o& &uture price level c.anges due to in&lation or de&lation. ,.e
di&&erences bet?een t.e t?o approac.es are primarily p.ilosop.ical and can be succinctly
stated as &ollo?sD
1. ,.e constant dollar approach. ,.e investor ?ants a speci&ied 4233 eIcluding
in&lation. (onse!uently t.e cas. &lo?s s.ould be eIpressed in terms o& base<year
or constant dollars and a discount rate eIcluding in&lation s.ould be used in
computing t.e net present value.
2. ,.e inflated dollar approach4 ,.e investor includes an in&lation component in t.e
speci&ied 4233. /ence t.e cas. &lo?s s.ould be eIpressed in terms o& t.en<
current or in&lated dollars and a discount rate including in&lation s.ould be used
in computing t.e net present value.
$& t.ese approac.es are applied correctly t.ey ?ill lead to identical results.
Let i be t.e discount rate eIcluding in&lation iH be t.e discount rate including in&lation
and B be t.e annual in&lation rate. ,.en
#.14
2nd
#.1"
A.en t.e in&lation rate B is small t.ese relations can be approIimated by
#.1#
5ote t.at in&lation over time .as a compounding e&&ect on t.e price levels in various
periods as discussed in connection ?it. t.e cost indices in (.apter ".
$& 2
t
denotes t.e cas. &lo? in year t eIpressed in terms o& constant Mbase yearN dollars
and 2H
t
denotes t.e cas. &lo? in year t eIpressed in terms o& in&lated Mt.en<currentN
dollars t.en
#.1%
or
#.1'
$t can be s.o?n t.at t.e results &rom t.ese t?o e!uations are identical. Kurt.ermore t.e
relations.ip applies to a&ter<taI cas. &lo? as ?ell as to be&ore<taI cas. &lo? by replacing
2
t
and 2H
t
?it. 9
t
and 9H
t
respectively in E!uations M#.1%N and M#.1'N.
&9ample 0)+* &ffects of $nflation
;uppose t.at in t.e previous eIample t.e in&lation eIpectation is "V per year and t.e
a&ter<taI 4233 speci&ied by t.e company is 'V eIcluding in&lation. 1etermine ?.et.er
t.e investment is ?ort.?.ile.
$n t.is case t.e be&ore<taI cas. &lo? 2
t
in terms o& constant dollars at base year + is
in&lated at B ] "V to t.en<current dollars 2H
t
&or t.e computation o& t.e taIable income
M2H
t
< 1
t
N and income taIes. ,.e resulting a&ter<taI &lo? 9H
t
in terms o& t.en<current
dollars is converted bac0 to constant dollars. ,.at is &or ^
t
] 34V and 1
t
] G1++++. ,.e
annual depreciation c.arges 1
t
are not in&lated to current dollars in con&ormity ?it. t.e
practice recommended by t.e U.;. $nternal 3evenue ;ervice. ,.usD
2H
t
] 2
t
M1 _ BN
t
] 2
t
M1 _ +.+"N
t
9H
t
] 2H
t
< ^
t
M2H
t
< 1
t
N ] 2H
t
< M34VNM2H
t
< G1++++N
9
t
] 9H
t
M1 _ BN
t
] 9H
t
M1 _ +.+"N
t

,.e detailed computation o& t.e a&ter<taI cas. &lo? is recorded in ,able #<3. ,.e net
present value discounted at 'V eIcluding in&lation is obtained by substituting 9
t
&or 2
t
in
E!. M#.1%N. /ence
R5*8S
'V
N ] <""+++ _ M1313'NM*dK 'V 1N _ M12)'"NM*dK 'V 2N _ M12'3%NM*dK 'V 3N
_ M12#)%NM*dK 'V 4N _ M12"#4 _ "+++NM*dK 'V "N ] <G22%
Ait. "V in&lation t.e investment is no longer ?ort.?.ile because t.e value o& t.e
depreciation taI deduction is not increased to matc. t.e in&lation rate.
TA<"& 0)+ 2&ter<,aI (as. Klo? $ncluding $n&lation
,ime
t
(onstant
G :<,aI
(K
2
t
(urrent
G :<,aI
(K
2H
t
(urrent G
depreciation
1
t
(urrent G
a&ter
depreciation
2H
t
<1
t
(urrent
G income
taI
^
t
M2H
t
<
1
t
N
(urrent
G 2<,aI
(K
9H
t
(onstant
G 2<,aI
(K
9
t
+
1
2
3
4
"
"
<G""+++
_1"+++
_1"+++
_1"+++
_1"+++
_1"+++
_"+++
_G""+++
_1"%"+
1#"4+
1%3#"
1'233
1)14"
G1++++
1++++
1++++
1++++
1++++
G"%"+
#"4+
%3#"
'233
)14"
G1)""
2224
2"+4
2%))
31+)
<G""+++
_13%)"
_1431#
_14'#1
_1"434
_1#+3#
<G""+++
_1313'
_12)'"
_12'3%
_12#)%
_12"#4
_"+++
5oteD :<,aI (K re&ers to :e&ore<,aI (as. Klo?O
2<,aI (K re&ers to 2&ter<,aI (as. Klo?
&9ample 0)-* $nflation and the <oston Central Artery Pro%ect
,.e cost o& maBor construction proBects are o&ten reported as simply t.e sum o& all
eIpenses no matter ?.at year t.e cost ?as incurred. Kor proBects eItending over a
lengt.y period o& time t.is practice can combine amounts o& considerably di&&erent
in.erent values. 2 good eIample is t.e :oston (entral 2rteryU,unnel *roBect a very
large proBect to construct or re<locate t?o $nterstate .ig.?ays ?it.in t.e city o& :oston.
$n ,able #<4 ?e s.o? one estimate o& t.e annual eIpenditures &or t.e (entral
2rteryU,unnel &rom 1)'# to 2++# in millions o& dollars appearing in t.e column labeled
JEIpenses MG 4N.J Ae also s.o? estimates o& construction price in&lation in t.e :oston
area &or t.e same period one based on 1)'2 dollars Mso t.e price indeI e!uals 1++ in
1)'2N and one on 2++2 dollars. $& t.e dollar eIpenditures are added up t.e total proBect
cost is G 14.# :illion dollars ?.ic. is .o? t.e proBect cost is o&ten reported in summary
documents. /o?ever i& t.e cost is calculated in constant 1)'2 dollars M?.en t.e original
proBect cost estimate ?as developed &or planning purposesN t.e proBect cost ?ould be
only G '.4 :illion ?it. price in&lation increasing eIpenses by G #.3 :illion. 2s ?it. cost
indices discussed in (.apter " t.e conversion to 1)'2 G is accomplis.ed by dividing by
t.e 1)'2 price indeI &or t.at year and t.en multiplying by 1++ Mt.e 1)'2 price indeI
valueN. $& t.e cost is calculated in constant 2++2 dollars t.e proBect cost increases to G
1".' :illion. A.en costs are incurred can signi&icantly a&&ect proBect eIpensese
TA<"& 0)- (as. Klo?s &or t.e :oston (entral 2rteryU,unnel *roBect
9ear
t
*rice
$ndeI
1)'2 G
*rice
$ndeI
2++2 G
*roBect
EIpenses
MG 4N
*roBect
EIpenses
M1)'2 G 4N
*roBect
EIpenses
M2++2 G 4N
1)'2
1)'3
1)'4
1)'"
1)'#
1)'%
1)''
1)')
1))+
1))1
1))2
1))3
1))4
1))"
1))#
1))%
1))'
1++
1+4
111
11'
122
123
13+
134
14+
144
14#
1"4
1#"
1#"
1#"
1%"
1%2
"3
""
")
#2
#"
#"
#)
%1
%4
%#
%%
'2
''
''
'%
)3
)1
33+++
'2+++
131+++
1#4+++
214+++
1)%+++
24#+++
"%4+++
'"4+++
'"2+++
%#4+++
12+#+++
14%++++
2%+++
#%+++
1+1+++
122+++
1"3+++
13%+++
1#)+++
3%2+++
"1%+++
"1"+++
4#4+++
#'%+++
'"3+++
"1+++
12#+++
1)++++
23++++
2')+++
2"'+++
31'+++
%+3+++
)%"+++
)%3+++
'%%+++
12)%+++
1#+)+++
1)))
2+++
2++1
2++2
2++3
2++4
2++"
2++#
;um
1%#
1'1
1'3
1')
1)"
2+2
2+'
21"
)4
)#
)%
1++
1+3
1+%
11+
114
1"23+++
132)+++
124#+++
12%2+++
111"+++
%%)+++
441+++
133+++
14#2"+++
'#3+++
%3"+++
#'2+++
#%4+++
"%2+++
3'#+++
212+++
#2+++
'3%++++
1#2)+++
13'%+++
12''+++
12%2+++
1+%)+++
%2)+++
3))+++
11%+++
1"%)%+++
0.4 =ncertainty and 2is:
;ince &uture events are al?ays uncertain all estimates o& costs and bene&its used in
economic evaluation involve a degree o& uncertainty. *robabilistic met.ods are o&ten
used in decision analysis to determine eIpected costs and bene&its as ?ell as to assess t.e
degree o& ris0 in particular proBects.
$n estimating bene&its and costs it is common to attempt to obtain t.e eIpected or
average values o& t.ese !uantities depending upon t.e di&&erent events ?.ic. mig.t
occur. ;tatistical tec.ni!ues suc. as regression models can be used directly in t.is regard
to provide &orecasts o& average values. 2lternatively t.e bene&its and costs associated
?it. di&&erent events can be estimated and t.e eIpected bene&its and costs calculated as
t.e sum over all possible events o& t.e resulting bene&its and costs multiplied by t.e
probability o& occurrence o& a particular eventD
#.1)
and
#.2+
?.ere ! ] 1....m represents possible events M:
td!
N and M(
td!
N are bene&its and costs
respectively in period t due to t.e occurrence o& ! *ra!b is t.e probability t.at ! occurs
and ER:
t
S and ER(
t
S are respectively eIpected bene&it and cost in period t. /ence t.e
eIpected net bene&it in period t is given byD
#.21
Kor eIample t.e average cost o& a &acility in an eart.!ua0e prone site mig.t be calculated
as t.e sum o& t.e cost o& operation under normal conditions Mmultiplied by t.e probability
o& no eart.!ua0eN plus t.e cost o& operation a&ter an eart.!ua0e Mmultiplied by t.e
probability o& an eart.!ua0eN. EIpected bene&its and costs can be used directly in t.e cas.
&lo? calculations described earlier.
$n &ormulating obBectives some organizations ?is. to avoid ris0 so as to avoid t.e
possibility o& losses. $n e&&ect a risk avoiding organization mig.t select a proBect ?it.
lo?er eIpected pro&it or net social bene&it as long as it .ad a lo?er ris0 o& losses. ,.is
pre&erence results in a risk premium or .ig.er desired pro&it &or ris0y proBects. 2 roug.
met.od o& representing a ris0 premium is to ma0e t.e desired 4233 .ig.er &or ris0y
proBects. Let r
&
be t.e ris0 &ree mar0et rate o& interest as represented by t.e average rate o&
return o& a sa&e investment suc. as U.;. government bonds. /o?ever U.;. government
bonds do not protect &rom in&lationary c.anges or eIc.ange rate &luctuations but only
insure t.at t.e principal and interest ?ill be repaid. Let r
p
be t.e ris0 premium re&lecting
an adBustment o& t.e rate o& return &or t.e perceived ris0. ,.en t.e ris0<adBusted rate o&
return r is given byD
#.22
$n using t.e ris0<adBusted rate o& return r to compute t.e net present value o& an estimated
net cas. &lo? 2
t
Mt ] + 1 2 ... nN over n years it is tacitly assumed t.at t.e values o& 2
t
become more uncertain as time goes on. ,.at isD
#.23
4ore directly a decision ma0er may be con&ronted ?it. t.e subBect c.oice among
alternatives ?it. di&&erent eIpected bene&its o& levels o& ris0 suc. t.at at a given period t
t.e decision ma0er is ?illing to eIc.ange an uncertain 2
t
?it. a smaller but certain return
a
t
2
t
?.ere a
t
is less t.an one. (onsider t.e decision tree in Kigure #<2 in ?.ic. t.e
decision ma0er is con&ronted ?it. a c.oice bet?een t.e certain return o& a
t
2
t
and a
gamble ?it. possible outcomes M2
t
ON
!
and respective probabilities *ra!b &or ! ] 12...m.
,.en t.e net present value &or t.e series o& Jcertainty e!uivalentsJ over n years may be
computed on t.e basis o& t.e ris0 &ree rate. /enceD
#.24
5ote t.at i& r
&c
r
p
is negligible in comparison ?it. r t.en
M1 _ r
&
NM1 _ r
p
N ] 1 _r
&
_ r
p
_ r
&
r
p
] 1 _ r
/ence &or E!. M#.23N
2
t
M1 _ rN
<t
] Ma
t
2
t
Ua
t
NM1 _ r
&
N
<t
M1 _ r
p
N
<t
]RMa
t
2
t
NM1 _ r
&
N
<t
SRM1 _ r
p
N
<t
Ua
t
S
$& a
t
] M1 _ r
p
N
<t
&or t ] 12...n t.en E!s. M#.23N and M#.24N ?ill be identical.
/ence t.e use o& t.e ris0<adBusted rate r &or computing 5*8 .as t.e same
e&&ect as accepting a
t
] M1 _ r
p
N
<t
as a Jcertainty e!uivalentJ &actor in adBusting
t.e estimated cas. &lo? over time.
(igure 0)! 1etermination o& a (ertainty E!uivalent 8alue
0.15 &ffects of (inancing on Pro%ect /election
;election o& t.e best design and &inancing plans &or capital proBects is typically done
separately and se!uentially. ,.ree approac.es to &acility investment planning most o&ten
adopted by an organization areD
1. Need or demand drivenD *ublic capital investments are de&ined and debated in
terms o& an absolute JneedJ &or particular &acilities or services. Ait. a pre<de&ined
JneedJ design and &inancing analysis t.en proceed separately. Even ?.en
investments are made on t.e basis o& a demand or revenue analysis o& t.e mar0et
t.e separation o& design and &inancing analysis is still prevalent.
2. &esign drivenD 1esigns are generated analyzed and approved prior to t.e
investigation o& &inancing alternatives because proBects are approved &irst and
only t.en programmed &or eventual &unding.
3. 7inance drivenD ,.e process o& developing a &acility ?it.in a particular budget
target is &inance<driven since t.e budget is &ormulated prior to t.e &inal design. $t
is a common procedure in private developments and increasingly used &or public
proBects.
,ypically di&&erent individuals or divisions o& an organization conduct t.e analysis &or
t.e operating and &inancing processes. Kinancing alternatives are sometimes not
eIamined at all since a single mec.anism is universally adopted. 2n eIample o& a single
&inancing plan in t.e public sector is t.e use o& pay<as<you<go .ig.?ay trust &unds.
/o?ever t.e importance o& &inancial analysis is increasing ?it. t.e increase o& private
o?ners.ip and private participation in t.e &inancing o& public proBects. ,.e availability o&
a broad spectrum o& ne? &inancing instruments .as accentuated t.e needs &or better
&inancial analysis in connection ?it. capital investments in bot. t.e public and private
sectors. A.ile simultaneous assessment o& all design and &inancing alternatives is not
al?ays essential more communication o& in&ormation bet?een t.e t?o evaluation
processes ?ould be advantageous in order to avoid t.e selection o& in&erior alternatives.
,.ere is an ever increasing variety o& borro?ing mec.anisms available. Kirst t.e eItent
to ?.ic. borro?ing is tied to a particular proBect or asset may be varied. Loans bac0ed by
speci&ic tangible and &ungible assets and ?it. restrictions on t.at assetHs use are regarded
as less ris0y. $n contrast speci&ic proBect &inance may be more costly to arrange due to
transactions costs t.an is general corporate or government borro?ing. 2lso bac0ing by
t.e &ull good &ait. and credit o& an organization is considered less ris0y t.an investments
bac0ed by generally immovable assets. ;econd t.e options o& &iIed versus variable rate
borro?ing are available. ,.ird t.e repayment sc.edule and time .orizon o& borro?ing
may be varied. 2 detailed discussion o& &inancing o& constructed &acilities ?ill be
de&erred until t.e neIt c.apter.
2s a general rule it is advisable to borro? as little as possible ?.en borro?ing rates
eIceed t.e minimum attractive rate o& return. E!uity or pay<as<you<go &inancing may be
desirable in t.is case. $t is generally pre&erable to obtain lo?er borro?ing rates unless
borro?ing associated ?it. lo?er rates re!uires substantial transaction costs or reduces t.e
&leIibility &or repayment and re&inancing. $n t.e public sector it may be t.at increasing
taIes or user c.arges to reduce borro?ing involves economic costs in eIcess o& t.e
bene&its o& reduced borro?ing costs o& borro?ed &unds. Kurt.ermore since cas. &lo?
analysis is typically conducted on t.e basis o& constant dollars and loan agreements are
made ?it. respect to current dollars removing t.e e&&ects o& in&lation ?ill reduce t.e cost
o& borro?ing. Kinally de&erring investments until pay<as<you<go or e!uity &inancing are
available may unduly de&er t.e bene&its o& ne? investments.
$t is di&&icult to conclude unambiguously t.at one &inancing mec.anism is al?ays
superior to ot.ers. (onse!uently evaluating alternative &inancing mec.anisms is an
important component o& t.e investment analysis procedure. One possible approac. to
simultaneously considering design and &inancing alternatives is to consider eac.
combination o& design and &inancing options as a speci&ic mutually eIclusive alternative.
,.e cas. &lo? o& t.is combined alternative ?ould be t.e sum o& t.e economic or
operating cas. &lo? Massuming e!uity &inancingN and t.e &inancial cas. &lo? over t.e
planning .orizon.
0.11 Com>ined &ffects of Operating and (inancing
Cash (lows
2 general approac. &or obtaining t.e combined e&&ects o& operating and &inancing cas.
&lo?s o& a proBect is to ma0e use o& t.e additive property o& net present values by
calculating an adBusted net present value. ,.e adBusted net present value M2*8N is t.e
sum o& t.e net present value M5*8N o& t.e operating cas. &lo? plus t.e net present value
o& t.e &inancial cas. &lo? due to borro?ing or raising capital MK*8N. ,.us
#.2"
?.ere eac. &unction is evaluated at i]4233 i& bot. t.e operating and t.e &inancing cas.
&lo?s .ave t.e same degree o& ris0 or i& t.e ris0s are ta0en care o& in ot.er ?ays suc. as
by t.e use o& certainty e!uivalents. ,.en proBect selection involving bot. design and
&inancing alternatives is accomplis.ed by selecting t.e combination ?.ic. .as t.e .ig.est
positive adBusted present value. ,.e use o& t.is adBusted net present value met.od ?ill
result in t.e same selection as an evaluation based on t.e net present value obtained &rom
t.e combined cas. &lo? o& eac. alternative combination directly.
,o be speci&ic let 2
t
be t.e net operating cas. &lo? be t.e net &inancial cas. &lo?
resulting &rom debt &inancing and 22
t
be t.e combined net cas. &lo? all &or year t
be&ore taI. ,.enD
#.2#
;imilarly let and 99
t
be t.e corresponding cas. &lo?s a&ter taI suc. t.atD
#.2%
,.e taI s.ields &or interest on borro?ing M&or t ] 1 2 ... nN are usually given by
#.2'
?.ere $
t
is t.e interest paid in year t and ^
t
is t.e marginal corporate income taI rate in
year t. $n vie? o& E!s. M#.13N M#.2%N and M#.2'N ?e obtain
#.2)
A.en 4233 ] i is applied to bot. t.e operating and t.e &inancial cas. &lo?s in E!s.
M#.13N and M#.2'N respectively in computing t.e net present values t.e combined e&&ect
?ill be t.e same as t.e net present value obtained by applying 4233 ] i to t.e
combined cas. &lo? in E!. M#.2)N.
$n many instances a ris0 premium related to t.e speci&ied type o& operation is added to
t.e 4233 &or discounting t.e operating cas. &lo?. On t.e ot.er .and t.e 4233 &or
discounting t.e &inancial cas. &lo? &or borro?ing is o&ten regarded as relatively ris0<&ree
because debtors or .olders o& corporate bonds must be paid &irst be&ore stoc0.olders in
case &inancial di&&iculties are encountered by a corporation. ,.en t.e adBusted net present
value is given by
#.3+
?.ere 5*8 is discounted at r and K*8 is obtained &rom t.e r
&
rate. 5ote t.at t.e net
present value o& t.e &inancial cas. &lo? includes not only taI s.ields &or interest on loans
and ot.er &orms o& government subsidy but also on transactions costs suc. as t.ose &or
legal and &inancial services associated ?it. issuing ne? bonds or stoc0s.
,.e evaluation o& combined alternatives based on t.e adBusted net present value met.od
s.ould also be per&ormed in dollar amounts ?.ic. eit.er consistently include or remove
t.e e&&ects o& in&lation. ,.e 4233 value used ?ould re&lect t.e inclusion or eIclusion o&
in&lation accordingly. Kurt.ermore it is pre&erable to use a&ter<taI cas. &lo?s in t.e
evaluation o& proBects &or private &irms since di&&erent designs and &inancing alternatives
are li0ely to .ave !uite di&&erent implications &or taI liabilities and taI s.ields.
$n t.eory t.e corporate &inance process does not necessarily re!uire a di&&erent approac.
t.an t.at o& t.e 2*8 met.od discussed above. 3at.er t.an considering single proBects in
isolation groups or sets o& proBects along ?it. &inancing alternatives can be evaluated.
,.e evaluation process ?ould be to select t.at group o& operating and &inancing plans
?.ic. .as t.e .ig.est total 2*8. Un&ortunately t.e number o& possible combinations to
evaluate can become very large even t.oug. many combinations can be rapidly
eliminated in practice because t.ey are clearly in&erior. 4ore commonly .euristic
approac.es are developed suc. as c.oosing proBects ?it. t.e .ig.est bene&itUcost ratio
?it.in a particular budget or &inancial constraint. ,.ese .euristic sc.emes ?ill o&ten
involve t.e separation o& t.e &inancing and design alternative evaluation. ,.e typical
result is design<driven or &inance<driven planning in ?.ic. one or t.e ot.er process is
conducted &irst.
&9ample 0).* Com>ined &ffects of Operating and (inancing Plans
2 public agency plans to construct a &acility and is considering t?o design alternatives
?it. di&&erent capacities. ,.e operating net cas. &lo?s &or bot. alternatives over a
planning .orizon o& " years are s.o?n in ,able #<4. Kor eac. design alternative t.e
proBect can be &inanced eit.er t.roug. overdra&t on ban0 credit or by issuing bonds
spanning over t.e "<year period and t.e cas. &lo? &or eac. &inancing alternative is also
s.o?n in ,able #<4. ,.e public agency .as speci&ied a 4233 o& 1+V &or discounting t.e
operating and &inancing cas. &lo?s &or t.is proBect. 1etermine t.e best combination o&
design and &inancing plan i&
MaN a design is selected be&ore &inancing plans are considered or
MbN t.e decision is made simultaneously rat.er t.an se!uentially.
,.e net present values M5*8N o& all cas. &lo?s can be computed by E!.M#."N and t.e
results are given at t.e bottom o& ,able #<4. ,.e adBusted net present value M2*8N
combining t.e operating cas. &lo? o& eac. design and an appropriate &inancing is
obtained according to E!. M#.2"N and t.e results are also tabulated at t.e bottom o& ,able
#<4.
Under condition MaN design alternative 2 ?ill be selected since 5*8 ] G%#%+++ is t.e
.ig.er value ?.en only operating cas. &lo?s are considered. ;ubse!uently bonds
&inancing ?ill be c.osen because 2*8 ] G4##+++ indicates t.at it is t.e best &inancing
plan &or design alternative 2.
Under condition MbN .o?ever t.e c.oice ?ill be based on t.e .ig.est value o& 2*8 i.e.
2*8 ] G4'4+++ &or design alternative one in combination ?ill overdra&t &inancing.
,.us t.e simultaneous decision approac. ?ill yield t.e best results.
TA<"& 0). $llustration o& 1i&&erent 1esign and Kinancing 2lternatives Min G t.ousandsN
9ear
1esign 2lternative One 1esign 2lternative ,?o
Operating
(as. Klo?
Overdra&t
Kinancing
:ond
Kinancing
Operating
(as. Klo?
Overdra&t
Kinancing
:ond
Kinancing
+
1
2
3
4
"
<G1+++
<2"++
1+++
1"++
1"++
1%++
G1+++
2"++
<1+++
<1"++
<1"++
<)21
G3#"3
<41'
<41'
<41'
<41'
<421%
G<2"++
<1+++
1+++
1"++
1"++
1)3+
G2"++
1+++
<1+++
<1"++
<1"++
<12"4
G3'+"
<43"
<43"
<43"
<43"
<43)2
5*8 or
K*8 at 1+V
%#1 <2%% <2)+ %#% <34% <3+1
2*8 ]
5*8 _ K*8
4'4 4%1 42+ 4##
0.1! Pu>lic ersus Priate Ownership of (acilities
$n recent years various organizational o?ners.ip sc.emes .ave been proposed to raise
t.e level o& investment in constructed &acilities. Kor eIample independent aut.orities are
assuming responsibility &or some ?ater and se?er systems ?.ile private entrepreneurs
are ta0ing over t.e o?ners.ip o& public buildings suc. as stadiums and convention
centers in Boint ventures ?it. local governments. ;uc. o?ners.ip arrangements not only
can generate t.e capital &or ne? &acilities but also ?ill in&luence t.e management o& t.e
construction and operation o& t.ese &acilities. $n t.is section ?e s.all revie? some o&
t.ese implications.
2 particular organizational arrangement or &inancial sc.eme is not necessarily superior to
all ot.ers in eac. case. Even &or similar &acilities t.ese arrangements and sc.emes may
di&&er &rom place to place or over time. Kor eIample U.;. ?ater supply systems are
o?ned and operated bot. by relatively large and small organizations in eit.er t.e private
or public sector. 4odern port&olio t.eory suggest t.at t.ere may be advantages in using a
variety o& &inancial sc.emes to spread ris0s. ;imilarly small or large organizations may
.ave di&&erent relative advantages ?it. respect to personnel training innovation or ot.er
activities.
$ifferences in Re"uired Rates of Return
2 basic di&&erence bet?een public and private o?ners.ip o& &acilities is t.at private
organizations are motivated by t.e eIpectation o& pro&its in ma0ing capital investments.
(onse!uently private &irms .ave a .ig.er minimum attractive rate o& return M4233N on
investments t.an do public agencies. ,.e 4233 represents t.e desired return or pro&it
&or ma0ing capital investments. Kurt.ermore private &irms o&ten must pay a .ig.er
interest rate &or borro?ing t.an public agencies because o& t.e taI eIempt or ot.er?ise
subsidized bonds available to public agencies. $nternational loans also o&&er subsidized
interest rates to !uali&ied agencies or proBects in many cases. Ait. .ig.er re!uired rates
o& return ?e eIpect t.at private &irms ?ill re!uire greater receipts t.an ?ould a public
agency to ma0e a particular investment desirable.
$n addition to di&&erent minimum attractive rates o& return t.ere is also an important
distinction bet?een public and private organizations ?it. respect to t.eir evaluation o&
investment bene&its. Kor private &irms t.e returns and bene&its to cover costs and provide
pro&it are monetary revenues. $n contrast public agencies o&ten consider total social
bene&its in evaluating proBects. ,otal social bene&its include monetary user payments plus
usersH surplus Me.g. t.e value received less costs incurred by usersN eIternal bene&its
Me.g. bene&its to local businesses or property o?nersN and non!uanti&iable &actors Me.g.
psyc.ological support unemployment relie& etc.N. 6enerally total social bene&its ?ill
eIceed monetary revenues.
A.ile t.ese di&&erent valuations o& bene&its may lead to radically di&&erent results ?it.
respect to t.e eItent o& bene&its associated ?it. an investment t.ey do not necessarily
re!uire public agencies to underta0e suc. investments directly. Kirst many public
enterprises must &und t.eir investments and operating eIpenses &rom user &ees. 4ost
public utilities &all into t.is category and t.e importance o& user &ee &inancing is
increasing &or many civil ?or0s suc. as ?ater?ays. Ait. user &ee &inancing t.e re!uired
returns &or t.e public and private &irms to underta0e t.e a&orementioned investment are
in &act limited to monetary revenues. 2s a second point it is al?ays possible &or a public
agency to contract ?it. a private &irm to underta0e a particular proBect.
2ll ot.er t.ings being e!ual ?e eIpect t.at private &irms ?ill re!uire larger returns &rom
a particular investment t.an ?ould a public agency. Krom t.e users or taIpayers point o&
vie? t.is implies t.at total payments ?ould be higher to private &irms &or identical
services. /o?ever t.ere are a number o& mitigating &actors to counterbalance t.is
disadvantage &or private &irms.
-a4 Implications of Pu*lic 6ersus Private (rganizations
2not.er di&&erence bet?een public and private &acility o?ners is in t.eir relative liability
&or taIes. *ublic entities are o&ten eIempt &rom taIes o& various 0inds ?.ereas private
&acility o?ners incur a variety o& income property and eIcise taIes. /o?ever t.ese
private taI liabilities can be o&&set at least in part by taI deductions o& various 0inds.
Kor private &irms income taIes represent a signi&icant cost o& operation. /o?ever
taIable income is based on t.e gross revenues less all eIpenses and allo?able deductions
as permitted by t.e prevalent taI la?s and regulations. ,.e most signi&icant allo?able
deductions are depreciation and interest. :y selecting t.e met.od o& depreciation and t.e
&inancing plan ?.ic. are most &avorable a &irm can eIert a certain degree o& control on
its taIable income and t.us its income taI.
2not.er &orm o& relie& in taI liability is t.e ta: credit ?.ic. allo?s a direct deduction &or
income taI purposes o& a small percentage o& t.e value o& certain ne?ly ac!uired assets.
2lt.oug. t.e provisions &or investment taI credit &or p.ysical &acilities and e!uipment
.ad been introduced at di&&erent times in t.e U; &ederal taI code t.ey ?ere eliminated in
t.e 1)'# ,aI 3e&ormation 2ct eIcept a taI credit &or lo?<income .ousing.
O& course a &irm must .ave pro&its to ta0e direct advantage o& suc. taI s.ields i.e. taI
deductions only reduce taI liabilities i& be&ore<taI pro&its eIist. $n many cases
investments in constructed &acilities .ave net outlays or losses in t.e early years o&
construction. 6enerally t.ese losses in early years can be o&&set against pro&its occurred
else?.ere or later in time. Ait.out suc. o&&setting pro&its losses can be carried &or?ard
by t.e &irm or merged ?it. ot.er &irmsH pro&its but t.ese mec.anisms ?ill not be
revie?ed .ere.
Effects of Financing Plans
4aBor investments in constructed &acilities typically rely upon borro?ed &unds &or a large
portion o& t.e re!uired capital investments. Kor private organizations t.ese borro?ed
&unds can be use&ul &or leverage to ac.ieve a .ig.er return on t.e organizationsH o?n
capital investment.
Kor public organizations borro?ing costs ?.ic. are larger t.an t.e 4233 results in
increased JcostJ and .ig.er re!uired receipts. $ncurring t.ese costs may be essential i& t.e
investment &unds are not ot.er?ise availableD capital &unds must come &rom some?.ere.
:ut it is not unusual &or t.e borro?ing rate to eIceed t.e 4233 &or public organizations.
$n t.is case reducing t.e amount o& borro?ing lo?ers costs ?.ereas increasing
borro?ing lo?ers costs ?.enever t.e 4233 is greater t.an t.e borro?ing rate.
2lt.oug. private organizations generally re!uire a .ig.er rate o& return t.an do public
bodies Mso t.at t.e re!uired receipts to ma0e t.e investment desirable are .ig.er &or t.e
private organization t.an &or t.e public bodyN consideration o& taI s.ields and
introduction o& a suitable &inancing plan may reduce t.is di&&erence. ,.e relative levels o&
t.e 4233 &or eac. group and t.eir borro?ing rates are critical in t.is calculation.
Effects of Capital 'rant Su*sidies
2n important element in public investments is t.e availability o& capital grant subsidies
&rom .ig.er levels o& government. Kor eIample interstate .ig.?ay construction is
eligible &or &ederal capital grants &or up to )+V o& t.e cost. Ot.er programs .ave di&&erent
matc.ing amounts ?it. "+U"+ matc.ing grants currently available &or ?aste?ater
treatment plants and various categories o& tra&&ic systems improvement in t.e U.;. ,.ese
capital grants are usually made available solely &or public bodies and &or designated
purposes.
A.ile t.e availability o& capital grant subsidies reduces t.e local cost o& proBects t.e
timing o& investment can also be a&&ected. $n particular public subsidies may be delayed
or spread over a longer time period because o& limited &unds. ,o t.e eItent t.at
MdiscountedN bene&its eIceed costs &or particular bene&its t.ese &unding delays can be
costly. (onse!uently private &inancing and investment may be a desirable alternative
even i& some subsidy &unds are available.
Implications for $esign and Construction
1i&&erent perspectives and &inancial considerations also may .ave implications &or design
and construction c.oices. Kor eIample an important class o& design decisions arises
relative to t.e trade<o&& bet?een capital and operating costs. $t is o&ten t.e case t.at initial
investment or construction costs can be reduced but at t.e eIpense o& a .ig.er operating
costs or more &re!uent and eItensive re.abilitation or repair eIpenditures. $t is t.is trade<
o&& ?.ic. .as led to t.e consideration o& Jli&e cycle costsJ o& alternative designs. ,.e
&inancial sc.emes revie?ed earlier can pro&oundly e&&ect suc. evaluations.
Kor &inancial reasons it ?ould o&ten be advantageous &or a public body to select a more
capital intensive alternative ?.ic. ?ould receive a larger capital subsidy and t.ereby
reduce t.e proBectHs local costs. $n e&&ect t.e capital grant subsidy ?ould distort t.e trade<
o&& bet?een capital and operating costs in &avor o& more capital intensive proBects.
,.e various taI and &inancing considerations ?ill also a&&ect t.e relative merits o&
relatively capital intensive proBects. Kor eIample as t.e borro?ing rate increases more
capital intensive alternatives become less attractive. ,aI provisions suc. as t.e
investment taI credit or accelerated depreciation are intended to stimulate investment and
t.ereby ma0e more capital intensive proBects relatively more desirable. $n contrast a
.ig.er minimum attractive rate o& return tends to ma0e more capital intensive proBects
less attractive.
0.1+ &conomic &aluation of ;ifferent (orms of
Ownership
A.ile it is di&&icult to conclude de&initely t.at one or anot.er organizational or &inancial
arrangement is al?ays superior di&&erent organizations .ave systematic implications &or
t.e ?ays in ?.ic. constructed &acilities are &inanced designed and constructed.
4oreover t.e selection o& alternative investments &or constructed &acilities is li0ely to be
a&&ected by t.e type and scope o& t.e decision<ma0ing organization.
2s an eIample o& t.e perspectives o& public and private organizations consider t.e
potential investment on a constructed &acility ?it. a proBected use&ul li&e o& n years. Let t
] + be t.e beginning o& t.e planning .orizon and t ] 1 2 ... n denote t.e end o& eac. o&
t.e subse!uent years. Kurt.ermore let (
o
be t.e cost o& ac!uiring t.e &acility at t ] + and
(
t
be t.e cost o& operation in year t. ,.en t.e net receipts 2
t
in year t is given by 2
t
] :
t
< (
t
in ?.ic. :
t
is t.e bene&it in year t and 2
t
may be positive or negative &or t ] + 1
2 ... n.
Let t.e minimum attractive rate o& return M4233N &or t.e o?ner o& t.e &acility be
denoted by i. ,.en t.e net present value M5*8N o& a proBect as represented by t.e net
cas. &lo? discounted to t.e present time is given byD
#.31
,.en a proBect is acceptable i& 5*8 +. A.en t.e annual gross receipt is uni&orm i.e. :
t
] : &or t ] 1 2 ... n and :
+
] + t.en &or 5*8 ] +D
#.32
,.us t.e minimum uni&orm annual gross receipt : ?.ic. ma0es t.e proBect
economically acceptable can be determined &rom E!uation M#.32N once t.e ac!uisition
and operation costs (
t
o& t.e &acility are 0no?n and t.e 4233 is speci&ied.
&9ample 0)0* ;ifferent ,A22s for Pu>lic and Priate Organi6ations
Kor t.e &acility cost stream o& a potential investment ?it. n ] % in ,able #<" t.e re!uired
uni&orm annual gross receipts : are di&&erent &or public and private o?ners.ips since
t.ese t?o types o& organizations usually c.oose di&&erent values o& 4233. Ait. a given
value o& 4233 ] i in eac. case t.e value o& : can be obtained &rom E!. M#.32N. Ait. a
4233 o& 1+V a public agency re!uires at least : ] G1'4+++. :y contrast a private
&irm using a 2+V 4233 be&ore taI ?.ile neglecting ot.er e&&ects suc. as depreciation
and taI deduction ?ould re!uire at least : ] G21)+++. ,.en according to E!. M#.31N t.e
gross receipt streams &or bot. public and private o?ners.ips in ,able #<" ?ill satis&y t.e
condition 5*8 ] + ?.en eac. o& t.em is netted &rom t.e cost stream and discounted at
t.e appropriate value o& 4233 i.e. 1+V &or a public agency and 2+V Mbe&ore taIN &or a
private &irm. ,.us t.is case suggests t.at public provision o& t.e &acility .as lo?er user
costs.
TA<"& 0)0 3e!uired Uni&orm 2nnual 6ross 3eceipts &or *ublic and
*rivate O?ners.ip o& a Kacility Min G t.ousandsN
9ear t Kacility *ublic O?ners.ip *rivate O?ners.ip
cost (
t
6ross
3eceipt
:
t
5et 3eceipt
2
t
]:
t
< (
t
6ross
3eceipt
:
t
5et 3eceipt
2
t
]:
t
< (
t
+
1
2
3
4
"
#
%
G"++
%#
%'
'+
'2
'4
'#
''
G+
1'4
1'4
1'4
1'4
1'4
1'4
1'4
<G"++
1+'
1+#
1+4
1+2
1++
)'
)#
G+
21)
21)
21)
21)
21)
21)
21)
<G"++
143
141
13)
13%
13"
133
131
&9ample 0)1* &ffects of ;epreciation and Ta9 /hields for Priate (irms
Using t.e same data as in EIample #<# ?e no? consider t.e e&&ects o& depreciation and
taI deduction &or private &irms. ;uppose t.at t.e marginal taI rate o& t.e &irm is 34V in
eac. year o& operation and losses can al?ays be o&&set by company<?ide pro&its.
;uppose &urt.er t.at t.e salvage value o& t.e &acility is zero at t.e end o& seven years so
t.at t.e entire amount o& cost can be depreciated by means o& t.e sum<o&<t.e<yearsH<digits
M;O91N met.od. ,.us &or t.e sum o& digits 1 t.roug. % e!ual to 2' t.e depreciation
allo?ances &or years 1 to % are respectively %U2' #U2' ... 1U2' o& t.e total depreciable
value o& G "+++++ and t.e results are recorded in column 3 o& ,able #<#. Kor a uni&orm
annual gross receipt : ] G21)+++ t.e net receipt be&ore taI in (olumn # o& ,able #<" in
EIample #<" can be used as t.e starting point &or computing t.e a&ter<taI cas. &lo?
according to E!uation M#.13N ?.ic. is carried out step<by<step in ,able #<#. M1ollar
amounts are given to t.e nearest G1+++N. :y trial and error it is &ound t.at an a&ter<taI
4233 ] 14."V ?ill produce a zero value &or t.e net present value o& t.e discounted
a&ter<taI &lo? at t ] +. $n ot.er ?ords t.e re!uired uni&orm annual gross receipt &or t.is
proBect at 14."V 4233 a&ter taI is also : ] G21)+++. $t means t.at t.e 4233 o& t.is
private &irm must speci&y a 2+V 4233 be&ore taI in order to receive t.e e!uivalent o&
14."V 4233 a&ter taI.
TA<"&0)1 &ffects of ;epreciation and Ta9 ;eductions for Priate
Ownership in a (acility Din L thousandsE
9ear t
5et 3eceipt
:e&ore<taI
2
t
1epreciation
M;O91N
1
t
,aIable
$ncome
M2
t
< 1
t
N
$ncome
,aI
^
t
M2
t
< 1
t
N
2&ter<taI
(as. Klo?
[ td\
+
1
2
3
4
"
#
<G"++
143
141
13)
13%
13"
133
G+
12"
1+%
')
%1
"4
3#
G+
1'
34
"+
##
'1
)%
G+
#
12
1%
22
2'
33
<G"++
13%
12)
122
11"
1+%
1++
% 131 1' 113 3' )3
&9ample 0)3* &ffects of <orrowing on Pu>lic Agencies
;uppose t.at t.e gross uni&orm annual receipt &or public o?ners.ip is : ] G1)++++
instead o& G1'4+++ &or t.e &acility ?it. cost stream given in (olumn 2 o& ,able #<".
;uppose &urt.er t.at t.e public agency must borro? G4+++++ M'+V o& t.e &acility costN at
12V annual interest resulting in an annual uni&orm payment o& G''+++ &or t.e
subse!uent seven years. ,.is in&ormation .as been summarized in ,able #<%. ,.e use o&
borro?ed &unds to &inance a &acility is re&erred to as debt &inancing or leveraged
&inancing and t.e combined cas. &lo? resulting &rom operating and &inancial cas. &lo?s
is re&erred to as t.e levered cas. &lo?.
,o t.e net receipt 2
t
in (olumn 4 o& ,able #<% ?.ic. .as been obtained &rom a uni&orm
annual gross receipt o& G1)++++ ?e add t.e &inancial cas. &lo? ?.ic. included a
loan o& G4+++++ ?it. an annual repayment o& G''+++ corresponding to an interest rate
o& 12V. ,.en t.e resulting combined cas. &lo? 22
t
as computed according to E!uation
M#.2#N is s.o?n in column # o& ,able #<%. 5ote t.at &or a loan at 12V interest t.e net
present value o& t.e combined cas. &lo? 22
t
is zero ?.en discounted at a 1+V 4233
&or t.e public agency. ,.is is not a coincidence but several values o& : .ave been tried
until : ] G1)++++ is &ound to satis&y 5*8 ] + at 1+V 4233. /ence t.e minimum
re!uired uni&orm annual gross receipt is : ] G1)++++.
TA<"& 0)3 &ffects of <orrowing on a Pu>licly Owned (acility Din L
thousandsE
9ear
t
6ross
receipt
:
t
Kacility
cost
(
t
5et receipt
Mno loanN
2
t
Loan and
payment
M12V interestN
(ombined cas.
&lo?
M12V interestN
22
t
+
1
2
3
4
"
#
%
G+
1)+
1)+
1)+
1)+
1)+
1)+
1)+
G"++
%#
%'
'+
'2
'4
'#
''
<G"++
114
112
11+
1+'
1+#
1+4
1+2
_G4++
<''
<''
<''
<''
<''
<''
<''
<G1++
2#
24
22
2+
1'
1#
14
&9ample 0)4* &ffects of "eerage and Ta9 /hields for Priate Organi6ations
;uppose t.at t.e uni&orm annual gross receipt &or a private &irm is also : ] G1)++++ Mt.e
same as t.at &or t.e public agency in EIample #<%N. ,.e salvage value o& t.e &acility is
zero at t.e end o& seven years so t.at t.e entire amount o& cost can be depreciated by
means o& t.e sum<o&<t.e<yearsH<digit M;O91N met.od. ,.e marginal taI rate o& t.e &irm is
34V in eac. year o& operation and losses can al?ays be o&&set by company<?ide pro&its.
;uppose &urt.er t.at t.e &irm must borro? G4+++++ M'+V o& t.e &acility costN at a 12V
annual interest resulting in an annual uni&orm payment o& G''+++ &or t.e subse!uent
seven years. ,.e interest c.arge eac. year can be computed as 12V o& t.e remaining
balance o& t.e loan in t.e previous year and t.e interest c.arge is deductible &rom t.e taI
liability.
Kor : ] G1)++++ and a &acility cost stream identical to t.at in EIample #<% t.e net
receipts be&ore taI 2
t
Moperating cas. &lo? ?it. no loanN in ,able #<% can be used as t.e
starting point &or analyzing t.e e&&ects o& &inancial leverage t.roug. borro?ing. ,.us
column 4 o& ,able #<% is reproduced in column 2 o& ,able #<'.
,.e computation o& t.e a&ter<taI cas. &lo? o& t.e private &irm including t.e e&&ects o& taI
s.ields &or interest is carried out in ,able #<'. ,.e &inancial < cas. stream in (olumn
4 o& ,able #<' indicates a loan o& G4+++++ ?.ic. is secured at t ] + &or an annual interest
o& 12V and results in a series o& uni&orm annual payments o& G''+++ in order to repay
t.e principal and interest. ,.e levered a&ter<taI cas. &lo? 99
t
can be obtained by E!.
M#.2)N using t.e same investment credit depreciation met.od and taI rate and is
recorded in (olumn % o& ,able #<'. ;ince t.e net present value o& 99
t
in (olumn % o&
,able #<' discounted at 14."V .appens to be zero t.e minimum re!uired uni&orm annual
gross receipt &or t.e potential investment is G1)++++. :y borro?ing G4+++++ M'+V o&
t.e &acility costN at 12V annual interest t.e investment becomes more attractive to t.e
private &irm. ,.is is eIpected because o& t.e taI s.ield &or t.e interest and t.e 12V
borro?ing rate ?.ic. is lo?er t.an t.e 14."V 4233 a&ter<taI &or t.e &irm.
TA<"& 0)4 &ffects of (inancial "eerage and Ta9 /hields on
Priate Ownership of a (acility Din L thousandsE
9ear
t
5et
3eceipt
:e&ore
,aI
Mno loanN
2
t
1epreciation
M;O91N
1
t
Loan and
;c.eduled
*ayment
$nterest
On Loan
$
t
$ncome
,aI
M34V
rateN
^
t
M2
t
< 1
t
< $
t
N
2&ter ,aI
(as. Klo?
MleveredN
99
t
+
1
2
3
4
"
#
%
<G"++
114
112
11+
1+'
1+#
1+4
1+2
G+
12"
1+%
')
%1
"4
3#
1'
G4++
<''
<''
<''
<''
<''
<''
<''
G+
4'
43
3'
32
2"
1'
)
G+
<1)
<13
<#
2
)
1%
2#
<G1++
4"
3%
2'
1'
)
<1
<12
&9ample 0)15* Comparison of Pu>lic and Priate Ownership.
$n eac. o& t.e analyses in EIamples #<" t.roug. #<' a minimum re!uired uni&orm annual
gross receipt : is computed &or eac. given condition ?.et.er t.e o?ner is a public
agency or a private &irm. :y &inding t.e value o& : ?.ic. ?ill lead to 5*8 ] + &or t.e
speci&ied 4233 &or t.e organization in eac. case various organizational e&&ects ?it. or
?it.out borro?ing can be analyzed. ,.e results are summarized in ,able #<) &or
comparison. $n t.is eIample public o?ners.ip ?it. a '+V loan and a 1+V 4233 .as
t.e same re!uired bene&it as private o?ners.ip ?it. an identical '+V loan and a 14."V
a&ter<taI 4233.
TA<"& 0)15 ;ummary e&&ects o& Kinancial Leverage and ,aI ;.ields
on *rivate O?ners.ip
Organizational
condition
Kinancial
arrangement
4inimum bene&it
re!uired
*ublic no taI
M4233 ] 1+VN
5o loan
'+V loan at 12V interest
G1'4+++
1)++++
*rivate be&ore taI
M4233 ] 2+VN
5o loan 21)+++
21)+++
*rivate a&ter taI
M4233 ] 14."VN
5o loan
'+V loan at 12V interest
21)+++
1)++++
0.1- 2eferences
1. 2u ,. J*ro&it 4easures and 4et.ods o& Economic 2nalysis &or (apital *roBect
;electionJ "#$E 2ournal of 'anagement in Engineering% 8ol. 4 5o. 3 1)''.
2. 2u ,. and ,. *. 2u Engineering Economics for $apital -nvestment "nalysis
2llyn and :acon 5e?ton 42 1)'3.
3. :ierman /. Pr. and ;. ;midt ,he $apital /udgeting &ecision "t. Ed.
4acmillan 5e? 9or0 1)'4.
4. :realey 3. and ;. 4yers !rinciples of $orporate 7inance% ;econd Edition
4c6ra?</ill 5e? 9or0 1)'4.
". Ed?ards A.(. and P.K. Aong J2 (omputer 4odel to Estimate (apital and
Operating (ostsJ $ost Engineering% 8ol. 2) 5o. 1+ 1)'% pp. 1"<21.
#. /endric0son (. and ,. 2u J*rivate versus *ublic O?ners.ip o& (onstructed
KacilitiesJ "#$E 2ournal of 'anagement in Engineering% 8ol. 1 5o. 3 1)'"
pp. 11)<131.
%. Ao.l 4. and (. /endric0son ,ransportation -nvestment and !ricing !rinciples
Po.n Ailey 5e? 9or0 1)'4.
0.1. Pro>lems
1. ,.e ;alisbury (orporation is considering &our mutually eIclusive alternatives &or a
maBor capital investment proBect. 2ll alternatives .ave a use&ul li&e o& 1+ years ?it.
no salvage value at t.e end. ;traig.t line depreciation ?ill be used. ,.e corporation
pays &ederal and state taI at a rate o& 34V and eIpects an a&ter<taI 4233 o& 1+V.
1etermine ?.ic. alternative s.ould be selected using t.e 5*8 met.od.
2lternatives
$nitial cost
MGmillionN
:e&ore<taI uni&orm
annual net bene&its
MGmillionN
1
2
3
4
G4.+
3."
3.+
3.%
G1."
1.1
1.+
1.3
2. ,.e operating cas. &lo? &or t.e ac!uisition and maintenance o& a clams.ell &or
eIcavation is given by 2
t
in t.e table belo?. ,.ree &inancing plans eac. c.arging a
borro?ing rate o& 'V but .aving a di&&erent met.od o& < repayment are represented
by t.ree di&&erent cas. &lo?s o& . Kind t.e net present value &or eac. o& t.e t.ree
combined cas. &lo?s 22
t
&or operating and &inancing i& t.e 4233 is speci&ied to
be 'V.
9ear
t
Operating
Kinancing
MaN MbN McN
+
1
2
3
4
"
<G'++++
3++++
3++++
3++++
3++++
3++++
G4++++
<1++2+
<1++2+
<1++2+
<1++2+
<1++2+
G4++++
<32++
<32++
<32++
<32++
<432++
G4++++
<132++
<124++
<11#++
<1+'++
+
3. Kind t.e net present value &or eac. o& t.e t.ree cases in *roblem 2 i& t.e 4233 is
speci&ied to beD
MaN "V
MbN 1+V.
4. ;uppose t.e clams.ell in *roblem 2 is purc.ased by a private &irm ?.ic. pays
corporate taIes at a rate o& 34V. 1epreciation is based on t.e straig.t line met.od
?it. no salvage value at t.e end o& &ive years. $& t.e a&ter<taI 4233 o& t.e &irm is
'V &ind t.e net present value &or eac. o& t.e combined cas. &lo?s &or operating
and &inancing including t.e interest deduction. ,.e interest payments included in
t.e annual repayments o& eac. o& t.e loans are 'V times t.e unpaid principal in
eac. year ?it. t.e &ollo?ing valuesD
9ear MtN MaN MbN McN
1
2
3
4
G'++
##4
"1#
3"%
G32++
32++
32++
32++
G32++
24++
1#++
'++
" 1'" 32++ +
". 2n investment in a .auler ?ill cost G4++++ and .ave no salvage value at t.e end o&
" years. ,.e .auler ?ill generate a gross income o& G12+++ per year but its
operating cost ?ill be G2+++ during t.e &irst year increasing by G"++ per year until
it reac.es G"+++ in t.e &i&t. year. ,.e straig.t line depreciation met.od is used.
,.e taI rate is 34V and t.e a&ter<taI 4233 is 1+V. 1etermine t.e net present
value o& t.e .auler purc.ase &or a &ive year planning .orizon.
#. ,.e :ailey (onstruction (ompany is considering t.e purc.ase o& a diesel po?er
s.ovel to improve its productivity. ,.e s.ovel ?.ic. costs G'++++ is eIpected to
produce a be&ore<taI bene&it o& G3#+++ in t.e &irst year and G4+++ less in eac.
succeeding year &or a total o& &ive years Mi.e. be&ore taI bene&it o& G32+++ in t.e
second year G2'+++ in t.e t.ird year continuing to G2++++ in t.e &i&t. yearN. ,.e
salvage value o& t.e e!uipment ?ill be G"+++ at t.e end o& " years. ,.e &irm uses
t.e sum<o&<yearsH<digits depreciation &or t.e e!uipment and .as an annual taI rate o&
34V. $& t.e 4233 a&ter taI is 1+V is t.e purc.ase ?ort.?.ileX
%. ,.e 2:( (orporation is considering t.e purc.ase o& a number o& pipe<laying
mac.ines in order to &acilitate t.e operation in a ne? pipeline proBect eIpected to
last siI years. Eac. mac.ine ?ill cost G2#+++ and ?ill .ave no salvage value a&ter
t.e proBect is complete. ,.e &irm uses t.e straig.t line depreciation met.od and
pays annual income taIes on pro&its at t.e rate o& 34V. $& t.e &irmHs 4233 is 'V
?.ic. is t.e minimum uni&orm annual bene&it be&ore taI t.at must be generated by
t.is mac.ine in order to Busti&y its purc.aseX
'. ,.e ;pringdale (orporation plans to purc.ase a demolition and ?rec0ing mac.ine
to save labor costs. ,.e mac.ine costs G#++++ and .as a salvage value o& G1++++
at t.e end o& " years. ,.e mac.ine is eIpected to be in operation &or " years and it
?ill be depreciated by t.e straig.t line met.od up to t.e salvage value. ,.e
corporation speci&ies an a&ter<taI 4233 including in&lation o& 1+V and .as an
income taI rate o& 34V. ,.e annual in&lation rate is eIpected to be "V during t.e
neIt " years. $& t.e uni&orm annual net bene&it be&ore taI in terms o& base<year
dollars &or t.e neIt " years is G2++++ is t.e ne? investment ?ort.?.ileX
). ^9Y (ompany plans to invest G2 million in a ne? plant ?.ic. is eIpected to
produce a uni&orm annual net bene&it be&ore taI o& G#+++++ in terms o& t.e base<
year dollars over t.e neIt # years. ,.e plant .as a salvage value o& G2"++++ at t.e
end o& # years and t.e depreciation allo?ance is based on t.e straig.t line
depreciation met.od. ,.e corporate taI rate is 34V and t.e a&ter<taI 4233
speci&ied by t.e &irm is 1+V eIcluding in&lation. $& t.e annual in&lation rate during
t.e neIt # years is eIpected to be "V determine ?.et.er t.e investment is
?ort.?.ile.
1+. 2 se?age treatment plant is being planned by a public aut.ority. ,?o proposed
designs re!uire initial and annual maintenance costs as s.o?n belo?.
9ear
t
1esign 5o. 1
MG1+++sN
1esign 5o. 2
MG1+++sN
+
1<1#Meac.N
1+++
1"+
)++
1'+
11. :ot. designs ?ill last 1# years ?it. no salvage value. ,.e &ederal government ?ill
subsidize "+V o& t.e initial capital cost and t.e state government .as a policy to
subsidize 1+V o& t.e annual maintenance cost. ,.e local community intends to
obtain a loan to &inance 3+V o& t.e initial capital cost at a borro?ing rate o& 1+V
?it. siIteen e!ual annual payments including principal and interest. ,.e 4233 &or
t.is type o& proBect is 12V re&lecting its operating ris0. A.at is t.e uni&orm annual
revenue t.at must be collected in t.e neIt 1# years to ma0e eac. o& t.e t?o designs
?ort.?.ile &rom t.e vie? o& t.e local aut.orityX A.ic. design .as lo?er cost &rom
t.is perspectiveX
1. (inancing of Constructed (acilities
1.1 The (inancing Pro>lem
$nvestment in a constructed &acility represents a cost in t.e s.ort term t.at returns bene&its
only over t.e long term use o& t.e &acility. ,.us costs occur earlier t.an t.e bene&its and
o?ners o& &acilities must obtain t.e capital resources to &inance t.e costs o& construction.
2 proBect cannot proceed ?it.out ade!uate &inancing and t.e cost o& providing ade!uate
&inancing can be !uite large. Kor t.ese reasons attention to proBect &inance is an
important aspect o& proBect management. Kinance is also a concern to t.e ot.er
organizations involved in a proBect suc. as t.e general contractor and material suppliers.
Unless an o?ner immediately and completely covers t.e costs incurred by eac.
participant t.ese organizations &ace &inancing problems o& t.eir o?n.
2t a more general level proBect &inance is only one aspect o& t.e general problem o&
corporate &inance. $& numerous proBects are considered and &inanced toget.er t.en t.e net
cas. &lo? re!uirements constitute t.e corporate &inancing problem &or capital investment.
A.et.er proBect &inance is per&ormed at t.e proBect or at t.e corporate level does not alter
t.e basic &inancing problem.
$n essence t.e proBect &inance problem is to obtain &unds to bridge t.e time bet?een
ma0ing eIpenditures and obtaining revenues. :ased on t.e conceptual plan t.e cost
estimate and t.e construction plan t.e cas. &lo? o& costs and receipts &or a proBect can be
estimated. 5ormally t.is cas. &lo? ?ill involve eIpenditures in early periods. (overing
t.is negative cas. balance in t.e most bene&icial or cost e&&ective &as.ion is t.e proBect
&inance problem. 1uring planning and design eIpenditures o& t.e o?ner are modest
?.ereas substantial costs are incurred during construction. Only a&ter t.e &acility is
complete do revenues begin. $n contrast a contractor ?ould receive periodic payments
&rom t.e o?ner as construction proceeds. /o?ever a contractor also may .ave a negative
cas. balance due to delays in payment and retainage o& pro&its or cost reimbursements on
t.e part o& t.e o?ner.
*lans considered by o?ners &or &acility &inancing typically .ave bot. long and s.ort term
aspects. $n t.e long term sources o& revenue include sales grants and taI revenues.
:orro?ed &unds must be eventually paid bac0 &rom t.ese ot.er sources. $n t.e s.ort term
a ?ider variety o& &inancing options eIist including borro?ing grants corporate
investment &unds payment delays and ot.ers. 4any o& t.ese &inancing options involve
t.e participation o& t.ird parties suc. as ban0s or bond under?riters. Kor private &acilities
suc. as o&&ice buildings it is customary to .ave completely di&&erent &inancing
arrangements during t.e construction period and during t.e period o& &acility use. 1uring
t.e latter period mortgage or loan &unds can be secured by t.e value o& t.e &acility itsel&.
,.us di&&erent arrangements o& &inancing options and participants are possible at
di&&erent stages o& a proBect so t.e practice o& &inancial planning is o&ten complicated.
On t.e ot.er .and t.e options &or borro?ing by contractors to bridge t.eir eIpenditures
and receipts during construction are relatively limited. Kor small or medium size proBects
overdra&ts &rom ban0 accounts are t.e most common &orm o& construction &inancing.
Usually a maIimum limit is imposed on an overdra&t account by t.e ban0 on t.e basis o&
eIpected eIpenditures and receipts &or t.e duration o& construction. (ontractors ?.o are
engaged in large proBects o&ten o?n substantial assets and can ma0e use o& ot.er &orms o&
&inancing ?.ic. .ave lo?er interest c.arges t.an overdra&ting.
$n recent years t.ere .as been gro?ing interest in design<build<operate proBects in ?.ic.
o?ners prescribe &unctional re!uirements and a contractor .andles &inancing. (ontractors
are repaid over a period o& time &rom proBect revenues or government payments.
Eventually o?ners.ip o& t.e &acilities is trans&erred to a government entity. 2n eIample
o& t.is type o& proBect is t.e (on&ederation :ridge to *rince Ed?ard $sland in (anada.
$n t.is c.apter ?e ?ill &irst consider &acility &inancing &rom t.e o?nerHs perspective ?it.
due consideration &or its interaction ?it. ot.er organizations involved in a proBect. Later
?e discuss t.e problems o& construction &inancing ?.ic. are crucial to t.e pro&itability
and solvency o& construction contractors.
1.! $nstitutional Arrangements for (acility (inancing
Kinancing arrangements di&&er s.arply by type o& o?ner and by t.e type o& &acility
construction. 2s one eIample many municipal proBects are &inanced in t.e United ;tates
?it. ta: e:empt )onds &or ?.ic. interest payments to a lender are eIempt &rom income
taIes. 2s a result taI eIempt municipal bonds are available at lo?er interest c.arges.
1i&&erent institutional arrangements .ave evolved &or speci&ic types o& &acilities and
organizations.
2 private corporation ?.ic. plans to underta0e large capital proBects may use its retained
earnings see0 e!uity partners in t.e proBect issue bonds o&&er ne? stoc0s in t.e &inancial
mar0ets or see0 borro?ed &unds in anot.er &as.ion. *otential sources o& &unds ?ould
include pension &unds insurance companies investment trusts commercial ban0s and
ot.ers. 1evelopers ?.o invest in real estate properties &or rental purposes .ave similar
sources plus !uasi<governmental corporations suc. as urban development aut.orities.
;yndicators &or investment suc. as real estate investment trusts M3E$,sN as ?ell as
domestic and &oreign pension &unds represent relatively ne? entries to t.e &inancial
mar0et &or building mortgage money.
*ublic proBects may be &unded by taI receipts general revenue bonds or special bonds
?it. income dedicated to t.e speci&ied &acilities. 6eneral revenue bonds ?ould be repaid
&rom general taIes or ot.er revenue sources ?.ile special bonds ?ould be redeemed
eit.er by special taIes or user &ees collected &or t.e proBect. 6rants &rom .ig.er levels o&
government are also an important source o& &unds &or state county city or ot.er local
agencies.
1espite t.e di&&erent sources o& borro?ed &unds t.ere is a roug. e!uivalence in t.e actual
cost o& borro?ing money &or particular types o& proBects. :ecause lenders can participate
in many di&&erent &inancial mar0ets t.ey tend to s?itc. to?ards loans t.at return t.e
.ig.est yield &or a particular level o& ris0. 2s a result borro?ed &unds t.at can be
obtained &rom di&&erent sources tend to .ave very similar costs including interest c.arges
and issuing costs.
2s a general principle .o?ever t.e costs o& &unds &or construction ?ill vary inversely
?it. t.e ris0 o& a loan. Lenders usually re!uire security &or a loan represented by a
tangible asset. $& &or some reason t.e borro?er cannot repay a loan t.en t.e borro?er can
ta0e possession o& t.e loan security. ,o t.e eItent t.at an asset used as security is o&
uncertain value t.en t.e lender ?ill demand a greater return and .ig.er interest
payments. Loans made &or proBects under construction represent considerable ris0 to a
&inancial institution. $& a lender ac!uires an un&inis.ed &acility t.en it &aces t.e di&&icult
tas0 o& re<assembling t.e proBect team. 4oreover a de&ault on a &acility may result i& a
problem occurs suc. as &oundation problems or anticipated unpro&itability o& t.e &uture
&acility. 2s a result o& t.ese uncertainties construction lending &or un&inis.ed &acilities
commands a premium interest c.arge o& several percent compared to mortgage lending
&or completed &acilities.
Kinancing plans ?ill typically include a reserve amount to cover un&oreseen eIpenses
cost increases or cas. &lo? problems. ,.is reserve can be represented by a special reserve
or a contingency amount in t.e proBect budget. $n t.e simplest case t.is reserve mig.t
represent a borro?ing agreement ?it. a &inancial institution to establis. a line of credit in
case o& need. Kor publicly traded bonds speci&ic reserve &unds administered by a t.ird
party may be establis.ed. ,.e cost o& t.ese reserve &unds is t.e di&&erence bet?een t.e
interest paid to bond.olders and t.e interest received on t.e reserve &unds plus any
administrative costs.
Kinally arranging &inancing may involve a lengt.y period o& negotiation and revie?.
*articularly &or publicly traded bond &inancing speci&ic legal re!uirements in t.e issue
must be met. 2 typical seven mont. sc.edule to issue revenue bonds ?ould include t.e
various steps outlined in ,able %<1. R1S $n many cases t.e speed in ?.ic. &unds may be
obtained ?ill determine a proBectHs &inancing mec.anism.
TA<"& 1)1 $llustrative *rocess and ,iming &or $ssuing 3evenue :onds
2ctivities ,ime o& 2ctivities
2nalysis o& &inancial alternatives
*reparation o& legal documents
*reparation o& disclosure documents
Korecasts o& costs and revenues
:ond 3atings
:ond 4ar0eting
:ond (losing and 3eceipt o& Kunds
Aee0s +<4
Aee0s 1<1%
Aee0s 2<2+
Aee0s 4<2+
Aee0s 2+<23
Aee0s 21<24
Aee0s 23<2#
&9ample 1)1* &9ample of financing options
;uppose t.at you represent a private corporation attempting to arrange &inancing &or a
ne? .ead!uarters building. ,.ese are several options t.at mig.t be consideredD
=se corporate equity and retained earnings* ,.e building could be &inanced by
directly committing corporate resources. $n t.is case no ot.er institutional parties
?ould be involved in t.e &inance. /o?ever t.ese corporate &unds mig.t be too
limited to support t.e &ull cost o& construction.
Construction loan and long term mortgage* $n t.is plan a loan is obtained
&rom a ban0 or ot.er &inancial institution to &inance t.e cost o& construction. Once
t.e building is complete a variety o& institutions may be approac.ed to supply
mortgage or long term &unding &or t.e building. ,.is &inancing plan ?ould
involve bot. s.ort and long term borro?ing and t.e t?o periods mig.t involve
di&&erent lenders. ,.e long term &unding ?ould .ave greater security since t.e
building ?ould t.en be complete. 2s a result more organizations mig.t be
interested in providing &unds Mincluding pension &undsN and t.e interest c.arge
mig.t be lo?er. 2lso t.is basic &inancing plan mig.t be supplemented by ot.er
sources suc. as corporate retained earnings or assistance &rom a local
development agency.
"ease the >uilding from a third party* $n t.is option t.e corporation ?ould
contract to lease space in a .ead!uarters building &rom a developer. ,.is
developer ?ould be responsible &or obtaining &unding and arranging construction.
,.is plan .as t.e advantage o& minimizing t.e amount o& &unds borro?ed by t.e
corporation. Under terms o& t.e lease contract t.e corporation still mig.t .ave
considerable in&luence over t.e design o& t.e .ead!uarters building even t.oug.
t.e developer ?as responsible &or design and construction.
$nitiate a Foint 'enture with "ocal Coernment* $n many areas local
governments ?ill .elp local companies ?it. maBor ne? ventures suc. as a ne?
.ead!uarters. ,.is .elp mig.t include assistance in assembling property lo?
interest loans or property taI reductions. $n t.e eItreme local governments may
&orce sale o& land t.roug. t.eir po?er o& eminent domain to assemble necessary
plots.

1.+ &aluation of Alternatie (inancing Plans

;ince t.ere are numerous di&&erent sources and arrangements &or obtaining t.e &unds
necessary &or &acility construction o?ners and ot.er proBect participants re!uire some
mec.anism &or evaluating t.e di&&erent potential sources. ,.e relative costs o& di&&erent
&inancing plans are certainly important in t.is regard. $n addition t.e &leIibility o& t.e
plan and availability o& reserves may be critical. 2s a proBect manager it is important to
assure ade!uate &inancing to complete a proBect. 2lternative &inancing plans can be
evaluated using t.e same tec.ni!ues t.at are employed &or t.e evaluation o& investment
alternatives.
2s described in (.apter # t.e availability o& di&&erent &inancing plans can a&&ect t.e
selection o& alternative proBects. 2 general approac. &or obtaining t.e combined e&&ects o&
operating and &inancing cas. &lo?s o& a proBect is to determine t.e adBusted net present
value M2*8N ?.ic. is t.e sum o& t.e net present value o& t.e operating cas. &lo? M5*8N
and t.e net present value o& t.e &inancial cas. &lo? MK*8N discounted at t.eir respective
minimum attractive rates o& return M4233N i.e.
%.1
?.ere r is t.e 4233 re&lecting t.e ris0 o& t.e operating cas. &lo? and r
&
is t.e 4233
representing t.e cost o& borro?ing &or t.e &inancial cas. &lo?. ,.us
%.2
?.ere 2
t
and are respectively t.e operating and &inancial cas. &lo?s in period t.
Kor t.e sa0e o& simplicity ?e s.all emp.asize in t.is c.apter t.e evaluation o& &inancing
plans ?it. occasional re&erences to t.e combined e&&ects o& operating and &inancing cas.
&lo?s. $n all discussions ?e s.all present various &inancing sc.emes ?it. eIamples
limiting to cases o& be&ore<taI cas. &lo?s discounted at a be&ore<taI 4233 o& r ] r
&
&or
bot. operating and &inancial cas. &lo?s. Once t.e basic concepts o& various &inancing
sc.emes are clearly understood t.eir application to more complicated situations
involving depreciation taI liability and ris0 &actors can be considered in combination
?it. t.e principles &or dealing ?it. suc. topics enunciated in (.apter #.
$n t.is section ?e s.all concentrate on t.e computational tec.ni!ues associated ?it. t.e
most common types o& &inancing arrangements. 4ore detailed descriptions o& various
&inancing sc.emes and t.e comparisons o& t.eir advantages and disadvantages ?ill be
discussed in later sections.
,ypically t.e interest rate &or borro?ing is stated in terms o& annual percentage rate
M2.*.3.N but t.e interest is accrued according to t.e rate &or t.e interest period speci&ied
in t.e borro?ing agreement. Let i
p
be t.e nominal annual percentage rate and i be t.e
interest rate &or eac. o& t.e p interest periods per year. :y de&inition
%.3
$& interest is accrued semi<annually i.e. p ] 2 t.e interest rate per period is i
p
U2O similarly
i& t.e interest is accrued mont.ly i.e. p ] 12 t.e interest rate per period is i
p
U12. On t.e
ot.er .and t.e e&&ective annual interest rate i
e
is given byD
%.4
5ote t.at t.e e&&ective annual interest rate i
e
ta0es into account compounding ?it.in t.e
year. 2s a result i
e
is greater t.an i
p
&or t.e typical case o& more t.an one compounding
period per year.
Kor a coupon bond t.e &ace value o& t.e bond denotes t.e amount borro?ed Mcalled
principalN ?.ic. must be repaid in &ull at a maturity or due date ?.ile eac. coupon
designates t.e interest to be paid periodically &or t.e total number o& coupons covering all
periods until maturity. Let L be t.e amount borro?ed and $
p
be t.e interest payment per
period ?.ic. is o&ten siI mont.s &or coupon bonds. $& t.e coupon bond is prescribed to
reac. maturity in n years &rom t.e date o& issue t.e total number o& interest periods ?ill
be pn ] 2n. ,.e semi<annual interest payment is given byD
%."
$n purc.asing a coupon bond a discount &rom or a premium above t.e &ace value may be
paid.
2n alternative loan arrangement is to ma0e a series o& uni&orm payments including bot.
interest and part o& t.e principal &or a pre<de&ined number o& repayment periods. $n t.e
case o& uni&orm payments at an interest rate i &or n repayment periods t.e uni&orm
repayment amount U is given byD
%.#
?.ere MUd*inN is a capital recovery &actor ?.ic. readsD Jto &ind U given *]1 &or an
interest rate i over n periods.J (ompound interest &actors are as tabulated in 2ppendiI 2.
,.e number o& repayment periods n ?ill clearly in&luence t.e amounts o& payments in
t.is uni&orm payment case. Uni&orm payment bonds or mortgages are based on t.is &orm
o& repayment.
Usually t.ere is an origination &ee associated ?it. borro?ing &or legal and ot.er
pro&essional services ?.ic. is payable upon t.e receipt o& t.e loan. ,.is &ee may appear
in t.e &orm o& issuance c.arges &or revenue bonds or percentage point c.arges &or
mortgages. ,.e borro?er must allo? &or suc. &ees in addition to t.e construction cost in
determining t.e re!uired original amount o& borro?ing. ;uppose t.at a sum o& *
o
must be
reserved at t]+ &or t.e construction cost and Q is t.e origination &ee. ,.en t.e original
loan needed to cover bot. isD
%.%
$& t.e origination &ee is eIpressed as 0 percent o& t.e original loan i.e. Q ] 0L
+
t.enD
%.'
;ince interest and sometimes parts o& t.e principal must be repaid periodically in most
&inancing arrangements an amount L considerably larger t.an L
+
is usually borro?ed in
t.e beginning to provide ade!uate reserve &unds to cover interest payments construction
cost increases and ot.er unanticipated s.ort&alls. ,.e net amount received &rom
borro?ing is deposited in a separate interest bearing account &rom ?.ic. &unds ?ill be
?it.dra?n periodically &or necessary payments. Let t.e borro?ing rate per period be
denoted by i and t.e interest &or t.e running balance accrued to t.e proBect reserve
account be denoted by .. Let 2
t
be t.e net operating cas. &lo? &or < period t Mnegative &or
construction cost in period tN and be t.e net &inancial cas. &lo? in period t Mnegative
&or payment o& interest or principal or a combination o& bot.N. ,.en t.e running balance
5
t
o& t.e proBect reserve account can be determined by noting t.at at t]+
%.)
and at t ] 12...nD
%.1+
?.ere t.e value o& 2
t
or
t
may be zero &or some periodMsN. E!uations M%.)N and M%.1+N are
approIimate in t.at interest mig.t be earned on intermediate balances based on t.e
pattern o& payments during a period instead o& at t.e end o& a period.
:ecause t.e borro?ing rate i ?ill generally eIceed t.e investment rate . &or t.e running
balance in t.e proBect account and since t.e origination &ee increases ?it. t.e amount
borro?ed t.e &inancial planner s.ould minimize t.e amount o& money borro?ed under
t.is &inance strategy. ,.us t.ere is an optimal value &or L suc. t.at all estimated
s.ort&alls are covered interest payments and eIpenses are minimized and ade!uate
reserve &unds are available to cover unanticipated &actors suc. as construction cost
increases. ,.is optimal value o& L can eit.er be identi&ied analytically or by trial and
error.
Kinally variations in o?ners.ip arrangements may also be used to provide at least partial
&inancing. Leasing a &acility removes t.e need &or direct &inancing o& t.e &acility. ;ale<
leasebac0 involves sale o& a &acility to a t.ird party ?it. a separate agreement involving
use o& t.e &acility &or a pre<speci&ied period o& time. $n one sense leasing arrangements
can be vie?ed as a particular &orm o& &inancing. $n return &or obtaining t.e use o& a
&acility or piece o& e!uipment t.e user MlesserN agrees to pay t.e o?ner MlesserN a lease
payment every period &or a speci&ied number o& periods. Usually t.e lease payment is at
a &iIed level due every mont. semi<annually or annually. ,.us t.e cas. &lo? associated
?it. t.e e!uipment or &acility use is a series o& uni&orm payments. ,.is cas. &lo? ?ould
be identical to a cas. &lo? resulting &rom &inancing t.e &acility or purc.ase ?it. su&&icient
borro?ed &unds to cover initial construction Mor purc.aseN and ?it. a repayment sc.edule
o& uni&orm amounts. O& course at t.e end o& t.e lease period t.e o?ners.ip o& t.e
&acility or e!uipment ?ould reside ?it. t.e lesser. /o?ever t.e lease terms may include
a provision &or trans&erring o?ners.ip to t.e lesser a&ter a &iIed period.
&9ample 1)!* A coupon >ond cash flow and cost
2 private corporation ?is.es to borro? G1+." million &or t.e construction o& a ne?
building by issuing a t?enty<year coupon bond at an annual percentage interest rate o&
1+V to be paid semi<annually i.e. "V per interest period o& siI mont.s. ,.e principal
?ill be repaid at t.e end o& 2+ years. ,.e amount borro?ed ?ill cover t.e construction
cost o& G1+.331 million and an origination &ee o& G1#)+++ &or issuing t.e coupon bond.
,.e interest payment per period is M"VN M1+."N ] G+."2" million over a li&e time o& M2N
M2+N ] 4+ interest periods. ,.us t.e cas. &lo? o& &inancing by t.e coupon bond consists
o& a G1+." million receipt at period + <G+."2" million eac. &or periods 1 t.roug. 4+ and
an additional <G1+." million &or period 4+. 2ssuming a 4233 o& "V per period t.e net
present value o& t.e &inancial cas. &lo? is given byD
RK*8S
"V
N ] 1+." < M+."2"NM*dU "V 4+N < M1+."NM*dK "V 4+N ] +
,.is result is eIpected since t.e corporation ?ill be indi&&erent bet?een borro?ing and
diverting capital &rom ot.er uses ?.en t.e 4233 is identical to t.e borro?ing rate. 5ote
t.at t.e e&&ective annual rate o& t.e bond may be computed according to E!.M%.4N as
&ollo?sD
i
e
] M1 _ +.+"N
2
< 1 ] +.1+2" ] 1+.2"V
$& t.e interest payments ?ere made only at t.e end o& eac. year over t?enty years t.e
annual payment s.ould beD
+."2"M1 _ +.+"N _ +."2" ] 1.+%#
?.ere t.e &irst term indicates t.e de&erred payment at t.e mid<year ?.ic. ?ould accrue
interest at "V until t.e end o& t.e year t.enD
RK*8S
1+.2"V
] 1+." < M1.+%#NM*dU 1+.2"V 2+N < M1+."NM*dK 1+.2"V 2+N ] +
$n ot.er ?ords i& t.e interest is paid at 1+.2"V annually over t?enty years o& t.e loan
t.e result is e!uivalent to t.e case o& semi<annual interest payments at "V over t.e same
li&etime.
&9ample 1)+* An e9ample of leasing ersus ownership analysis
;uppose t.at a developer o&&ered a building to a corporation &or an annual lease payment
o& G1+ million over a t.irty year li&etime. Kor t.e sa0e o& simplicity let us assume t.at t.e
developer also o&&ers to donate t.e building to t.e corporation at t.e end o& t.irty years
or alternatively t.e building ?ould t.en .ave no commercial value. 2lso suppose t.at
t.e initial cost o& t.e building ?as G#".## million. Kor t.e corporation t.e lease is
e!uivalent to receiving a loan ?it. uni&orm payments over t.irty years at an interest rate
o& 1"V since t.e present value o& t.e lease payments is e!ual to t.e initial cost at t.is
interest rateD
$& t.e minimum attractive rate o& return o& t.e corporation is greater t.an 1"V t.en t.is
lease arrangement is advantageous as a &inancing sc.eme since t.e net present value o&
t.e leasing cas. &lo? ?ould be less t.an t.e cas. &lo? associated ?it. construction &rom
retained earnings. Kor eIample ?it. 4233 e!ual to 2+VD
RK*8S
2+V
] G#".## million < MG1+ millionNM*dU 2+V 3+N ] G1".'%1 million
On t.e ot.er .and ?it. 4233 e!ual to 1+VD
RK*8S
1+V
] G#".## million < MG1+ millionNM*dU 2+V 3+N ] G2'.#+) million
and t.e lease arrangement is not advantageous.
&9ample 1)-* &9ample ealuation of alternatie financing plans.
;uppose t.at a small corporation ?is.es to build a .ead!uarters building. ,.e
construction ?ill re!uire t?o years and cost a total o& G12 million assuming t.at G"
million is spent at t.e end o& t.e &irst year and G% million at t.e end o& t.e second year.
,o &inance t.is construction several options are possible includingD
$nvestment &rom retained corporate earningsO
:orro?ing &rom a local ban0 at an interest rate o& 11.2V ?it. uni&orm annual
payments over t?enty years to pay &or t.e construction costs. ,.e s.ort&alls &or
repayments on loans ?ill come &rom corporate earnings. 2n origination &ee o&
+.%"V o& t.e original loan is re!uired to cover engineerHs reports legal issues etcO
or
2 t?enty year coupon bond at an annual interest rate o& 1+.2"V ?it. interest
payments annually repayment o& t.e principal in year 2+ and a G1#)+++
origination &ee to pay &or t.e construction cost only.
,.e current corporate 4233 is 1"V and s.ort term cas. &unds can be deposited in an
account .aving a 1+V annual interest rate.
,.e &irst step in evaluation is to calculate t.e re!uired amounts and cas. &lo?s associated
?it. t.ese t.ree alternative &inancing plans. Kirst investment using retained earnings ?ill
re!uire a commitment o& G" million in year 1 and G% million in year 2.
;econd borro?ing &rom t.e local ban0 must yield su&&icient &unds to cover bot. years o&
construction plus t.e issuing &ee. Ait. t.e unused &und accumulating interest at a rate o&
1+V t.e amount o& dollars needed at t.e beginning o& t.e &irst year &or &uture
construction cost payments isD
*
+
] MG" millionNUM1.1N _ MG% millionNUM1.1N
2
] G1+.331 million
1iscounting at ten percent in t.is calculation re&lects t.e interest earned in t.e
intermediate periods. Ait. a 1+V annual interest rate t.e accrued interests &or t.e &irst
t?o years &rom t.e proBect account o& G1+.331 at t]+ ?ill beD
9ear 1D $
1
] M1+VNM1+.331 millionN ] G1.+33 million
9ear 2D $
2
] M1+VNM1+.331 million _ G1.+33 million < G".+ millionN ] +.#3# million
;ince t.e issuance c.arge is +.%"V o& t.e loan t.e amount borro?ed &rom t.e ban0 at t]+
to cover bot. t.e construction cost and t.e issuance c.arge is
L
+
] MG1+.331 millionNUM1 < +.++%"N ] G 1+.4+) million
,.e issuance c.arge is 1+.4+) < 1+.331 ] G +.+%' million or G%'+++. $& t.is loan is to be
repaid by annual uni&orm payments &rom corporate earnings t.e amount o& eac. payment
over t.e t?enty year li&e time o& t.e loan can be calculated by E!. M%.#N as &ollo?sD
U ] MG1+.4+) millionNRM+.112NM1.112N
2+
SURM1.112N
2+
< 1S ] G1.324 million
Kinally t.e t?enty<year coupon bond ?ould .ave to be issued in t.e amount o& G1+."
million ?.ic. ?ill re&lect a .ig.er origination &ee o& G1#)+++. ,.us t.e amount &or
&inancing isD
L
+
] G1+.331 million _ G+.1#) million ] G1+." million
Ait. an annual interest c.arge o& 1+.2"V over a t?enty year li&e time t.e annual
payment ?ould be G1.+%# million eIcept in year 2+ ?.en t.e sum o& principal and
interest ?ould be 1+." _ 1.+%# ] G11."%# million. ,.e computation &or t.is case o&
borro?ing .as been given in EIample %<2.
,able %<2 summarizes t.e cas. &lo?s associated ?it. t.e t.ree alternative &inancing
plans. 5ote t.at annual incomes generated &rom t.e use o& t.is building .ave not been
included in t.e computation. ,.e adBusted net present value o& t.e combined operating
and &inancial cas. &lo?s &or eac. o& t.e t.ree plans discounted at t.e corporate 4233 o&
1"V is also s.o?n in t.e table. $n t.is case t.e coupon bond is t.e least eIpensive
&inancing plan. ;ince t.e borro?ing rates &or bot. t.e ban0 loan and t.e coupon bond are
lo?er t.an t.e corporate 4233 t.ese results are eIpected.
TA<"& 1)! (as. Klo? $llustration o& ,.ree 2lternative Kinancing *lans Min G millionsN
9ear ;ource 3etained Earnings :an0 Loan (oupon :ond
+
+
1
1
1
2
2
2
3<1)
2+
R2*8S
1"V
*rincipal
$ssuing (ost
Earned $nterest
(ontractor *ayment
Loan 3epayment
Earned $nterest
(ontractor *ayment
Loan 3epayment
Loan 3epayment
Loan 3epayment
<
<
<
< ".+++
<
<
< %.+++
<
<
<
< ).#41
G1+.4+)
< +.+%'
1.+33
< ".+++
< 1.324
+.#3#
< %.+++
< 1.324
< 1.324
< 1.324
< #.21%
G1+."++
< +.1#)
1.+33
< ".+++
< 1.+%#
+.#3#
< %.+++
< 1.+%#
<1.+%#
< 11."%#
< ".3+'
1.- /ecured "oans with <onds, Motes and ,ortgages
;ecured lending involves a contract bet?een a borro?er and lender ?.ere t.e lender can
be an individual a &inancial institution or a trust organization. 5otes and mortgages
represent &ormal contracts bet?een &inancial institutions and o?ners. Usually repayment
amounts and timing are speci&ied in t.e loan agreement. *ublic &acilities are o&ten
&inanced by bond issues &or eit.er speci&ic proBects or &or groups o& proBects. Kor publicly
issued bonds a trust company is usually designated to represent t.e diverse bond .olders
in case o& any problems in t.e repayment. ,.e borro?ed &unds are usually secured by
granting t.e lender some rig.ts to t.e &acility or ot.er assets in case o& de&aults on
re!uired payments. $n contrast corporate bonds suc. as debentures can represent loans
secured only by t.e good &ait. and credit ?ort.iness o& t.e borro?er.
Under t.e terms o& many bond agreements t.e borro?er reserves t.e rig.t to repurc.ase
t.e bonds at any time be&ore t.e maturity date by repaying t.e principal and all interest
up to t.e time o& purc.ase. ,.e re!uired repayment 3
c
at t.e end o& period c is t.e net
&uture value o& t.e borro?ed amount L < less t.e payment made at intermediate
periods compounded at t.e borro?ing rate i to period c as &ollo?sD
%.11
,.e re!uired repayment 3
c
at t.e end o& t.e period c can also be obtained by noting t.e
net present value o& t.e repayments in t.e remaining Mn<cN periods discounted at t.e
borro?ing rate i to t ] c as &ollo?sD
%.12
Kor coupon bonds t.e re!uired repayment 3
c
a&ter t.e redemption o& t.e coupon at t.e
end o& period c is simply t.e original borro?ed amount L. Kor uni&orm payment bonds
t.e re!uired repayment 3
c
a&ter t.e last payment at t.e end o& period c isD
%.13
4any types o& bonds can be traded in a secondary mar0et by t.e bond .older. 2s interest
rates &luctuate over time bonds ?ill gain or lose in value. ,.e actual value o& a bond is
re&lected in t.e mar0et discount or premium paid relative to t.e original principal amount
Mt.e &ace valueN. 2not.er indicator o& t.is value is t.e yield to maturity or internal rate of
return o& t.e bond. ,.is yield is calculated by &inding t.e interest rate t.at sets t.e
MdiscountedN &uture cas. &lo? o& t.e bond e!ual to t.e current mar0et priceD
%.14
?.ere 8
c
is t.e current mar0et value a&ter c periods .ave lapsed since t.e < issuance o&
t.e bond is t.e bond cas. &lo? in period t and r is t.e mar0et yield. ;ince all t.e
bond cas. &lo?s are positive a&ter t.e initial issuance only one value o& t.e yield to
maturity ?ill result &rom E!. M%.14N.
;everal ot.er &actors come into play in evaluation o& bond values &rom t.e lenders point
o& vie? .o?ever. Kirst t.e lender must adBust &or t.e possibility t.at t.e borro?er may
de&ault on re!uired interest and principal payments. $n t.e case o& publicly traded bonds
special rating companies divide bonds into di&&erent categories o& ris0 &or Bust t.is
purpose. Obviously bonds t.at are more li0ely to de&ault ?ill .ave a lo?er value.
;econdly lenders ?ill typically ma0e adBustments to account &or c.anges in t.e taI code
a&&ecting t.eir a&ter<taI return &rom a bond. Kinally eIpectations o& &uture in&lation or
de&lation as ?ell as eIc.ange rates ?ill in&luence mar0et values.
2not.er common &eature in borro?ing agreements is to .ave a variable interest rate. $n
t.is case interest payments ?ould vary ?it. t.e overall mar0et interest rate in some pre<
speci&ied &as.ion. Krom t.e borro?erHs perspective t.is is less desirable since cas. &lo?s
are less predictable. /o?ever variable rate loans are typically available at lo?er interest
rates because t.e lenders are protected in some measure &rom large increases in t.e
mar0et interest rate and t.e conse!uent decrease in value o& t.eir eIpected repayments.
8ariable rate loans can .ave &loors and ceilings on t.e applicable interest rate or on rate
c.anges in eac. year.
&9ample 1).* &9ample of a corporate promissory note
2 corporation ?is.es to consider t.e option o& &inancing t.e .ead!uarters building in
EIample %<4 by issuing a &ive year promissory note ?.ic. re!uires an origination &ee &or
t.e note is G2"+++. ,.en a total borro?ed amount needed at t.e beginning o& t.e &irst
year to pay &or t.e construction costs and origination &ee is 1+.331 _ +.+2" ] G1+.3"#
million. $nterest payments are made annually at an annual rate o& 1+.'V ?it. repayment
o& t.e principal at t.e end o& t.e &i&t. year. ,.us t.e annual interest payment is M1+.'VN
M1+.3"#N ] G1.11' million. Ait. t.e data in EIample %<4 &or construction costs and
accrued interests &or t.e &irst t?o year t.e combined operating and &inancial cas. &lo?s
in million dollars can be obtainedD
9ear + 22
+
] 1+.3"# < +.+2" ] 1+.331
9ear 1 22
1
] 1.+33 < ".+ < 1.11' ] <".+'"
9ear 2 22
2
] +.#3# < %.+ < 1.11' ] <%.4'2
9ear 3 22
3
] <1.11'
9ear 4 22
4
] <1.11'
9ear " 22
"
] <1.11' < 1+.3"# ] <11.4%4
2t t.e current corporate 4233 o& 1"V
?.ic. is in&erior to t.e 2+<year coupon bond analyzed in ,able %<3.
Kor t.is problem as ?ell as &or t.e &inancing arrangements in EIample %<4 t.e proBect
account is maintained to pay t.e construction costs only ?.ile t.e interest and principal
payments are repaid &rom corporate earnings. < (onse!uently t.e terms in E!. M%.1+N
?ill disappear ?.en t.e account balance in eac. period is computed &or t.is problemD
2t t]+ 5
+
] 1+.3"# < +.+2" ] G1+.331 million
2t t]1 5
1
] M1 _ +.1N M1+.331N < ".+ ] G#.3#4 million
2t t]2 5
2
] M1 _ +.1N M#.3#4N < %.+ ] G+
&9ample 1)0* <ond financing mechanisms.
;uppose t.at t.e net operating eIpenditures and receipts o& a &acility investment over a
&ive year time .orizon are as s.o?n in column 2 o& ,able %<3 in ?.ic. eac. period is siI
mont.s. ,.is is a .ypot.etical eIample ?it. a deliberately s.ort li&e time period to reduce
t.e re!uired number o& calculations. (onsider t?o alternative bond &inancing
mec.anisms &or t.is proBect. :ot. involve borro?ing G2." million at an issuing cost o&
&ive percent o& t.e loan ?it. semi<annual repayments at a nominal annual interest rate o&
ten percent i.e. "V per period. 2ny eIcess &unds can earn an interest o& &our percent eac.
semi<annual period. ,.e coupon bond involves only interest payments in intermediate
periods plus t.e repayment o& t.e principal at t.e end ?.ereas t.e uni&orm payment
bond re!uires ten uni&orm payments to cover bot. interests and t.e principal. :ot. bonds
are subBect to optional redemption by t.e borro?er be&ore maturity.
,.e operating cas. &lo? in column 2 o& ,able %<3 represents t.e construction
eIpenditures in t.e early periods and rental receipts in later periods over t.e li&etime o&
t.e &acility. :y trial and error ?it. E!s. M%.)N and M%.1+N it can be &ound t.at L ] G2."
million MQ ] G+.12" or "V o& LN is necessary to insure a nonnegative balance in t.e
proBect account &or t.e uni&orm payment bond as s.o?n in (olumn # o& ,able %<3. Kor
t.e purpose o& comparison t.e same amount is borro?ed &or t.e coupon bond option
even t.oug. a smaller loan ?ill be su&&icient &or t.e construction eIpenditures in t.is
case.
,.e &inancial cas. &lo? o& t.e coupon bond can easily be derived &rom L ] G2." million
and Q ] G+.12" million. Using E!. M%."N $
p
] M"VNM2."N ] G+.12" million and t.e
repayment in *eriod 1+ is L _ $
p
] G2.#2" million as s.o?n in (olumn 3 o& ,able %<3.
,.e account balance &or t.e coupon bond in (olumn 4 is obtained &rom E!s. M%.)N and
M%.1+N. On t.e ot.er .and t.e uni&orm annual payment U ] G+.324 million &or t.e
&inancial cas. &lo? o& t.e uni&orm payment bond M(olumn "N can be obtained &rom E!.
M%.#N and t.e bond account &or t.is type o& balance is computed by E!s. M%.)N and M%.1+N.
:ecause o& t.e optional redemption provision &or bot. types o& bonds it is advantageous
to gradually redeem bot. options at t.e end o& period 3 to avoid interest payments
resulting &rom i ] "V and . ] 4V unless t.e account balance beyond period 3 is needed
to &und ot.er corporate investments. corporate earnings are available &or repurc.asing t.e
bonds at end o& period 3 t.e re!uired repayment &or coupon bond a&ter redeeming t.e last
coupon at t.e end o& period 3 is simply G2.#2" million. $n t.e case o& t.e uni&orm
payment bond t.e re!uired payment a&ter t.e last uni&orm payment at t.e end o& period 3
is obtained &rom E!uation M%<13N asD
3
3
] M+.324NM*dU "V %N ] M+.324NM".%'#4N ] G1.'%" million.
TA<"& 1)+ EIample o& ,?o :orro?ing (as. Klo?s Min G t.ousandsN
*eriod
Operating (as.
Klo?
(oupon (as.
Klo?
2ccount
:alance
Uni&orm (as.
Klo?
2ccount
:alance
+
1
2
3
4
"
#
%
'
)
1+
<
< G'++
<%++
<#+
4++
#++
'++
1+++
1+++
1+++
1+++
G23%"
< 12"
< 12"
< 12"
< 12"
< 12"
< 12"
< 12"
< 12"
< 12"
< 2#2"
G23%"
1"4"
%'2
#2'
)2'
144+
21%3
313"
413"
"1%#
3%"'
G23%"
< 324
< 324
< 324
< 324
< 324
< 324
< 324
< 324
< 324
< 324
G23%"
134#
3%#
'
'4
3#4
'"4
1"#"
23+4
3+%2
3'%1
&9ample 1)1* Proision of 2esere (unds
,ypical borro?ing agreements may include various re!uired reserve &unds. R2S (onsider
an eig.teen mont. proBect costing &ive million dollars. ,o &inance t.is &acility coupon
bonds ?ill be issued to generate revenues ?.ic. must be su&&icient to pay interest c.arges
during t.e eig.teen mont.s o& construction to cover all construction costs to pay
issuance eIpenses and to maintain a debt service reserve &und. ,.e reserve &und is
introduced to assure bond.olders o& payments in case o& unanticipated construction
problems. $t is estimated t.at a total amount o& G%.4 million o& bond proceeds is re!uired
including a t?o percent discount to under?riters and an issuance eIpense o& G1+++++.
,.ree interest bearing accounts are establis.ed ?it. t.e bond proceeds to separate various
categories o& &undsD
2 construction &und to provide payments to contractors ?it. an initial balance o&
G4%21#++. $ncluding interest earnings t.is &und ?ill be su&&icient to cover t.e
G"++++++ in construction eIpenses.
2 capitalized interest &und to provide interest payments during t.e construction
period. Uli\
2 debt service reserve &und to be used &or retiring outstanding debts a&ter t.e
completion o& construction.
,.e total sources o& &unds Mincluding interest &rom account balancesN and uses o& &unds
are summarized in ,able %<4
TA<"& 1)- $llustrative ;ources and Uses o& Kunds &rom 3evenue :onds 1uring
(onstruction
;ources o& Kunds
:ond *roceeds
$nterest Earnings on (onstruction Kund
$nterest Earnings o& (apitalized $nterest Kund
G%4+++++
2%'4++
%%#++
2'%#4+
$nterest Earnings on 1ebt ;ervice 3eserve Kund
,otal ;ources o& Kunds G'+43#4+
Uses o& Kunds
(onstruction (osts
$nterest *ayments
1ebt ;ervice 3eserve Kund
:ond 1iscount M2.+VN
$ssuance EIpense
,otal Uses o& Kunds
G"++++++
)+41++
1')1"4+
14'+++
1+++++
G'+43#4+
&9ample 1)3* 'aria>le rate reenue >onds prospectus
,.e in&ormation in ,able %<" is abstracted &rom t.e *rospectus &or a ne? issue o& revenue
bonds &or t.e 2t?ood (ity. ,.is prospectus language is typical &or municipal bonds.
5otice t.e provision &or variable rate a&ter t.e initial interest periods. ,.e borro?er
reserves t.e rig.t to repurc.ase t.e bond be&ore t.e date &or conversion to variable rate
ta0es e&&ect in order to protect itsel& &rom declining mar0et interest rates in t.e &uture so
t.at t.e borro?er can obtain ot.er &inancing arrangements at lo?er rates.
TA<"& 1). *rovision o& 8ariable 3ate &or :onds
Kirst series o& 1)'%D G12++++++
1ateD 1ecember 1 1)'% 1ueD 5ovember 1 2+1%
The Bonds will be issued as fully registered bonds in the denomination of $5,000 or
any multiple thereof. Principal or redemption price of the bonds will be payable upon
surrender thereof. nterest on the Bonds will be payable on !ay ", "#$$, and semi%
annually thereafter on &o'ember " and !ay " by chec( mailed to the Bond owners
registered on the )tate *uthority+s boo(s on the ,ecord -ate. The proceeds of the
Bonds will be loaned to *twood City under a loan agreement, dated as of &o'ember ",
"#$. between the )tate *uthority and /erald Ban( as Trustee and Paying *gent. The
Bonds will bear interest at a semi%annual fi0ed rate of 12 for the initial interest periods
from -ecember ", "#$. through *pril ", "##0, after which the Bonds may be con'erted
to semi%annual 'ariable mode at the option of *twood City upon proper notice. f the
bonds are so con'erted, such Bonds must be tendered for mandatory purchase at par,
plus "3$th of "2 of principal amount under certain circumstances and accrued interest
to the Purchase -ate 4unless the Bond owner files a &on%tender 5lection6. To be so
purchased, Bonds must be deli'ered, accompanied by a notice of election to tender the
Bonds, to the Paying *gent between the opening of business on the first day of the
month preceding the effecti'e rate date of the Bonds and 1700 pm &ew 8or( City time
on the fifteenth day preceding such effecti'e rate date for the Bonds.
1.. Oerdraft Accounts
Overdra&ts can be arranged ?it. a ban0ing institution to allo? accounts to .ave eit.er a
positive or a negative balance. Ait. a positive balance interest is paid on t.e account
balance ?.ereas a negative balance incurs interest c.arges. Usually an overdra&t account
?ill .ave a maIimum overdra&t limit imposed. 2lso t.e interest rate . available on
positive balances is less t.an t.e interest rate i c.arged &or borro?ing.
(learly t.e e&&ects o& overdra&t &inancing depend upon t.e pattern o& cas. &lo?s over
time. ;uppose t.at t.e net cas. &lo? &or period t in t.e account is denoted by 2
t
?.ic. is
t.e di&&erence bet?een t.e receipt *
t
and t.e payment E
t
in period t. /ence 2
t
can eit.er
be positive or negative. ,.e amount o& overdra&t at t.e end o& period t is t.e cumulative
net cas. &lo? 5
t
?.ic. may also be positive or negative. $& 5
t
is positive a surplus is
indicated and t.e subse!uent interest ?ould be paid to t.e borro?er. 4ost o&ten 5
t
is
negative during t.e early time periods o& a proBect and becomes positive in t.e later
periods ?.en t.e borro?er .as received payments eIceeding eIpenses.
$& t.e borro?er uses overdra&t &inancing and pays t.e interest per period on t.e
accumulated overdra&t at a borro?ing rate i in eac. period t.en t.e interest per period &or
t.e accumulated overdra&t 5
t<1
&rom t.e previous period Mt<1N is $
t
] i5
t<1
?.ere $
t
?ould
be negative &or a negative account balance 5
t<1
. Kor a positive account balance t.e
interest received is $
t
] .5
t<1
?.ere $
t
?ould be positive &or a positive account balance.
,.e account balance 5
t
at eac. period t is t.e sum o& receipts *
t
payments E
t
interest $
t
and t.e account balance &rom t.e previous period 5
t<1
. ,.us
%.1"
?.ere $
t
] i5
t<1
&or a negative 5
t<1
and $
t
] .5
t<1
&or a positive 5
t<1
. ,.e net cas. &lo?
2
t
] *
t
< E
t
is positive &or a net receipt and negative &or a net payment. ,.is e!uation is
approIimate in t.at t.e interest mig.t be earned on intermediate balances based on t.e
pattern o& payments during t.e period instead o& at t.e end o& a period. ,.e account
balance in eac. period is o& interest because t.ere ?ill al?ays be a maIimum limit on t.e
amount o& overdra&t available.
Kor t.e purpose o& separating proBect &inances ?it. ot.er receipts and payments in an
organization it is convenient to establis. a credit account into ?.ic. receipts related to
t.e proBect must be deposited ?.en t.ey are received and all payments related to t.e
proBect ?ill be ?it.dra?n &rom t.is account ?.en t.ey are needed. ;ince receipts
typically lag be.ind payments &or a proBect t.is credit account ?ill .ave a negative
balance until suc. time ?.en t.e receipts plus accrued interests are e!ual to or eIceed
payments in t.e period. A.en t.at .appens any surplus ?ill not be deposited in t.e
credit account and t.e account is t.en closed ?it. a zero balance. $n t.at case &or
negative 5
t<1
E!. M%.1"N can be eIpressed asD
%.1#
and as soon as 5
t
reac.es a positive value or zero t.e account is closed.
&9ample 1)4* Oerdraft (inancing with Crants to a "ocal Agency
2 public proBect ?.ic. costs G#1"2"+++ is &unded eig.ty percent by a &ederal grant and
t?enty percent &rom a state grant. ,.e anticipated duration o& t.e proBect is siI years ?it.
receipts &rom grant &unds allocated at t.e end o& eac. year to a local agency to cover
partial payments to contractors &or t.at year ?.ile t.e remaining payments to contractors
?ill be allocated at t.e end o& t.e siIt. year. ,.e end<o&<year payments are given in
,able %<# in ?.ic. t]+ re&ers to t.e beginning o& t.e proBect and eac. period is one year.
$& t.is proBect is &inanced ?it. an overdra&t at an annual interest rate i ] 1+V t.en t.e
account balance are computed by E!. M%.1"N and t.e results are s.o?n in ,able %<#.
$n t.is proBect t.e total grant &unds to t.e local agency covered t.e cost o& construction in
t.e sense t.at t.e sum o& receipts e!ualed t.e sum o& construction payments o&
G#1"2"+++. /o?ever t.e timing o& receipts lagged payments and t.e agency incurred a
substantial &inancing cost e!ual in t.is plan to t.e overdra&t amount o& G1%'++++ at t.e
end o& year # ?.ic. must be paid to close t.e credit account. (learly t.is &inancing
problem ?ould be a signi&icant concern to t.e local agency.
TA<"& 1)0 $llustrative *ayments 3eceipts and
Overdra&ts &or a ;iI 9ear *roBect
*eriod t 3eceipts *
t
*ayments E
t
$nterest $
t
2ccount 5
t
+
1
2
3
4
"
#
,otal
+
G".'2#
'.4+1
12.+13
1".14)
13.)'4
#.1"2
G#1."2"
+
G#.4%3
).334
13.34'
1#.'32
1"."3'
+
G#1."2"
+
+
< G+.+#"
< +.1#"
< +.31"
< +."14
< +.%21
<G1.%'+
+
<G+.#4%
< 1.#4"
< 3.14"
< ".143
< %.211
< 1.%'+
&9ample 1)15* =se of oerdraft financing for a facility
2 corporation is contemplating an investment in a &acility ?it. t.e &ollo?ing be&ore<taI
operating net cas. &lo? Min t.ousands o& dollarsN at year endsD
9ear + 1 2 3 4 " # %
(as. Klo? <"++ 11+ 112 114 11# 11' 12+ 23'
,.e 4233 o& t.e corporation be&ore taI is 1+V. ,.e corporation ?ill &inance t.e &acility
be using G2+++++ &rom retained earnings and by borro?ing t.e remaining G3+++++
t.roug. an overdra&t credit account ?.ic. c.arges 14V interest &or borro?ing. $s t.is
proposed proBect including &inancing costs ?ort.?.ileX
,.e results o& t.e analysis o& t.is proBect is s.o?n in ,able %<% as &ollo?sD
5
+
] <"++ _ 2++ ] <3++
5
1
] M1.14NM<3++N _ 11+ ] <232
5
2
] M1.14NM<232N _ 112 ] <1"2.4'
5
3
] M1.14NM<1"2.4'N _ 114 ] <").'2%
5
4
] M1.14NM<").'2%N _11# ] _4%.%)%
;ince 5
4
is positive it is revised to eIclude t.e net receipt o& 11# &or t.is period. ,.en
t.e revised value &or t.e last balance is
5
4
H ] 5
4
< 11# ] < #'.2+3
,.e &inancial cas. &lo? resulting &rom using overdra&ts and ma0ing repayments &rom
proBect receipts ?ill beD
] < 5
+
] 3++
] < 2
1
] <11+
] < 2
2
] <112
] < 2
3
] <114
] 5
4
< 2
4
] < #'.2+3
,.e adBusted net present value o& t.e combined cas. &lo? discounted at 1"V is G2%#%)
as s.o?n in ,able %<%. /ence t.e proBect including t.e &inancing c.arges is ?ort.?.ile.
TA<"& 1)1 Evaluation o& Kacility Kinancing Using Overdra&t Min G
t.ousandsN
End o&
9ear
t
Operating
(as. Klo?
2
t
Overdra&t
:alance
5
t
Kinancing
(as. Klo?
(ombined (as.
Klo?
22
t
+
1
2
3
4
"
#
%
R*8S
1"V
< G"++
11+
112
114
11#
11'
12+
122
G21.)%1
< G3++
< 232
< 1"2.4'+
<").'2%
+
+
+
+
W3++
< 11+
< 112
< 114
< #'.2+3
+
+
+
G".%+'
< G2++
+
+
+
4%.%)%
11'
12+
122
G2%.#%)
1.0 2efinancing of ;e>ts
3e&inancing o& debts .as t?o maBor advantages &or an o?ner. Kirst t.ey allo? re<
&inancing at intermediate stages to save interest c.arges. $& a borro?ing agreement is
made during a period o& relatively .ig. interest c.arges t.en a repurc.ase agreement
allo?s t.e borro?er to re<&inance at a lo?er interest rate. A.enever t.e borro?ing
interest rate declines suc. t.at t.e savings in interest payments ?ill cover any transaction
eIpenses M&or purc.asing outstanding notes or bonds and arranging ne? &inancingN t.en
it is advantageous to do so.
2not.er reason to repurc.ase bonds is to permit c.anges in t.e operation o& a &acility or
ne? investments. Under t.e terms o& many bond agreements t.ere may be restrictions on
t.e use o& revenues &rom a particular &acility ?.ile any bonds are outstanding. ,.ese
restrictions are inserted to insure bond.olders t.at debts ?ill be repaid. :y repurc.asing
bonds t.ese restrictions are removed. Kor eIample several bridge aut.orities .ad bonds
t.at restricted any diversion o& toll revenues to ot.er transportation services suc. as
transit. :y repurc.asing t.ese bonds t.e aut.ority could underta0e ne? operations. ,.is
type o& repurc.ase may occur voluntarily even ?it.out a repurc.ase agreement in t.e
original bond. ,.e borro?er may give bond.olders a premium to retire bonds early.
&9ample 1)11* 2efinancing a loan.
;uppose t.at t.e ban0 loan s.o?n in EIample %<4 .ad a provision permitting t.e
borro?er to repay t.e loan ?it.out penalty at any time. Kurt.er suppose t.at interest
rates &or ne? loans dropped to nine percent at t.e end o& year siI o& t.e loan. $ssuing
costs &or a ne? loan ?ould be G"++++. Aould it be advantageous to re<&inance t.e loan
at t.at timeX
,o repay t.e original loan at t.e end o& year siI ?ould re!uire a payment o& t.e
remaining principal plus t.e interest due at t.e end o& year siI. ,.is amount 3
#
is e!ual to
t.e present value o& remaining &ourteen payments discounted at t.e loan interest rate
11.2V to t.e end o& year # as given in E!uation M%<13N as &ollo?sD
,.e ne? loan ?ould be in t.e amount o& G ).1"2 million plus t.e issuing cost o& G+.+"
million &or a total o& G ).2+2 million. :ased on t.e ne? loan interest rate o& )V t.e ne?
uni&orm annual payment on t.is loan &rom years % to 2+ ?ould beD
,.e net present value o& t.e &inancial cas. &lo? &or t.e ne? loan ?ould be obtained by
discounting at t.e corporate 4233 o& 1"V to t.e end o& year siI as &ollo?sD
;ince t.e annual payment on t.e ne? loan is less t.an t.e eIisting loan MG1.1'2 versus
G1.324 millionN t.e ne? loan is pre&erable.
1.1 Pro%ect ersus Corporate (inance
Ae .ave &ocused so &ar on problems and concerns at t.e proBect level. A.ile t.is is t.e
appropriate vie?point &or proBect managers it is al?ays ?ort. bearing in mind t.at
proBects must &it into broader organizational decisions and structures. ,.is is particularly
true &or t.e problem o& proBect &inance since it is o&ten t.e case t.at &inancing is planned
on a corporate or agency level rat.er t.an a proBect level. 2ccordingly proBect managers
s.ould be a?are o& t.e concerns at t.is level o& decision ma0ing.
2 construction proBect is only a portion o& t.e general capital budgeting problem &aced by
an o?ner. Unless t.e proBect is very large in scope relative to t.e o?ner a particular
construction proBect is only a small portion o& t.e capital budgeting problem. 5umerous
construction proBects may be lumped toget.er as a single category in t.e allocation o&
investment &unds. (onstruction proBects ?ould compete &or attention ?it. e!uipment
purc.ases or ot.er investments in a private corporation.
Kinancing is usually per&ormed at t.e corporate level using a miIture o& long term
corporate debt and retained earnings. 2 typical set o& corporate debt instruments ?ould
include t.e di&&erent bonds and notes discussed in t.is c.apter. 8ariations ?ould typically
include di&&erent maturity dates di&&erent levels o& security interests di&&erent currency
denominations and o& course di&&erent interest rates.
6rouping proBects toget.er &or &inancing in&luences t.e type o& &inancing t.at mig.t be
obtained. 2s noted earlier small and large proBects usually involve di&&erent institutional
arrangements and &inancing arrangements. Kor small proBects t.e &iIed costs o&
underta0ing particular 0inds o& &inancing may be pro.ibitively eIpensive. Kor eIample
municipal bonds re!uire &iIed costs associated ?it. printing and preparation t.at do not
vary signi&icantly ?it. t.e size o& t.e issue. :y combining numerous small construction
proBects di&&erent &inancing arrangements become more practical.
A.ile individual proBects may not be considered at t.e corporate &inance level t.e
problems and analysis procedures described earlier are directly relevant to &inancial
planning &or groups o& proBects and ot.er investments. ,.us t.e net present values o&
di&&erent &inancing arrangements can be computed and compared. ;ince t.e net present
values o& di&&erent sub<sets o& eit.er investments or &inancing alternatives are additive
eac. proBect or &inance alternative can be disaggregated &or closer attention or aggregated
to provide in&ormation at a .ig.er decision ma0ing level.
&9ample 1)1!* <asic types of repayment schedules for loans.
(oupon bonds are used to obtain loans ?.ic. involve no payment o& principal until t.e
maturity date. :y combining loans o& di&&erent maturities .o?ever it is possible to
ac.ieve almost any pattern o& principal repayments. /o?ever t.e interest rates c.arged
on loans o& di&&erent maturities ?ill re&lect mar0et &orces suc. as &orecasts o& .o? interest
rates ?ill vary over time. 2s an eIample ,able %<' illustrates t.e cas. &lo?s o& debt
service &or a series o& coupon bonds used to &und a municipal construction proBectO &or
simplicity not all years o& payments are s.o?n in t.e table.
$n t.is &inancing plan a series o& coupon bonds ?ere sold ?it. maturity dates ranging
&rom Pune 1)'' to Pune 2+12. (oupon interest payments on all outstanding bonds ?ere to
be paid every siI mont.s on 1ecember 1 and Pune 1 o& eac. year. ,.e interest rate or
Jcoupon rateJ ?as larger on bonds ?it. longer maturities re&lecting an assumption t.at
in&lation ?ould increase during t.is period. ,.e total principal obtained &or construction
?as G2#2"++++ &rom sale o& t.ese bonds. ,.is amount represented t.e gross sale
amount be&ore subtracting issuing costs or any sales discountsO t.e amount available to
support construction ?ould be lo?er. ,.e maturity dates &or bonds ?ere selected to
re!uire relative .ig. repayment amounts until 1ecember 1))" ?it. a declining
repayment amount subse!uently. :y s.i&ting t.e maturity dates and amounts o& bonds
t.is pattern o& repayments could be altered. ,.e initial interest payment Mo& G'1)%#+ on
1ecember 1 1)'%N re&lected a payment &or only a portion o& a siI mont. period since t.e
bonds ?ere issued in late Pune o& 1)'%.
TA<"& 1)3 $llustration o& a ,?enty<&ive 9ear 4aturity ;c.edule &or :onds
1ate
4aturing
*rincipal
(orresponding $nterest
3ate $nterest 1ue
2nnual 1ebt
;ervice
1ec. 1
1)'%
Pune 1
1)''
1ec. 1
1)''
Pune 1
1)')
1ec. 1
1)')
Pune 1
1))+
1ec. 1
1))+
Pune 1
1))1
1ec. 1
1))1
Pune 1
1))2
1ec. 1
1))2
Pune 1
G13"++++
14"++++
1""++++
1#+++++
1%+++++
1'+++++
.
.
.
''++++
)#+++
".++V
".2"
"."+
".'+
#.++
#.2+
.
.
.
'.++
'.++
G'1)%#+
')442)
'#+"4+
'#+"4+
'224'+
'224'+
%%)'"+
%%)'"+
%334"+
%334"+
#'24"+
#'24"+
#2##"+
.
.
.
#'+++
3#+++
3#+++
G'1)%#+
31+4)#)
3133+2+
31"233+
31133++
311")++
31+)1++
.
.
.
)'4+++
))#+++
1))3
1ec. 1
1))3
.
.
.
Pune 1
2+11
1ec. 1
2+11
Pune 1
2+12
1ec. 1
2+12
1.3 /hifting (inancial <urdens
,.e di&&erent participants in t.e construction process .ave !uite distinct perspectives on
&inancing. $n t.e realm o& proBect &inance t.e revenues to one participant represent an
eIpenditure to some ot.er participant. *ayment delays &rom one participant result in a
&inancial burden and a cas. &lo? problem to ot.er participants. $t is common occurrence
in construction to reduce &inancing costs by delaying payments in Bust t.is &as.ion.
;.i&ting payment times does not eliminate &inancing costs .o?ever since t.e &inancial
burden still eIists.
,raditionally many organizations .ave used payment delays bot. to s.i&t &inancing
eIpenses to ot.ers or to overcome momentary s.ort&alls in &inancial resources. Krom t.e
o?nerHs perspective t.is policy may .ave s.ort term bene&its but it certainly .as long
term costs. ;ince contractors do not .ave large capital assets t.ey typically do not .ave
large amounts o& credit available to cover payment delays. (ontractors are also perceived
as credit ris0s in many cases so loans o&ten re!uire a premium interest c.arge.
(ontractors &aced ?it. large &inancing problems are li0ely to add premiums to bids or not
bid at all on particular ?or0. Kor eIample 2. 4aevis notedD R3S
...t.ere ?ere days in 5e? 9or0 (ity ?.en city agencies .ad trouble attracting biddersO
yet contractors ?ere beating on t.e door to get ?or0 &rom (onsolidated Edison t.e local
utility. A.yX Kirst t.e city ?as a notoriously slo? payer (Os Mc.ange ordersN years
be.ind decision process c.aotic and payments made #+ days a&ter close o& estimate. (on
Edison paid on t.e 2+t. o& t.e mont. &or ?or0 done to t.e &irst o& t.e mont.. (.ange
orders negotiated and paid ?it.in 3+ days<#+ days. $& a decision ?as needed it came in
1+ days. ,.e number o& bids you receive on your proBects are one measure o& your
administrative e&&iciency. Kurt.er competition is bound to give you t.e lo?est possible
construction price.
Even a&ter bids are received and contracts signed delays in payments may &orm t.e basis
&or a success&ul claim against an agency on t.e part o& t.e contractor.
,.e o?ner o& a constructed &acility usually .as a better credit rating and can secure loans
at a lo?er borro?ing rate but t.ere are some notable eIceptions to t.is rule particularly
&or construction proBects in developing countries. Under certain circumstances it is
advisable &or t.e o?ner to advance periodic payments to t.e contractor in return &or some
concession in t.e contract price. ,.is is particularly true &or large<scale construction
proBects ?it. long durations &or ?.ic. &inancing costs and capital re!uirements are .ig..
$& t.e o?ner is ?illing to advance t.ese amounts to t.e contractor t.e gain in lo?er
&inancing costs can be s.ared by bot. parties t.roug. prior agreement.
Un&ortunately t.e c.oice o& &inancing during t.e construction period is o&ten le&t to t.e
contractor ?.o cannot ta0e advantage o& all available options alone. ,.e o?ner is o&ten
s.ielded &rom participation t.roug. t.e traditional met.od o& price !uotation &or
construction contracts. ,.is practice merely eIacerbates t.e problem by eIcluding t.e
o?ner &rom participating in decisions ?.ic. may reduce t.e cost o& t.e proBect.
Under conditions o& economic uncertainty a premium to .edge t.e ris0 must be added to
t.e estimation o& construction cost by bot. t.e o?ner and t.e contractor. ,.e larger and
longer t.e proBect is t.e greater is t.e ris0. Kor an unsop.isticated o?ner ?.o tries to
avoid all ris0s and to place t.e &inancing burdens o& construction on t.e contractor t.e
contract prices &or construction &acilities are li0ely to be increased to re&lect t.e ris0
premium c.arged by t.e contractors. $n dealing ?it. small proBects ?it. s.ort durations
t.is practice may be acceptable particularly ?.en t.e o?ner lac0s any eIpertise to
evaluate t.e proBect &inancing alternatives or t.e &inancial stability to adopt innovative
&inancing sc.emes. /o?ever &or large scale proBects o& long duration t.e o?ner cannot
escape t.e responsibility o& participation i& it ?ants to avoid catastrop.es o& run<a?ay
costs and eIpensive litigation. ,.e construction o& nuclear po?er plants in t.e private
sector and t.e construction o& transportation &acilities in t.e public sector o&&er ample
eIamples o& suc. problems. $& t.e responsibilities o& ris0 s.aring among various parties in
a construction proBect can be clearly de&ined in t.e planning stage all parties can be
bene&ited to ta0e advantage o& cost saving and early use o& t.e constructed &acility.
&9ample 1)1+* &ffects of payment delays
,able %<) s.o?s an eIample o& t.e e&&ects o& payment timing on t.e general contractor
and subcontractors. ,.e total contract price &or t.is proBect is G"1+++++ ?it. sc.eduled
payments &rom t.e o?ner s.o?n in (olumn 2. ,.e general contractorHs eIpenses in eac.
period over t.e li&etime o& t.e proBect are given in (olumn 3 ?.ile t.e subcontractorHs
eIpenses are s.o?n in (olumn 4. $& t.e general contractor must pay t.e subcontractorHs
eIpenses as ?ell as its o?n at t.e end o& eac. period t.e net cas. &lo? o& t.e general
contractor is obtained in (olumn " and its cumulative cas. &lo? in (olumn #.
TA<"& 1)4 2n EIample o& t.e E&&ects o& *ayment ,iming
*eriod O?ner
*ayments
6eneral
(ontractorHs
;ubcontractorHs
EIpenses
6eneral
(ontractorHs
(umulative
(as. Klo?
EIpenses 5et (as. Klo?
1
2
3
4
"
#
,otal
<<<
G)"++++
)"++++
)"++++
)"++++
13+++++
G"1+++++
G1+++++
1+++++
1+++++
1+++++
1+++++
<
G"+++++
G)+++++
)+++++
)+++++
)+++++
)+++++
<
G4"+++++
< G1++++++
< "++++
< "++++
< "++++
< "++++
13+++++
G1+++++
< G1++++++
< 1+"++++
< 11+++++
< 11"++++
< 12+++++
1+++++
5oteD (umulative cas. &lo? includes no &inancing c.arges.
$n t.is eIample t.e o?ner ?it..olds a &ive percent retainage on cost as ?ell as a
payment o& G1+++++ until t.e completion o& t.e proBect. ,.is G1+++++ is e!ual to t.e
eIpected gross pro&it o& t.e contractor ?it.out considering &inancing costs or cas. &lo?
discounting. *rocessing time and contractual agreements ?it. t.e o?ner result in a delay
o& one period in receiving payments. ,.e actual construction eIpenses &rom t.e
vie?point o& t.e general contractor consist o& G1+++++ in eac. construction period plus
payments due to subcontractors o& G)+++++ in eac. period. A.ile t.e net cas. &lo?
?it.out regard to discounting or &inancing is e!ual to a G1+++++ pro&it &or t.e general
contractor &inancial costs are li0ely to be substantial. Ait. immediate payment to
subcontractors over G1++++++ must be &inanced by t.e contractor t.roug.out t.e
duration o& t.e proBect. $& t.e general contractor uses borro?ing to &inance its eIpenses a
maIimum borro?ing amount o& G12+++++ in period &ive is re!uired even ?it.out
considering intermediate interest c.arges. Kinancing t.is amount is li0ely to be !uite
eIpensive and may easily eIceed t.e eIpected proBect pro&it.
:y delaying payments to subcontractors t.e general contractor can substantially reduce
its &inancing re!uirement. Kor eIample ,able %<1+ s.o?s t.e resulting cas. &lo?s &rom
delaying payments to subcontractors &or one period and &or t?o periods respectively.
Ait. a one period delay a maIimum amount o& G3+++++ Mplus intermediate interest
c.argesN ?ould .ave to be &inanced by t.e general contractor. ,.at is &rom t.e data in
,able %<1+ t.e net cas. &lo? in period 1 is <G1+++++ and t.e net cas. &lo? &or eac. o&
t.e periods 2 t.roug. " is given byD
G)"++++ < G1+++++ < G)+++++ ] <G "++++
Kinally t.e net cas. &lo? &or period # isD
G13+++++ < G)+++++ ] G4+++++
,.us t.e cumulative net cas. &lo? &rom periods 1 t.roug. " as s.o?n in (olumn 2 o&
,able %<1+ results in maIimum s.ort&all o& G3+++++ in period " in (olumn 3. Kor t.e
case o& a t?o period payment delay to t.e subcontractors t.e general contractor even
runs a positive balance during construction as s.o?n in (olumn ". ,.e positive balance
results &rom t.e receipt o& o?ner payments prior to reimbursing t.e subcontractorHs
eIpenses. ,.is positive balance can be placed in an interest bearing account to earn
additional revenues &or t.e general contractor. 5eedless to say .o?ever t.ese payment
delays mean eItra costs and &inancing problems to t.e subcontractors. Ait. a t?o period
delay in payments &rom t.e general contractor t.e subcontractors .ave an unpaid balance
o& G1'+++++ ?.ic. ?ould represent a considerable &inancial cost.
TA<"& 1)15 2n EIample o& t.e (as. Klo? E&&ects o& 1elayed *ayments
*eriod
One *eriod *ayment 1elay ,?o *eriod *ayment 1elay
5et (as. Klo? (umulative (as. Klo? 5et (as. Klo? (umulative (as. Klo?
1
2
3
4
"
#
%
< G1+++++
< "++++
< "++++
< "++++
< "++++
4+++++
< G1+++++
< 1"++++
< 2+++++
< 2"++++
< 3+++++
1+++++
< G1+++++
'"++++
< "++++
< "++++
< "++++
4+++++
< )+++++
< G1+++++
%"++++
%+++++
#"++++
#+++++
1++++++
1+++++
1.4 Construction (inancing for Contractors
Kor a general contractor or subcontractor t.e cas. &lo? pro&ile o& eIpenses and incomes
&or a construction proBect typically &ollo?s t.e ?or0 in progress &or ?.ic. t.e contractor
?ill be paid periodically. ,.e mar0up by t.e contractor above t.e estimated eIpenses is
included in t.e total contract price and t.e terms o& most contracts generally call &or
mont.ly reimbursements o& ?or0 completed less retainage. 2t time period + ?.ic.
denotes t.e beginning o& t.e construction contract a considerable sum may .ave been
spent in preparation. ,.e contractorHs eIpenses ?.ic. occur more or less continuously &or
t.e proBect duration are depicted by a piece?ise continuous curve ?.ile t.e receipts Msuc.
as progress payments &rom t.e o?nerN are represented by a step &unction as s.o?n in Kig.
%<1. ,.e o?nerHs payments &or t.e ?or0 completed are assumed to lag one period be.ind
eIpenses eIcept t.at a ?it..olding proportion or remainder is paid at t.e end o&
construction. ,.is met.od o& analysis is applicable to realistic situations ?.ere a time
period is represented by one mont. and t.e number o& time periods is eItended to cover
delayed receipts as a result o& retainage.
(igure 1)1 (ontractorHs EIpenses and O?nerHs *ayments
A.ile t.e cas. &lo? pro&iles o& eIpenses and receipts are eIpected to vary &or di&&erent
proBects t.e c.aracteristics o& t.e curves depicted in Kig. %<1 are su&&iciently general &or
most cases. Let E
t
represent t.e contractorHs eIpenses in period t and *
t
represent o?nerHs
payments in period t &or t]+12...n &or n]" in t.is case. ,.e net operating cas. &lo? at
t.e end o& period t &or t + is given byD
%.1%
?.ere 2
t
is positive &or a surplus and negative &or a s.ort&all.
,.e cumulative operating cas. &lo? at t.e end o& period t Bust be&ore receiving payment
*
t
M&or t 1N isD
%.1'
?.ere 5
t<1
is t.e cumulative net cas. &lo?s &rom period + to period Mt<1N. Kurt.ermore t.e
cumulative net operating cas. &lo? a&ter receiving payment *
t
at t.e end o& period t M&or t
1N isD
%.1)
,.e gross operating pro&it 6 &or a n<period proBect is de&ined as net operating cas. &lo? at
t]n and is given byD
%.2+
,.e use o& 5
n
as a measure o& t.e gross operating pro&it .as t.e disadvantage t.at it is not
adBusted &or t.e time value o& money.
;ince t.e net cas. &lo? 2
t
M&or t]+1...nN &or a construction proBect represents t.e amount
o& cas. re!uired or accrued a&ter t.e o?nerHs payment is plo?ed bac0 to t.e proBect at t.e
end o& period t t.e internal rate o& return M$33N o& t.is cas. &lo? is o&ten cited in t.e
traditional literature in construction as a pro&it measure. ,o compute $33 let t.e net
present value M5*8N o& 2
t
discounted at a discount rate i per period be zero i.e.
%.21
,.e resulting i Mi& it is uni!ueN &rom t.e solution o& E!. M%.21N is t.e $33 o& t.e net cas.
&lo? 2
t
. 2side &rom t.e complications t.at may be involved in t.e solution o& E!. M%.21N
t.e resulting i ] $33 .as a meaning to t.e contractor only i& t.e &irm &inances t.e entire
proBect &rom its o?n e!uity. ,.is is seldom i& ever t.e case since most construction &irms
are .ig.ly leveraged i.e. t.ey .ave relatively small e!uity in &iIed assets suc. as
construction e!uipment and depend almost entirely on borro?ing in &inancing individual
construction proBects. ,.e use o& t.e $33 o& t.e net cas. &lo?s as a measure o& pro&it &or
t.e contractor is t.us misleading. $t does not represent even t.e $33 o& t.e ban0 ?.en t.e
contractor &inances t.e proBect t.roug. overdra&t since t.e gross operating pro&it ?ould
not be given to t.e ban0.
;ince overdra&t is t.e most common &orm o& &inancing &or small or medium size proBects
?e s.all consider t.e &inancing costs and e&&ects on pro&it o& < t.e use o& overdra&ts. Let
be t.e cumulative cas. &lo? be&ore t.e o?nerHs payment in period t including interest
and be t.e cumulative net cas. &lo? in period t including interest. 2t t ] + ?.en t.ere
is no accrued interest ] K
+
and ] 5
+
. Kor t in period t can be obtained by
considering t.e contractorHs eIpenses $ E
t
to be dispersed uni&ormly during t.e period.
,.e inclusion o& interest on contractorHs eIpenses E
t
during period t M&or 6 1N is based on
t.e rationale t.at t.e ;<s.aped curve depicting t.e contractorHs eIpenses in Kigure %<1 is
&airly typical o& actual situations ?.ere t.e o?nerHs payments are typically made at t.e
end o& ?ell de&ined periods. /ence interest on eIpenses during period t is approIimated
by one .al& o& t.e amount as i& t.e eIpenses ?ere paid at t.e beginning o& t.e period. $n
&act E
t
is t.e accumulation o& all eIpenses in period t and is treated < as an eIpense at t.e
end o& t.e period. ,.us t.e interest per period M&or t 1N is t.e combination o& interest
c.arge &or 5
t<1
in period t and t.at &or one .al& o& E
t
in t.e same period t. $& is negative
and i is t.e borro?ing rate &or t.e s.ort&all
%.22
$& is positive and . is t.e investment rate &or t.e surplus
%.23
/ence i& t.e cumulative net cas. &lo? is negative t.e interest on t.e overdra&t &or
eac. period t is paid by t.e contractor at t.e end o& eac. period. $& 5
t
is positive a surplus
is indicated and t.e subse!uent interest ?ould be paid to t.e contractor. 4ost o&ten 5
t
is
negative during t.e early time periods o& a proBect and becomes positive in t.e later
periods ?.en t.e contractor .as received payments eIceeding eIpenses.
$ncluding t.e interest accrued in period t t.e cumulative cas. &lo? at t.e end o& period t
Bust be&ore receiving payment *
t
M&or t 1N isD
%.24
Kurt.ermore t.e cumulative net cas. &lo? a&ter receiving payment *
t
at t.e end o& period
t M&or t 1N isD
%.2"
,.e gross operating pro&it at t.e end o& a n<period proBect including interest c.arges
isD
%.2#
?.ere is t.e cumulative net cas. &lo? &or t ] n.
&9ample 1)1-* Contractor's gross profit from a pro%ect
,.e contractorHs eIpenses and o?nerHs payments &or a multi<year construction proBect are
given in (olumns 2 and 3 respectively o& ,able %<11. Eac. time period is represented by
one year and t.e annual interest rate i is &or borro?ing 11V. ,.e computation .as been
carried out in ,able %<11 and t.e contractorHs gross pro&it 6 is &ound to be 5
"
] G'.+2"
million in t.e last column o& t.e table.
TA<"& 1)11 EIample o& (ontractorHs EIpenses and O?nerHs *ayments MG 4illionN
*eriod
t
(ontractorHs
EIpenses
E
t
O?nerHs
*ayments
*
t
5et (as.
Klo?
2
t
(umulative
(as.
:e&ore
*ayments
(umulative 5et
(as.
5
t
K
t
+
1
2
3
4
"
,otal
G3.%'2
%.4"'
1+.42"
14.%3#
11.42+
".#%)
G"3."++
G+
#.4%3
).334
13.34'
1#.'32
1"."3'
G#1."2"
<G3.%'2
<+.)'"
<1.+)1
<1.3''
_".412
_).'")
_G'.+2"
<G3.%'2
<11.24+
<1".1)2
<2+.")4
<1'.###
<%."13
<G3.%'2
<4.%#%
<".'"'
<%.24#
<1.'34
_'.+2"
&9ample 1)1.* &ffects of Construction (inancing
,.e computation o& t.e cumulative cas. &lo?s including interest c.arges at i ] 11V &or
EIample %<14 is s.o?n in ,able %<12 ?it. gross pro&it ] ] G1.3'4 million. ,.e
results o& computation are also s.o?n in Kigure %<2.
TA<"& 1)1! EIample (umulative (as. Klo?s $ncluding $nterests &or a (ontractor MG
4illionN
*eriod
MyearN
t
(onstruction
EIpenses
E
t
O?nerHs
*ayments
*
t
2nnual
$nterest
(umulative
:e&ore
*ayments
(umulative
5et (as.
Klo?
+
1
2
3
4
"
G3.%'2
%.4"'
1+.42"
14.%3#
11.42+
".#%)
+
G#.4%3
).334
13.34'
1#.'32
1"."3'
+
<G+.'2#
<1.1''
<1.#%#
<1.'31
<1.121
<G3.%'2
<12.+##
<1%.2+#
<24.2'4
<24.1'%
<14.1"4
<G3.%'2
<".")3
<%.'%2
<1+.)3#
<%.3"4
_1.3'4
(igure 1)! E&&ects o& Overdra&t Kinancing
1.15 &ffects of Other (actors on a Contractor's Profits
$n times o& economic uncertainty t.e &luctuations in in&lation rates and mar0et interest
rates a&&ect pro&its signi&icantly. ,.e total contract price is usually a composite o&
eIpenses and payments in t.en<current dollars at di&&erent payment periods. $n t.is case
estimated eIpenses are also eIpressed in t.en<current dollars.
1uring periods o& .ig. in&lation t.e contractorHs pro&its are particularly vulnerable to
delays caused by uncontrollable events &or ?.ic. t.e o?ner ?ill not be responsible.
/ence t.e o?nerHs payments ?ill not be c.anged ?.ile t.e contractorHs eIpenses ?ill
increase ?it. in&lation.
&9ample 1)10* &ffects of $nflation
;uppose t.at bot. eIpenses and receipts &or t.e construction proBect in t.e EIample %<14
are no? eIpressed in t.en<current dollars M?it. annual in&lation rate o& 4VN in ,able %<
13. ,.e mar0et interest rate re&lecting t.is in&lation is no? 1"V. $n considering t.ese
eIpenses and receipts in t.en<current dollars and using an interest rate o& 1"V including
in&lation ?e can recompute t.e cumulative net cas. &lo? M?it. interestN. ,.us t.e gross
pro&it less &inancing costs becomes ] ] G+.4 million. ,.ere ?ill be a loss rat.er
t.an a pro&it a&ter deducting &inancing costs and adBusting &or t.e e&&ects o& in&lation ?it.
t.is proBect.
TA<"& 1)1+ EIample o& Overdra&t Kinancing :ased on $n&lated 1ollars MG 4illionN
*eriod (onstruction O?nerHs 2nnual (umulative (umulative
MyearN
t
EIpenses
E
t
*ayments
*
t
$nterest
:e&ore
*ayments
5et (as.
Klo?
+
1
2
3
4
"
G3.%'2
%.%"#
11.2%#
1#."%#
13.3#+
#.)+)
+
G#.%32
1+.+)#
1".+1"
1#.#)1
1'.)+4
+
<G1.14)
<1.%3)
<2."%4
<2.)"3
<1.)#4
<G3.%'2
<12.#'%
<1'.)%+
<2'.+24
<2).322
<1'."+4
<G3.%'2
<".)""
<'.'%4
<13.++)
<).#31
_+.4++
&9ample 1)11* &ffects of 7or: /toppage at Periods of $nflation
;uppose &urt.er t.at besides t.e in&lation rate o& 4V t.e proBect in EIample %<1# is
suspended at t.e end o& year 2 due to a labor stri0e and resumed a&ter one year. 2lso
assume t.at ?.ile t.e contractor ?ill incur .ig.er interest eIpenses due to t.e ?or0
stoppage t.e o?ner ?ill not increase t.e payments to t.e contractor. ,.e cumulative net
cas. &lo?s &or t.e cases o& operation and &inancing eIpenses are recomputed and
tabulated in ,able %<14. ,.e construction eIpenses and receipts in t.en<current dollars
resulting &rom t.e ?or0 stopping and t.e corresponding net cas. &lo? o& t.e proBect
including &inancing M?it. annual interest accumulated in t.e overdra&t to t.e end o& t.e
proBectN is s.o?n in Kig. %<3. $t is note?ort.y t.at ?it. or ?it.out t.e ?or0 stoppage t.e
gross operating pro&it declines in value at t.e end o& t.e proBect as a result o& in&lation
but ?it. t.e ?or0 stoppage it .as eroded < &urt.er to a loss o& G3."24 million as indicated
by ] <3."24 in ,able %<14.
TA<"& 1)1- EIample o& t.e E&&ects o& Aor0 ;toppage and $n&lation on a (ontractor MG
4illionN
*eriod
MyearN
t
(onstruction
EIpenses
E
t
O?nerHs
*ayments
*
t
2nnual
$nterest
(umulative
:e&ore
*ayments
(umulative
5et (as.
Klo?
+
1
2
3
4
"
#
G3.%'2
%.%"#
11.2%#
+
1%.23)
13.')4
%.1'"
+
G#.%32
1+.+)#
+
1".+1"
1#.#)1
1'.)+4
+
<G1.14)
<1.%3)
<1.331
<2.'24
<3.33+
<2.4"%
<G3.%'2
<12.#'%
<1'.)%+
<1+.2+"
<3+.2#'
<32.4%%
22.42'
<G3.%'2
<".)""
<'.'%4
<1+.2+"
<1".2"3
<12.%'#
<3."24
(igure 1)+ E&&ects o& $n&lation and Aor0 ;toppage
&9ample 1)13* &9change 2ate (luctuation. (ontracting &irms engaged in international
practice also &ace &inancial issues associated ?it. eIc.ange rate &luctuations. Kirms are
typically paid in local currencies and t.e local currency may loose value relative to t.e
contractorHs .ome currency. 4oreover a construction contractor may .ave to purc.ase
component parts in t.e .ome currency. 8arious strategies can be used to reduce t.is
eIc.ange rate ris0 includingD
*ooling eIpenses and incomes &rom multiple proBects to reduce t.e amount o&
currency eIc.anged.
*urc.asing &utures contracts to eIc.ange currency at a &uture date at a guaranteed
rate. $& t.e eIc.ange rate does not c.ange or c.anges in a &avorable direction t.e
contractor may decide not to eIercise or use t.e &utures contract.
:orro?ing &unds in local currencies and immediately eIc.anging t.e eIpected
pro&it ?it. t.e borro?ing paid by eventual payments &rom t.e o?ner.
1.11 2eferences
1. 2u ,. and (. /endric0son J*ro&it 4easures &or (onstruction *roBectsJ "#$E
2ournal of $onstruction Engineering and 'anagement 8ol. 112 5o. (O<2
1)'# pp. 2%3<2'#.
2. :realey 3. and ;. 4yers !rinciples of $orporate 7inance% 4c6ra?</ill ;iIt.
Edition 2++2.
3. (ollier (.2. and 1.2. /alperin $onstruction 7unding3 1here the 'oney $omes
7rom ;econd Edition Po.n Ailey and ;ons 5e? 9or0 1)'4.
4. 1ipas!uale 1. and (. /endric0son JOptions &or Kinancing a 3egional ,ransit
2ut.orityJ ,ransportation Research Record 5o. '"' 1)'2 pp. 2)<3".
". Qapila *ras.ant and (.ris /endric0son JEIc.ange 3ate 3is0 4anagement in
$nternational (onstruction 8enturesJ "#$E 24 of $onstruction Eng4 and 'gmt%
1%M4N October 2++1.
#. 6oss (.2. JKinancingD ,.e (ontractorHs *erspectiveJ $onstruction $ontracting%
8ol. #2 5o. 1+ pp. 1"<1% 1)'+.
1.1! Pro>lems
1. (ompute t.e e&&ective annual interest rate ?it. a nominal annual rate o& 12V and
compounding periods o&D
1. mont.ly
2. !uarterly and
3. semi<annually Mi.e. t?ice a yearN.
2. 2 corporation is contemplating investment in a &acility ?it. t.e &ollo?ing be&ore<
taI operating cas. &lo? Min t.ousands o& constant dollarsN at year endsD
9ear + 1 2 3 4 " # %
(as. Klo? < G "++ G 11+ G 112 G 114 G 11# G 11' G 12+ G 122
3. ,.e 4233 o& t.e corporation be&ore taI is 1+V. ,.e corporation ?ill &inance t.e
&acility by using G2+++++ &rom retained earning and by borro?ing t.e remaining
amount t.roug. one o& t.e &ollo?ing t?o plansD
1. 2 seven year coupon bond ?it. "V issuance cost and 12V interest rate
payable annually.
2. Overdra&t &rom a ban0 at 13V interest
A.ic. &inancing plan is pre&erableX
4. ;uppose t.at an overseas constructor proposed to build t.e &acility in *roblem *%<
2 at a cost o& G""++++ Mrat.er t.an G"+++++N but ?ould also arrange &inancing
?it. a "V issuing c.arge and uni&orm payments over a seven year period. ,.is
&inancing is available &rom an eIport ban0 ?it. a special interest rate o& )V. $s
t.is o&&er attractiveX
". ,.e original &inancing arrangement to obtain a G""++++ loan &or a seven year
proBect ?it. "V issuing c.arge is to repay bot. t.e loan and issue c.arge t.roug.
uni&orm annual payments ?it. a )V annual interest rate over t.e seven year
period. $& t.is arrangement is to be re&inanced a&ter 2 years by coupon bonds
?.ic. pays 'V nominal annual interest M4V per #<mont. periodN &or t.e
remaining " years at t.e end o& ?.ic. t.e principal ?ill be due. 2ssuming an
origination &ee o& 2V determine t.e total amount o& coupon bonds necessary &or
re&inancing and t.e interest payment per period.
#. 2 public agency is contemplating construction o& a &acility ?it. t.e &ollo?ing
operating cas. &lo? Min t.ousands o& constant dollarsN at year ends.
9ear + 1 2 3 4 "
(as. Klo? < G 4++ < G 2++ G 2'+ G 3++ G 32+ G 34+
%. ,.e 4233 o& t.e agency is 1+V including in&lation. $& t.e agency can &inancing
t.is &acility in one o& t.e &ollo?ing t?o ?ays ?.ic. &inancing sc.eme is
pre&erableX
1. Overdra&t &inancing at an interest rate o& 12V per annum.
2. Kive year coupon bonds Mso t.at all principal is repaid at t.e end o& year "N
in t.e amount o& G#%2+++ including an issuing cost o& "V and at a 1+V
interest rate.
'. ;uppose t.at t.e coupon bonds in *roblem " are to be re&inanced a&ter t?o years
by a uni&orm payment mortgage &or t.e remaining t.ree years &or an issuing cost
o& G1++++ in t.en<current dollars. $& t.e mortgage is repaid ?it. uni&orm mont.ly
payments &or 3# mont.s and t.e mont.ly interest rate is 1V determine t.e
amount o& mont.ly payment.
). ;uppose t.e investment in a &acility by a public agency results in a net operating
cas. &lo? at year ends Min t.ousands o& dollarsN as &ollo?sD
9ear + 1 2 3 4 " #
(as. Klo? < G '"+ < G 2"+ G 2"+ G 2"+ G 4"+ G 4"+ G 4"+
1+. ,.e agency .as a 4233 o& )V and is not subBect to taI. $& t.e proBect can be
&inanced in one o& t.e t?o &ollo?ing ?ays ?.ic. &inancing sc.eme is pre&erableX
1. ;iI<year uni&orm payment bonds at 11V interest rate &or a total amount o&
borro?ing o& G'%"+++ ?.ic. includes G2"+++ o& issuing cost.
2. Kive year coupon bonds at 1+V interest rate &or a total amount o&
borro?ing o& G)+++++ ?.ic. includes G"++++ o& issuing cost.
11. ;uppose t.at t.e &ive year coupon bond in *roblem % is to be re&inanced after t.e
payment o& interest at t.e end o& year 3 by a uni&orm mortgage ?.ic. re!uires an
issuance cost o& 2V. $& t.e annual interest rate is )V ?.at is t.e uni&orm annual
payment on t.e mortgage &or anot.er " years.
12. 2 corporation plans to invest in a small proBect ?.ic. costs a one<time
eIpenditure o& G%+++++ and o&&ers an annual return o& G2"++++ eac. in t.e neIt
&our years. $t intends to &inance t.is proBect by issuing a &ive year promissory note
?.ic. re!uires an origination &ee o& G1++++. $nterest payments are made annually
at )V ?it. t.e repayment o& t.e principal at t.e end o& &ive years. $& t.e be&ore taI
4233 o& t.e (orporation is 11V &ind t.e adBusted net present value o& t.e
investment in conBunction ?it. t.e proposed &inancing.
13. 2 local transportation agency is receiving a construction grant in annual
installments &rom t.e &ederal and state governments &or a construction proBect.
/o?ever it must ma0e payments to t.e contractor periodically &or construction
eIpenditures. ;uppose t.at all receipts and eIpenditures Min million dollarsN are
made at year ends as s.o?n belo?. 1etermine t.e overdra&t at t.e end o& year " i&
t.e proBect is &inanced ?it. an overdra&t at an annual interest rate o& 1+V.
9ear + 1 2 3 4 "
3eceipts
EIpenditures
G +.+++
G 1.2"+
G 4.%#4
G #.'21
G %.4"#
G ).3#2
G '.2'%
G %.%44
G #."2"
G 4.323
G 2.4#'
G +.+++
14. ,.e operating cas. &lo?s o& contractorHs eIpenses and t.e o?nerHs payments &or a
construction proBect as stipulated in t.e contract agreement are s.o?n in ,able %<
1". ,.e contractor .as establis.ed a line o& credit &rom t.e ban0 at a mont.ly
interest rate o& 1."V and t.e contractor is allo?ed to borro? t.e s.ort&all bet?een
eIpense and receipt at t.e end o& eac. mont. but must deposit any eIcess o& net
operating cas. &lo? to reduce t.e loan amount. 2ssuming t.at t.ere is no
in&lation determine t.e cumulative net cas. &lo? including interest due to
overdra&ting. 2lso &ind t.e contractorHs gross pro&it.
Ta>le 1)1.
End o& 4ont. (ontractorHs EIpenses O?nerHs *ayments
+
1
2
3
4
"
#
%
'
<G2+++++
<2"++++
<4+++++
<"2++++
<#3++++
<%'++++
<%"++++
<##++++
<43++++
+
G22"+++
3#++++
4#'+++
"#%+++
%+2+++
#%"+++
")4+++
3'%+++
)
1+
11
12
13
14
,otal
<3'++++
<332+++
<2"#+++
<412+++
+
+
G#++++++
342+++
2)''++
23+4++
3%+'++
1+'++++
#+++++
#)+++++
1". ;uppose t.at bot. contractorHs eIpenses and o?nerHs receipts &or a construction
proBect are eIpressed in t.en<current in&lated dollars in ,able %<1#. ;uppose also
t.at t.e mont.ly interest rate re!uired by t.e ban0 is 1."V. ;uppose t.at t.e ?or0
is stopped &or t?o mont.s at t.e end o& mont. " due to labor stri0e ?.ile t.e
mont.ly in&lation rate is +."V. Under t.e terms o& t.e contract bet?een t.e o?ner
and t.e contractor suppose t.at t.e o?nerHs payments ?ill be delayed but not
adBusted &or in&lation. Kind t.e cumulative net cas. &lo? ?it. interest due to
overdra&ting.
Ta>le 1)10
End o& 4ont. (ontractorHs EIpenses O?nerHs *ayments
+
1
2
3
4
"
#
%
'
)
1+
11
12
13
14
,otal
<G2+++++
<2"12"+
<4+4+++
<"2%'"2
<#42%2#
<%))%34
<%%2'++
<#'343+
<44%"+1
<3)%442
<34')#"
<2%+43'
<43%42+
+
+
<G#1'3""'
+
G22"+++
3#++++
4#'+++
"#%+++
%+2+++
#%"+++
")4+++
3'%+++
342+++
2)''++
23+4++
3%+'++
1+'++++
#+++++
#)+++++
1#. ,.e contractorHs construction eIpenses and t.e o?nerHs payments &or a
construction proBect in t.en<current dollars as stipulated in t.e contract agreement
are s.o?n in ,able %<1%. ,.e contractor .as establis.ed a line o& credit &rom t.e
ban0 at a mont.ly interest rate o& 2V Mbased on t.en<current dollarsN and t.e
contractor is allo?ed to borro? t.e s.ort&alls bet?een eIpense and receipt at t.e
end o& eac. mont. but must deposit any eIcess o& net operating cas. &lo? to
reduce t.e loan amount. 1etermine t.e cumulative net cas. &lo? including
interest due to overdra&ting. 2lso &ind t.e contractorHs gross pro&it.
Ta>le 1)11
End o& 4ont. (ontractorHs EIpenses O?nerHs *ayments
+
1
2
3
4
"
#
%
'
)
,otal
G"++++
'"+++
1%#+++
24++++
2'4+++
2"2+++
1)2+++
123+++
)'+++
+
<G1"+++++
+
G4%"++
'+%++
1#%2++
22'+++
2%++++
23%"++
1'24++
11#'++
31))++
1#"++++
1%. ;uppose t.at bot. t.e contractorHs eIpenses and o?nerHs payments &or a
construction proBect are eIpressed in t.en<current dollars in ,able %<1% M*roblem
13N. ,.e mont.ly interest rate re!uired by t.e ban0 is 2."V based on t.en<current
dollars. ;uppose t.at t.e ?or0 is stopped &or t.ree mont.s at t.e end o& mont. 4
due to a labor stri0e ?.ile t.e mont.ly in&lation rate is +."V. ,.e o?nerHs
payments ?ill be delayed but not adBusted &or in&lation. Kind t.e cumulative net
cas. &lo? eIpressed in t.en<current dollars ?it. interest compounded and
accumulated to t.e end o& t.e proBect.
1.1+ (ootnotes
1. ,.is table is adapted &rom 2.P. /en0el J,.e 4ec.anics o& a 3evenue :ond KinancingD
2n Overvie?J -nfrastructure 7inancing Qidder *eabody W (o. 5e? 9or0 1)'4.
2. ,.e calculations &or t.is bond issue are adapted &rom a .ypot.etical eIample in K. /.
Kuller J2nalyzing (as. Klo?s &or 3evenue :ond KinancingJ -nfrastructure 7inancing
Qidder *eabody W (o. $nc. 5e? 9or0 1)'4 pp. 3%<4%.
3. 4aevis 2l&red (.J(onstruction (ost (ontrol by t.e O?nerJ "#$E 2ournal of the
$onstruction &ivision 8ol. 1+# 5o. 4 1ecember 1)'+ pg. 444.
3. Construction Pricing and Contracting
3.1 Pricing for Constructed (acilities
:ecause o& t.e uni!ue nature o& constructed &acilities it is almost imperative to .ave a
separate price &or eac. &acility. ,.e construction contract price includes t.e direct proBect
cost including &ield supervision eIpenses plus t.e mar0up imposed by contractors &or
general over.ead eIpenses and pro&it. ,.e &actors in&luencing a &acility price ?ill vary by
type o& &acility and location as ?ell. Ait.in eac. o& t.e maBor categories o& construction
suc. as residential .ousing commercial buildings industrial compleIes and
in&rastructure t.ere are smaller segments ?.ic. .ave very di&&erent environments ?it.
regard to price setting. /o?ever all pricing arrangements .ave some common &eatures in
t.e &orm o& t.e legal documents binding t.e o?ner and t.e supplierMsN o& t.e &acility.
Ait.out addressing special issues in various industry segments t.e most common types
o& pricing arrangements can be described broadly to illustrate t.e basic principles.
Competitive Bidding
,.e basic structure o& t.e bidding process consists o& t.e &ormulation o& detailed plans
and speci&ications o& a &acility based on t.e obBectives and re!uirements o& t.e o?ner
and t.e invitation o& !uali&ied contractors to bid &or t.e rig.t to eIecute t.e proBect. ,.e
de&inition o& a !uali&ied contractor usually calls &or a minimal evidence o& previous
eIperience and &inancial stability. $n t.e private sector t.e o?ner .as considerable
latitude in selecting t.e bidders ranging &rom open competition to t.e restriction o&
bidders to a &e? &avored contractors. $n t.e public sector t.e rules are care&ully
delineated to place all !uali&ied contractors on an e!ual &ooting &or competition and
strictly en&orced to prevent collusion among contractors and unet.ical or illegal actions
by public o&&icials.
1etailed plans and speci&ications are usually prepared by an arc.itecturalUengineering
&irm ?.ic. oversees t.e bidding process on be.al& o& t.e o?ner. ,.e &inal bids are
normally submitted on eit.er a lump sum or unit price basis as stipulated by t.e o?ner.
2 lump sum bid represents t.e total price &or ?.ic. a contractor o&&ers to complete a
&acility according to t.e detailed plans and speci&ications. Unit price bidding is used in
proBects &or ?.ic. t.e !uantity o& materials or t.e amount o& labor involved in some 0ey
tas0s is particularly uncertain. $n suc. cases t.e contractor is permitted to submit a list o&
unit prices &or t.ose tas0s and t.e &inal price used to determine t.e lo?est bidder is based
on t.e lump sum price computed by multiplying t.e !uoted unit price &or eac. speci&ied
tas0 by t.e corresponding !uantity in t.e o?nerHs estimates &or !uantities. /o?ever t.e
total payment to t.e ?inning contractor ?ill be based on t.e actual !uantities multiplied
by t.e respective !uoted unit prices.
+egotiated Contracts
$nstead o& inviting competitive bidding private o?ners o&ten c.oose to a?ard
construction contracts ?it. one or more selected contractors. 2 maBor reason &or using
negotiated contracts is t.e &leIibility o& t.is type o& pricing arrangement particularly &or
proBects o& large size and great compleIity or &or proBects ?.ic. substantially duplicate
previous &acilities sponsored by t.e o?ner. 2n o?ner may value t.e eIpertise and
integrity o& a particular contractor ?.o .as a good reputation or .as ?or0ed success&ully
&or t.e o?ner in t.e past. $& it becomes necessary to meet a deadline &or completion o& t.e
proBect t.e construction o& a proBect may proceed ?it.out ?aiting &or t.e completion o&
t.e detailed plans and speci&ications ?it. a contractor t.at t.e o?ner can trust. /o?ever
t.e o?nerHs sta&& must be .ig.ly 0no?ledgeable and competent in evaluating contractor
proposals and monitoring subse!uent per&ormance.
6enerally negotiated contracts re!uire t.e reimbursement o& direct proBect cost plus t.e
contractorHs &ee as determined by one o& t.e &ollo?ing met.odsD
1. (ost plus &iIed percentage
2. (ost plus &iIed &ee
3. (ost plus variable &ee
4. ,arget estimate
". 6uaranteed maIimum price or cost
,.e &iIed percentage or &iIed &ee is determined at t.e outset o& t.e proBect ?.ile variable
&ee and target estimates are used as an incentive to reduce costs by s.aring any cost
savings. 2 guaranteed maIimum cost arrangement imposes a penalty on a contractor &or
cost overruns and &ailure to complete t.e proBect on time. Ait. a guaranteed maIimum
price contract amounts belo? t.e maIimum are typically s.ared bet?een t.e o?ner and
t.e contractor ?.ile t.e contractor is responsible &or costs above t.e maIimum.
Speculative Residential Construction
$n residential construction developers o&ten build .ouses and condominiums in
anticipation o& t.e demand o& .ome buyers. :ecause t.e basic needs o& .ome buyers are
very similar and .ome designs can be standardized to some degree t.e probability o&
&inding buyers o& good .ousing units ?it.in a relatively s.ort time is !uite .ig..
(onse!uently developers are ?illing to underta0e speculative building and lending
institutions are also ?illing to &inance suc. construction. ,.e developer essentially set t.e
price &or eac. .ousing unit as t.e mar0et ?ill bear and can adBust t.e prices o& remaining
units at any given time according to t.e mar0et trend.
Force2ccount Construction
;ome o?ners use in<.ouse labor &orces to per&orm a substantial amount o& construction
particularly &or addition renovation and repair ?or0. ,.en t.e total o& t.e &orce<account
c.arges including in<.ouse over.ead eIpenses ?ill be t.e pricing arrangement &or t.e
construction.
3.! Contract Proisions for 2is: Allocation
*rovisions &or t.e allocation o& ris0 among parties to a contract can appear in numerous
areas in addition to t.e total construction price. ,ypically t.ese provisions assign
responsibility &or covering t.e costs o& possible or un&oreseen occurances. 2 partial list o&
responsibilities ?it. concomitant ris0 t.at can be assigned to di&&erent parties ?ould
includeD
Korce maBeure Mi.e. t.is provision absolves an o?ner or a contractor &or payment
&or costs due to J2cts o& 6odJ and ot.er eIternal events suc. as ?ar or labor
stri0esN
$ndemni&ication Mi.e. t.is provision absolves t.e indemi&ied party &rom any
payment &or losses and damages incurred by a t.ird party suc. as adBacent
property o?ners.N
Liens Mi.e. assurances t.at t.ird party claims are settled suc. as Jmec.anics liensJ
&or ?or0er ?agesN
Labor la?s Mi.e. payments &or any violation o& labor la?s and regulations on t.e
Bob siteN
1i&&ering site conditions Mi.e. responsibility &or eItra costs due to uneIpected site
conditionsN
1elays and eItensions o& time
Li!uidated damages Mi.e. payments &or any &acility de&ects ?it. payment amounts
agreed to in advanceN
(onse!uential damages Mi.e. payments &or actual damage costs assessed upon
impact o& &acility de&ectsN
Occupational sa&ety and .ealt. o& ?or0ers
*ermits licenses la?s and regulations
E!ual employment opportunity regulations
,ermination &or de&ault by contractor
;uspension o& ?or0
Aarranties and guarantees.
,.e language used &or speci&ying t.e ris0 assignments in t.ese areas must con&orm to
legal re!uirements and past interpretations ?.ic. may vary in di&&erent Burisdictions or
over time. Ait.out using standard legal language contract provisions may be
unen&orceable. Un&ortunately standard legal language &or t.is purpose may be di&&icult to
understand. 2s a result proBect managers o&ten .ave di&&iculty in interpreting t.eir
particular responsibilities. (ompetent legal counsel is re!uired to advise t.e di&&erent
parties to an agreement about t.eir respective responsibilities.
;tandard &orms &or contracts can be obtained &rom numerous sources suc. as t.e
2merican $nstitute o& 2rc.itects M2$2N or t.e 2ssociated 6eneral (ontractors M26(N.
,.ese standard &orms may include ris0 and responsibility allocations ?.ic. are
unacceptable to one or more o& t.e contracting parties. $n particular standard &orms may
be biased to reduce t.e ris0 and responsibility o& t.e originating organization or group.
*arties to a contract s.ould read and revie? all contract documents care&ully.
,.e t.ree eIamples appearing belo? illustrate contract language resulting in di&&erent
ris0 assignments bet?een a contractor M(O5,32(,O3N and an o?ner M(O4*259N.
Eac. contract provision allocates di&&erent levels o& indemni&ication ris0 to t.e contractor.
R1S
&9ample 3)1* A Contract Proision &9ample with Aigh Contractor 2is:
JEIcept ?.ere t.e sole negligence o& (O4*259 is involved or alleged
(O5,32(,O3 s.all indemni&y and .old .armless (O4*259 its o&&icers agents and
employees &rom and against any and all loss damage and liability and &rom any and all
claims &or damages on account o& or by reason o& bodily inBury including deat. not
limited to t.e employees o& (O5,32(,O3 (O4*259 and o& any subcontractor or
(O5,32(,O3 and &rom and against any and all damages to property% including
property of $*'!"NA and third parties% direct andBor conse9uential% caused by or
arising out o& in ?.ile or in part or claimed to .ave been caused by or to .ave arisen out
o& in ?.ole or in part an act o& omission o& (O5,32(,O3 or its agents employees
vendors or subcontractors o& t.eir employees or agents in connection ?it. t.e
per&ormance o& t.e (ontract 1ocuments whether or not insured againstO and
(O5,32(,O3 s.all at its o?n cost and eIpense de&end any claim suit action or
proceeding ?.et.er groundless or not ?.ic. may be commenced against (O4*259
by reason t.ereo& or in connection t.ere?it. and (O5,32(,O3 s.all pay any and all
Budgments ?.ic. may be recovered in suc. action claim proceeding or suit and de&ray
any and all eIpenses including costs and attorneyHs &ees ?.ic. may be incurred by reason
o& suc. actions claims proceedings or suits.J
Comment* ,.is is a very burdensome provision &or t.e contractor. $t ma0es t.e
contractor responsible &or practically every conceivable occurrence and type o& damage
eIcept ?.en a claim &or loss or damages is due to t.e sole negligence o& t.e o?ner. 2s a
practical matter sole negligence on a construction proBect is very di&&icult to ascertain
because t.e ?or0 is so inter<t?ined. ;ince t.ere is no dollar limitation to t.e contractorHs
eIposure su&&icient liability coverage to cover ?orst scenario ris0s ?ill be di&&icult to
obtain. ,.e best t.e contractor can do is to obtain as complete and broad eIcess liability
insurance coverage as can be purc.ased. ,.is insurance is costly so t.e contractor s.ould
insure t.e contract price is su&&iciently .ig. to cover t.e eIpense.
&9ample 3)!* An &9ample Contract Proision with ,edium 2is: Allocation to
Contractor
J(O5,32(,O3 s.all protect de&end .old .armless and indemni&y (O4*259 &rom
and against any loss damage claim action liability or demand ?.atsoever Mincluding
?it. limitation costs eIpenses and attorneyHs &ees ?.et.er &or appeals or ot.er?ise in
connection t.ere?it.N arising out o& any personal inBury Mincluding ?it.out limitation
inBury to any employee o& (O4*259 (O5,32(,O3 or any subcontractorN arising
out o& any personal inBury Mincluding ?it.out limitation inBury to any employee o&
(O4*259 (O5,32(,O3 or any subcontractorN including deat. resulting t.ere&rom
or out o& any damage to or loss or destruction o& property real and or personal Mincluding
property o& (O4*259 (O5,32(,O3 and any subcontractor and including tools
and e!uipment ?.et.er o?ned rented or used by (O5,32(,O3 any subcontractor or
any ?or0manN in any manner based upon occasioned by or attributable or related to t.e
per&ormance ?.et.er by t.e (O5,32(,O3 or any subcontractor o& t.e Aor0 or any
part t.ereo& and (O5,32(,O3 s.all at its o?n eIpense de&end any and all actions
based t.ereon eIcept ?.ere said personal inBury or property damage is caused by t.e
negligence o& (O4*259 or (O4*259H; employees. 2ny loss damage cost eIpense
or attorneyHs &ees incurred by (O4*259 in connection ?it. t.e &oregoing may in
addition to ot.er remedies be deducted &rom (O5,32(,O3H; compensation t.en due
or t.erea&ter to become due. $*'!"NA shall effect for the )enefit of $*N,R"$,*R a
waiver of su)rogation on the e:isting facilities% including conse9uential damages such
as% )ut not )y way of limitation% loss of profit and loss of product or plant downtime )ut
e:cluding any deducti)les which shall e:ist as at the date of this $*N,R"$,8 provided%
however% that said waiver of su)rogation shall )e e:panded to include all said deducti)le
amounts on the acceptance of the 1ork )y $*'!"NA4J
CommentD ,.is clause provides t.e contractor considerable relie&. /e still .as unlimited
eIposure &or inBury to all persons and t.ird party property but only to t.e eItent caused by
t.e contractorHs negligence. ,.e JsoleJ negligence issue does not arise. Kurt.ermore t.e
contractorHs liability &or damages to t.e o?nerHs property<a maBor concern &or contractors
?or0ing in petroc.emical compleIes at times ?ort. billions<is limited to t.e o?nerHs
insurance deductible and t.e o?nerHs insurance carriers .ave no rig.t o& recourse against
t.e contractor. ,.e contractorHs limited eIposure regarding t.e o?nerHs &acilities ends on
completion o& t.e ?or0.
&9ample 3)+* An &9ample Contract Proision with "ow 2is: Allocation to
Contractor
J(O5,32(,O3 .ereby agrees to indemni&y and .old (O4*259 andUor any parent
subsidiary or a&&iliate or (O4*259 andUor o&&icers agents or employees o& any o&
t.em .armless &rom and against any loss or liability arising directly or indirectly out o&
any claim or cause o& action &or loss or damage to property including but not limited to
(O5,32(,O3H; property and (O4*259H; property and &or inBuries to or deat. o&
persons including but not limited to (O5,32(,O3H; employees caused by or resulting
&rom t.e per&ormance o& t.e ?or0 by (O5,32(,O3 its employees agents and
subcontractors and s.all at t.e option o& (O4*259 de&end (O4*259 at
(O5,32(,O3H; sole eIpense in any litigation involving t.e same regardless o&
?.et.er suc. ?or0 is per&ormed by (O5,32(,O3 its employees or by its
subcontractors t.eir employees or all or eit.er o& t.em. -n all instances%
$*N,R"$,*R># indemnity to $*'!"NA shall )e limited to the proceeds of
$*N,R"$,*R># um)rella lia)ility insurance coverage4J
CommentD Ait. respect to indemni&ying t.e o?ner t.e contractor in t.is provision .as
minimal out<o&<poc0et ris0. EIposure is limited to ?.atever can be collected &rom t.e
contractorHs insurance company.
3.+ 2is:s and $ncenties on Construction Iuality
2ll o?ners ?ant !uality construction ?it. reasonable costs but not all are ?illing to
s.are ris0s andUor provide incentives to en.ance t.e !uality o& construction. $n recent
years more o?ners recognize t.at t.ey do not get t.e best !uality o& construction by
s!ueezing t.e last dollar o& pro&it &rom t.e contractor and t.ey accept t.e concept o& ris0
s.aringUris0 assignment in principle in letting construction contracts. /o?ever t.e
implementation o& suc. a concept in t.e past decade .as received miIed results.
4any public o?ners .ave been t.e victims o& t.eir o?n sc.emes not only because o& t.e
usual re!uirement in letting contracts o& public ?or0s t.roug. competitive bidding to
avoid &avoritism but at times because o& t.e s.eer ?eig.t o& entrenc.ed bureaucracy.
;ome contractors steer a?ay &rom public ?or0s altoget.erO ot.ers submit bids at .ig.er
prices to compensate &or t.e restrictive provisions o& contract terms. 2s a result some
public aut.orities &ind t.at eit.er t.ere are &e? responsible contractors responding to t.eir
invitations to submit bids or t.e bid prices &ar eIceed t.eir engineersH estimates. ,.ose
public o?ners ?.o .ave adopted t.e &ederal governmentHs ris0 s.aringUris0 assignment
contract concepts .ave &ound t.at ?.ile initial bid prices may .ave decreased some?.at
claims and disputes on contracts are more &re!uent t.an be&ore and notably more so t.an
in privately &unded construction. ;ome o& t.ese claims and disputes can no doubt be
avoided by improving t.e contract provisions. R2S
;ince most claims and disputes arise most &re!uently &rom lump sum contracts &or bot.
public and private o?ners t.e &ollo?ing &actors associated ?it. lump sum contracts are
particularly note?ort.yD
unbalanced bids in unit prices on ?.ic. periodic payment estimates are based.
c.ange orders subBect to negotiated payments
c.anges in design or construction tec.nology
incentives &or early completion
2n unbalanced bid re&ers to raising t.e unit prices on items to be completed in t.e early
stage o& t.e proBect and lo?ering t.e unit prices on items to be completed in t.e later
stages. ,.e purpose o& t.is practice on t.e part o& t.e contractor is to ease its burden o&
construction &inancing. $t is better &or o?ners to o&&er eIplicit incentives to aid
construction &inancing in eIc.ange &or lo?er bid prices t.an to allo? t.e use o& .idden
unbalanced bids. Unbalanced bids may also occur i& a contractor &eels some item o& ?or0
?as underestimated in amount so t.at a .ig. unit price on t.at item ?ould increase
pro&its. ;ince lump sum contracts are a?arded on t.e basis o& lo? bids it is di&&icult to
c.allenge t.e lo? bidders on t.e validity o& t.eir unit prices eIcept &or &lagrant violations.
(onse!uently remedies s.ould be soug.t by re!uesting t.e contractor to submit pertinent
records o& &inancial transactions to substantiate t.e eIpenditures associated ?it. its
mont.ly billings &or payments o& ?or0 completed during t.e period.
One o& t.e most contentious issues in contract provisions concerns t.e payment &or
c.ange orders. ,.e o?ner and its engineer s.ould .ave an appreciation o& t.e e&&ects o&
c.anges &or speci&ic items o& ?or0 and negotiate ?it. t.e contractor on t.e identi&iable
cost o& suc. items. ,.e o?ner s.ould re!uire t.e contractor to submit t.e price !uotation
?it.in a certain period o& time a&ter t.e issuance o& a c.ange order and to assess ?.et.er
t.e c.ange order may cause delay damages. $& t.e contract does not contain speci&ic
provisions on cost disclosures &or evaluating c.ange order costs it ?ill be di&&icult to
negotiate payments &or c.ange orders and claim settlements later.
$n some proBects t.e contract provisions may allo? t.e contractor to provide alternative
design andUor construction tec.nology. ,.e o?ner may impose di&&erent mec.anisms &or
pricing t.ese c.anges. Kor eIample a contractor may suggest a design or construction
met.od c.ange t.at &ul&ills t.e per&ormance re!uirements. ;avings due to suc. c.anges
may accrue to t.e contractor or t.e o?ner or may be divided in some &as.ion bet?een
t.e t?o. ,.e contract provisions must re&lect t.e o?ners ris0<re?ard obBectives in calling
&or alternate design andUor construction tec.nology. A.ile innovations are o&ten soug.t to
save money and time unsuccess&ul innovations may re!uire additional money and time
to correct earlier misBudgment. 2t ?orse a &ailure could .ave serious conse!uences.
$n spite o& admonitions and good intentions &or better planning be&ore initiating a
construction proBect most o?ners ?ant a &acility to be in operation as soon as possible
once a decision is made to proceed ?it. its construction. 4any construction contracts
contain provisions o& penalties &or late completion beyond a speci&ied deadlineO .o?ever
unless suc. provisions are accompanied by similar incentives &or early completion t.ey
may be ruled unen&orceable in court. Early completion may result in signi&icant savings
particularly in re.abilitation proBects in ?.ic. t.e &acility users are inconvenienced by t.e
loss o& t.e &acility and t.e disruption due to construction operations.
&9ample 3)-* Ar:ansas 2ice Crowers Cooperatie Association . Alchemy
$ndustries
2 1)'# court case can illustrate t.e assumption o& ris0 on t.e part o& contractors and
design pro&essionals. R3S ,.e 2r0ansas 3ice 6ro?ers (ooperative contracted ?it.
2lc.emy $ndustries $nc. to provide engineering and construction services &or a ne?
&acility intended to generate steam by burning rice .ulls. Under t.e terms o& t.e contract
2lc.emy $ndustries guaranteed t.at t.e completed plant ?ould be capable o& Jreducing a
minimum o& seven and one<.al& tons o& rice .ulls per .our to an as. and producing a
minimum o& 4' million :,UHs per .our o& steam at 2++ pounds pressure.J Un&ortunately
t.e &inis.ed plant did not meet t.is per&ormance standard and t.e 2r0ansas 3ice 6ro?ers
(ooperative 2ssociation sued 2lc.emy $ndustries and its subcontractors &or breac. o&
?arranty. 1amages o& almost G1." million ?ere a?arded to t.e 2ssociation.
3.- Types of Construction Contracts
A.ile construction contracts serve as a means o& pricing construction t.ey also structure
t.e allocation o& ris0 to t.e various parties involved. ,.e o?ner .as t.e sole po?er to
decide ?.at type o& contract s.ould be used &or a speci&ic &acility to be constructed and to
set &ort. t.e terms in a contractual agreement. $t is important to understand t.e ris0s o&
t.e contractors associated ?it. di&&erent types o& construction contracts.
)ump Sum Contract
$n a lump sum contract t.e o?ner .as essentially assigned all t.e ris0 to t.e contractor
?.o in turn can be eIpected to as0 &or a .ig.er mar0up in order to ta0e care o&
un&oreseen contingencies. :eside t.e &iIed lump sum price ot.er commitments are o&ten
made by t.e contractor in t.e &orm o& submittals suc. as a speci&ic sc.edule t.e
management reporting system or a !uality control program. $& t.e actual cost o& t.e
proBect is underestimated t.e underestimated cost ?ill reduce t.e contractorHs pro&it by
t.at amount. 2n overestimate .as an opposite e&&ect but may reduce t.e c.ance o& being
a lo? bidder &or t.e proBect.
3nit Price Contract
$n a unit price contract t.e ris0 o& inaccurate estimation o& uncertain !uantities &or some
0ey tas0s .as been removed &rom t.e contractor. /o?ever some contractors may submit
an Junbalanced bidJ ?.en it discovers large discrepancies bet?een its estimates and t.e
o?nerHs estimates o& t.ese !uantities. 1epending on t.e con&idence o& t.e contractor on
its o?n estimates and its propensity on ris0 a contractor can slig.tly raise t.e unit prices
on t.e underestimated tas0s ?.ile lo?ering t.e unit prices on ot.er tas0s. $& t.e
contractor is correct in its assessment it can increase its pro&it substantially since t.e
payment is made on t.e actual !uantities o& tas0sO and i& t.e reverse is true it can lose on
t.is basis. Kurt.ermore t.e o?ner may dis!uali&y a contractor i& t.e bid appears to be
.eavily unbalanced. ,o t.e eItent t.at an underestimate or overestimate is caused by
c.anges in t.e !uantities o& ?or0 neit.er error ?ill e&&ect t.e contractorHs pro&it beyond
t.e mar0up in t.e unit prices.
Cost Plus Fi4ed Percentage Contract
Kor certain types o& construction involving ne? tec.nology or eItremely pressing needs
t.e o?ner is sometimes &orced to assume all ris0s o& cost overruns. ,.e contractor ?ill
receive t.e actual direct Bob cost plus a &iIed percentage and .ave little incentive to
reduce Bob cost. Kurt.ermore i& t.ere are pressing needs to complete t.e proBect overtime
payments to ?or0ers are common and ?ill &urt.er increase t.e Bob cost. Unless t.ere are
compelling reasons suc. as t.e urgency in t.e construction o& military installations t.e
o?ner s.ould not use t.is type o& contract.
Cost Plus Fi4ed Fee Contract
Under t.is type o& contract t.e contractor ?ill receive t.e actual direct Bob cost plus a
&iIed &ee and ?ill .ave some incentive to complete t.e Bob !uic0ly since its &ee is &iIed
regardless o& t.e duration o& t.e proBect. /o?ever t.e o?ner still assumes t.e ris0s o&
direct Bob cost overrun ?.ile t.e contractor may ris0 t.e erosion o& its pro&its i& t.e
proBect is dragged on beyond t.e eIpected time.
Cost Plus 6aria*le Percentage Contract
Kor t.is type o& contract t.e contractor agrees to a penalty i& t.e actual cost eIceeds t.e
estimated Bob cost or a re?ard i& t.e actual cost is belo? t.e estimated Bob cost. $n return
&or ta0ing t.e ris0 on its o?n estimate t.e contractor is allo?ed a variable percentage o&
t.e direct Bob<cost &or its &ee. Kurt.ermore t.e proBect duration is usually speci&ied and
t.e contractor must abide by t.e deadline &or completion. ,.is type o& contract allocates
considerable ris0 &or cost overruns to t.e o?ner but also provides incentives to
contractors to reduce costs as muc. as possible.
-arget Estimate Contract
,.is is anot.er &orm o& contract ?.ic. speci&ies a penalty or re?ard to a contractor
depending on ?.et.er t.e actual cost is greater t.an or less t.an t.e contractorHs estimated
direct Bob cost. Usually t.e percentages o& savings or overrun to be s.ared by t.e o?ner
and t.e contractor are predetermined and t.e proBect duration is speci&ied in t.e contract.
:onuses or penalties may be stipulated &or di&&erent proBect completion dates.
'uaranteed &a4imum Cost Contract
A.en t.e proBect scope is ?ell de&ined an o?ner may c.oose to as0 t.e contractor to
ta0e all t.e ris0s bot. in terms o& actual proBect cost and proBect time. 2ny ?or0 c.ange
orders &rom t.e o?ner must be eItremely minor i& at all since per&ormance speci&ications
are provided to t.e o?ner at t.e outset o& construction. ,.e o?ner and t.e contractor
agree to a proBect cost guaranteed by t.e contractor as maIimum. ,.ere may be or may
not be additional provisions to s.are any savings i& any in t.e contract. ,.is type o&
contract is particularly suitable &or turnkey operation.
3.. 2elatie Costs of Construction Contracts
3egardless o& t.e type o& construction contract selected by t.e o?ner t.e contractor
recognizes t.at t.e actual construction cost ?ill never be identical to its o?n estimate
because o& imper&ect in&ormation. Kurt.ermore it is common &or t.e o?ner to place ?or0
c.ange orders to modi&y t.e original scope o& ?or0 &or ?.ic. t.e contractor ?ill receive
additional payments as stipulated in t.e contract. ,.e contractor ?ill use di&&erent
mar0ups commensurate ?it. its mar0et circumstances and ?it. t.e ris0s involved in
di&&erent types o& contracts leading to di&&erent contract prices at t.e time o& bidding or
negotiation. ,.e type o& contract agreed upon may also provide t.e contractor ?it.
greater incentives to try to reduce costs as muc. as possible. ,.e contractorHs gross pro&it
at t.e completion o& a proBect is a&&ected by t.e type o& contract t.e accuracy o& its
original estimate and t.e nature o& ?or0 c.ange orders. ,.e o?nerHs actual payment &or
t.e proBect is also a&&ected by t.e contract and t.e nature o& ?or0 c.ange orders.
$n order to illustrate t.e relative costs o& several types o& construction contracts t.e
pricing mec.anisms &or suc. construction contracts are &ormulated on t.e same direct Bob
cost plus corresponding mar0ups re&lecting t.e ris0s. Let us adopt t.e &ollo?ing notationD
E] contractorHs original estimate o& t.e direct Bob cost at t.e time o& contract a?ard
4 ] amount o& mar0up by t.e contractor in t.e contract
: ] estimated construction price at t.e time o& signing contract
2 ] contractorHs actual cost &or t.e original scope o& ?or0 in t.e contract
U ] underestimate o& t.e cost o& ?or0 in t.e original estimate M?it. negative value o& U
denoting an overestimateN
( ] additional cost o& ?or0 due to c.ange orders
* ] actual payment to contractor by t.e o?ner
K ] contractorHs gross pro&it
3 ] basic percentage mar0up above t.e original estimate &or &iIed &ee contract
3
i
] premium percentage mar0up &or contract type i suc. t.at t.e total percentage mar0up
is M3 _ 3
i
N e.g. M3 _ 3
1
N &or a lump sum contract M3 _ 3
2
N &or a unit price contract and
M3 _ 3
3
N &or a guaranteed maIimum cost contract
5 ] a &actor in t.e target estimate &or s.aring t.e savings in cost as agreed upon by t.e
o?ner and t.e contractor ?it. + 5 1.
2t t.e time o& a contract a?ard t.e contract price is given byD
'.1
,.e underestimation o& t.e cost o& ?or0 in t.e original contract is de&ined asD
'.2
,.en at t.e completion o& t.e proBect t.e contractorHs actual cost &or t.e original scope
o& ?or0 isD
'.3
Kor various types o& construction contracts t.e contractorHs mar0up and t.e price &or
construction agreed to in t.e contract are s.o?n in ,able '<1. 5ote t.at at t.e time o&
contract a?ard it is assumed t.at 2 ] E even t.oug. t.e e&&ects o& underestimation on
t.e contractorHs gross pro&its are di&&erent &or various types o& construction contracts
?.en t.e actual cost o& t.e proBect is assessed upon its completion.
TA<"& 3)1 Original Estimated (ontract *rices
,ype o& (ontract 4ar0up (ontract *rice
1. Lump sum
2. Unit price
3. (ost plus &iIed V
4. (ost plus &iIed &ee
". (ost plus variable V
#. ,arget estimate
%. 6uaranteed maI cost
4 ] M3 _3
1
NE
4 ] M3 _ 3
2
NE
4 ] 32 ] 3E
4 ] 3E
4 ] 3 M2E < 2N ] 3E
4 ] 3E _ 5 ME<2N ] 3E
4 ] M3 _ 3
3
NE
: ] M1 _ 3 _ 3
1
NE
: ] M1 _ 3 _ 3
2
NE
: ] M1 _ 3NE
: ] M1 _ 3NE
: ] M1 _ 3NE
: ] M1 _ 3NE
: ] M1 _ 3 _ 3
3
NE
*ayments o& c.ange orders are also di&&erent in contract provisions &or di&&erent types o&
contracts. ;uppose t.at payments &or c.ange orders agreed upon &or various types o&
contracts are as s.o?n in column 2 o& ,able '<2. ,.e o?nerHs actual payments based on
t.ese provisions as ?ell as t.e incentive provisions &or various types o& contracts are
given in column 3 o& ,able '<2. ,.e corresponding contractorHs pro&its under various
contractual arrangements are s.o?n in ,able '<3.
TA<"& 3)! O?nerHs 2ctual *ayment ?it. 1i&&erent (ontract *rovisions
,ype o& (ontract (.ange Order *ayment O?nerHs *ayment
1. Lump sum
2. Unit price
3. (ost plus &iIed V
4. (ost plus &iIed &ee
". (ost plus variable V
#. ,arget estimate
%. 6uaranteed maI cost
(M1 _ 3 _ 3
1
N
(M1 _ 3 _ 3
2
N
(M1 _ 3N
(
(M1 _ 3N
(
+
* ] : _ (M1 _ 3 _ 3
1
N
* ] M1 _ 3 _ 3
2
N2 _ (
* ] M1 _ 3NM2 _ (N
* ] 3E _ 2 _ (
* ] 3 M2E < 2 _ (N _ 2 _ (
* ] 3E _ 5 ME < 2N _ 2 _ (
* ] :
TA<"& 3)+ (ontractorHs 6ross *ro&it ?it. 1i&&erent (ontract *rovisions
,ype o& (ontract *ro&it &rom (.ange Order (ontractorHs 6ross *ro&it
1. Lump sum
2. Unit price
3. (ost plus &iIed V
4. (ost plus &iIed &ee
". (ost plus variable V
#. ,arget estimate
%. 6uaranteed maI cost
(M3 _ 3
1
N
(M3 _ 3
2
(3
+
(3
+
<(
K ] E < 2 _ M3 _ 3
1
NME _ (N
K ] M3 _ 3
2
NM2 _ (N
K ] 3 M2 _ (N
K ] 3E
K ] 3 M2E < 2 _ (N
K ] 3E _ 5 ME < 2N
K ] M1 _ 3 _ 3
3
NE < 2 < (
$t is important to note t.at t.e e!uations in ,ables '<1 t.roug. '<3 are illustrative subBect
to t.e simpli&ied conditions o& payments assumed under t.e various types o& contracts.
A.en t.e negotiated conditions o& payment are di&&erent t.e e!uations must also be
modi&ied.
&9ample 3).* Contractor's Cross Profits under ;ifferent Contract Arrangements
(onsider a construction proBect &or ?.ic. t.e contractorHs original estimate is G#++++++.
Kor various types o& contracts 3 ] 1+V 3
1
] 2V 3
2
] 1V 3
3
] "V and 5 ] +.". ,.e
contractor is not compensated &or c.ange orders under t.e guaranteed maIimum cost
contract i& t.e total cost &or t.e c.ange orders is ?it.in #V MG3#++++N o& t.e original
estimate. 1etermine t.e contractorHs gross pro&it &or eac. o& t.e seven types o&
construction contracts &or eac. o& t.e &ollo?ing conditions.
MaN U ] + ( ] +
MbN U ] + ( ] #V E ] G3#++++
McN U ] 4V E ] G24++++ ( ] +
MdN U ] 4V E ] G24++++ ( ] #V E ] G3#++++
MeN U ] <4V E ] <G24++++ ( ] +
M&N U ] <4V E ] <G24++++ ( ] #V E ] G3#++++
$n t.is eIample t.e percentage mar0up &or t.e cost plus &iIed percentage contract is 1+V
?.ic. is used as t.e benc. mar0 &or comparison.
,.e percentage mar0up &or t.e lump sum contract is 12V ?.ile t.at &or t.e unit price
contract is 11V re&lecting t.e degrees o& .ig.er ris0.
,.e &iIed &ee &or t.e cost plus &iIed &ee is based on 1+V o& t.e estimated cost ?.ic. is
comparable to t.e cost plus &iIed percentage contract i& t.ere is no overestimate or
underestimate in cost. ,.e basic percentage mar0up is 1+V &or bot. t.e cost plus variable
percentage contract and t.e target estimator contract but t.ey are subBect to incentive
bonuses and penalties t.at are built in t.e &ormulas &or o?nersH payments.
,.e percentage mar0up &or t.e guaranteed maIimum cost contract is 1"V to account &or
t.e .ig. ris0 underta0en by t.e contractor.
,.e results o& computation &or all seven types o& contracts under di&&erent conditions o&
underestimation U and c.ange order ( are s.o?n in ,able '<4
TA<"& 3)- (ontractorHs 6ross *ro&its under 1i&&erent (onditions Min
G1+++N
,ype o& (ontract
U]+
(]+
U]+
(]#VE
U]4VE
(]+
U]4VE
(]#VE
U]<4VE
(]+
U]<4VE
(]#VE
1. lump sum
2. unit price
3. cost _ &iIed V
4. cost _ &iIed
&ee
". cost _ 8ar V
#. target estimate
%. guar. maI.
cost
G%2+
##+
#++
#++
#++
#++
)++
G%#3
%++
#3#
#++
#3#
#++
"4+
G4'+
#'#
#24
#++
"%#
4'+
##+
G"23
%2#
##+
#++
#1#
4'+
3++
G)#+
#34
"%#
#++
#24
%2+
114+
G1++3
#%4
#12
#++
##+
%2+
%'+
&9ample 3)0* Owner's Payments under ;ifferent Contract Arrangements
Using t.e data in EIample '<" determine t.e o?nerHs actual payment &or eac. o& t.e
seven types o& construction contracts &or t.e same conditions o& U and (. ,.e results o&
computation are s.o?n in ,able '<".
TA<"& 3). O?nerHs 2ctual *ayments under 1i&&erent (onditions Min
G1+++N
,ype o&
(ontract
U]+
(]+
U]+
(]#VE
U]4VE
(]+
U]4VE
(]#VE
U]<4VE
(]+
U]<4VE
(]#VE
1. lump sum
2. unit price
3. cost _ &iIed
V
4. cost _ &iIed
&ee
G#%2+
###+
##++
##++
##++
##++
G%123
%+#+
#))#
#)#+
#))#
#)#+
G#%2+
#)2#
#'#4
#'4+
#'1#
#%2+
G%123
%32#
%2#+
%2++
%212
%+'+
G#%2+
#3)4
#33#
#3#+
#3'4
#4'+
G%123
#%)4
#%32
#%2+
#%'+
#'4+
". cost _ 8ar V
#. target
estimate
%. guar. maI.
cost
#)++ #)++ #)++ #)++ #)++ #)++
3.0 Principles of Competitie <idding
(ompetitive bidding on construction proBects involves decision ma0ing under uncertainty
?.ere one o& t.e greatest sources o& t.e uncertainty &or eac. bidder is due to t.e
unpredictable nature o& .is competitors. Eac. bid submitted &or a particular Bob by a
contractor ?ill be determined by a large number o& &actors including an estimate o& t.e
direct Bob cost t.e general over.ead t.e con&idence t.at t.e management .as in t.is
estimate and t.e immediate and long<range obBectives o& management. ;o many &actors
are involved t.at it is impossible &or a particular bidder to attempt to predict eIactly ?.at
t.e bids submitted by its competitors ?ill be.
$t is use&ul to t.in0 o& a bid as being made up o& t?o basic elementsD M1N t.e estimate o&
direct Bob cost ?.ic. includes direct labor costs material costs e!uipment costs and
direct &iled supervisionO and M2N t.e mar0up or return ?.ic. must be su&&icient to cover a
portion o& general over.ead costs and allo? a &air pro&it on t.e investment. 2 large return
can be assured simply by including a su&&iciently .ig. mar0up. /o?ever t.e .ig.er t.e
mar0up t.e less c.ance t.ere ?ill be o& getting t.e Bob. (onse!uently a contractor ?.o
includes a very large mar0up on every bid could become ban0rupt &rom lac0 o& business.
(onversely t.e strategy o& bidding ?it. very little mar0up in order to obtain .ig. volume
is also li0ely to lead to ban0ruptcy. ;ome?.ere in bet?een t.e t?o eItreme approac.es
to bidding lies an Joptimum mar0upJ ?.ic. considers bot. t.e return and t.e li0eli.ood
o& being lo? bidder in suc. a ?ay t.at over t.e long run t.e average return is
maIimized.
Krom all indications most contractors con&ront uncertain bidding conditions by
eIercising a .ig. degree o& subBective Budgment and eac. contractor may give di&&erent
?eig.ts to various &actors. ,.e decision on t.e bid price i& a bid is indeed submitted
re&lects t.e contractorHs best Budgment on .o? ?ell t.e proposed proBect &its into t.e
overall strategy &or t.e survival and gro?t. o& t.e company as ?ell as t.e contractorHs
propensity to ris0 greater pro&it versus t.e c.ance o& not getting a contract.
One maBor concern in bidding competitions is t.e amount o& Jmoney le&t on t.e tableJ o&
t.e di&&erence bet?een t.e ?inning and t.e neIt best bid. ,.e ?inning bidder ?ould li0e
t.e amount o& Jmoney le&t on t.e tableJ to be as small as possible. Kor eIample i& a
contractor ?ins ?it. a bid o& G2+++++ and t.e neIt lo?est bid ?as G22"+++
Mrepresenting G2"+++ o& Jmoney le&t on t.e tableJN t.en t.e ?inning contractor ?ould
.ave pre&erred to .ave bid G22++++ Mor per.aps G224)))N to increase potential pro&itsO
;ome o& t.e maBor &actors impacting bidding competitions includeD
E4ogenous Economic Factors
(ontractors generally tend to specialize in a submar0et o& construction and concentrate
t.eir ?or0 in particular geograp.ic locations. ,.e level o& demand in a submar0et at a
particular time can in&luence t.e number o& bidders and t.eir bid prices. A.en ?or0 is
scarce in t.e submar0et t.e average number o& bidders &or proBects ?ill be larger t.an at
times o& plenty. ,.e net result o& scarcity is li0ely to be t.e increase in t.e number o&
bidders per proBect and do?n?ard pressure on t.e bid price &or eac. proBect in t.e
submar0et. 2t times o& severe scarcity some contractors may cross t.e line bet?een
segments to eIpand t.eir activities or move into ne? geograp.ic locations to get a larger
s.are o& t.e eIisting submar0et. Eit.er action ?ill increase t.e ris0s incurred by suc.
contractors as t.ey move into less &amiliar segments or territories. ,.e trend o& mar0et
demand in construction and o& t.e economy at large may also in&luence t.e bidding
decisions o& a contractor in ot.er ?ays. $& a contractor perceives drastic increases in labor
?ages and material prices as a result o& recent labor contract settlements it may ta0e into
consideration possible increases in unit prices &or determining t.e direct proBect cost.
Kurt.ermore t.e perceptions o& increase in in&lation rates and interest rates may also
cause t.e contractor to use a .ig.er mar0up to .edge t.e uncertainty. (onse!uently at
times o& economic eIpansion andUor .ig.er in&lation rate contractors are reluctant to
commit t.emselves to long<term &iIed price contracts.
C!aracteristics of Bidding Competition
2ll ot.er t.ings being e!ual t.e probability o& ?inning a contract diminis.es as more
bidders participate in t.e competition. (onse!uently a contractor tries to &ind out as
muc. in&ormation as possible about t.e number and identities o& potential bidders on a
speci&ic proBect. ;uc. in&ormation is o&ten available in t.e &odge /ulletin[&odge
/ulletin Mdaily publicationN K. A. 1odge (orp. 5e? 9or0 59.\ or similar publications
?.ic. provide data o& potential proBects and names o& contractors ?.o .ave ta0en out
plans and speci&ications. Kor certain segments potential competitors may be identi&ied
t.roug. private contacts and bidders o&ten con&ront t.e same competitorHs proBect a&ter
proBect since t.ey .ave similar capabilities and interests in underta0ing t.e same type o&
?or0 including size compleIity and geograp.ical location o& t.e proBects. 2 general
contractor may also obtain in&ormation o& potential subcontractors &rom publications suc.
as $redit ReportsM$redit Reports% :uilding (onstruction 1ivision and :radstreet $nc.
5e? 9or0 5.9.N publis.ed by 1un and :radstreet $nc. /o?ever most contractors &orm
an eItensive net?or0 ?it. a group o& subcontractors ?it. ?.om t.ey .ave .ad previous
business transactions. ,.ey usually rely on t.eir o?n eIperience in soliciting subcontract
bids be&ore &inalizing a bid price &or t.e proBect.
(*.ectives of 'eneral Contractors in Bidding
,.e bidding strategy o& some contractors is in&luenced by a policy o& minimum
percentage mar0up &or general over.ead and pro&it. /o?ever t.e percentage mar0up
may also re&lect additional &actors stipulated by t.e o?ner suc. as .ig. retention and
slo? payments &or completed ?or0 or perceptions o& uncontrollable &actors in t.e
economy. ,.e intensity o& a contractorHs e&&orts in bidding a speci&ic proBect is in&luenced
by t.e contractorHs desire to obtain additional ?or0. ,.e ?inning o& a particular proBect
may be potentially important to t.e overall miI o& ?or0 in progress or t.e cas. &lo?
implications &or t.e contractor. ,.e contractorHs decision is also in&luenced by t.e
availability o& 0ey personnel in t.e contractor organization. ,.e company sometimes
?ants to reserve its resources &or &uture proBects or commits itsel& to t.e current
opportunity &or di&&erent reasons.
Contractor7s Comparative dvantages
2 &inal important consideration in &orming bid prices on t.e part o& contractors is t.e
possible special advantages enBoyed by a particular &irm. 2s a result o& lo?er costs a
particular contractor may be able to impose a .ig.er pro&it mar0up yet still .ave a lo?er
total bid t.an competitors. ,.ese lo?er costs may result &rom superior tec.nology
greater eIperience better management better personnel or lo?er unit costs. 2
comparative cost advantage is t.e most desirable o& all circumstances in entering a bid
competition.
3.1 Principles of Contract Megotiation
5egotiation is anot.er important mec.anism &or arranging construction contracts. *roBect
managers o&ten &ind t.emselves as participants in negotiations eit.er as principal
negotiators or as eIpert advisors. ,.ese negotiations can be compleI and o&ten present
important opportunities and ris0s &or t.e various parties involved. Kor eIample
negotiation on ?or0 contracts can involve issues suc. as completion date arbitration
procedures special ?or0 item compensation contingency allo?ances as ?ell as t.e
overall price. 2s a general rule eIogenous &actors suc. as t.e .istory o& a contractor and
t.e general economic climate in t.e construction industry ?ill determine t.e results o&
negotiations. /o?ever t.e s0ill o& a negotiator can a&&ect t.e possibility o& reac.ing an
agreement t.e pro&itability o& t.e proBect t.e scope o& any eventual disputes and t.e
possibility &or additional ?or0 among t.e participants. ,.us negotiations are an
important tas0 &or many proBect managers. Even a&ter a contract is a?arded on t.e basis
o& competitive bidding t.ere are many occasions in ?.ic. subse!uent negotiations are
re!uired as conditions c.ange over time.
$n conducting negotiations bet?een t?o parties eac. side ?ill .ave a series o& obBectives
and constraints. ,.e overall obBective o& eac. party is to obtain t.e most &avorable
acceptable agreement. 2 t?o party one issue negotiation illustrates t.is &undamental
point. ;uppose t.at a developer is ?illing to pay up to G"+++++ &or a particular plot o&
land ?.ereas t.e o?ner ?ould be ?illing to sell t.e land &or G4"++++ or more. ,.ese
maIimum and minimum sales prices represent constraints on any eventual agreement. $n
t.is eIample any purc.ase price bet?een G4"++++ and G"+++++ is acceptable to bot. o&
t.e involved parties. ,.is range represents a feasi)le agreement space4 ;uccess&ul
negotiations ?ould conclude in a sales price ?it.in t.is range. A.ic. party receives t.e
G"++++ in t.e middle range bet?een G4"++++ and G"+++++ ?ould typically depend
upon t.e negotiating s0ills and special 0no?ledge o& t.e parties involved. Kor eIample i&
t.e developer ?as a better negotiator t.en t.e sales price ?ould tend to be close to t.e
minimum G4"++++ level.
Ait. di&&erent constraints it mig.t be impossible to reac. an agreement. Kor eIample i&
t.e o?ner ?as only ?illing to sell at a price o& G""++++ ?.ile t.e developer remains
?illing to pay only G"+++++ t.en t.ere ?ould be no possibility &or an agreement
bet?een t.e t?o parties. O& course t.e t?o parties typically do not 0no? at t.e beginning
o& negotiations i& agreements ?ill be possible. :ut it is !uite important &or eac. party to
t.e negotiation to .ave a sense o& t.eir o?n reservation price suc. as t.e o?nerHs
minimum selling price or t.e buyerHs maIimum purc.ase price in t.e above eIample.
,.is reservation price is e!ual to t.e value o& t.e best alternative to a negotiated
agreement.
*oor negotiating strategies adopted by one or t.e ot.er party may also preclude an
agreement even ?it. t.e eIistence o& a &easible agreement range. Kor eIample one party
may be so demanding t.at t.e ot.er party simply brea0s o&& negotiations. $n e&&ect
negotiations are not a ?ell be.aved solution met.odology &or t.e resolution o& disputes.
,.e possibility o& negotiating &ailures in t.e land sale eIample .ig.lig.ts t.e importance
o& negotiating style and strategy ?it. respect to revealing in&ormation. ;tyle includes t.e
eItent to ?.ic. negotiators are ?illing to seem reasonable t.e type o& arguments c.osen
t.e &orce&ulness o& language used etc. (learly di&&erent negotiating styles can be more or
less e&&ective. (ultural &actors are also eItremely important. 2merican and Papanese
negotiating styles di&&er considerably &or eIample. 3evealing in&ormation is also a
negotiating decision. $n t.e land sale case some negotiators ?ould readily reveal t.eir
reserve or constraint prices ?.ereas ot.ers ?ould conceal as muc. in&ormation as
possible Mi.e. Jplay t.eir cards close to t.e vestJN or provide misleading in&ormation.
$n lig.t o& t.ese tactical problems it is o&ten bene&icial to all parties to adopt obBective
standards in determining appropriate contract provisions. ,.ese standards ?ould
prescribe a particular agreement or a met.od to arrive at appropriate values in a
negotiation. ObBective standards can be derived &rom numerous sources including mar0et
values precedent pro&essional standards ?.at a court ?ould decide etc. :y using
obBective criteria o& t.is sort personalities and disruptive negotiating tactics do not
become impediments to reac.ing mutually bene&icial agreements.
Ait. additional issues negotiations become more compleI bot. in procedure and in
result. Ait. respect to procedure t.e se!uence in ?.ic. issues are de&ined or considered
can be very important. Kor eIample negotiations may proceed on an issue<by<issue basis
and t.e outcome may depend upon t.e eIact se!uence o& issues considered.
2lternatively t.e parties may proceed by proposing complete agreement pac0ages and
t.en proceed to compare pac0ages. Ait. respect to outcomes t.e possibility o& t.e
parties .aving di&&erent valuations or ?eig.ts on particular issues arises. $n t.is
circumstance it is possible to trade<o&& t.e outcomes on di&&erent issues to t.e bene&it o&
bot. parties. :y yielding on an issue o& lo? value to .imsel& but .ig. value to t.e ot.er
party concessions on ot.er issues may be obtained.
,.e notion o& *areto optimal agreements can be introduced to identi&y negotiated
agreements in ?.ic. no c.ange in t.e agreement can simultaneously ma0e bot. parties
better o&&. Kigure '<1 illustrates *areto optimal agreements ?.ic. can be .elp&ul in
assessing t.e result o& multiple issue negotiations. $n t.is &igure t.e aIes represent t.e
satis&action or desirability o& agreements to t.e parties denoted $ and $$. ,.is
representation assumes t.at one can place a dollar or utility value on various agreements
reac.ed in a multiple<issue negotiation bet?een t?o parties. *oints in t.e grap. represent
particular agreements on t.e di&&erent issues under consideration. 2 particular point may
be obtained by more t.an one contract agreement. ,.e curved line encloses t.e set o& all
&easible agreementsO any point in t.is area is an acceptable agreement. Eac. party .as a
minimum acceptable satis&action level in t.is grap.. *oints on t.e interior o& t.is &easible
area represent inferior agreements since some ot.er agreement is possible t.at bene&its
bot. parties. Kor eIample point : represents a more desirable agreement t.an point 2. $n
t.e previous eIample point : mig.t represent a purc.ase price o& G4)++++ and an
immediate purc.ase ?.ereas point 2 mig.t represent a G4%"+++ sale price and a siI
mont. delay. ,.e &easible points t.at are not in&erior constitute t.e set o& *areto optimal
or e&&icient agreementsO t.ese points lie on t.e nort.<east !uadrant o& t.e &easible region
as mar0ed on t.e &igure.
(igure 3)1 $llustration o& a *areto Optimal 2greement ;et
,.e de&inition o& *areto optimal agreements allo?s one to assess at least one aspect o&
negotiated outcomes. $& t?o parties arrive at an in&erior agreement Msuc. as point 2 in
Kigure '<1N t.en t.e agreement could be improved to the )enefit of )oth parties4 $n
contrast di&&erent *areto optimal agreements Msuc. as points : and ( in Kigure '<1N can
represent ?idely di&&erent results to t.e individual parties but do not .ave t.e possibility
&or Boint improvement.
O& course 0no?ledge o& t.e concept o& *areto optimal agreements does not
automatically give any guidance on ?.at mig.t constitute t.e best agreements. 4uc. o&
t.e s0ill in contract negotiation comes &rom t.e ability to invent ne? options t.at
represent mutual gains. Kor eIample devising contract incentives &or speedier completion
o& proBects may result in bene&its to bot. contractors and t.e o?ner.
&9ample 3)1* &ffects of different alue perceptions.
;uppose t.at t.e closing date &or sale o& t.e land in t.e previous case must also be
decided in negotiation. ,.e current o?ner ?ould li0e to delay t.e sale &or siI mont.s
?.ic. ?ould represent rental savings o& G1++++. /o?ever t.e developer estimates t.at
t.e cost o& a siI mont. delay ?ould be G2++++. 2&ter negotiation suppose t.at a
purc.ase price o& G4%"+++ and a siI mont. purc.ase delay are agreed upon. ,.is
agreement is acceptable but not optimal &or bot. parties. $n particular bot. sides ?ould
be better o&& i& t.e purc.ase price ?as increased by G1"+++ and immediate closing
instituted. ,.e current o?ner ?ould receive an additional payment o& G1"+++ incur a
cost o& G1++++ and .ave a net gain o& G"+++. ;imilarly t.e developer ?ould pay
G1"+++ more &or t.e land but save G2++++ in delay costs. A.ile t.is superior result may
seem obvious and easily ac.ievable recognizing suc. opportunities during a negotiation
becomes increasingly di&&icult as t.e number and compleIity o& issues increases.
3.3 Megotiation /imulation* An &9ample
,.is construction negotiation game simulates a contract negotiation bet?een a utility
J(46 6asJ and a designUconstruct &irm J*ipeline (onstructors $nc.J R4S ,.e
negotiation involves only t?o parties but multiple issues. *articipants in t.e game are
assigned to represent one party or t.e ot.er and to negotiate ?it. a designated partner. $n
a class setting numerous negotiating partners are created. ,.e &ollo?ing overvie? &rom
t.e (46 6as participantsH instructions describes t.e setting &or t.e gameD
(46 6as .as t.e opportunity to provide natural gas to an automobile &actory under
construction. ;ervice ?ill re!uire a ne? siIteen mile pipeline t.roug. &arms and lig.t
&orest. ,.e terrain is .illy ?it. moderate slopes and e!uipment access is relatively good.
,.e pipeline is to be buried t.ree &eet deep. (onstruction o& t.e pipeline itsel& ?ill be
contracted to a !uali&ied designUconstruction &irm ?.ile re!uired compression stations
and ancillary ?or0 ?ill be done by (46 6as. 2s proBect manager &or (46 6as you are
about to enter negotiations ?it. a local contractor J*ipeline (onstructors $nc.J ,.is &irm
is t.e only local contractor !uali&ied to .andle suc. a large proBect. $& a suitable contract
agreement cannot be reac.ed t.en you ?ill .ave to brea0 o&& negotiations soon and turn
to anot.er company.
,.e *ipeline (onstructors $nc. instructions o&&er a similar overvie?.
,o &ocus t.e negotiations t.e issues to be decided in t.e contract are already de&inedD
;urationD ,.e &inal contract must speci&y a re!uired completion date.
Penalty for "ate CompletionD ,.e &inal contract may include a daily
penalty &or late proBect completion on t.e part o& t.e contractor.
<onus for &arly CompletionD ,.e &inal contract may include a daily bonus
&or early proBect completion.
2eport (ormatD (ontractor progress reports ?ill eit.er con&orm to t.e
traditional (46 6as &ormat or to a ne? &ormat proposed by t.e state.
(requency of Progress 2eportsD *rogress reports can be re!uired daily
?ee0ly bi<?ee0ly or mont.ly.
Conform to Pending "egislation 2egarding Pipeline ,ar:ingD ;tate
legislation is pending to re!uire special mar0ings and dra?ings &or pipelines. ,.e
parties .ave to decide ?.et.er to con&orm to t.is pending legislation.
Contract TypeD ,.e construction contract may be a &lat &ee a cost plus a
percentage pro&it or a guaranteed maIimum ?it. cost plus a percentage pro&it
belo? t.e maIimum.
Amount of (lat (eeD $& t.e contract is a &lat &ee t.e dollar amount must be
speci&ied.
Percentage of ProfitD $& t.e contract involves a percentage pro&it t.en t.e
percentage must be agreed upon.
C,C Cas Cler: on /iteD ,.e contract may speci&y t.at a (46 6as (ler0
may be on site and .ave access to all accounts or t.at only progress reports are
made by *ipeline (onstructors $nc.
Penalty for "ate /tarting ;ateD (46 6as is responsible &or obtaining rig.t<
o&<?ay agreements &or t.e ne? pipeline. ,.e parties may agree to a daily penalty
i& (46 6as cannot obtain t.ese agreements.
2 &inal contract re!uires an agreement on eac. o& t.ese issues represented on a &orm
signed by bot. negotiators.
2s a &urt.er aid eac. participant is provided ?it. additional in&ormation and a scoring
system to indicate t.e relative desirability o& di&&erent contract agreements. 2dditional
in&ormation includes items suc. as estimated construction cost and eIpected duration as
?ell as company policies suc. as desired reporting &ormats or ?or0 arrangements. ,.is
in&ormation may be revealed or ?it..eld &rom t.e ot.er party depending upon an
individualHs negotiating strategy. ,.e numerical scoring system includes point totals &or
di&&erent agreements on speci&ic issues including interactions among t.e various issues.
Kor eIample t.e amount o& points received by *ipeline (onstructors $nc. &or a bonus &or
early completion increases as t.e completion date become later4 2n earlier completion
becomes more li0ely ?it. a later completion date and .ence t.e probability o& receiving
a bonus increases so t.e resulting point total li0e?ise increases.
,.e t?o &irms .ave di&&ering perceptions o& t.e desirability o& di&&erent agreements. $n
some cases t.eir vie?s ?ill be directly con&licting. Kor eIample increases in a &lat &ee
imply greater pro&its &or *ipeline (onstructors $nc. and greater costs &or (46 6as. $n
some cases one party may &eel strongly about a particular issue ?.ereas t.e ot.er is not
particularly concerned. Kor eIample (46 6as may ?ant a cler0 on site ?.ile *ipeline
(onstructors $nc. may not care. 2s described in t.e previous section t.ese di&&erences in
t.e evaluation o& an issue provide opportunities &or negotiators. :y conceding an
unimportant issue to t.e ot.er party a negotiator may trade &or progress on an issue t.at
is more important to .is or .er &irm. EIamples o& instructions to t.e negotiators appear
belo?.
Instructions to t!e Pipelines Constructors5 Inc. Representative
2&ter eIamining t.e proBect site your companyHs estimators are convinced t.at t.e proBect
can be completed in t.irty<siI ?ee0s. $n bargaining &or t.e duration 0eep t?o t.ings in
mindO t.e longer past t.irty<siI ?ee0s t.e contract duration is t.e more money t.at can
be made o&& t.e Jbonuses &or being earlyJ and t.e c.ances o& being late are reduced. ,.at
reduces t.e ris0 o& paying a Jpenalty &or latenessJ.
,.roug.out t.e proBect t.e gas company ?ill ?ant progress reports. ,.ese reports ta0e
time to compile and t.ere&ore t.e &e?er you need to submit t.e better. $n addition ;tate
la? dictates t.at t.e 3e!uired ;tandard 3eport be used unless t.e contractor and t.e
o?ner agree ot.er?ise. ,.ese standard reports are even more time consuming to produce
t.an more traditional reports.
,.e ;tate Legislature is considering a la? t.at re!uires accurate dra?ings and mar0ers o&
all pipelines by all utilities. 9ou ?ould pre&er not to con&orm to t.is uncertain set o&
re!uirements but t.is is negotiable.
A.at type o& contract and t.e amount your company ?ill be paid are t?o o& t.e most
important issues in negotiations. $n t.e Klat Kee contract your company ?ill receive an
agreed amount &rom $'5 5as. ,.ere&ore ?.en t.ere is any delay or cost overruns it
?ill be t.e &ull responsibility o& your company. ?it. t.is type o& contract your company
assumes all t.e ris0 and ?ill in turn ?ant a .ig.er price. 9our estimators believe a cost
and contingency amount o& 4"+++++ dollars. 9ou ?ould li0e a .ig.er &ee o& course.
Ait. t.e (ost *lus (ontract t.e ris0 is s.ared by t.e gas company and your company.
Ait. t.is type o& contract your company ?ill bill $'5 5as &or all o& its costs plus a
speci&ied percentage o& t.ose costs. $n t.is case cost overruns ?ill be paid by t.e gas
company. 5ot only does t.e percentage above cost .ave to be decided upon but also
?.et.er or not your company ?ill allo? a Kield (ler0 &rom t.e gas company to be at t.e
Bob site to monitor reported costs. A.et.er or not .e is around is o& no concern to your
company since its policy is not to in&late costs. t.is point can be used as a bargaining
?eapon.
Kinally your company is ?orried ?.et.er t.e gas company ?ill obtain t.e land rig.ts to
lay t.e pipe. ,.ere&ore you s.ould demand a penalty &or t.e potential delay o& t.e proBect
starting date.
Instructions to t!e C&' 'as Company Representative
$n order to satis&y t.e auto manu&acturer t.e pipeline must be completed in &orty ?ee0s.
2n earlier completion date ?ill not result in receiving revenue any earlier. ,.us t.e only
reason to bargain &or s.orter duration is to &eel sa&er about .aving t.e proBect done on
time. $& t.e proBect does eIceed t.e &orty ?ee0 maIimum a penalty ?ill .ave to be paid
to t.e auto manu&acturer. (onse!uently i& t.e proBect eIceeds t.e agreed upon duration
t.e contractor s.ould pay you a penalty. ,.e penalty &or late completion mig.t be related
to t.e proBect duration. Kor eIample i& t.e duration is agreed to be t.irty<siI ?ee0s t.en
t.e penalty &or being late need not be so severe. 2lso it is normal t.at t.e contractor get a
bonus &or early completion. O& course completion be&ore &orty ?ee0s doesnHt yield any
bene&it ot.er t.an your o?n peace o& mind. ,ry to 0eep t.e early bonus as lo? as
possible.
,.roug.out t.e proBect you ?ill ?ant progress reports. ,.e more o&ten t.ese reports are
received t.e better to monitor t.e progress. ;tate la? dictates t.at t.e 3e!uired ;tandard
3eport be used unless t.e contractor and t.e o?ner agree ot.er?ise. ,.ese reports are
very detailed and time consuming to revie?. 9ou ?ould pre&er to use t.e traditional
$'5 5as reports.
,.e state legislature is considering a la? t.at re!uires accurate dra?ings and mar0ers o&
all pipelines by all utilities. Kor t.is proBect it ?ill cost an additional G2"++++ to do t.is
no? or G%"++++ to do t.is ?.en t.e la? is passed.
One o& t.e most important issues is t.e type o& contract and t.e amount o& be paid. ,.e
Klat Kee contract means t.at $'5 5as ?ill pay t.e contractor a set amount. ,.ere&ore
?.en t.ere are delays and cost overruns t.e contractor assumes &ull responsibility &or t.e
individual costs. /o?ever t.is evasion o& ris0 .as to be paid &or and results in a .ig.er
price. $& Klat Kee is c.osen only t.e contract price is to be determined. 9our companyHs
estimators .ave determined t.at t.e proBect s.ould cost about G"++++++.
,.e (ost *lus *ercent contract may be c.eaper but t.e ris0 is s.ared. Ait. t.is type o&
contract t.e contractor ?ill bill t.e gas company &or all costs plus a speci&ied percentage
o& t.ose costs. $n t.is case cost overruns ?ill be paid by t.e gas company. $& t.is type o&
contract is c.osen not only must t.e pro&it percentage be c.osen but also ?.et.er or not
a gas company representative ?ill be allo?ed on site all o& t.e time acting as a Kield
(ler0 to ensure t.at a proper amount o& material and labor is billed. ,.e usual percentage
agreed upon is about ten percent.
(ontractors also .ave a concern ?.et.er or not t.ey ?ill receive a penalty i& t.e gas
rig.t<o&<?ay is not obtained in time to start t.e proBect. $n t.is case $'5 5as .as
already secured t.e rig.t<o&<?ays. :ut i& t.e penalty is too .ig. t.is is a dangerous
precedent &or &uture negotiations. /o?ever you mig.t try to use t.is as a bargaining tool.
&9ample 3)3* An e9ample of a negotiated contract
2 typical contract resulting &rom a simulation o& t.e negotiation bet?een (46 6as and
*ipeline (onstructors $nc. appears in ,able '<#. 2n agreement ?it. respect to eac. pre<
de&ined issue is included and t.e resulting contract signed by bot. negotiators.
TA<"& 3)0 EIample o& a 5egotiated (ontract bet?een (46 6as and
*ipeline (onstructors $nc
1uration 3' ?ee0s
*enalty &or Late (ompletion G#'++ per day
:onus &or Early (ompletion G+ per day
3eport Kormat traditional (46 &orm
Kre!uency o& *rogress 3eports ?ee0ly
(on&orm to *ending *ipeline 4ar0ing
Legislation
yes
(ontract ,ype &lat &ee
2mount o& Klat Kee G"+"++++
*ercentage o& *ro&it 5ot applicable
(46 6as (ler0 on ;ite yes
*enalty &or Late ;tarting 1ate G3+++ per day
;ignedD
(46 6as 3epresentative
*ipeline (onstructors $nc.
&9ample 3)4* /coring systems for the negotiated contract games
,o measure t.e per&ormance o& t.e negotiators in t.e previous eIample a scoring system
is needed &or t.e representative o& *ipeline (onstructors $nc. and anot.er scoring system
&or t.e representative o& (46 6as. ,.ese scoring systems &or t.e companies associated
?it. t.e issues described in EIample '<% are designated as system 2.
$n order to ma0e t.e negotiating game viable &or classroom use anot.er set o&
instructions &or eac. company is described in t.is eIample and t.e associated scoring
systems &or t.e t?o companies are designated as ;ystem :. $n eac. game play t.e
instructor may c.oose a di&&erent combination o& instructions and negotiating teams
leading to &our possible combinations o& scoring systems &or *ipeline (onstructors $nc.
and (46 6as. R"S
Instruction -o -!e Pipeline Constructors5 Inc. Representative
$n order to .elp you your boss .as le&t you ?it. a scoring table &or all t.e issues and
alternatives. ,?o di&&erent scoring systems are listed .ereO you ?ill be assigned to use
one or t.e ot.er. $nstructions &or scoring system 2 are included in ;ection '.). ,.e
instructions &or scoring system : are as &ollo?sD
2&ter eIamining t.e site your estimator believes t.at t.e proBect ?ill re!uire 3' ?ee0s.
9ou are .appy to con&orm ?it. any reporting or pipeline mar0ing system since your
computer based proBect control and design systems can easily produce t.ese submissions.
9ou ?ould pre&er to delay t.e start o& t.e contract as long as possible since your &orces
are busy on anot.er BobO .ence you do not ?ant to impose a penalty &or late start. ,ry to
maIimize t.e amount o& points as t.ey re&lect pro&it broug.t into your company or a
cost savings. $n *arts 3 and 4 be sure to use t.e proBect duration agreed upon to calculate
your score. Kinally do not discuss your scoring system ?it. t.e (46 6as representativeO
t.is is proprietary in&ormatione
/CO2$MC (O2 P$P&"$M& COM/T2=CTO2/, $MC.
MOT&* 52 means not acceptable and t.e deal ?ill not be approved by your boss ?it.
any o& t.ese provisions. also t.e alternatives listed are t.e only ones in t.e conteIt o& t.is
problemO no ot.er alternatives are acceptable.
1. (O4*LE,$O5 12,E
/ystem A /ystem <
Under 3# Aee0s
3# ?ee0s
3% ?ee0s
3' ?ee0s
3) ?ee0s
4+ ?ee0s
52
+
_"
_1+
_2+
_4+
52
52
<1+
+
_1+
_2+
2. 3E*O3,;
;tate ;tandard
3eport
(46 3eports
<2+
<"
+
+
3. *E52L,9 KO3 L2,E5E;; MG *E3 129N
;=2AT$OM D7&&N/E
/coring /ystem A
/coring /ystem <
+0
+1
+1
+3
+3
+4
+4
-5
-5
-1
+ < )))
1+++ < 1)))
2+++ < 2)))
3+++ < 3)))
4+++ < 4)))
"+++ < ")))
#+++ < #)))
%+++ < %)))
Over '+++
<1
<2
<4
<#
<'
<11
<14
<1'
52
<1
<2
<3
<"
<%
<)
<12
<14
52
<1
<2
<3
<4
<"
<%
<)
<11
52
+
<1
<2
<3
<4
<"
<#
<%
52
+
+
<1
<1
<2
<2
<3
<3
52
4. :O5U; KO3 :E$56 E23L9 MG *E3 129N
/coring /ystem A
/coring /ystem <
+0
+1
+1
+3
+3
+4
+4
-5
-5
-1
+ < )))
1+++ < 1)))
2+++ < 2)))
3+++ < 3)))
4+++ < 4)))
"+++ < ")))
#+++ < #)))
%+++ < %)))
'+++ < ')))
)+++ < ))))
Over 1++++
+
+
+
1
2
3
4
"
#
%
'
+
+
2
4
#
'
1+
12
14
1#
1'
+
2
4
#
'
1+
14
1'
22
2#
3+
+
2
4
#
1+
14
1'
24
2'
32
3#
2
2
4
'
12
1#
22
2'
3#
4+
4"
". (O5KO34 ,O *E51$56 LE6$;L2,$O5 M423Q$56 *$*EL$5E;N
A <
9es
5o
_"
_1"
_1+
_1+
#. /OA OK,E5 KO3 ,/E *3O63E;; 3E*O3,;
A <
1aily
Aee0ly
:i<?ee0ly
4ont.ly
52
<2+
<1+
<#
+
+
+
+
%. (O5,32(, ,9*E
A <
Klat Kee
(ost _ ^V
"
_2"
"
_2"
$f (lat (ee do part 3 and s:ip parts 4 and 15.
$f Cost O PQ do parts 4 and 15 and s:ip part 3.
'. KL2, KEE MGN
A <
:elo? 4"+++++
Over 4"+++++
52
_1 &or eac.
1++++
<1" &or eac.
1++++
_2 &or eac. 1++++
). $K (O;, *LU; ^V
A <
:elo? #V
#V
%V
'V
)V
1+V
11V
12V
13V
14V
Over 14V
52
_2"+
_3%"
_4"+
_4%"
_"++
_"2"
_""+
_#++
_%2"
_)++
52
52
_3++
_33+
_3#+
_4++
_44+
_4'+
_"4+
_#++
_'++
1+. 62; (O. K$EL1 (LE3Q O5 ;$,E
A <
9es
5o
+
+
+
_1+
11. *E52L,9 KO3 1EL29E1 ;,23,$56 12,E 1UE ,O 62; (O4*259
E33O3 MG *E3 129N
A <
+ < 4))
"++ < 14))
1"++ < 24))
1"++ < 34))
3"++ < 44))
4"++ < "4))
""++ < #4))
#"++ < %4))
%"++ or more
52
<#
<4
<2
<1
+
_1
_2
_4
52
<1+
<%
<"
<3
<1
+
_3
_#
Instructions to t!e C&' 'as Company Representative
$n order to .elp you your boss .as le&t you ?it. a scoring table &or all t.e issues and
alternatives. ,?o di&&erent scoring systems are listed .ereO you ?ill be assigned to use
one or t.e ot.er. $nstructions &or scoring system 2 are included in ;ection '.). ,.e
instructions &or scoring system : are described as &ollo?sD
9our contract ?it. t.e automobile company provides an incentive &or completion o& t.e
pipeline earlier t.an 3' ?ee0s and a penalty &or completion a&ter 3' ?ee0s. ,o insure
timely completion o& t.e proBect you ?ould li0e to receive detailed proBect reports as
o&ten as possible.
,ry to maIimize t.e number o& points &rom t.e &inal contract provisionsO t.is corresponds
to minimizing costs. 1o not discuss your scoring systems ?it. *ipeline (onstructors $nc.
/CO2$MC /R/T&, (O2 C,C CA/
MOT&* 52 means not acceptable and t.e deal ?ill not be approved by your boss ?it.
any o& t.ese provisions. $& you canHt negotiate a contract your score ?ill be _4"+. 2lso
t.e alternatives listed are t.e only ones in t.e conteIt o& t.is problem no ot.er
alternatives are acceptable. f
/CO2$MC /R/T&, (O2 C,C CA/
1. ;=2AT$OM PO$MT/
/ystem A /ystem <
Over 4+ ?ee0s
4+ ?ee0s
3) ?ee0s
3' ?ee0s
3% ?ee0s
+<3# ?ee0s
52
+
_2
_4
_"
_#
<4+
<1+
_2
_'
_14
_14
!. 2&PO2T/ A <
3e!uired ;tandard
3eport
J,raditionalJ (46 6as
3eports
_2
_1+
+
+
+. P&MA"TR (O2 "AT&M&// DL P&2 ;ARE
;=2AT$OM D7&&N/E
/coring /ystem A
/coring /ystem <
+0
+3
+1
+4
+3
-5
+4
-1
-5
-!
+ < )))
1+++ < 1)))
2+++ < 2)))
3+++ < 3)))
52
)
1+
11
52
%
)
1+
52
#
'
)
52
3
"
#
52
+
2
4
4+++ < 4)))
"+++ < ")))
#+++ < #)))
%+++ < %)))
'+++ < ')))
)+++ < ))))
1++++ or more
12
13
14
1"
1#
1%
1'
11
12
13
1"
1"
1#
1#
1+
11
12
13
14
1"
1"
%
'
)
11
12
13
13
"
#
%
'
)
1+
11
-. <OM=/ (O2 <&$MC &A2"R DL P&2 ;ARE
A <
'+++ or more
%+++ < %)))
#+++ < #)))
"+++ < ")))
4+++ < 4)))
3+++ < 3)))
2+++ < 2)))
1+++ < 1)))
+ < )))
52
_3
_#
_'
_1+
_12
_13
_14
_1"
<"
<2
<1
+
_"
_%
_)
_13
_1%
.. COM(O2, TO P&M;$MC "&C$/"AT$OM D,A2N$MC P$P&"$M&/E
A <
9es
5o
_2"
<2"
+
52
0. AO7 O(T&M (O2 TA& P2OC2&// 2&PO2T/
A <
1aily
Aee0ly
:i<?ee0ly
4ont.ly
_4"
_"+
_3+
52
_"+
_3+
_1+
_"
1. COMT2ACT TRP&
A <
Klat Kee
(ost _ ^V
2"
+
2"
+
$f (lat (ee do part 3 and s:ip parts 4 and 15.
$f Cost O PQ do parts 4 and 15 and s:ip part 3.
3. ("AT (&& DLE
A <
Over "++++++ 52 52
+ < "++++++ _1 &or eac.
1++++
belo?
"++++++
_1 &or eac.
1++++
belo?
"++++++
4. $( CO/T P"=/ PQ
A <
:elo? "V
"V
#V
%V
'V
)V
1+V
11V
12V
13V
14V
1"V
Over 14V
_)"+
_'++
_%++
_#++
_""+
_"2"
_"++
_4%"
_4"+
_4++
_3++
_2++
52
_%++
_##+
_#2+
_")+
_"%+
_""+
_"3"
_"++
_44+
_3'+
_3++
_1++
_1+
15. CA/ CO. ($&"; C"&2N OM /$T&
A <
9es
5o
_2+
_"
_1+
+
11. P&MA"TR (O2 ;&"AR&; /TA2T$MC ;AT& ;=& TO =MA'A$"A<"&
2$CAT)O()7AR/ DL P&2 ;ARE
A <
+ < 1)))
2+++ < 3)))
4+++ < ")))
#+++ < %)))
'+++ < ))))
1++++ or more
_1+
_'
_#
_4
_2
52
_3
_2
_1
+
<1+
<2+
3.4 2esolution of Contract ;isputes
Once a contract is reac.ed a variety o& problems may emerge during t.e course o& ?or0.
1isputes may arise over !uality o& ?or0 over responsibility &or delays over appropriate
payments due to c.anged conditions or a multitude o& ot.er considerations. 3esolution o&
contract disputes is an important tas0 &or proBect managers. ,.e mec.anism &or contract
dispute resolution can be speci&ied in t.e original contract or less desirably decided
?.en a dispute arises.
,.e most prominent mec.anism &or dispute resolution is adBudication in a court o& la?.
,.is process tends to be eIpensive and time consuming since it involves legal
representation and ?aiting in !ueues o& cases &or available court times. 2ny party to a
contract can bring a suit. $n adBudication t.e dispute is decided by a neutral t.ird party
?it. no necessary specialized eIpertise in t.e disputed subBect. 2&ter all it is not a
prere!uisite &or Budges to be &amiliar ?it. construction procedurese Legal procedures are
.ig.ly structured ?it. rigid &ormal rules &or presentations and &act &inding. On t.e
positive side legal adBudication strives &or consistency and predictability o& results. ,.e
results o& previous cases are publis.ed and can be used as precedents &or resolution o&
ne? disputes.
5egotiation among t.e contract parties is a second important dispute resolution
mec.anism. ,.ese negotiations can involve t.e same sorts o& concerns and issues as ?it.
t.e original contracts. 5egotiation typically does not involve t.ird parties suc. as Budges.
,.e negotiation process is usually in&ormal unstructured and relatively ineIpensive. $& an
agreement is not reac.ed bet?een t.e parties t.en adBudication is a possible remedy.
2 t.ird dispute resolution mec.anism is t.e resort to arbitration or mediation and
conciliation. $n t.ese procedures a t.ird party serves a central role in t.e resolution.
,.ese outside parties are usually c.osen by mutually agreement o& t.e parties involved
and ?ill .ave specialized 0no?ledge o& t.e dispute subBect. $n arbitration t.e t.ird party
may ma0e a decision ?.ic. is binding on t.e participants. $n mediation and conciliation
t.e t.ird party serves only as a &acilitator to .elp t.e participants reac. a mutually
acceptable resolution. Li0e negotiation t.ese procedures can be in&ormal and
unstructured.
Kinally t.e .ig. cost o& adBudication .as inspired a series o& non<traditional dispute
resolution mec.anisms t.at .ave some o& t.e c.aracteristics o& Budicial proceedings.
,.ese mec.anisms includeD
Priate %udging in ?.ic. t.e participants .ire a t.ird party Budge to ma0e a
decision
Meutral e9pert fact)finding in ?.ic. a t.ird party ?it. specialized 0no?ledge
ma0es a recommendation and
,ini)trial in ?.ic. legal summaries o& t.e participantsH positions are presented to
a Bury comprised o& principals o& t.e a&&ected parties.
;ome o& t.ese procedures may be court sponsored or re!uired &or particular types o&
disputes.
A.ile t.ese various disputes resolution mec.anisms involve varying costs it is important
to note t.at t.e most important mec.anism &or reducing costs and problems in dispute
resolution is t.e reasonableness o& t.e initial contract among t.e parties as ?ell as t.e
competence o& t.e proBect manager.
3.15 2eferences
1. 2u ,. 3.L. :ostleman and E.A. *arti J(onstruction 4anagement 6ame<
1eterministic 4odelJ "sce 2ournal of the $onstruction &ivision 8ol. )" 1)#)
pp. 2"<3'.
2. :uilding 3esearc. 2dvisory :oard E:ploratory #tudy on Responsi)ility%
.ia)ility and "ccounta)ility for Risks in $onstruction% 5ational 2cademy o&
;ciences Aas.ington 1.(. 1)%'.
3. (onstruction $ndustry (ost E&&ectiveness *roBect J(ontractual 2rrangementsJ
3eport 2<% ,.e :usiness 3oundtable 5e? 9or0 October 1)'2.
4. 1udzia0 A. and (. /endric0son J2 5egotiating ;imulation 6ameJ "#$E
2ournal of 'anagement in Engineering% 8ol. 4 5o. 2 1)''.
". 6ra.am *./. JO?ner 4anagement o& 3is0 in (onstruction (ontractsJ $urrent
!ractice in $ost Estimating and $ost $ontrol% *roceedings o& an 2;(E
(on&erence 2ustin ,eIas 2pril 1)'3 pp. 2+%<21".
#. 6reen E.1. J6etting Out o& (ourt << *rivate 3esolution o& (ivil 1isputesJ
/oston /ar 2ournal 4ay<Pune 1)'# pp. 11<2+.
%. *ar0 Ailliam 3. ,he #trategy of $ontracting for !rofit 2nd Edition *rentice<
/all Engle?ood (li&&s 5P 1)'#.
'. 3ai&&a /o?ard ,he "rt and #cience of Negotiation /arvard University *ress
(ambridge 42 1)'2.
). Aal0er 5. E.5. Aal0er and ,.Q. 3o.denburg .egal !itfalls in "rchitecture%
Engineering and /uilding $onstruction% 2nd Edition 4c6ra?</ill :oo0 (o.
5e? 9or0 1)%).
3.11 Pro>lems
1. ;uppose t.at in EIample '<" t.e terms &or t.e guaranteed maIimum cost contract
are suc. t.at c.ange orders ?ill not be compensated i& t.eir total cost is ?it.in
3V o& t.e original estimate but ?ill be compensated in &ull &or t.e amount
beyond 3V o& t.e original estimate. $& all ot.er conditions remain unc.anged
determine t.e contractorHs pro&it and t.e o?nerHs actual payment under t.is
contract &or t.e &ollo?ing conditions o& U and (D
1. U ] +
2. U ] 4VE
3. U ] < 4VE
( ] #VE
( ] #VE
( ] #VE
2. ;uppose t.at in EIample '<" t.e terms o& t.e target estimate contract call &or 5 ]
+.3 instead o& 5 ] +." meaning t.at t.e contractor ?ill receive 3+V o& t.e
savings. $& all ot.er conditions remain unc.anged determine t.e contractorHs
pro&it and t.e o?nerHs actual payment under t.is contract &or t.e given conditions
o& U and (.
3. ;uppose t.at in EIample '<" t.e terms o& t.e cost plus variable percentage
contract allo? an incentive bonus &or early completion and a penalty &or late
completion o& t.e proBect. Let 1 be t.e number o& days early ?it. negative value
denoting 1 days late. ,.e bonus per days early or t.e penalty per day late ?it. be
, dollars. ,.e agreed &ormula &or o?nerHs payment isD
* ] 3M2E < 2 _ (N _ 2 _ ( _ 1,M1 _ +.4(UEN
,.e value o& , is set at G"+++ per day and t.e proBect is completed 3+ days
be.ind sc.edule. $& all ot.er conditions remain unc.anged &ind t.e contractorHs
pro&it and t.e o?nerHs actual payment under t.is contract &or t.e given conditions
o& U and (.
4. (onsider a construction proBect &or ?.ic. t.e contractorHs estimate is G3++++++.
Kor various types o& contracts 3 ] 1+V 3
1
] 3V 3
2
] 1."V 3
3
] #V and 5 ]
+.#. ,.e contractor is not compensated &or c.ange orders under t.e guaranteed
maIimum cost contract i& t.e total cost &or t.e c.ange order is ?it.in "V
MG1"++++N o& t.e original estimate. 1etermine t.e contractorHs gross pro&it &or
eac. o& t.e seven types o& construction contracts &or eac. o& t.e &ollo?ing
conditions o& U and (D
1. U ] +
2. U ] +
3. U ] "V E ] G1"++++
4. U ] "V E ] G1"++++
". U ] 2V E ] G#++++
#. U ] 2V E ] G#++++
( ] +
( ] 4V E ] G12++++
( ] +
( ] 4V E ] 12++++
( ] +
( ] 4V E ] 12++++
". Using t.e data in *roblem 4 determine t.e o?nerHs actual payment &or eac. o& t.e
seven types o& construction contracts &or t.e same conditions o& U and (.
#. ;uppose t.at in *roblem 4 t.e terms o& t.e guaranteed maIimum cost contract
are suc. t.at c.ange orders ?ill not be compensated i& t.eir total cost is ?it.in
3V o& t.e original estimate but ?ill be compensated in &ull &or t.e amount
beyond 3V o& t.e original estimate. $& all conditions remained unc.anged
determine t.e contractorHs pro&it and t.e o?nerHs actual payment under t.is
contract &or t.e &ollo?ing conditions o& U and (D
1. U ] + ( ] "VE
2. U ] 2V
3. U ] <2V
( ] "VE
( ] "VE
%. ;uppose t.at in *roblem 4 t.e terms o& t.e target estimate contract call &or 5 ]
+.% instead o& 5 ] +.3 meaning t.at t.e contractor ?ill receive %+V o& t.e
savings. $& all ot.er conditions remain unc.anged determine t.e contractorHs
pro&it and t.e o?nerHs actual payment under t.is contract &or t.e given conditions
o& U and (.
'. ;uppose t.at in *roblem 4 t.e terms o& t.e cost plus variable percentage contract
allo? an incentive bonus &or early completion and a penalty &or late completion o&
t.e proBect. Let 1 be t.e number o& days early ?it. negative value denoting 1
days late. ,.e bonus per days early or t.e penalty per day late ?ill be , dollars.
,.e agreed &ormula &or o?nerHs payment isD
* ] 3M2E < 2 _ (N _ 2 _ ( _ 1,M1 _ +.2(UEN
,.e value o& , is set at G 1++++ per day and t.e proBect is completed 2+ days
a.ead sc.edule. $& all ot.er conditions remain unc.anged &ind t.e contractorHs
pro&it and t.e o?nerHs actual payment under t.is contract &or t.e given conditions
o& U and (.
). $n playing t.e construction negotiating game described in ;ection '.' your
instructor may c.oose one o& t.e &ollo?ing combinations o& companies and issues
leading to di&&erent combinations o& t.e scoring systemsD
*ipeline (onstructors $nc. (46 6as
a.
>.
c.
d.
;ystem 2
;ystem 2
;ystem :
;ystem :
;ystem 2
;ystem :
;ystem 2
;ystem :
1+. ;ince t.e scoring systems are con&idential in&ormation your instructor ?ill not
disclose t.e combination used &or t.e assignment. 9our instructor may divide t.e
class into groups o& t?o students eac. group acting as negotiators representing
t.e t?o companies in t.e game. ,o 0eep t.e game interesting and &air do not try
to &ind out t.e scoring system o& your negotiating counterpart. ,o see0 insider
in&ormation is unet.ical and illegale
3.1! (ootnotes
1. ,.ese eIamples are ta0en directly &rom 2 (onstruction $ndustry (ost E&&ectiveness
*roBect 3eport J(ontractual 2rrangementsJ ,.e :usiness 3oundtable 5e? 9or0
2ppendiI 1 1)'2. *ermission to !uote t.is material &rom t.e :usiness 3oundtable is
grate&ully ac0no?ledged.
2. ;ee (.1. ;utli&& and P.6. Yac0 Pr. J(ontract *rovisions t.at Ensure (omplete (ost
1isclosuresJ $ost Engineering 8ol. 2) 5o. 1+ October 1)'% pp. 1+<14.
3. 2r0ansas 3ice 6ro?ers v. 2lc.emy $ndustries $nc. United ;tates (ourt o& 2ppeals
Eig.t. (ircuit 1)'#. ,.e court decision appears in %)% Kederal 3eporter 2d ;eries pp.
"#"<"%4.
4. ,.is game is &urt.er described in A. 1udzia0 and (. /endric0son J2 5egotiation
;imulation 6ameJ "#$E 2ournal of 'anagement in Engineering 8ol. 4 5o. 2 1)''.
". ,o underta0e t.is eIercise t.e instructor needs to divide students into negotiating
teams ?it. eac. individual assigned scoring system 2 or :. 5egotiators ?ill represent
*ipeline (onstructors $nc. or (46 6as. 5egotiating pairs s.ould not be told ?.ic.
scoring system t.eir counterpart is assigned.
4. Construction Planning
4.1 <asic Concepts in the ;eelopment of Construction
Plans
$onstruction planning is a &undamental and c.allenging activity in t.e management and
eIecution o& construction proBects. $t involves t.e c.oice o& tec.nology t.e de&inition o&
?or0 tas0s t.e estimation o& t.e re!uired resources and durations &or individual tas0s
and t.e identi&ication o& any interactions among t.e di&&erent ?or0 tas0s. 2 good
construction plan is t.e basis &or developing t.e budget and t.e sc.edule &or ?or0.
1eveloping t.e construction plan is a critical tas0 in t.e management o& construction
even i& t.e plan is not ?ritten or ot.er?ise &ormally recorded. $n addition to t.ese
tec.nical aspects o& construction planning it may also be necessary to ma0e
organizational decisions about t.e relations.ips bet?een proBect participants and even
?.ic. organizations to include in a proBect. Kor eIample t.e eItent to ?.ic. sub<
contractors ?ill be used on a proBect is o&ten determined during construction planning.
Korming a construction plan is a .ig.ly c.allenging tas0. 2s ;.erloc0 /olmes notedD
4ost people i& you describe a train o& events to t.em ?ill tell you ?.at t.e result ?ould
be. ,.ey can put t.ose events toget.er in t.eir minds and argue &rom t.em t.at
somet.ing ?ill come to pass. ,.ere are &e? people .o?ever ?.o i& you told t.em a
result ?ould be able to evolve &rom t.eir o?n inner consciousness ?.at t.e steps ?ere
?.ic. led up to t.at result. ,.is po?er is ?.at $ mean ?.en $ tal0 o& reasoning bac0?ard.
R1S
Li0e a detective a planner begins ?it. a result Mi.e. a &acility designN and must synt.esize
t.e steps re!uired to yield t.is result. Essential aspects o& construction planning include
t.e generation o& re!uired activities analysis o& t.e implications o& t.ese activities and
choice among t.e various alternative means o& per&orming activities. $n contrast to a
detective discovering a single train o& events .o?ever construction planners also &ace
t.e normative problem o& c.oosing t.e best among numerous alternative plans.
4oreover a detective is &aced ?it. an observable result ?.ereas a planner must imagine
t.e &inal &acility as described in t.e plans and speci&ications.
$n developing a construction plan it is common to adopt a primary emp.asis on eit.er
cost control or on sc.edule control as illustrated in Kig. )<1. ;ome proBects are primarily
divided into eIpense categories ?it. associated costs. $n t.ese cases construction
planning is cost or eIpense oriented. Ait.in t.e categories o& eIpenditure a distinction is
made bet?een costs incurred directly in t.e per&ormance o& an activity and indirectly &or
t.e accomplis.ment o& t.e proBect. Kor eIample borro?ing eIpenses &or proBect
&inancing and over.ead items are commonly treated as indirect costs. Kor ot.er proBects
sc.eduling o& ?or0 activities over time is critical and is emp.asized in t.e planning
process. $n t.is case t.e planner insures t.at t.e proper precedences among activities are
maintained and t.at e&&icient sc.eduling o& t.e available resources prevails. ,raditional
sc.eduling procedures emp.asize t.e maintenance o& tas0 precedences Mresulting in
critical path scheduling proceduresN or e&&icient use o& resources over time Mresulting in
jo) shop scheduling proceduresN. Kinally most compleI proBects re!uire consideration o&
bot. cost and sc.eduling over time so t.at planning monitoring and record 0eeping must
consider bot. dimensions. $n t.ese cases t.e integration o& sc.edule and budget
in&ormation is a maBor concern.
(igure 4)1 2lternative Emp.ases in (onstruction *lanning
$n t.is c.apter ?e s.all consider t.e &unctional re!uirements &or construction planning
suc. as tec.nology c.oice ?or0 brea0do?n and budgeting. (onstruction planning is not
an activity ?.ic. is restricted to t.e period a&ter t.e a?ard o& a contract &or construction.
$t s.ould be an essential activity during t.e &acility design. 2lso i& problems arise during
construction re<planning is re!uired.
4.! Choice of Technology and Construction ,ethod
2s in t.e development o& appropriate alternatives &or &acility design c.oices o&
appropriate tec.nology and met.ods &or construction are o&ten ill<structured yet critical
ingredients in t.e success o& t.e proBect. Kor eIample a decision ?.et.er to pump or to
transport concrete in buc0ets ?ill directly a&&ect t.e cost and duration o& tas0s involved in
building construction. 2 decision bet?een t.ese t?o alternatives s.ould consider t.e
relative costs reliabilities and availability o& e!uipment &or t.e t?o transport met.ods.
Un&ortunately t.e eIact implications o& di&&erent met.ods depend upon numerous
considerations &or ?.ic. in&ormation may be s0etc.y during t.e planning p.ase suc. as
t.e eIperience and eIpertise o& ?or0ers or t.e particular underground condition at a site.
$n selecting among alternative met.ods and tec.nologies it may be necessary to
&ormulate a number o& construction plans based on alternative met.ods or assumptions.
Once t.e &ull plan is available t.en t.e cost time and reliability impacts o& t.e
alternative approac.es can be revie?ed. ,.is eIamination o& several alternatives is o&ten
made eIplicit in bidding competitions in ?.ic. several alternative designs may be
proposed or value engineering &or alternative construction met.ods may be permitted. $n
t.is case potential constructors may ?is. to prepare plans &or eac. alternative design
using t.e suggested construction met.od as ?ell as to prepare plans &or alternative
construction met.ods ?.ic. ?ould be proposed as part o& t.e value engineering process.
$n &orming a construction plan a use&ul approac. is to simulate t.e construction process
eit.er in t.e imagination o& t.e planner or ?it. a &ormal computer based simulation
tec.ni!ue. R2S :y observing t.e result comparisons among di&&erent plans or problems
?it. t.e eIisting plan can be identi&ied. Kor eIample a decision to use a particular piece
o& e!uipment &or an operation immediately leads to t.e !uestion o& ?.et.er or not t.ere is
su&&icient access space &or t.e e!uipment. ,.ree dimensional geometric models in a
computer aided design M(21N system may be .elp&ul in simulating space re!uirements
&or operations and &or identi&ying any inter&erences. ;imilarly problems in resource
availability identi&ied during t.e simulation o& t.e construction process mig.t be
e&&ectively &orestalled by providing additional resources as part o& t.e construction plan.
&9ample 4)1* roadway reha>ilitation
2n eIample &rom a road?ay re.abilitation proBect in *ittsburg. *2 can serve to illustrate
t.e importance o& good construction planning and t.e e&&ect o& tec.nology c.oice. $n t.is
proBect t.e dec0s on overpass bridges as ?ell as t.e pavement on t.e .ig.?ay itsel& ?ere
to be replaced. ,.e initial construction plan ?as to ?or0 out?ard &rom eac. end o& t.e
overpass bridges ?.ile t.e .ig.?ay sur&ace ?as replaced belo? t.e bridges. 2s a result
access o& e!uipment and concrete truc0s to t.e overpass bridges ?as a considerable
problem. /o?ever t.e .ig.?ay ?or0 could be staged so t.at eac. overpass bridge ?as
accessible &rom belo? at prescribed times. :y pumping concrete up to t.e overpass
bridge dec0 &rom t.e .ig.?ay belo? costs ?ere reduced and t.e ?or0 ?as accomplis.ed
muc. more !uic0ly.
&9ample 4)!* "aser "eeling
2n eIample o& tec.nology c.oice is t.e use o& laser leveling e!uipment to improve t.e
productivity o& eIcavation and grading. R3S $n t.ese systems laser surveying e!uipment is
erected on a site so t.at t.e relative .eig.t o& mobile e!uipment is 0no?n eIactly. ,.is
.eig.t measurement is accomplis.ed by &las.ing a rotating laser lig.t on a level plane
across t.e construction site and observing eIactly ?.ere t.e lig.t s.ines on receptors on
mobile e!uipment suc. as graders. ;ince laser lig.t does not disperse appreciably t.e
.eig.t at ?.ic. t.e laser s.ines any?.ere on t.e construction site gives an accurate
indication o& t.e .eig.t o& a receptor on a piece o& mobile e!uipment. $n turn t.e receptor
.eig.t can be used to measure t.e .eig.t o& a blade eIcavator buc0et or ot.er piece o&
e!uipment. (ombined ?it. electro<.ydraulic control systems mounted on mobile
e!uipment suc. as bulldozers graders and scrapers t.e .eig.t o& eIcavation and grading
blades can be precisely and automatically controlled in t.ese systems. ,.is automation o&
blade .eig.ts .as reduced costs in some cases by over '+V and improved !uality in t.e
&inis.ed product as measured by t.e desired amount o& eIcavation or t.e eItent to ?.ic.
a &inal grade ac.ieves t.e desired angle. ,.ese systems also permit t.e use o& smaller
mac.ines and less s0illed operators. /o?ever t.e use o& t.ese semi<automated systems
re!uire investments in t.e laser surveying e!uipment as ?ell as modi&ication to
e!uipment to permit electronic &eedbac0 control units. ;till laser leveling appears to be
an eIcellent tec.nological c.oice in many instances.
4.+ ;efining 7or: Tas:s
2t t.e same time t.at t.e c.oice o& tec.nology and general met.od are considered a
parallel step in t.e planning process is to de&ine t.e various ?or0 tas0s t.at must be
accomplis.ed. ,.ese ?or0 tas0s represent t.e necessary &rame?or0 to permit scheduling
o& construction activities along ?it. estimating t.e resources re!uired by t.e individual
?or0 tas0s and any necessary precedences or re!uired se!uence among t.e tas0s. ,.e
terms ?or0 Jtas0sJ or JactivitiesJ are o&ten used interc.angeably in construction plans to
re&er to speci&ic de&ined items o& ?or0. $n Bob s.op or manu&acturing terminology a
proBect ?ould be called a JBobJ and an activity called an JoperationJ but t.e sense o& t.e
terms is e!uivalent. R4S ,.e scheduling pro)lem is to determine an appropriate set o&
activity start time resource allocations and completion times t.at ?ill result in
completion o& t.e proBect in a timely and e&&icient &as.ion. (onstruction planning is t.e
necessary &ore<runner to sc.eduling. $n t.is planning de&ining ?or0 tas0s tec.nology
and construction met.od is typically done eit.er simultaneously or in a series o&
iterations.
,.e de&inition o& appropriate ?or0 tas0s can be a laborious and tedious process yet it
represents t.e necessary in&ormation &or application o& &ormal sc.eduling procedures.
;ince construction proBects can involve t.ousands o& individual ?or0 tas0s t.is de&inition
p.ase can also be eIpensive and time consuming. Kortunately many tas0s may be
repeated in di&&erent parts o& t.e &acility or past &acility construction plans can be used as
general models &or ne? proBects. Kor eIample t.e tas0s involved in t.e construction o& a
building &loor may be repeated ?it. only minor di&&erences &or eac. o& t.e &loors in t.e
building. 2lso standard de&initions and nomenclatures &or most tas0s eIist. 2s a result
t.e individual planner de&ining ?or0 tas0s does not .ave to approac. eac. &acet o& t.e
proBect entirely &rom scratc..
A.ile repetition o& activities in di&&erent locations or reproduction o& activities &rom past
proBects reduces t.e ?or0 involved t.ere are very &e? computer aids &or t.e process o&
de&ining activities. 1atabases and in&ormation systems can assist in t.e storage and recall
o& t.e activities associated ?it. past proBects as described in (.apter 14. Kor t.e
sc.eduling process itsel& numerous computer programs are available. :ut &or t.e
important tas0 o& de&ining activities reliance on t.e s0ill Budgment and eIperience o& t.e
construction planner is li0ely to continue.
4ore &ormally an activity is any subdivision o& proBect tas0s. ,.e set o& activities de&ined
&or a proBect s.ould be comprehensive or completely e:haustive so t.at all necessary
?or0 tas0s are included in one or more activities. ,ypically eac. design element in t.e
planned &acility ?ill .ave one or more associated proBect activities. EIecution o& an
activity re!uires time and resources including manpo?er and e!uipment as described in
t.e neIt section. ,.e time re!uired to per&orm an activity is called t.e duration o& t.e
activity. ,.e beginning and t.e end o& activities are signposts or milestones% indicating
t.e progress o& t.e proBect. Occasionally it is use&ul to de&ine activities ?.ic. .ave no
duration to mar0 important events. Kor eIample receipt o& e!uipment on t.e construction
site may be de&ined as an activity since ot.er activities ?ould depend upon t.e e!uipment
availability and t.e proBect manager mig.t appreciate &ormal notice o& t.e arrival.
;imilarly receipt o& regulatory approvals ?ould also be specially mar0ed in t.e proBect
plan.
,.e eItent o& ?or0 involved in any one activity can vary tremendously in construction
proBect plans. $ndeed it is common to begin ?it. &airly coarse de&initions o& activities and
t.en to &urt.er sub<divide tas0s as t.e plan becomes better de&ined. 2s a result t.e
de&inition o& activities evolves during t.e preparation o& t.e plan. 2 result o& t.is process
is a natural hierarchy o& activities ?it. large abstract &unctional activities repeatedly sub<
divided into more and more speci&ic sub<tas0s. Kor eIample t.e problem o& placing
concrete on site ?ould .ave sub<activities associated ?it. placing &orms installing
rein&orcing steel pouring concrete &inis.ing t.e concrete removing &orms and ot.ers.
Even more speci&ically sub<tas0s suc. as removal and cleaning o& &orms a&ter concrete
placement can be de&ined. Even &urt.er t.e sub<tas0 Jclean concrete &ormsJ could be
subdivided into t.e various operationsD
,ransport &orms &rom on<site storage and unload onto t.e cleaning station.
*osition &orms on t.e cleaning station.
Aas. &orms ?it. ?ater.
(lean concrete debris &rom t.e &ormHs sur&ace.
(oat t.e &orm sur&ace ?it. an oil release agent &or t.e neIt use.
Unload t.e &orm &rom t.e cleaning station and transport to t.e storage location.
,.is detailed tas0 brea0do?n o& t.e activity Jclean concrete &ormsJ ?ould not generally
be done in standard construction planning but it is essential in t.e process o&
programming or designing a ro)ot to underta0e t.is activity since t.e various speci&ic
tas0s must be ?ell de&ined &or a robot implementation. R"S
$t is generally advantageous to introduce an eIplicit hierarchy o& ?or0 activities &or t.e
purpose o& simpli&ying t.e presentation and development o& a sc.edule. Kor eIample t.e
initial plan mig.t de&ine a single activity associated ?it. Jsite clearance.J Later t.is
single activity mig.t be sub<divided into Jre<locating utilitiesJ Jremoving vegetationJ
JgradingJ etc. /o?ever t.ese activities could continue to be identi&ied as sub<activities
under t.e general activity o& Jsite clearance.J ,.is .ierarc.ical structure also &acilitates
t.e preparation o& summary c.arts and reports in ?.ic. detailed operations are combined
into aggregate or JsuperJ<activities.
4ore &ormally a .ierarc.ical approac. to ?or0 tas0 de&inition decomposes t.e ?or0
activity into component parts in t.e &orm o& a tree. /ig.er levels in t.e tree represent
decision nodes or summary activities ?.ile branc.es in t.e tree lead to smaller
components and ?or0 activities. 2 variety o& constraints among t.e various nodes may be
de&ined or imposed including precedence relations.ips among di&&erent tas0s as de&ined
belo?. ,ec.nology c.oices may be decomposed to decisions made at particular nodes in
t.e tree. Kor eIample c.oices on plumbing tec.nology mig.t be made ?it.out re&erence
to c.oices &or ot.er &unctional activities.
O& course numerous di&&erent activity .ierarc.ies can be de&ined &or eac. construction
plan. Kor eIample upper level activities mig.t be related to &acility components suc. as
&oundation elements and t.en lo?er level activity divisions into t.e re!uired construction
operations mig.t be made. 2lternatively upper level divisions mig.t represent general
types o& activities suc. as electrical ?or0 ?.ile lo?er ?or0 divisions represent t.e
application o& t.ese operations to speci&ic &acility components. 2s a t.ird alternative
initial divisions mig.t represent di&&erent spatial locations in t.e planned &acility. ,.e
c.oice o& a .ierarc.y depends upon t.e desired sc.eme &or summarizing ?or0
in&ormation and on t.e convenience o& t.e planner. $n computerized databases multiple
.ierarc.ies can be stored so t.at di&&erent aggregations or vie?s o& t.e ?or0 brea0do?n
structure can be obtained.
,.e number and detail o& t.e activities in a construction plan is a matter o& Budgment or
convention. (onstruction plans can easily range bet?een less t.an a .undred to many
t.ousand de&ined tas0s depending on t.e plannerHs decisions and t.e scope o& t.e proBect.
$& subdivided activities are too re&ined t.e size o& t.e net?or0 becomes un?ieldy and t.e
cost o& planning eIcessive. ;ub<division yields no bene&it i& reasonably accurate
estimates o& activity durations and t.e re!uired resources cannot be made at t.e detailed
?or0 brea0do?n level. On t.e ot.er .and i& t.e speci&ied activities are too coarse it is
impossible to develop realistic sc.edules and details o& resource re!uirements during t.e
proBect. 4ore detailed tas0 de&initions permit better control and more realistic sc.eduling.
$t is use&ul to de&ine separate ?or0 tas0s &orD
t.ose activities ?.ic. involve di&&erent resources or
t.ose activities ?.ic. do not re!uire continuous per&ormance.
Kor eIample t.e activity Jprepare and c.ec0 s.op dra?ingsJ s.ould be divided into a
tas0 &or preparation and a tas0 &or c.ec0ing since di&&erent individuals are involved in t.e
t?o tas0s and t.ere may be a time lag bet?een preparation and c.ec0ing.
$n practice t.e proper level o& detail ?ill depend upon t.e size importance and di&&iculty
o& t.e proBect as ?ell as t.e speci&ic sc.eduling and accounting procedures ?.ic. are
adopted. /o?ever it is generally t.e case t.at most sc.edules are prepared ?it. too little
detail t.an too muc.. $t is important to 0eep in mind t.at tas0 de&inition ?ill serve as t.e
basis &or sc.eduling &or communicating t.e construction plan and &or construction
monitoring. (ompletion o& tas0s ?ill also o&ten serve as a basis &or progress payments
&rom t.e o?ner. ,.us more detailed tas0 de&initions can be !uite use&ul. :ut more
detailed tas0 brea0do?ns are only valuable to t.e eItent t.at t.e resources re!uired
durations and activity relations.ips are realistically estimated &or eac. activity. *roviding
detailed ?or0 tas0 brea0do?ns is not .elp&ul ?it.out a commensurate e&&ort to provide
realistic resource re!uirement estimates. 2s more po?er&ul computer<based sc.eduling
and monitoring procedures are introduced t.e ease o& de&ining and manipulating tas0s
?ill increase and t.e number o& ?or0 tas0s can reasonably be eIpected to eIpand.
&9ample 4)+* Tas: ;efinition for a 2oad <uilding Pro%ect
2s an eIample o& construction planning suppose t.at ?e ?is. to develop a plan &or a
road construction proBect including t?o culverts. R#S $nitially ?e divide proBect activities
into t.ree categories as s.o?n in Kigure )<2D structures road?ay and general. ,.is
division is based on t.e maBor types o& design elements to be constructed. Ait.in t.e
road?ay ?or0 a &urt.er sub<division is into eart.?or0 and pavement. Ait.in t.ese
subdivisions ?e identi&y clearing eIcavation &illing and &inis.ing Mincluding seeding
and soddingN associated ?it. eart.?or0 and ?e de&ine ?atering compaction and paving
sub<activities associated ?it. pavement. Kinally ?e note t.at t.e road?ay segment is
&airly long and so individual activities can be de&ined &or di&&erent p.ysical segments
along t.e road?ay pat.. $n Kigure )<2 ?e divide eac. paving and eart.?or0 activity into
activities speci&ic to eac. o& t?o road?ay segments. Kor t.e culvert construction ?e
de&ine t.e sub<divisions o& structural eIcavation concreting and rein&orcing. Even more
speci&ically structural eIcavation is divided into eIcavation itsel& and t.e re!uired
bac0&ill and compaction. ;imilarly concreting is divided into placing concrete &orms
pouring concrete stripping &orms and curing t.e concrete. 2s a &inal step in t.e
structural planning detailed activities are de&ined &or rein&orcing eac. o& t.e t?o culverts.
6eneral ?or0 activities are de&ined &or move in general supervision and clean up. 2s a
result o& t.is planning over t.irty di&&erent detailed activities .ave been de&ined.
2t t.e option o& t.e planner additional activities mig.t also be de&ined &or t.is proBect.
Kor eIample materials ordering or lane striping mig.t be included as separate activities.
$t mig.t also be t.e case t.at a planner ?ould de&ine a di&&erent .ierarc.y o& ?or0
brea0do?ns t.an t.at s.o?n in Kigure )<2. Kor eIample placing rein&orcing mig.t .ave
been a sub<activity under concreting &or culverts. One reason &or separating
rein&orcement placement mig.t be to emp.asize t.e di&&erent material and resources
re!uired &or t.is activity. 2lso t.e division into separate road?ay segments and culverts
mig.t .ave been introduced early in t.e .ierarc.y. Ait. all t.ese potential di&&erences
t.e important aspect is to insure t.at all necessary activities are included some?.ere in
t.e &inal plan.
(igure 4)! $llustrative /ierarc.ical 2ctivity 1ivisions &or a 3oad?ay *roBect
4.- ;efining Precedence 2elationships Among Actiities
Once ?or0 activities .ave been de&ined t.e relations.ips among t.e activities can be
speci&ied. !recedence relations bet?een activities signi&y t.at t.e activities must ta0e
place in a particular se!uence. 5umerous natural se!uences eIist &or construction
activities due to re!uirements &or structural integrity regulations and ot.er tec.nical
re!uirements. Kor eIample design dra?ings cannot be c.ec0ed be&ore t.ey are dra?n.
1iagramatically precedence relations.ips can be illustrated by a network or graph in
?.ic. t.e activities are represented by arro?s as in Kigure )<+. ,.e arro?s in Kigure )<3
are called )ranches or links in t.e activity network ?.ile t.e circles mar0ing t.e
beginning or end o& eac. arro? are called nodes or events. $n t.is &igure lin0s represent
particular activities ?.ile t.e nodes represent milestone events.
(igure 4)+ $llustrative ;et o& Kour 2ctivities ?it. *recedences
4ore complicated precedence relations.ips can also be speci&ied. Kor eIample one
activity mig.t not be able to start &or several days a&ter t.e completion o& anot.er activity.
2s a common eIample concrete mig.t .ave to cure Mor setN &or several days be&ore
&orm?or0 is removed. ,.is restriction on t.e removal o& &orms activity is called a lag
bet?een t.e completion o& one activity Mi.e. pouring concrete in t.is caseN and t.e start o&
anot.er activity Mi.e. removing &orm?or0 in t.is caseN. 4any computer based sc.eduling
programs permit t.e use o& a variety o& precedence relations.ips.
,.ree mista0es s.ould be avoided in speci&ying predecessor relations.ips &or construction
plans. Kirst a circle o& activity precedences ?ill result in an impossible plan. Kor
eIample i& activity 2 precedes activity : activity : precedes activity ( and activity (
precedes activity 2 t.en t.e proBect can never be started or completede Kigure )<4
illustrates t.e resulting activity net?or0. Kortunately &ormal sc.eduling met.ods and
good computer sc.eduling programs ?ill &ind any suc. errors in t.e logic o& t.e
construction plan.
(igure 4)- EIample o& an $mpossible Aor0 *lan
Korgetting a necessary precedence relations.ip can be more insidious. Kor eIample
suppose t.at installation o& dry ?all s.ould be done prior to &loor &inis.ing. $gnoring t.is
precedence relations.ip may result in bot. activities being sc.eduled at t.e same time.
(orrections on t.e spot may result in increased costs or problems o& !uality in t.e
completed proBect. Un&ortunately t.ere are &e? ?ays in ?.ic. precedence omissions can
be &ound ot.er t.an ?it. c.ec0s by 0no?ledgeable managers or by comparison to
comparable proBects. One ot.er possible but little used mec.anism &or c.ec0ing
precedences is to conduct a p.ysical or computer based simulation o& t.e construction
process and observe any problems.
Kinally it is important to realize t.at di&&erent types o& precedence relations.ips can be
de&ined and t.at eac. .as di&&erent implications &or t.e sc.edule o& activitiesD
;ome activities .ave a necessary tec.nical or p.ysical relations.ip t.at cannot be
superseded. Kor eIample concrete pours cannot proceed be&ore &orm?or0 and
rein&orcement are in place.
;ome activities .ave a necessary precedence relations.ip over a continuous space
rat.er t.an as discrete ?or0 tas0 relations.ips. Kor eIample &orm?or0 may be
placed in t.e &irst part o& an eIcavation trenc. even as t.e eIcavation e!uipment
continues to ?or0 &urt.er along in t.e trenc.. Korm?or0 placement cannot
proceed &urt.er t.an t.e eIcavation but t.e t?o activities can be started and
stopped independently ?it.in t.is constraint.
;ome Jprecedence relations.ipsJ are not tec.nically necessary but are imposed
due to implicit decisions ?it.in t.e construction plan. Kor eIample t?o activities
may re!uire t.e same piece o& e!uipment so a precedence relations.ip mig.t be
de&ined bet?een t.e t?o to insure t.at t.ey are not sc.eduled &or t.e same time
period. A.ic. activity is sc.eduled &irst is arbitrary. 2s a second eIample
reversing t.e se!uence o& t?o activities may be tec.nically possible but more
eIpensive. $n t.is case t.e precedence relations.ip is not p.ysically necessary but
only applied to reduce costs as perceived at t.e time o& sc.eduling.
$n revising sc.edules as ?or0 proceeds it is important to realize t.at di&&erent types o&
precedence relations.ips .ave !uite di&&erent implications &or t.e &leIibility and cost o&
c.anging t.e construction plan. Un&ortunately many &ormal sc.eduling systems do not
possess t.e capability o& indicating t.is type o& &leIibility. 2s a result t.e burden is
placed upon t.e manager o& ma0ing suc. decisions and insuring realistic and e&&ective
sc.edules. Ait. all t.e ot.er responsibilities o& a proBect manager it is no surprise t.at
preparing or revising t.e &ormal computer based construction plan is a lo? priority to a
manager in suc. cases. 5evert.eless &ormal construction plans may be essential &or good
management o& complicated proBects.
&9ample 4)-* Precedence ;efinition for /ite Preparation and (oundation 7or:
;uppose t.at a site preparation and concrete slab &oundation construction proBect consists
o& nine di&&erent activitiesD
A. ;ite clearing Mo& brus. and minor debrisN
<. 3emoval o& trees
C. 6eneral eIcavation
;. 6rading general area
&. EIcavation &or utility trenc.es
(. *lacing &orm?or0 and rein&orcement &or concrete
C. $nstalling se?er lines
A. $nstalling ot.er utilities
$. *ouring concrete.
2ctivities 2 Msite clearingN and : Mtree removalN do not .ave preceding activities since
t.ey depend on none o& t.e ot.er activities. Ae assume t.at activities ( Mgeneral
eIcavationN and 1 Mgeneral gradingN are preceded by activity 2 Msite clearingN. $t mig.t
also be t.e case t.at t.e planner ?is.ed to delay any eIcavation until trees ?ere removed
so t.at : Mtree removalN ?ould be a precedent activity to ( Mgeneral eIcavationN and 1
Mgeneral gradingN. 2ctivities E Mtrenc. eIcavationN and K Mconcrete preparationN cannot
begin until t.e completion o& general eIcavation and tree removal since t.ey involve
subse!uent eIcavation and trenc. preparation. 2ctivities 6 Minstall linesN and / Minstall
utilitiesN represent installation in t.e utility trenc.es and cannot be attempted until t.e
trenc.es are prepared so t.at activity E Mtrenc. eIcavationN is a preceding activity. Ae
also assume t.at t.e utilities s.ould not be installed until grading is completed to avoid
e!uipment con&licts so activity 1 Mgeneral gradingN is also preceding activities 6 Minstall
se?ersN and / Minstall utilitiesN. Kinally activity $ Mpour concreteN cannot begin until t.e
se?er line is installed and &orm?or0 and rein&orcement are ready so activities K and 6
are preceding. Ot.er utilities may be routed over t.e slab &oundation so activity / Minstall
utilitiesN is not necessarily a preceding activity &or activity $ Mpour concreteN. ,.e result o&
our planning are t.e immediate precedences s.o?n in ,able )<1.
TA<"& 4)1 *recedence 3elations &or a 5ine<2ctivity *roBect EIample
2ctivity 1escription *redecessors
2
:
(
1
E
K
6
/
$
;ite clearing
3emoval o& trees
6eneral eIcavation
6rading general area
EIcavation &or utility trenc.es
*lacing &orm?or0 and rein&orcement &or concrete
$nstalling se?er lines
$nstalling ot.er utilities
*ouring concrete
<<<
<<<
2
2
:(
:(
1E
1E
K6
Ait. t.is in&ormation t.e neIt problem is to represent t.e activities in a net?or0 diagram
and to determine all t.e precedence relations.ips among t.e activities. One net?or0
representation o& t.ese nine activities is s.o?n in Kigure )<" in ?.ic. t.e activities
appear as branc.es or lin0s bet?een nodes. ,.e nodes represent milestones o& possible
beginning and starting times. ,.is representation is called an activity-on-)ranch diagram.
5ote t.at an initial event beginning activity is de&ined M5ode + in Kigure )<"N ?.ile node
" represents t.e completion o& all activities.
(igure 4). 2ctivity<on<:ranc. 3epresentation o& a 5ine 2ctivity *roBect
2lternatively t.e nine activities could be represented by nodes and predecessor
relations.ips by branc.es or lin0s as in Kigure )<#. ,.e result is an activity-on-node
diagram. $n Kigure )<# ne? activity nodes representing t.e beginning and t.e end o&
construction .ave been added to mar0 t.ese important milestones.
,.ese net?or0 representations o& activities can be very .elp&ul in visualizing t.e various
activities and t.eir relations.ips &or a proBect. A.et.er activities are represented as
branc.es Mas in Kigure )<"N or as nodes Mas in Kigure )<"N is largely a matter o&
organizational or personal c.oice. ;ome considerations in c.oosing one &orm or anot.er
are discussed in (.apter 1+.
(igure 4)0 2ctivity<on<5ode 3epresentation o& a 5ine 2ctivity *roBect
$t is also notable t.at ,able )<1 lists only t.e immediate predecessor relations.ips.
(learly t.ere are ot.er precedence relations.ips ?.ic. involve more t.an one activity.
Kor eIample Jinstalling se?er linesJ Mactivity 6N cannot be underta0en be&ore Jsite
clearingJ M2ctivity 2N is complete since t.e activity Jgrading general areaJ M2ctivity 1N
must precede activity 6 and must &ollo? activity 2. ,able )<1 is an implicit precedence
list since only immediate predecessors are recorded. 2n eIplicit predecessor list ?ould
include all o& t.e preceding activities &or activity 6. ,able )<2 s.o?s all suc. predecessor
relations.ips implied by t.e proBect plan. ,.is table can be produced by tracing all pat.s
t.roug. t.e net?or0 bac0 &rom a particular activity and can be per&ormed
algorit.mically. R%S Kor eIample inspecting Kigure )<# reveals t.at eac. activity eIcept
&or activity : depends upon t.e completion o& activity 2.
TA<"& 4)! 2ll 2ctivity *recedence 3elations.ips &or a 5ine<2ctivity *roBect
*redecessor
2ctivity
1irect ;uccessor
2ctivities
2ll ;uccessor
2ctivities
2ll *redecessor
2ctivities
2
:
(
1
E
K
6
/
$
(1
EK
EK
6/
6/
$
$
<<<
<<<
EK6/$
6/$
6/$
$
$
<<<
<<<
<<<
<<<
<<<
<<<
2
2
2:(
2:(
2:(1E
2:(1E
2:(1EK6
4.. &stimating Actiity ;urations
$n most sc.eduling procedures eac. ?or0 activity .as associated time duration. ,.ese
durations are used eItensively in preparing a sc.edule. Kor eIample suppose t.at t.e
durations s.o?n in ,able )<3 ?ere estimated &or t.e proBect diagrammed in Kigure )<+.
,.e entire set o& activities ?ould t.en re!uire at least 3 days since t.e activities &ollo?
one anot.er directly and re!uire a total o& 1.+ _ +." _ +." _ 1.+ ] 3 days. $& anot.er
activity proceeded in parallel ?it. t.is se!uence t.e 3 day minimum duration o& t.ese
&our activities is una&&ected. 4ore t.an 3 days ?ould be re!uired &or t.e se!uence i& t.ere
?as a delay or a lag bet?een t.e completion o& one activity and t.e start o& anot.er.
TA<"& 4)+ 1urations and *redecessors &or a Kour 2ctivity *roBect $llustration
2ctivity *redecessor 1uration M1aysN
EIcavate trenc.
*lace &orm?or0
*lace rein&orcing
*our concrete
<<<
EIcavate trenc.
*lace &orm?or0
*lace rein&orcing
1.+
+."
+."
1.+
2ll &ormal sc.eduling procedures rely upon estimates o& t.e durations o& t.e various
proBect activities as ?ell as t.e de&initions o& t.e predecessor relations.ips among tas0s.
,.e variability o& an activityHs duration may also be considered. Kormally t.e pro)a)ility
distri)ution o& an activityHs duration as ?ell as t.e eIpected or most li0ely duration may
be used in sc.eduling. 2 probability distribution indicates t.e c.ance t.at particular
activity duration ?ill occur. $n advance o& actually doing a particular tas0 ?e cannot be
certain eIactly .o? long t.e tas0 ?ill re!uire.
2 straig.t&or?ard approac. to t.e estimation o& activity durations is to 0eep .istorical
records o& particular activities and rely on t.e average durations &rom t.is eIperience in
ma0ing ne? duration estimates. ;ince t.e scope o& activities are unli0ely to be identical
bet?een di&&erent proBects unit productivity rates are typically employed &or t.is purpose.
Kor eIample t.e duration o& an activity 1
iB
suc. as concrete &orm?or0 assembly mig.t be
estimated asD
).1
?.ere 2
iB
is t.e re!uired &orm?or0 area to assemble Min s!uare yardsN *
iB
is t.e average
productivity o& a standard cre? in t.is tas0 Mmeasured in s!uare yards per .ourN and 5
iB
is
t.e number o& cre?s assigned to t.e tas0. $n some organizations unit production time ,
iB

is de&ined as t.e time re!uired to complete a unit o& ?or0 by a standard cre? Mmeasured
in .ours per s!uare yardsN is used as a productivity measure suc. t.at ,
iB
is a reciprocal o&
*
iB
.
2 &ormula suc. as E!. M).1N can be used &or nearly all construction activities. ,ypically
t.e re!uired !uantity o& ?or0 2
iB
is determined &rom detailed eIamination o& t.e &inal
&acility design. ,.is 9uantity-take-off to obtain t.e re!uired amounts o& materials
volumes and areas is a very common process in bid preparation by contractors. $n some
countries specialized !uantity surveyors provide t.e in&ormation on re!uired !uantities
&or all potential contractors and t.e o?ner. ,.e number o& cre?s ?or0ing 5
iB
is decided
by t.e planner. $n many cases t.e number or amount o& resources applied to particular
activities may be modi&ied in lig.t o& t.e resulting proBect plan and sc.edule. Kinally
some estimate o& t.e eIpected ?or0 productivity *
iB
must be provided to apply E!uation
M).1N. 2s ?it. cost &actors commercial services can provide average productivity &igures
&or many standard activities o& t.is sort. /istorical records in a &irm can also provide data
&or estimation o& productivities.
,.e calculation o& a duration as in E!uation M).1N is only an approIimation to t.e actual
activity duration &or a number o& reasons. Kirst it is usually t.e case t.at peculiarities o&
t.e proBect ma0e t.e accomplis.ment o& a particular activity more or less di&&icult. Kor
eIample access to t.e &orms in a particular location may be di&&icultO as a result t.e
productivity o& assembling &orms may be lower t.an t.e average value &or a particular
proBect. O&ten adBustments based on engineering Budgment are made to t.e calculated
durations &rom E!uation M).1N &or t.is reason.
$n addition productivity rates may vary in bot. systematic and random &as.ions &rom t.e
average. 2n eIample o& systematic variation is t.e e&&ect o& learning on productivity. 2s
a cre? becomes &amiliar ?it. an activity and t.e ?or0 .abits o& t.e cre? t.eir
productivity ?ill typically improve. Kigure )<% illustrates t.e type o& productivity
increase t.at mig.t occur ?it. eIperienceO t.is curve is called a learning curve. ,.e
result is t.at productivity *
iB
is a &unction o& t.e duration o& an activity or proBect. 2
common construction eIample is t.at t.e assembly o& &loors in a building mig.t go &aster
at .ig.er levels due to improved productivity even t.oug. t.e transportation time up to
t.e active construction area is longer. 2gain .istorical records or subBective adBustments
mig.t be made to represent learning curve variations in average productivity. R'S
(igure 4)1 $llustration o& *roductivity (.anges 1ue to Learning
3andom &actors ?ill also in&luence productivity rates and ma0e estimation o& activity
durations uncertain. Kor eIample a sc.eduler ?ill typically not 0no? at t.e time o&
ma0ing t.e initial sc.edule .o? s0ill&ul t.e cre? and manager ?ill be t.at are assigned to
a particular proBect. ,.e productivity o& a s0illed designer may be many times t.at o& an
uns0illed engineer. $n t.e absence o& speci&ic 0no?ledge t.e estimator can only use
average values o& productivity.
Aeat.er e&&ects are o&ten very important and t.us deserve particular attention in
estimating durations. Aeat.er .as bot. systematic and random in&luences on activity
durations. A.et.er or not a rainstorm ?ill come on a particular day is certainly a random
e&&ect t.at ?ill in&luence t.e productivity o& many activities. /o?ever t.e li0eli.ood o& a
rainstorm is li0ely to vary systematically &rom one mont. or one site to t.e neIt.
2dBustment &actors &or inclement ?eat.er as ?ell as meteorological records can be used
to incorporate t.e e&&ects o& ?eat.er on durations. 2s a simple eIample an activity mig.t
re!uire ten days in per&ect ?eat.er but t.e activity could not proceed in t.e rain.
Kurt.ermore suppose t.at rain is eIpected ten percent o& t.e days in a particular mont..
$n t.is case t.e eIpected activity duration is eleven days including one eIpected rain day.
Kinally t.e use o& average productivity &actors t.emselves cause problems in t.e
calculation presented in E!uation M).1N. ,.e eIpected value o& t.e multiplicative
reciprocal o& a variable is not eIactly e!ual to t.e reciprocal o& t.e variableHs eIpected
value. Kor eIample i& productivity on an activity is eit.er siI in good ?eat.er Mie. *]#N
or t?o in bad ?eat.er Mie. *]2N and good or bad ?eat.er is e!ually li0ely t.en t.e
eIpected productivity is * ] M#NM+."N _ M2NM+."N ] 4 and t.e reciprocal o& eIpected
productivity is 1U4. /o?ever t.e eIpected reciprocal o& productivity is ER1U*S ] M+."NU# _
M+."NU2 ] 1U3. ,.e reciprocal o& eIpected productivity is 2"V less t.an t.e eIpected value
o& t.e reciprocal in t.is casee :y representing only t?o possible productivity values t.is
eIample represents an eItreme case but it is al?ays true t.at t.e use o& average
productivity &actors in E!uation M).1N ?ill result in optimistic estimates o& activity
durations. ,.e use o& actual averages &or t.e reciprocals o& productivity or small
adBustment &actors may be used to correct &or t.is non<linearity problem.
,.e simple duration calculation s.o?n in E!uation M).1N also assumes an inverse linear
relations.ip bet?een t.e number o& cre?s assigned to an activity and t.e total duration o&
?or0. A.ile t.is is a reasonable assumption in situations &or ?.ic. cre?s can ?or0
independently and re!uire no special coordination it need not al?ays be true. Kor
eIample design tas0s may be divided among numerous arc.itects and engineers but
delays to insure proper coordination and communication increase as t.e number o&
?or0ers increase. 2s anot.er eIample insuring a smoot. &lo? o& material to all cre?s on
a site may be increasingly di&&icult as t.e number o& cre?s increase. $n t.ese latter cases
t.e relations.ip bet?een activity duration and t.e number o& cre?s is unli0ely to be
inversely proportional as s.o?n in E!uation M).1N. 2s a result adBustments to t.e
estimated productivity &rom E!uation M).1N must be made. 2lternatively more
complicated &unctional relations.ips mig.t be estimated bet?een duration and resources
used in t.e same ?ay t.at nonlinear preliminary or conceptual cost estimate models are
prepared.
One mec.anism to &ormalize t.e estimation o& activity durations is to employ a
.ierarc.ical estimation &rame?or0. ,.is approac. decomposes t.e estimation problem
into component parts in ?.ic. t.e .ig.er levels in t.e .ierarc.y represent attributes
?.ic. depend upon t.e details o& lo?er level adBustments and calculations. Kor eIample
Kigure )<' represents various levels in t.e estimation o& t.e duration o& masonry
construction. R)S 2t t.e lo?est level t.e maIimum productivity &or t.e activity is
estimated based upon general ?or0 conditions. ,able )<4 illustrates some possible
maIimum productivity values t.at mig.t be employed in t.is estimation. 2t t.e neIt
.ig.er level adBustments to t.ese maIimum productivities are made to account &or
special site conditions and cre? compositionsO table )<" illustrates some possible
adBustment rules. 2t t.e .ig.est level adBustments &or overall e&&ects suc. as ?eat.er are
introduced. 2lso s.o?n in Kigure )<' are nodes to estimate do?n or unproductive time
associated ?it. t.e masonry construction activity. ,.e &ormalization o& t.e estimation
process illustrated in Kigure )<' permits t.e development o& computer aids &or t.e
estimation process or can serve as a conceptual &rame?or0 &or a .uman estimator.
TA<"& 4)- 4aIimum *roductivity Estimates &or 4asonry Aor0
4asonry unit
size (onditionMsN
4aIimum productivity
ac.ievable
' inc. bloc0 5one 4++ unitsUdayUmason
# inc. Aall is JlongJ 43+ unitsUdayUmason
# inc. Aall is not JlongJ 3%+ unitsUdayUmason
12 inc. Labor is nonunion 3++ unitsUdayUmason
4 inc. Aall is JlongJ
Aeat.er is J?arm and dryJ
or .ig.<strengt. mortar is
used
4'+ unitsUdayUmason
4 inc. Aall is not JlongJ
Aeat.er is J?arm and dryJ
or .ig.<strengt. mortar is
used
43+ unitsUdayUmason
4 inc. Aall is JlongJ
Aeat.er is not J?arm and
dryJ
or .ig.<strengt. mortar is
not used
3%+ unitsUdayUmason
4 inc. Aall is not JlongJ
Aeat.er is not J?arm and
dryJ
or .ig.<strengt. mortar is
not used
32+ unitsUdayUmason
' inc. ,.ere is support &rom
eIisting ?all
1+++ unitsUdayUmason
' inc. ,.ere is no support &rom
eIisting ?all
%"+ unitsUdayUmason
12 inc. ,.ere is support &rom
eIisting ?all
%++ unitsUdayUmason
12 inc. ,.ere is no support &rom
eIisting ?all
""+ unitsUdayUmason
TA<"& 4). *ossible
2dBustments to 4aIimum
*roductivities &or 4asonry
(onstructionUcaption\ $mpact
(onditionMsN
2dBustment
magnitude
MV o&
maIimumN
(re? type (re? type is nonunion 1"V
Pob is JlargeJ
(re? type (re? type is union
Pob is JsmallJ
1+V
;upporting labor ,.ere are less t.an t?o
laborers per cre?
2+V
;upporting labor ,.ere are more t.an
t?o masonsUlaborers
1+V
Elevation ;teel &rame building
?it. masonry eIterior
?all .as Jinsu&&icientJ
support labor
1+V
Elevation ;olid masonry building
?it. ?or0 on eIterior
uses nonunion labor
12V
8isibility :loc0 is not covered %V
,emperature ,emperature is belo?
4"
o
K
1"V
,emperature ,emperature is above
4"
o
K
1+V
(igure 4)3 2 /ierarc.ical Estimation Krame?or0 &or 4asonry (onstruction
$n addition to t.e problem o& estimating t.e eIpected duration o& an activity some
sc.eduling procedures eIplicitly consider t.e uncertainty in activity duration estimates by
using t.e probabilistic distribution o& activity durations. ,.at is t.e duration o& a
particular activity is assumed to be a random variable t.at is distributed in a particular
&as.ion. Kor eIample an activity duration mig.t be assumed to be distributed as a normal
or a beta distributed random variable as illustrated in Kigure )<). ,.is &igure s.o?s t.e
probability or c.ance o& eIperiencing a particular activity duration based on a
probabilistic distribution. ,.e beta distribution is o&ten used to c.aracterize activity
durations since it can .ave an absolute minimum and an absolute maIimum o& possible
duration times. ,.e normal distribution is a good approIimation to t.e beta distribution in
t.e center o& t.e distribution and is easy to ?or0 ?it. so it is o&ten used as an
approIimation.
(igure 4)4 :eta and 5ormally 1istributed 2ctivity 1urations
$& a standard random variable is used to c.aracterize t.e distribution o& activity durations
t.en only a &e? parameters are re!uired to calculate t.e probability o& any particular
duration. ;till t.e estimation problem is increased considerably since more t.an one
parameter is re!uired to c.aracterize most o& t.e probabilistic distribution used to
represent activity durations. Kor t.e beta distribution t.ree or &our parameters are
re!uired depending on its generality ?.ereas t.e normal distribution re!uires t?o
parameters.
2s an eIample t.e normal distribution is c.aracterized by t?o parameters and
representing t.e average duration and t.e standard deviation o& t.e duration respectively.
2lternatively t.e variance o& t.e distribution could be used to describe or
c.aracterize t.e variability o& duration timesO t.e variance is t.e value o& t.e standard
deviation multiplied by itsel&. Krom .istorical data t.ese t?o parameters can be estimated
asD
).2
).3
?.ere ?e assume t.at n di&&erent observations I
0
o& t.e random variable I are available.
,.is estimation process mig.t be applied to activity durations directly Mso t.at I
0
?ould
be a record o& an activity duration 1
iB
on a past proBectN or to t.e estimation o& t.e
distribution o& productivities Mso t.at I
0
?ould be a record o& t.e productivity in an
activity *
i
N on a past proBectN ?.ic. in turn is used to estimate durations using E!uation
M).4N. $& more accuracy is desired t.e estimation e!uations &or mean and standard
deviation E!uations M).2N and M).3N ?ould be used to estimate t.e mean and standard
deviation o& t.e reciprocal o& productivity to avoid non<linear e&&ects. Using estimates o&
productivities t.e standard deviation o& activity duration ?ould be calculated asD
).4
?.ere is t.e estimated standard deviation o& t.e reciprocal o& productivity t.at is
calculated &rom E!uation M).3N by substituting 1U* &or I.
4.0 &stimating 2esource 2equirements for 7or:
Actiities
$n addition to precedence relations.ips and time durations resource re9uirements are
usually estimated &or eac. activity. ;ince t.e ?or0 activities de&ined &or a proBect are
compre.ensive t.e total resources re!uired &or t.e proBect are t.e sum o& t.e resources
re!uired &or t.e various activities. :y ma0ing resource re!uirement estimates &or eac.
activity t.e re!uirements &or particular resources during t.e course o& t.e proBect can be
identi&ied. *otential bottlenec0s can t.us be identi&ied and sc.edule resource allocation
or tec.nology c.anges made to avoid problems.
4any &ormal sc.eduling procedures can incorporate constraints imposed by t.e
availability o& particular resources. Kor eIample t.e unavailability o& a speci&ic piece o&
e!uipment or cre? may pro.ibit activities &rom being underta0en at a particular time.
2not.er type o& resource is space. 2 planner typically ?ill sc.edule only one activity in
t.e same location at t.e same time. A.ile activities re!uiring t.e same space may .ave
no necessary tec.nical precedence simultaneous ?or0 mig.t not be possible.
(omputational procedures &or t.ese various sc.eduling problems ?ill be described in
(.apters 1+ and 11. $n t.is section ?e s.all discuss t.e estimation o& re!uired resources.
,.e initial problem in estimating resource re!uirements is to decide t.e eItent and
number o& resources t.at mig.t be de&ined. 2t a very aggregate level resources
categories mig.t be limited to t.e amount o& labor Mmeasured in man<.ours or in dollarsN
t.e amount o& materials re!uired &or an activity and t.e total cost o& t.e activity. 2t t.is
aggregate level t.e resource estimates may be use&ul &or purposes o& proBect monitoring
and cas. &lo? planning. Kor eIample actual eIpenditures on an activity can be compared
?it. t.e estimated re!uired resources to reveal any problems t.at are being encountered
during t.e course o& a proBect. 4onitoring procedures o& t.is sort are described in (.apter
12. /o?ever t.is aggregate de&inition o& resource use ?ould not reveal bottlenec0s
associated ?it. particular types o& e!uipment or ?or0ers.
4ore detailed de&initions o& re!uired resources ?ould include t.e number and type o&
bot. ?or0ers and e!uipment re!uired by an activity as ?ell as t.e amount and types o&
materials. ;tandard resource re!uirements &or particular activities can be recorded and
adBusted &or t.e special conditions o& particular proBects. 2s a result t.e resources types
re!uired &or particular activities may already be de&ined. 3eliance on .istorical or
standard activity de&initions o& t.is type re!uires a standard coding system &or activities.
$n ma0ing adBustments &or t.e resources re!uired by a particular activity most o& t.e
problems encountered in &orming duration estimations described in t.e previous section
are also present. $n particular resources suc. as labor re!uirements ?ill vary in
proportion to t.e ?or0 productivity *
iB
used to estimate activity durations in E!uation
M).1N. 4at.ematically a typical estimating e!uation ?ould beD
)."
?.ere 3
0
iB
are t.e resources o& type 0 re!uired by activity iB 1
iB
is t.e duration o& activity
iB 5
iB
is t.e number o& standard cre?s allocated to activity iB and U
0
iB
is t.e amount o&
resource type 0 used per standard cre?. Kor eIample i& an activity re!uired eig.t .ours
?it. t?o cre?s assigned and eac. cre? re!uired t.ree ?or0ers t.e e&&ort ?ould be 3 ]
'c2c3 ] 4' labor<.ours.
Krom t.e planning perspective t.e important decisions in estimating resource
re!uirements are to determine t.e type o& tec.nology and e!uipment to employ and t.e
number o& cre?s to allocate to eac. tas0. (learly assigning additional cre?s mig.t result
in &aster completion o& a particular activity. /o?ever additional cre?s mig.t result in
congestion and coordination problems so t.at ?or0 productivity mig.t decline. Kurt.er
completing a particular activity earlier mig.t not result in earlier completion o& t.e entire
proBect as discussed in (.apter 1+.
&9ample 4).* 2esource 2equirements for <loc: (oundations
$n placing concrete bloc0 &oundation ?alls a typical cre? ?ould consist o& t.ree
bric0layers and t?o bric0layer .elpers. $& su&&icient space ?as available on t.e site
several cre?s could ?or0 on t.e same Bob at t.e same time t.ereby speeding up
completion o& t.e activity in proportion to t.e number o& cre?s. $n more restricted sites
multiple cre?s mig.t inter&ere ?it. one anot.er. Kor special considerations suc. as
complicated sca&&olding or large bloc0s Msuc. as t?elve inc. bloc0N a bric0layer .elper
&or eac. bric0layer mig.t be re!uired to insure smoot. and productive ?or0. $n general
standard cre? composition depends upon t.e speci&ic construction tas0 and t.e
e!uipment or tec.nology employed. ,.ese standard cre?s are t.en adBusted in response
to special c.aracteristics o& a particular site.
&9ample 4)0* Pouring Concrete /la>s
Kor large concrete pours on .orizontal slabs it is important to plan t.e activity so t.at t.e
slab &or a &ull bloc0 can be completed continuously in a single day. 3esources re!uired
&or pouring t.e concrete depend upon t.e tec.nology used. Kor eIample a standard cre?
&or pumping concrete to t.e slab mig.t include a &oreman &ive laborers one &inis.er and
one e!uipment operator. 3elated e!uipment ?ould be vibrators and t.e concrete pump
itsel&. Kor delivering concrete ?it. a c.ute directly &rom t.e delivery truc0 t.e standard
cre? mig.t consist o& a &oreman &our laborers and a &inis.er. ,.e number o& cre?s
?ould be c.osen to insure t.at t.e desired amount o& concrete could be placed in a single
day. $n addition to t.e resources involved in t.e actual placement it ?ould also be
necessary to insure a su&&icient number o& delivery truc0s and availability o& t.e concrete
itsel&.
4.1 Coding /ystems
One obBective in many construction planning e&&orts is to de&ine t.e plan ?it.in t.e
constraints o& a universal coding system &or identi&ying activities. Eac. activity de&ined
&or a proBect ?ould be identi&ied by a pre<de&ined code speci&ic to t.at activity. ,.e use o&
a common nomenclature or identi&ication system is basically motivated by t.e desire &or
better integration o& organizational e&&orts and improved in&ormation &lo?. $n particular
coding systems are adopted to provide a numbering system to replace verbal descriptions
o& items. ,.ese codes reduce t.e lengt. or compleIity o& t.e in&ormation to be recorded.
2 common coding system ?it.in an organization also aids consistency in de&initions and
categories bet?een proBects and among t.e various parties involved in a proBect.
(ommon coding systems also aid in t.e retrieval o& .istorical records o& cost
productivity and duration on particular activities. Kinally electronic data storage and
retrieval operations are muc. more e&&icient ?it. standard coding systems as described
in (.apter 14.
$n 5ort. 2merica t.e most ?idely used standard coding system &or constructed &acilities
is t.e 42;,E3KO342, system developed by t.e (onstruction ;peci&ications $nstitute
M(;$N o& t.e United ;tates and (onstruction ;peci&ications o& (anada. R1+S 2&ter
development o& separate systems t.is combined system ?as originally introduced as t.e
Uni&orm (onstruction $ndeI MU($N in 1)%2 and ?as subse!uently adopted &or use by
numerous &irms in&ormation providers pro&essional societies and trade organizations.
,.e term 42;,E3KO342, ?as introduced ?it. t.e 1)%' revision o& t.e U($ codes.
42;,E3KO342, provides a standard identi&ication code &or nearly all t.e elements
associated ?it. building construction.
42;,E3KO342, involves a .ierarc.ical coding system ?it. multiple levels plus
0ey?ord teIt descriptions o& eac. item. $n t.e numerical coding system t.e &irst t?o
digits represent one o& t.e siIteen divisions &or ?or0O a seventeent. division is used to
code conditions o& t.e contract &or a constructor. $n t.e latest version o& t.e
42;,E3KO342, a t.ird digit is added to indicate a subdivision ?it.in eac. division.
Eac. division is &urt.er speci&ied by a t.ree digit eItension indicating anot.er level o&
subdivisions. $n many cases t.ese subdivisions are &urt.er divided ?it. an additional
t.ree digits to identi&y more speci&ic ?or0 items or materials. Kor eIample t.e code 1#<
)"+<)#+ JElectrical E!uipment ,estingJ are de&ined as ?it.in 1ivision 1# MElectricalN
and ;ub<1ivision )"+ M,estingN. ,.e 0ey?ords JElectrical E!uipment ,estingJ is a
standard description o& t.e activity. ,.e seventeen maBor divisions in t.e U($U(;$
42;,E3KO342, system are s.o?n in ,able )<#. 2s an eIample site ?or0 second
level divisions are s.o?n in ,able )<%.
TA<"& 4)0 4aBor 1ivisions in t.e Uni&orm (onstruction
$ndeI
+ (onditions o& t.e contract
1 6eneral re!uirements
2 ;ite ?or0
3 (oncrete
4 4asonry
" 4etals
# Aood and plastics
% ,.ermal and moisture prevention
' 1oors and ?indo?s
) Kinis.es
1+ ;pecialties
11 E!uipment
12 Kurnis.ings
13 ;pecial construction
14 (onveying system
1" 4ec.anical
1# Electrical
A.ile 42;,E3KO342, provides a very use&ul means o& organizing and
communicating in&ormation it .as some obvious limitations as a complete proBect coding
system. Kirst more speci&ic in&ormation suc. as location o& ?or0 or responsible
organization mig.t be re!uired &or proBect cost control. (ode eItensions are t.en added in
addition to t.e digits in t.e basic 42;,E3KO342, codes. Kor eIample a typical
eItended code mig.t .ave t.e &ollo?ing elementsD
+"34.+222+.21.2.++.c&34
,.e &irst &our digits indicate t.e proBect &or t.is activityO t.is code re&ers to an activity on
proBect number +"34. ,.e neIt &ive digits re&er to t.e 42;,E3KO342, secondary
divisionO re&erring to ,able )<% t.is activity ?ould be +222+ JEIcavating :ac0&illing
and (ompacting.J ,.e neIt t?o digits re&er to speci&ic activities de&ined ?it.in t.is
42;,E3KO342, codeO t.e digits 21 in t.is eIample mig.t re&er to eIcavation o&
column &ootings. ,.e neIt c.aracter re&ers to t.e )lock or general area on t.e site t.at t.e
activity ?ill ta0e placeO in t.is case bloc0 2 is indicated. ,.e digits ++ could be replaced
by a code to indicate t.e responsible organization &or t.e activity. Kinally t.e c.aracters
c&34 re&er to t.e particular design element number &or ?.ic. t.is eIcavation is intendedO
in t.is case column &ooting number 34 is intended. ,.us t.is activity is to per&orm t.e
eIcavation &or column &ooting number 34 in bloc0 2 on t.e site. 5ote t.at a number o&
additional activities ?ould be associated ?it. column &ooting 34 including &orm?or0
and concreting. 2dditional &ields in t.e coding systems mig.t also be added to indicate
t.e responsible cre? &or t.is activity or to identi&y t.e speci&ic location o& t.e activity on
t.e site Mde&ined &or eIample as I y and z coordinates ?it. respect to a base pointN.
2s a second problem t.e 42;,E3KO342, system ?as originally designed &or
building construction activities so it is di&&icult to include various construction activities
&or ot.er types o& &acilities or activities associated ?it. planning or design. 1i&&erent
coding systems .ave been provided by ot.er organizations in particular sub<&ields suc. as
po?er plants or road?ays. 5evert.eless 42;,E3KO342, provides a use&ul starting
point &or organizing in&ormation in di&&erent construction domains.
$n devising organizational codes &or proBect activities t.ere is a continual tension
bet?een adopting systems t.at are convenient or eIpedient &or one proBect or &or one
proBect manager and systems appropriate &or an entire organization. 2s a general rule t.e
record 0eeping and communication advantages o& standard systems are eIcellent
arguments &or t.eir adoption. Even in small proBects .o?ever ad .oc or .ap.azard
coding systems can lead to problems as t.e system is revised and eItended over time.
TA<"& 4)1 ;econdary 1ivisions in 42;,E3KO342, &or ;ite Aor0 R11S
+2<+1+
+2<
+12
+2<
+1#
;ubsur&ace investigation
;tandard penetration tests
;eismic investigation
+2<+"+
+2<
+#+
+2<
+%+
+2<
+%"
+2<
+'+
1emolition
:uilding demolition
;elective demolition
(oncrete removal
2sbestos removal
+2<1++
+2<
11+
+2<
11"
+2<
12+
;ite preparation
;ite clearing
;elective clearing
;tructure moving
+2<14+ 1e?atering
+2<1"+ ;.oring and underpinning
+2<1#+ EIcavation supporting system
+2<1%+ (o&&erdams
+2<2++
+2<
21+
Eart.?or0
6rading
EIcavating bac0&illing and
+2<3"+
+2<
3""
+2<
3#+
+2<
3%+
+2<
3'+
*iles and caissons
*ile driving
1riven piles
:oredUaugered piles
(aissons
+2<4"+ 3ailroad ?or0
+2<4'+ 4arine ?or0
+2<"++
+2<
"1+
+2<
"1"
+2<
"2"
+2<
"3+
+2<
"4+
+2<
"4"
+2<
""+
+2<
"#+
+2<
"%"
*aving and sur&acing
Aal0 road and par0ing paving
Unit pavers
(urbs
2t.letic paving and sur&acing
;ynt.etic sur&acing
;ur&acing
/ig.?ay paving
2ir&ield paving
*avement repair
*avement mar0ing
+2<
22+
+2<
23+
+2<
24+
+2<
2"+
+2<
2%+
+2<
2'+
+2<
2)+
compaction
:ase course
;oil stabilization
8ibro<&loatation
;lope protection
;oil treatment
Eart. dams
+2<3++
+2<
3+"
+2<
31+
+2<
32+
+2<
33+
+2<
34+
,unneling
,unnel ventilation
,unnel eIcavating
,unnel lining
,unnel grouting
,unnel support systems
+2<
"'+
+2<#++ *iped utility materials
+2<##+ Aater distribution
+2<#'+ Kuel distribution
+2<%++ ;e?age and drainage
+2<%#+ 3estoration o& underground
pipelines
+2<%%+ *onds and reservoirs
+2<'++ *o?er and communications
+2<''+ ;ite improvements
+2<)++ Landscaping
4.3 2eferences
1. :aracco<4iller E. J*lanning &or (onstructionJ Unpublis.ed 4; ,.esis 1ept.
o& (ivil Engineering (arnegie 4ellon University 1)'%.
2. (onstruction ;peci&ications $nstitute '"#,ER7*R'", - 'aster .ist of #ection
,itles and Num)ers% 3eleasing $ndustry 6roup 2leIandria 82 1)'3.
3. Pac0son 4.P. $omputers in $onstruction !lanning and $ontrol% 2llen W Un?in
London 1)'#.
4. ;acerdoti E.1. " #tructure for !lans and /ehavior% Elsevier 5ort.</olland 5e?
9or0 1)%%.
". Yozaya<6orostiza (. J2n EIpert ;ystem &or (onstruction *roBect *lanningJ
Unpublis.ed *.1 1issertation 1ept. o& (ivil Engineering (arnegie 4ellon
University 1)''.
4.4 Pro>lems
1. 1evelop an alternative ?or0 brea0do?n &or t.e activities s.o?n in Kigure )<2
MEIample )<3N. :egin &irst ?it. a spatial division on t.e site Mi.e. by road?ay
segment and structure numberN and t.en include &unctional divisions to develop a
di&&erent .ierarc.y o& activities.
2. (onsider a cold ?eat.er structure built by in&lating a special rubber tent spraying
?ater on t.e tent letting t.e ?ater &reeze and t.en de<&lating and removing t.e
tent. 1evelop a ?or0 brea0do?n &or t.is structure precedence relations.ips and
estimate t.e re!uired resources. 2ssume t.at t.e tent is t?enty &eet by &i&teen &eet
by eig.t &eet tall.
3. 1evelop a ?or0 brea0do?n and activity net?or0 &or t.e proBect o& designing a
to?er to support a radio transmission antenna.
4. ;elect a vacant site in your vicinity and de&ine t.e various activities and
precedences among t.ese activities t.at ?ould be re!uired to prepare t.e site &or
t.e placement o& pre<&abricated residences. Use t.e coding system &or site ?or0
s.o?n in ,able )<% &or eIecuting t.is problem.
". 1evelop precedence relations.ips &or t.e road?ay proBect activities appearing in
Kigure )<2 MEIample )<3N.
#. ;uppose t.at you .ave a robot capable o& per&orming t?o tas0s in manipulating
bloc0s on a large tabletopD
o *L2(E :LO(Q ^ O5 :LO(Q 9D ,.is action places t.e bloc0 I on top
o& t.e bloc0 y. *reconditions &or applying t.is action are t.at bot. bloc0 I
and bloc0 y .ave clear tops Mso t.ere is no bloc0 on top o& I or yN. ,.e
robot ?ill automatically locate t.e speci&ied bloc0s.
o (LE23 :LO(Q ^D ,.is action removes any bloc0 &rom t.e top o& bloc0
I. 2 necessary precondition &or t.is action is t.at bloc0 I .as one and only
one bloc0 on top. ,.e bloc0 removed is placed on t.e table top.
Kor t.is robot ans?er t.e &ollo?ing !uestionsD
1. Using only t.e t?o robot actions speci&y a se!uence o& robot actions to
ta0e t.e &ive bloc0s s.o?n in Kigure )<1+MaN to t.e position s.o?n in Kigure )<
1+MbN in &ive or siI robot actions.
2. ;peci&y a se!uence o& robot actions to move t.e bloc0s &rom position MbN
to position McN in Kigure )<1+ in siI moves.
3. 1evelop an activity net?or0 &or t.e robot actions in moving &rom position
MbN to position McN in Kigure )<1+. *repare bot. activity<on<node and
activity<on<lin0 representations. 2re t.ere alternative se!uences o&
activities t.at t.e robot mig.t per&orm to accomplis. t.e desired positionX
(igure 4)15 $llustrative :loc0 *ositions &or 3obot 4otion *lanning
2. $n t.e previous problem suppose t.at s?itc.ing &rom t.e *L2(E :LO(Q action
to t.e (LE23 :LO(Q action or vice versa re!uires an eItra ten seconds.
4ovements t.emselves re!uire ' seconds. A.at is t.e se!uence o& actions o&
s.ortest duration to go &rom position MbN to position MaN in Kigure )<1+X
3. 3epeat *roblem # above &or t.e movement &rom position MaN to position McN in
Kigure )<1+.
4. 3epeat *roblem % above &or t.e movement &rom position MaN to position McN in
Kigure )<1+.
". ;uppose t.at you .ave an en.anced robot ?it. t?o additional commands
capabilitiesD
o (2339 :LO(Q; ^<9 to :LO(Q YD ,.is action moves bloc0s ^<9 to
t.e top o& bloc0 Y. :loc0s ^<9 may involve any number o& bloc0s as long
as ^ is on t.e bottom and 9 is on t.e top. ,.is move assumes t.at Y .as a
clear top.
o (LE23 2LL :LO(Q ^ ,O :LO(Q YD ,.is action moves all bloc0s on
top o& bloc0 ^ to t.e top o& bloc0 Y. $& a bloc0 Y is not speci&ied t.en t.e
bloc0s are moved to t.e table top.
/o? do t.ese capabilities c.ange your ans?er to *roblems # and %X
%. /o? does t.e additional capability described in *roblem 1+ c.ange your ans?er
to *roblems ' and 1+

4.15 (ootnotes
1. 2.(. 1oyle J2 ;tudy in ;carletJ ,he $omplete #herlock (olmes 1oubleday W (o.
pg. '3 1)3+.
2. ;ee &or eIample *aulson :.(. ;.2. 1ouglas 2. Qal0 2. ,ouran and 6.2. 8ictor
J;imulation and 2nalysis o& (onstruction OperationsJ "#$E 2ournal of ,echnical
,opics in $ivil Engineering 1+)M2N 2ugust 1)'3 pp. ') or (arr 3.$. J;imulation o&
(onstruction *roBect 1urationJ "#$E 2ournal of the $onstruction &ivision% 1+"M2N Pune
1)%) 11%<12'.
3. Kor a description o& a laser leveling system see *aulson :.(. Pr. J2utomation and
3obotics &or (onstructionJ "#$E 2ournal of $onstruction Engineering and
'anagement M111N3 pp. 1)+<2+% ;ept. 1)'".
4. ;ee :a0er Q.3. -ntroduction to #e9uencing and #cheduling Po.n<Ailey and ;ons
5e? 9or0 1)%4 &or an introduction to sc.eduling in manu&acturing.
". ;ee ;0ibnie?s0i 4.P. and (.,. /endric0son JEvaluation 4et.od &or 3obotics
$mplementationD 2pplication to (oncrete Korm (leaningJ !roc4 #econd -ntl4 $onf4 on
Ro)otics in $onstruction (arnegie<4ellon University *ittsburg. *2. 1)'" &or more
detail on t.e ?or0 process design o& a concrete &orm cleaning robot.
#. ,.is eIample is adapted &rom 2ras 3. and P. ;ur0is J*E3, and (*4 ,ec.ni!ues in
*roBect 4anagementJ "#$E 2ournal of the $onstruction &ivision% 8ol. )+ 5o. (O1
4arc. 1)#4.
%. Kor a discussion o& net?or0 reac.ability and connectivity computational algorit.ms
see (.apters 2 and % in 5. (.risto&ides 5raph ,heory3 "n "lgorithmic "pproach
LondonD 2cademic *ress 1)%" or any ot.er teIt on grap. t.eory.
'. ;ee /.3. ,.omas (.,. 4att.e?s and P.6. Aard JLearning (urve 4odels o&
(onstruction *roductivityJ "#$E 2ournal of $onstruction Engineering and
'anagement 8ol. 112 5o. 2 Pune 1)'# pp. 24"<2"'.
). Kor a more eItension discussion and description o& t.is estimation procedure see
/endric0son (. 1. 4artinelli and 1. 3e.a0 J/ierarc.ical 3ule<based 2ctivity
1uration EstimationJ "#$E 2ournal of $onstruction Engineering and 'anagement 8ol
113 5o. 2 1)'%pp. 2''<3+1.
1+. $n&ormation on t.e 42;,E3KO342, coding system can be obtained &romD ,.e
(onstruction ;peci&ications $nstitute #+1 4adison ;t. 2leIandria 82 22314.
11. ;ourceD 42;,E3KO342,D 4aster List o& ;ection ,itles and 5umbers 1)'3
Edition ,.e construction ;peculations $nstitute 2leIandria 82 1)'3.
15. (undamental /cheduling Procedures
15.1 2eleance of Construction /chedules
$n addition to assigning dates to proBect activities proBect sc.eduling is intended to matc.
t.e resources o& e!uipment materials and labor ?it. proBect ?or0 tas0s over time. 6ood
sc.eduling can eliminate problems due to production bottlenec0s &acilitate t.e timely
procurement o& necessary materials and ot.er?ise insure t.e completion o& a proBect as
soon as possible. $n contrast poor sc.eduling can result in considerable ?aste as laborers
and e!uipment ?ait &or t.e availability o& needed resources or t.e completion o&
preceding tas0s. 1elays in t.e completion o& an entire proBect due to poor sc.eduling can
also create .avoc &or o?ners ?.o are eager to start using t.e constructed &acilities.
2ttitudes to?ard t.e &ormal sc.eduling o& proBects are o&ten eItreme. 4any o?ners
re!uire detailed construction sc.edules to be submitted by contractors as a means o&
monitoring t.e ?or0 progress. ,.e actual ?or0 per&ormed is commonly compared to t.e
sc.edule to determine i& construction is proceeding satis&actorily. 2&ter t.e completion o&
construction similar comparisons bet?een t.e planned sc.edule and t.e actual
accomplis.ments may be per&ormed to allocate t.e liability &or proBect delays due to
c.anges re!uested by t.e o?ner ?or0er stri0es or ot.er un&oreseen circumstances.
$n contrast to t.ese instances o& reliance upon &ormal sc.edules many &ield supervisors
disdain and disli0e &ormal sc.eduling procedures. $n particular t.e critical path method
o& sc.eduling is commonly re!uired by o?ners and .as been taug.t in universities &or
over t?o decades but is o&ten regarded in t.e &ield as irrelevant to actual operations and a
time consuming distraction. ,.e result is Jseat<o&<t.e<pantsJ sc.eduling t.at can be good
or t.at can result in grossly ine&&icient sc.edules and poor productivity. *rogressive
construction &irms use &ormal sc.eduling procedures ?.enever t.e compleIity o& ?or0
tas0s is .ig. and t.e coordination o& di&&erent ?or0ers is re!uired.
Kormal sc.eduling procedures .ave become muc. more common ?it. t.e advent o&
personal computers on construction sites and easy<to<use so&t?are programs. ;.aring
sc.edule in&ormation via t.e $nternet .as also provided a greater incentive to use &ormal
sc.eduling met.ods. ;avvy construction supervisors o&ten carry sc.edule and budget
in&ormation around ?it. ?earable or .and.eld computers. 2s a result t.e continued
development o& easy to use computer programs and improved met.ods o& presenting
sc.edules .av overcome t.e practical problems associated ?it. &ormal sc.eduling
mec.anisms. :ut problems ?it. t.e use o& sc.eduling tec.ni!ues ?ill continue until
managers understand t.eir proper use and limitations.
2 basic distinction eIists bet?een resource oriented and time oriented sc.eduling
tec.ni!ues. Kor resource oriented sc.eduling t.e &ocus is on using and sc.eduling
particular resources in an e&&ective &as.ion. Kor eIample t.e proBect managerHs main
concern on a .ig.<rise building site mig.t be to insure t.at cranes are used e&&ectively &or
moving materialsO ?it.out e&&ective sc.eduling in t.is case delivery truc0s mig.t !ueue
on t.e ground and ?or0ers ?ait &or deliveries on upper &loors. Kor time oriented
sc.eduling t.e emp.asis is on determining t.e completion time o& t.e proBect given t.e
necessary precedence relations.ips among activities. /ybrid tec.ni!ues &or resource
leveling or resource constrained sc.eduling in t.e presence o& precedence relations.ips
also eIist. 4ost sc.eduling so&t?are is time<oriented alt.oug. virtually all o& t.e
programs .ave t.e capability to introduce resource constraints.
,.is c.apter ?ill introduce t.e &undamentals o& sc.eduling met.ods. Our discussion ?ill
generally assume t.at computer based sc.eduling programs ?ill be applied.
(onse!uently t.e ?ide variety o& manual or mec.anical sc.eduling tec.ni!ues ?ill not
be discussed in any detail. ,.ese manual met.ods are not as capable or as convenient as
computer based sc.eduling. Ait. t.e availability o& t.ese computer based sc.eduling
programs it is important &or managers to understand t.e basic operations per&ormed by
sc.eduling programs. 4oreover even i& &ormal met.ods are not applied in particular
cases t.e conceptual &rame?or0 o& &ormal sc.eduling met.ods provides a valuable
re&erence &or a manager. 2ccordingly eIamples involving .and calculations ?ill be
provided t.roug.out t.e c.apter to &acilitate understanding.
15.! The Critical Path ,ethod
,.e most ?idely used sc.eduling tec.ni!ue is t.e critical pat. met.od M(*4N &or
sc.eduling o&ten re&erred to as critical path scheduling. ,.is met.od calculates t.e
minimum completion time &or a proBect along ?it. t.e possible start and &inis. times &or
t.e proBect activities. $ndeed many teIts and managers regard critical pat. sc.eduling as
t.e only usable and practical sc.eduling procedure. (omputer programs and algorit.ms
&or critical pat. sc.eduling are ?idely available and can e&&iciently .andle proBects ?it.
t.ousands o& activities.
,.e critical path itsel& represents t.e set or se!uence o& predecessorUsuccessor activities
?.ic. ?ill ta0e t.e longest time to complete. ,.e duration o& t.e critical pat. is t.e sum
o& t.e activitiesH durations along t.e pat.. ,.us t.e critical pat. can be de&ined as t.e
longest possible pat. t.roug. t.e Jnet?or0J o& proBect activities as described in (.apter
). ,.e duration o& t.e critical pat. represents t.e minimum time re!uired to complete a
proBect. 2ny delays along t.e critical pat. ?ould imply t.at additional time ?ould be
re!uired to complete t.e proBect.
,.ere may be more t.an one critical pat. among all t.e proBect activities so completion
o& t.e entire proBect could be delayed by delaying activities along any one o& t.e critical
pat.s. Kor eIample a proBect consisting o& t?o activities per&ormed in parallel t.at eac.
re!uires t.ree days ?ould .ave eac. activity critical &or a completion in t.ree days.
Kormally critical pat. sc.eduling assumes t.at a proBect .as been divided into activities
o& &iIed duration and ?ell de&ined predecessor relations.ips. 2 predecessor relations.ip
implies t.at one activity must come be&ore anot.er in t.e sc.edule. 5o resource
constraints ot.er t.an t.ose implied by precedence relations.ips are recognized in t.e
simplest &orm o& critical pat. sc.eduling.
,o use critical pat. sc.eduling in practice construction planners o&ten represent a
resource constraint by a precedence relation. 2 constraint is simply a restriction on t.e
options available to a manager and a resource constraint is a constraint deriving &rom t.e
limited availability o& some resource o& e!uipment material space or labor. Kor eIample
one o& t?o activities re!uiring t.e same piece o& e!uipment mig.t be arbitrarily assumed
to precede t.e ot.er activity. ,.is arti&icial precedence constraint insures t.at t.e t?o
activities re!uiring t.e same resource ?ill not be sc.eduled at t.e same time. 2lso most
critical pat. sc.eduling algorit.ms impose restrictions on t.e generality o& t.e activity
relations.ips or net?or0 geometries ?.ic. are used. $n essence t.ese restrictions imply
t.at t.e construction plan can be represented by a net?or0 plan in ?.ic. activities appear
as nodes in a net?or0 as in Kigure )<#. 5odes are numbered and no t?o nodes can .ave
t.e same number or designation. ,?o nodes are introduced to represent t.e start and
completion o& t.e proBect itsel&.
,.e actual computer representation o& t.e proBect sc.edule generally consists o& a list o&
activities along ?it. t.eir associated durations re!uired resources and predecessor
activities. 6rap.ical net?or0 representations rat.er t.an a list are .elp&ul &or visualization
o& t.e plan and to insure t.at mat.ematical re!uirements are met. ,.e actual input o& t.e
data to a computer program may be accomplis.ed by &illing in blan0s on a screen menu
reading an eIisting data&ile or typing data directly to t.e program ?it. identi&iers &or t.e
type o& in&ormation being provided.
Ait. an activity<on<branc. net?or0 dummy activities may be introduced &or t.e
purposes o& providing uni!ue activity designations and maintaining t.e correct se!uence
o& activities. 2 dummy activity is assumed to .ave no time duration and can be
grap.ically represented by a das.ed line in a net?or0. ;everal cases in ?.ic. dummy
activities are use&ul are illustrated in Kig. 1+<1. $n Kig. 1+<1MaN t.e elimination o& activity
( ?ould mean t.at bot. activities : and 1 ?ould be identi&ied as being bet?een nodes 1
and 3. /o?ever i& a dummy activity ^ is introduced as s.o?n in part MbN o& t.e &igure
t.e uni!ue designations &or activity : Mnode 1 to 2N and 1 Mnode 1 to 3N ?ill be preserved.
Kurt.ermore i& t.e problem in part MaN is c.anged so t.at activity E cannot start until bot.
( and 1 are completed but t.at K can start a&ter 1 alone is completed t.e order in t.e
ne? se!uence can be indicated by t.e addition o& a dummy activity 9 as s.o?n in part
McN. $n general dummy activities may be necessary to meet t.e re!uirements o& speci&ic
computer sc.eduling algorit.ms but it is important to limit t.e number o& suc. dummy
lin0 insertions to t.e eItent possible.
(igure 15)1 1ummy 2ctivities in a *roBect 5et?or0
4any computer sc.eduling systems support only one net?or0 representation eit.er
activity<on<branc. or acitivity<on<node. 2 good proBect manager is &amiliar ?it. eit.er
representation.
&9ample 15)1* (ormulating a networ: diagram
;uppose t.at ?e ?is. to &orm an activity net?or0 &or a seven<activity net?or0 ?it. t.e
&ollo?ing precedencesD
Actiity Predecessors
2
:
(
1
E
K
6
<<<
<<<
2:
(
(
1
1E
Korming an activity<on<branc. net?or0 &or t.is set o& activities mig.t begin be dra?ing
activities 2 : and ( as s.o?n in Kigure 1+<2MaN. 2t t.is point ?e note t.at t?o activities
M2 and :N lie bet?een t.e same t?o event nodesO &or clarity ?e insert a dummy activity
^ and continue to place ot.er activities as in Kigure 1+<2MbN. *lacing activity 6 in t.e
&igure presents a problem .o?ever since ?e ?is. bot. activity 1 and activity E to be
predecessors. $nserting an additional dummy activity 9 along ?it. activity 6 completes
t.e activity net?or0 as s.o?n in Kigure 1+<2McN. 2 comparable activity<on<node
representation is s.o?n in Kigure 1+<3 including proBect start and &inis. nodes. 5ote t.at
dummy activities are not re!uired &or eIpressing precedence relations.ips in activity<on<
node net?or0s.
(igure 15)! 2n 2ctivity<on<:ranc. 5et?or0 &or (ritical *at. ;c.eduling
(igure 15)+ 2n 2ctivity<on<5ode 5et?or0 &or (ritical *at. ;c.eduling
15.+ Calculations for Critical Path /cheduling
Ait. t.e bac0ground provided by t.e previous sections ?e can &ormulate t.e critical
pat. sc.eduling mat.ematically. Ae s.all present an algorit.m or set o& instructions &or
critical pat. sc.eduling assuming an activity<on<branc. proBect net?or0. Ae also assume
t.at all precedences are o& a &inis.<to<start nature so t.at a succeeding activity cannot
start until t.e completion o& a preceding activity. $n a later section ?e present a
comparable algorit.m &or activity<on<node representations ?it. multiple precedence
types.
;uppose t.at our proBect net?or0 .as n_1 nodes t.e initial event being + and t.e last
event being n. Let t.e time at ?.ic. node events occur be I
1
I
2
.... I
n
respectively. ,.e
start o& t.e proBect at I
+
?ill be de&ined as time +. 5odal event times must be consistent
?it. activity durations so t.at an activityHs successor node event time must be larger t.an
an activityHs predecessor node event time plus its duration. Kor an activity de&ined as
starting &rom event i and ending at event B t.is relations.ip can be eIpressed as t.e
ine!uality constraint I
B
I
i
_ 1
iB
?.ere 1
iB
is t.e duration o& activity MiBN. ,.is same
eIpression can be ?ritten &or every activity and must .old true in any &easible sc.edule.
4at.ematically t.en t.e critical pat. sc.eduling problem is to minimize t.e time o&
proBect completion MI
n
N subBect to t.e constraints t.at eac. node completion event cannot
occur until eac. o& t.e predecessor activities .ave been completedD
4inimize
1+.1
subBect toD
,.is is a linear programming problem since t.e obBective value to be minimized and eac.
o& t.e constraints is a linear e!uation. R1S
3at.er t.an solving t.e critical pat. sc.eduling problem ?it. a linear programming
algorit.m Msuc. as t.e ;impleI met.odN more e&&icient tec.ni!ues are available t.at ta0e
advantage o& t.e net?or0 structure o& t.e problem. ,.ese solution met.ods are very
e&&icient ?it. respect to t.e re!uired computations so t.at very large net?or0s can be
treated even ?it. personal computers. ,.ese met.ods also give some very use&ul
in&ormation about possible activity sc.edules. ,.e programs can compute t.e earliest and
latest possible starting times &or eac. activity ?.ic. are consistent ?it. completing t.e
proBect in t.e s.ortest possible time. ,.is calculation is o& particular interest &or activities
?.ic. are not on t.e critical pat. Mor pat.sN since t.ese activities mig.t be slig.tly
delayed or re<sc.eduled over time as a manager desires ?it.out delaying t.e entire
proBect.
2n e&&icient solution process &or critical pat. sc.eduling based upon node labeling is
s.o?n in ,able 1+<1. ,.ree algorit.ms appear in t.e table. ,.e event num)ering
algorithm numbers t.e nodes Mor eventsN o& t.e proBect suc. t.at t.e beginning event .as
a lo?er number t.an t.e ending event &or eac. activity. ,ec.nically t.is algorit.m
accomplis.es a Jtopological sortJ o& t.e activities. ,.e proBect start node is given number
+. 2s long as t.e proBect activities &ul&ill t.e conditions &or an activity<on<branc.
net?or0 t.is type o& numbering system is al?ays possible. ;ome so&t?are pac0ages &or
critical pat. sc.eduling do not .ave t.is numbering algorit.m programmed so t.at t.e
construction proBect planners must insure t.at appropriate numbering is done.
TA<"& 15)1 (ritical *at. ;c.eduling 2lgorit.ms M2ctivity<on<:ranc. 3epresentationN
&ent Mum>ering Algorithm
#tep 1D 6ive t.e starting event number +.
#tep CD 6ive t.e neIt number to any unnumbered event ?.ose predecessor events
are eac. already numbered.
3epeat ;tep 2 until all events are numbered.
&arliest &ent Time Algorithm
#tep 1D Let EM+N ] +.
#tep CD Kor B ] 123...n M?.ere n is t.e last eventN let
EMBN ] maIimum aEMiN _ 1
iB
b
?.ere t.e maIimum is computed over all activities MiBN t.at .ave B as t.e ending event.
"atest &ent Time Algorithm
#tep 1D Let LMnN e!ual t.e re!uired completion time o& t.e proBect.
5oteD LMnN must e!ual or eIceed EMnN.
#tep CD Kor i ] n<1 n<2 ... + let
LMiN ] minimum aLMBN < 1
iB
b
?.ere t.e minimum is computed over all activities MiBN t.at .ave i as t.e starting event.
,.e earliest event time algorithm computes t.e earliest possible time EMiN at ?.ic. eac.
event i in t.e net?or0 can occur. Earliest event times are computed as t.e maIimum o&
t.e earliest start times plus activity durations &or eac. o& t.e activities immediately
preceding an event. ,.e earliest start time &or eac. activity MiBN is e!ual to t.e earliest
possible time &or t.e preceding event EMiND
1+.2
,.e earliest &inis. time o& eac. activity Mi BN can be calculated byD
1+.3
2ctivities are identi&ied in t.is algorit.m by t.e predecessor node Mor eventN i and t.e
successor node B. ,.e algorit.m simply re!uires t.at eac. event in t.e net?or0 s.ould be
eIamined in turn beginning ?it. t.e proBect start Mnode +N.
,.e latest event time algorithm computes t.e latest possible time LMBN at ?.ic. eac.
event B in t.e net?or0 can occur given t.e desired completion time o& t.e proBect LMnN
&or t.e last event n. Usually t.e desired completion time ?ill be e!ual to t.e earliest
possible completion time so t.at EMnN ] LMnN &or t.e &inal node n. ,.e procedure &or
&inding t.e latest event time is analogous to t.at &or t.e earliest event time eIcept t.at t.e
procedure begins ?it. t.e &inal event and ?or0s bac0?ards t.roug. t.e proBect activities.
,.us t.e earliest event time algorit.m is o&ten called a forward pass t.roug. t.e
net?or0 ?.ereas t.e latest event time algorit.m is t.e )ackward pass t.roug. t.e
net?or0. ,.e latest &inis. time consistent ?it. completion o& t.e proBect in t.e desired
time &rame o& LMnN &or eac. activity Mi BN is e!ual to t.e latest possible time LMBN &or t.e
succeeding eventD
1+.4
,.e latest start time o& eac. activity Mi BN can be calculated byD
1+."
,.e earliest start and latest &inis. times &or eac. event are use&ul pieces o& in&ormation in
developing a proBect sc.edule. Events ?.ic. .ave e!ual earliest and latest times EMiN ]
LMiN lie on t.e critical pat. or pat.s. 2n activity Mi BN is a critical activity i& it satis&ies all
o& t.e &ollo?ing conditionsD
1+.#
1+.%
1+.'
/ence activities bet?een critical events are also on a critical pat. as long as t.e activityHs
earliest start time e!uals its latest start time E;MiBN ] L;MiBN. ,o avoid delaying t.e
proBect all t.e activities on a critical pat. s.ould begin as soon as possible so eac.
critical activity Mi BN must be sc.eduled to begin at t.e earliest possible start time EMiN.
&9ample 15)!* Critical path scheduling calculations
(onsider t.e net?or0 s.o?n in Kigure 1+<4 in ?.ic. t.e proBect start is given number +.
,.en t.e only event t.at .as eac. predecessor numbered is t.e successor to activity 2 so
it receives number 1. 2&ter t.is t.e only event t.at .as eac. predecessor numbered is t.e
successor to t.e t?o activities : and ( so it receives number 2. ,.e ot.er event numbers
resulting &rom t.e algorit.m are also s.o?n in t.e &igure. Kor t.is simple proBect net?or0
eac. stage in t.e numbering process &ound only one possible event to number at any time.
Ait. more t.an one &easible event to number t.e c.oice o& ?.ic. to number neIt is
arbitrary. Kor eIample i& activity ( did not eIist in t.e proBect &or Kigure 1+<4 t.e
successor event &or activity 2 or &or activity : could .ave been numbered 1.
(igure 15)- 2 5ine<2ctivity *roBect 5et?or0
Once t.e node numbers are establis.ed a good aid &or manual sc.eduling is to dra? a
small rectangle near eac. node ?it. t?o possible entries. ,.e le&t .and side ?ould
contain t.e earliest time t.e event could occur ?.ereas t.e rig.t .and side ?ould contain
t.e latest time t.e event could occur ?it.out delaying t.e entire proBect. Kigure 1+<"
illustrates a typical boI.
(igure 15). EMiN and LMiN 1isplay &or /and (alculation o& (ritical *at. &or 2ctivity<on<
:ranc. 3epresentation
TA<"& 15)! *recedence 3elations and 1urations &or a 5ine 2ctivity *roBect EIample
2ctivity 1escription *redecessors 1uration
2
:
(
1
E
K
6
/
$
;ite clearing
3emoval o& trees
6eneral eIcavation
6rading general area
EIcavation &or trenc.es
*lacing &orm?or0 and rein&orcement &or concrete
$nstalling se?er lines
$nstalling ot.er utilities
*ouring concrete
<<<
<<<
2
2
: (
: (
1 E
1 E
K 6
4
3
'
%
)
12
2
"
#
Kor t.e net?or0 in Kigure 1+<4 ?it. activity durations in ,able 1+<2 t.e earliest event
time calculations proceed as &ollo?sD
#tep 1 EM+N ] +
#tep C
B ] 1 EM1N ] 4aIaEM+N _ 1
+1
b ] 4aIa + _ 4 b ] 4
B ] 2 EM2N ] 4aIaEM+N _ 1
+2
O EM1N _ 1
12
b ] 4aIa+ _ 3O 4 _ 'b ] 12
B ] 3 EM3N ] 4aIaEM1N _ 1
13
O EM2N _ 1
23
b ] 4aIa4 _ %O 12 _ )b ] 21
B ] 4 EM4N ] 4aIaEM2N _ 1
24
O EM3N _ 1
34
b ] 4aIa12 _ 12O 21 _ 2b ] 24
B ] " EM"N ] 4aIaEM3N _ 1
3"
O EM4N _ 1
4"
b ] 4aIa21 _ "O 24 _ #b ] 3+
,.us t.e minimum time re!uired to complete t.e proBect is 3+ since EM"N ] 3+. $n t.is
case eac. event .ad at most t?o predecessors. Kor t.e Jbac0?ard passJ t.e latest event
time calculations areD
#tep 1 LM"N ] EM"N ] 3+
#tep C
B ] 4 LM4N ] 4in aLM"N < 1
4"
b ] 4in a3+ < #b ] 24
B ] 3 LM3N ] 4in aLM"N < 1
3"
O LM4N < 1
34
b ] 4in a3+ <"O 24 < 2b ] 22
B ] 2 LM2N ] 4in aLM4N < 1
24
O LM3N < 1
23
b ] 4in a24 < 12O 22 < )b ] 12
B ] 1 LM1N ] 4in aLM3N < 1
13
O LM2N < 1
12
b ] 4in a22 < %O 12 < 'b ] 4
B ] + LM+N ] 4in aLM2N < 1
+2
O LM1N < 1
+1
b ] 4in a12 < 3O 4 < 4b ] +
$n t.is eIample EM+N ] LM+N EM1N ] LM1N EM2N ] LM2N EM4N ] LM4Nand EM"N ] LM"N. 2s a
result all nodes but node 3 are in t.e critical pat.. 2ctivities on t.e critical pat. include
2 M+1N ( M12N K M24N and $ M4"N as s.o?n in ,able 1+<3.
TA<"& 15)+ $denti&ication o& 2ctivities on t.e (ritical *at. &or a 5ine<2ctivity *roBect
2ctivity
1uration
1
iB
Earliest start time
EMiN]E;MiBN
Latest &inis. time
LMBN]LKMiBN
Latest start time
L;MiBN
2 M+1N
: M+2N
( M12N
1 M13N
E M23N
K M24N
6 M34N
/ M3"N
$ M4"N
4
3
'
%
)
12
2
"
#
+c
+
4c
4
12
12c
21
21
24
4c
12
12c
22
22
24c
24
3+
3+c
+
)
4
1"
13
12
22
2"
24
c2ctivity on a critical pat. since EMiN _ 1
iP
] LMBN.
15.- Actiity (loat and /chedules
2 number o& di&&erent activity sc.edules can be developed &rom t.e critical pat.
sc.eduling procedure described in t.e previous section. 2n earliest time sc.edule ?ould
be developed by starting eac. activity as soon as possible at E;MiBN. ;imilarly a latest
time sc.edule ?ould delay t.e start o& eac. activity as long as possible but still &inis. t.e
proBect in t.e minimum possible time. ,.is late sc.edule can be developed by setting
eac. activityHs start time to L;MiBN.
2ctivities t.at .ave di&&erent early and late start times Mi.e. E;MiBN [ L;MiBNN can be
sc.eduled to start anytime bet?een E;MiBN and L;MiBN as s.o?n in Kigure 1+<#. ,.e
concept o& float is to use part or all o& t.is allo?able range to sc.edule an activity ?it.out
delaying t.e completion o& t.e proBect. 2n activity t.at .as t.e earliest time &or its
predecessor and successor nodes di&&ering by more t.an its duration possesses a ?indo?
in ?.ic. it can be sc.eduled. ,.at is i& EMiN _ 1
iB
[ LMBN t.en some &loat is available in
?.ic. to sc.edule t.is activity.
(igure 15)0 $llustration o& 2ctivity Kloat
Kloat is a very valuable concept since it represents t.e sc.eduling &leIibility or
Jmaneuvering roomJ available to complete particular tas0s. 2ctivities on t.e critical pat.
do not provide any &leIibility &or sc.eduling nor lee?ay in case o& problems. Kor
activities ?it. some &loat t.e actual starting time mig.t be c.osen to balance ?or0 loads
over time to correspond ?it. material deliveries or to improve t.e proBectHs cas. &lo?.
O& course i& one activity is allo?ed to &loat or c.ange in t.e sc.edule t.en t.e amount o&
&loat available &or ot.er activities may decrease. ,.ree separate categories o& &loat are
de&ined in critical pat. sc.edulingD
1. 7ree float is t.e amount o& delay ?.ic. can be assigned to any one activity
?it.out delaying subse!uent activities. ,.e &ree &loat KKMiBN associated ?it.
activity MiBN isD
1+.)
2. -ndependent float is t.e amount o& delay ?.ic. can be assigned to any one
activity ?it.out delaying subse!uent activities or restricting t.e sc.eduling o&
preceding activities. $ndependent &loat $KMiBN &or activity MiBN is calculated asD
1+.1+
3. ,otal float is t.e maIimum amount o& delay ?.ic. can be assigned to any activity
?it.out delaying t.e entire proBect. ,.e total &loat ,KMiBN &or any activity MiBN is
calculated asD
1+.11
Eac. o& t.ese J&loatsJ indicates an amount o& &leIibility associated ?it. an activity. $n all
cases total &loat e!uals or eIceeds &ree &loat ?.ile independent &loat is al?ays less t.an
or e!ual to &ree &loat. 2lso any activity on a critical pat. .as all t.ree values o& &loat
e!ual to zero. ,.e converse o& t.is statement is also true so any activity ?.ic. .as zero
total &loat can be recognized as being on a critical pat..
,.e various categories o& activity &loat are illustrated in Kigure 1+<# in ?.ic. t.e activity
is represented by a bar ?.ic. can move bac0 and &ort. in time depending upon its
sc.eduling start. ,.ree possible sc.eduled starts are s.o?n corresponding to t.e cases o&
starting eac. activity at t.e earliest event time EMiN t.e latest activity start time L;MiBN
and at t.e latest event time LMiN. ,.e t.ree categories o& &loat can be &ound directly &rom
t.is &igure. Kinally a &ourt. bar is included in t.e &igure to illustrate t.e possibility t.at an
activity mig.t start be temporarily .alted and t.en re<start. $n t.is case t.e temporary
.alt ?as su&&iciently s.ort t.at it ?as less t.an t.e independent &loat time and t.us ?ould
not inter&ere ?it. ot.er activities. A.et.er or not suc. ?or0 splitting is possible or
economical depends upon t.e nature o& t.e activity.
2s s.o?n in ,able 1+<3 activity 1M13N .as &ree and independent &loats o& 1+ &or t.e
proBect s.o?n in Kigure 1+<4. ,.us t.e start o& t.is activity could be sc.eduled anytime
bet?een time 4 and 14 a&ter t.e proBect began ?it.out inter&ering ?it. t.e sc.edule o&
ot.er activities or ?it. t.e earliest completion time o& t.e proBect. 2s t.e total &loat o& 11
units indicates t.e start o& activity 1 could also be delayed until time 1" but t.is ?ould
re!uire t.at t.e sc.edule o& ot.er activities be restricted. Kor eIample starting activity 1
at time 1" ?ould re!uire t.at activity 6 ?ould begin as soon as activity 1 ?as
completed. /o?ever i& t.is sc.edule ?as maintained t.e overall completion date o& t.e
proBect ?ould not be c.anged.
&9ample 15)+* Critical path for a fa>rication pro%ect
2s anot.er eIample o& critical pat. sc.eduling consider t.e seven activities associated
?it. t.e &abrication o& a steel component s.o?n in ,able 1+<4. Kigure 1+<% s.o?s t.e
net?or0 diagram associated ?it. t.ese seven activities. 5ote t.at an additional dummy
activity ^ .as been added to insure t.at t.e correct precedence relations.ips are
maintained &or activity E. 2 simple rule to observe is t.at i& an activity .as more t.an one
immediate predecessor and anot.er activity .as at least one but not all o& t.is predecessor
activity as a predecessor a dummy activity ?ill be re!uired to maintain precedence
relations.ips. ,.us in t.e &igure activity E .as activities : and ( as predecessors ?.ile
activity 1 .as only activity ( as a predecessor. /ence a dummy activity is re!uired.
5ode numbers .ave also been added to t.is &igure using t.e procedure outlined in ,able
1+<1. 5ote t.at t.e node numbers on nodes 1 and 2 could .ave been eIc.anged in t.is
numbering process since a&ter numbering node + eit.er node 1 or node 2 could be
numbered neIt.
TA<"& 15)- *recedences and 1urations &or a ;even 2ctivity *roBect
2ctivity 1escription *redecessors 1uration
2
:
(
1
E
K
6
*reliminary design
Evaluation o& design
(ontract negotiation
*reparation o& &abrication plant
Kinal design
Kabrication o& *roduct
;.ipment o& *roduct to o?ner
<<<
2
<<<
(
: (
1 E
K
#
1
'
"
)
12
3
(igure 15)1 $llustration o& a ;even 2ctivity *roBect 5et?or0
,.e results o& t.e earliest and latest event time algorit.ms Mappearing in ,able 1+<1N are
s.o?n in ,able 1+<". ,.e minimum completion time &or t.e proBect is 32 days. $n t.is
small proBect all o& t.e event nodes eIcept node 1 are on t.e critical pat.. ,able 1+<#
s.o?s t.e earliest and latest start times &or t.e various activities including t.e di&&erent
categories o& &loat. 2ctivities (EK6 and t.e dummy activity ^ are seen to lie on t.e
critical pat..
TA<"& 15). Event ,imes &or a ;even 2ctivity *roBect
5ode Earliest ,ime EMiN Latest ,ime LMBN
+
1
2
3
4
"
#
+
#
'
'
1%
2)
32
+
%
'
'
1%
2)
32
TA<"& 15)0 Earliest ;tart Latest ;tart and 2ctivity Kloats &or a ;even 2ctivity *roBect
2ctivity Earliest start time
Latest start time
E;MiBN
Kree &loat
L;MiBN $ndependent &loat ,otal &loat
2 M+1N
: M13N
( M+2N
1 M24N
E M34N
K M4"N
6 M"#N
^ M23N
+
#
+
'
'
1%
2)
'
1
%
+
12
'
1%
2)
'
+
1
+
4
+
+
+
+
+
+
+
4
+
+
+
+
1
1
+
4
+
+
+
+
15.. Presenting Pro%ect /chedules
(ommunicating t.e proBect sc.edule is a vital ingredient in success&ul proBect
management. 2 good presentation ?ill greatly ease t.e managerHs problem o&
understanding t.e multitude o& activities and t.eir inter<relations.ips. 4oreover
numerous individuals and parties are involved in any proBect and t.ey .ave to understand
t.eir assignments. 5raphical presentations o& proBect sc.edules are particularly use&ul
since it is muc. easier to compre.end a grap.ical display o& numerous pieces o&
in&ormation t.an to si&t t.roug. a large table o& numbers. Early computer sc.eduling
systems ?ere particularly poor in t.is regard since t.ey produced pages and pages o&
numbers ?it.out aids to t.e manager &or understanding t.em. 2 s.ort eIample appears in
,ables 1+<" and 1+<#O in practice a proBect summary table ?ould be muc. longer. $t is
eItremely tedious to read a table o& activity numbers durations sc.edule times and
&loats and t.ereby gain an understanding and appreciation o& a proBect sc.edule. $n
practice producing diagrams manually .as been a common prescription to t.e lac0 o&
automated dra&ting &acilities. $ndeed it .as been common to use computer programs to
per&orm critical pat. sc.eduling and t.en to produce bar c.arts o& detailed activity
sc.edules and resource assignments manually. Ait. t.e availability o& computer
grap.ics t.e cost and e&&ort o& producing grap.ical presentations .as been signi&icantly
reduced and t.e production o& presentation aids can be automated.
5et?or0 diagrams &or proBects .ave already been introduced. ,.ese diagrams provide a
po?er&ul visualization o& t.e precedences and relations.ips among t.e various proBect
activities. ,.ey are a basic means o& communicating a proBect plan among t.e
participating planners and proBect monitors. *roBect planning is o&ten conducted by
producing net?or0 representations o& greater and greater re&inement until t.e plan is
satis&actory.
2 use&ul variation on proBect net?or0 diagrams is to dra? a time-scaled net?or0. ,.e
activity diagrams s.o?n in t.e previous section ?ere topological net?or0s in t.at only
t.e relations.ip bet?een nodes and branc.es ?ere o& interest. ,.e actual diagram could
be distorted in any ?ay desired as long as t.e connections bet?een nodes ?ere not
c.anged. $n time<scaled net?or0 diagrams activities on t.e net?or0 are plotted on a
.orizontal aIis measuring t.e time since proBect commencement. Kigure 1+<' gives an
eIample o& a time<scaled activity<on<branc. diagram &or t.e nine activity proBect in
Kigure 1+<4. $n t.is time<scaled diagram eac. node is s.o?n at its earliest possible time.
:y loo0ing over t.e .orizontal aIis t.e time at ?.ic. activity can begin can be observed.
Obviously t.is time scaled diagram is produced as a display a&ter activities are initially
sc.eduled by t.e critical pat. met.od.
(igure 15)3 $llustration o& a ,ime ;caled 5et?or0 1iagram ?it. 5ine 2ctivities
2not.er use&ul grap.ical representation tool is a bar or 6antt c.art illustrating t.e
sc.eduled time &or eac. activity. ,.e bar c.art lists activities and s.o?s t.eir sc.eduled
start &inis. and duration. 2n illustrative bar c.art &or t.e nine activity proBect appearing
in Kigure 1+<4 is s.o?n in Kigure 1+<). 2ctivities are listed in t.e vertical aIis o& t.is
&igure ?.ile time since proBect commencement is s.o?n along t.e .orizontal aIis.
1uring t.e course o& monitoring a proBect use&ul additions to t.e basic bar c.art include a
vertical line to indicate t.e current time plus small mar0s to indicate t.e current state o&
?or0 on eac. activity. $n Kigure 1+<) a .ypot.etical proBect state a&ter 4 periods is
s.o?n. ,.e small JvJ mar0s on eac. activity represent t.e current state o& eac. activity.
(igure 15)4 2n EIample :ar (.art &or a 5ine 2ctivity *roBect
:ar c.arts are particularly .elp&ul &or communicating t.e current state and sc.edule o&
activities on a proBect. 2s suc. t.ey .ave &ound ?ide acceptance as a proBect
representation tool in t.e &ield. Kor planning purposes bar c.arts are not as use&ul since
t.ey do not indicate t.e precedence relations.ips among activities. ,.us a planner must
remember or record separately t.at a c.ange in one activityHs sc.edule may re!uire
c.anges to successor activities. ,.ere .ave been various sc.emes &or mec.anically
lin0ing activity bars to represent precedences but it is no? easier to use computer based
tools to represent suc. relations.ips.
Ot.er grap.ical representations are also use&ul in proBect monitoring. ,ime and activity
grap.s are eItremely use&ul in portraying t.e current status o& a proBect as ?ell as t.e
eIistence o& activity &loat. Kor eIample Kigure 1+<1+ s.o?s t?o possible sc.edules &or
t.e nine activity proBect described in ,able )<1 and s.o?n in t.e previous &igures. ,.e
&irst sc.edule ?ould occur i& eac. activity ?as sc.eduled at its earliest start time E;MiBN
consistent ?it. completion o& t.e proBect in t.e minimum possible time. Ait. t.is
sc.edule Kigure 1+<1+ s.o?s t.e percent o& proBect activity completed versus time. ,.e
second sc.edule in Kigure 1+<1+ is based on latest possible start times &or eac. activity
L;MiBN. ,.e .orizontal time di&&erence bet?een t.e t?o &easible sc.edules gives an
indication o& t.e eItent o& possible &loat. $& t.e proBect goes according to plan t.e actual
percentage completion at di&&erent times s.ould &all bet?een t.ese curves. $n practice a
vertical aIis representing cas. eIpenditures rat.er t.an percent completed is o&ten used in
developing a proBect representation o& t.is type. Kor t.is purpose activity cost estimates
are used in preparing a time versus completion grap.. ;eparate J;<curvesJ may also be
prepared &or groups o& activities on t.e same grap. suc. as separate curves &or t.e
design procurement &oundation or particular sub<contractor activities.
(igure 15)15 EIample o& *ercentage (ompletion versus ,ime &or 2lternative ;c.edules
?it. a 5ine 2ctivity *roBect
,ime versus completion curves is also use&ul in proBect monitoring. 5ot only t.e .istory
o& t.e proBect can be indicated but t.e &uture possibilities &or earliest and latest start
times. Kor eIample Kigure 1+<11 illustrates a proBect t.at is &orty percent complete a&ter
eig.t days &or t.e nine activity eIample. $n t.is case t.e proBect is ?ell a.ead o& t.e
original sc.eduleO some activities ?ere completed in less t.an t.eir eIpected durations.
,.e possible earliest and latest start time sc.edules &rom t.e current proBect status are
also s.o?n on t.e &igure.
(igure 15)11 $llustration o& 2ctual *ercentage (ompletion versus ,ime &or a 5ine
2ctivity *roBect Under?ay
6rap.s o& resource use over time are also o& interest to proBect planners and managers.
2n eIample o& resource use is s.o?n in Kigure 1+<12 &or t.e resource o& total
employment on t.e site o& a proBect. ,.is grap. is prepared by summing t.e resource
re!uirements &or eac. activity at eac. time period &or a particular proBect sc.edule. Ait.
limited resources o& some 0ind grap.s o& t.is type can indicate ?.en t.e competition &or
a resource is too large to accommodateO in cases o& t.is 0ind resource constrained
sc.eduling may be necessary as described in ;ection 1+.). Even ?it.out &iIed resource
constraints a sc.eduler tries to avoid eItreme &luctuations in t.e demand &or labor or
ot.er resources since t.ese &luctuations typically incur .ig. costs &or training .iring
transportation and management. ,.us a planner mig.t alter a sc.edule t.roug. t.e use
o& available activity &loats so as to level or smoot. out t.e demand &or resources.
3esource grap.s suc. as Kigure 1+<12 provide an invaluable indication o& t.e potential
trouble spots and t.e success t.at a sc.eduler .as in avoiding t.em.
(igure 15)1! $llustration o& 3esource Use over ,ime &or a 5ine 2ctivity *roBect
2 common di&&iculty ?it. proBect net?or0 diagrams is t.at too muc. in&ormation is
available &or easy presentation in a net?or0. $n a proBect ?it. say &ive .undred
activities dra?ing activities so t.at t.ey can be seen ?it.out a microscope re!uires a
considerable eIpanse o& paper. 2 large proBect mig.t re!uire t.e ?all space in a room to
include t.e entire diagram. On a computer display a typical restriction is t.at less t.an
t?enty activities can be success&ully displayed at t.e same time. ,.e problem o&
displaying numerous activities becomes particularly acute ?.en accessory in&ormation
suc. as activity identi&ying numbers or p.rases durations and resources are added to t.e
diagram.
One practical solution to t.is representation problem is to de&ine sets o& activities t.at can
be represented toget.er as a single activity. ,.at is &or display purposes net?or0
diagrams can be produced in ?.ic. one JactivityJ ?ould represent a number o& real sub<
activities. Kor eIample an activity suc. as J&oundation designJ mig.t be inserted in
summary diagrams. $n t.e actual proBect plan t.is one activity could be sub<divided into
numerous tas0s ?it. t.eir o?n precedences durations and ot.er attributes. ,.ese sub<
groups are sometimes termed fragnets &or &ragments o& t.e &ull net?or0. ,.e result o& t.is
organization is t.e possibility o& producing diagrams t.at summarize t.e entire proBect as
?ell as detailed representations o& particular sets o& activities. ,.e .ierarc.y o& diagrams
can also be introduced to t.e production o& reports so t.at summary reports &or groups o&
activities can be produced. ,.us detailed representations o& particular activities suc. as
plumbing mig.t be prepared ?it. all ot.er activities eit.er omitted or summarized in
larger aggregate activity representations. ,.e (;$U42;,E3;*E( activity de&inition
codes described in (.apter ) provide a ?idely adopted eIample o& a .ierarc.ical
organization o& t.is type. Even i& summary reports and diagrams are prepared t.e actual
sc.eduling ?ould use detailed activity c.aracteristics o& course.
2n eIample &igure o& a sub<net?or0 appears in Kigure 1+<13. ;ummary displays ?ould
include only a single node 2 to represent t.e set o& activities in t.e sub<net?or0. 5ote
t.at precedence relations.ips s.o?n in t.e master net?or0 ?ould .ave to be interpreted
?it. care since a particular precedence mig.t be due to an activity t.at ?ould not
commence at t.e start o& activity on t.e sub<net?or0.
(igure 15)1+ $llustration o& a ;ub<5et?or0 in a ;ummary 1iagram
,.e use o& grap.ical proBect representations is an important and eItremely use&ul aid to
planners and managers. O& course detailed numerical reports may also be re!uired to
c.ec0 t.e peculiarities o& particular activities. :ut grap.s and diagrams provide an
invaluable means o& rapidly communicating or understanding a proBect sc.edule. Ait.
computer based storage o& basic proBect data grap.ical output is readily obtainable and
s.ould be used ?.enever possible.
Kinally t.e sc.eduling procedure described in ;ection 1+.3 simply counted days &rom t.e
initial starting point. *ractical sc.eduling programs include a calendar conversion to
provide calendar dates &or sc.eduled ?or0 as ?ell as t.e number o& days &rom t.e
initiation o& t.e proBect. ,.is conversion can be accomplis.ed by establis.ing a one<to<
one correspondence bet?een proBect dates and calendar dates. Kor eIample proBect day 2
?ould be 4ay 4 i& t.e proBect began at time + on 4ay 2 and no .olidays intervened. $n
t.is calendar conversion ?ee0ends and .olidays ?ould be eIcluded &rom consideration
&or sc.eduling alt.oug. t.e planner mig.t overrule t.is &eature. 2lso t.e number o&
?or0 s.i&ts or ?or0ing .ours in eac. day could be de&ined to provide consistency ?it.
t.e time units used is estimating activity durations. *roBect reports and grap.s ?ould
typically use actual calendar days.
15.0 Critical Path /cheduling for Actiity)on)Mode and
with "eads, "ags, and 7indows
*er&orming t.e critical pat. sc.eduling algorit.m &or activity<on<node representations is
only a small variation &rom t.e activity<on<branc. algorit.m presented above. 2n
eIample o& t.e activity<on<node diagram &or a seven activity net?or0 is s.o?n in Kigure
1+<3. ;ome addition terminology is needed to account &or t.e time delay at a node
associated ?it. t.e tas0 activity. 2ccordingly ?e de&ineD E;MiN as t.e earliest start time
&or activity Mand nodeN i EKMiN is t.e earliest &inis. time &or activity Mand nodeN i L;MiN is
t.e latest start and LKMiN is t.e latest &inis. time &or activity Mand nodeN i. ,able 1+<%
s.o?s t.e relevant calculations &or t.e node numbering algorit.m t.e &or?ard pass and
t.e bac0?ard pass calculations.
TA<"& 15)1 (ritical *at. ;c.eduling 2lgorit.ms M2ctivity<on<5ode 3epresentationN
Actiity Mum>ering Algorithm
#tep 1D 6ive t.e starting activity number +.
#tep CD 6ive t.e neIt number to any unnumbered activity ?.ose predecessor activities
are eac. already numbered.
3epeat ;tep 2 until all activities are numbered.
(orward Pass
#tep 1D Let EM+N ] +.
#tep CD Kor B ] 123...n M?.ere n is t.e last activityN let
E;MBN ] maIimum aEKMiNb
?.ere t.e maIimum is computed over all activities MiN t.at .ave B as t.eir successor.
#tep DD EKMBN ] E;MBN _ 1
B
<ac:ward Pass
#tep 1D Let LMnN e!ual t.e re!uired completion time o& t.e proBect.
5oteD LMnN must e!ual or eIceed EMnN.
#tep CD Kor i ] n<1 n<2 ... + let
LKMiN ] minimum aL;MBNb
?.ere t.e minimum is computed over all activities MBN t.at .ave i as t.eir predecessor.
#tep DD L;MiN ] LKMiN < 1
i

Kor manual application o& t.e critical pat. algorit.m s.o?n in ,able 1+<% it is .elp&ul to
dra? a s!uare o& &our entries representing t.e E;MiN EKMiN L;MiN and LK MiN as s.o?n in
Kigure 1+<14. 1uring t.e &or?ard pass t.e boIes &or E;MiN and EKMiN are &illed in. 2s an
eIercise &or t.e reader t.e seven activity net?or0 in Kigure 1+<3 can be sc.eduled.
3esults s.ould be identical to t.ose obtained &or t.e activity<on<branc. calculations.
(igure 15)1- E; EK L; and LK 1isplay &or /and (alculation o& (ritical *at. &or
2ctivity<on<5ode 3epresentation
:uilding on t.e critical pat. sc.eduling calculations described in t.e previous sections
some additional capabilities are use&ul. 1esirable eItensions include t.e de&inition o&
allo?able windows &or activities and t.e introduction o& more complicated precedence
relations.ips among activities. Kor eIample a planner may ?is. to .ave an activity o&
removing &orm?or0 &rom a ne? building component follow t.e concrete pour by some
pre<de&ined lag period to allo? setting. ,.is delay ?ould represent a re!uired gap
bet?een t.e completion o& a preceding activity and t.e start o& a successor. ,.e
sc.eduling calculations to accommodate t.ese complications ?ill be described in t.is
section. 2gain t.e standard critical pat. sc.eduling assumptions o& &iIed activity
durations and unlimited resource availability ?ill be made .ere alt.oug. t.ese
assumptions ?ill be relaIed in later sections.
2 capability o& many sc.eduling programs is to incorporate types o& activity interactions
in addition to t.e straig.t&or?ard predecessor &inis. to successor start constraint used in
;ection 1+.3. $ncorporation o& additional categories o& interactions is o&ten called
precedence diagramming. R2S Kor eIample it may be t.e case t.at installing concrete
&orms in a &oundation trenc. mig.t begin a &e? .ours a&ter t.e start o& t.e trenc.
eIcavation. ,.is ?ould be an eIample o& a start<to<start constraint ?it. a leadD t.e start o&
t.e trenc.<eIcavation activity ?ould lead t.e start o& t.e concrete<&orm<placement
activity by a &e? .ours. Eig.t separate categories o& precedence constraints can be
de&ined representing greater t.an MleadsN or less t.an MlagsN time constraints &or eac. o&
&our di&&erent inter<activity relations.ips. ,.ese relations.ips are summarized in ,able
1+<'. ,ypical precedence relations.ips ?ould beD
;irect or finish)to)start leads
,.e successor activity cannot start until t.e preceding activity is complete by at
least t.e prescribed lead time MK;N. ,.us t.e start o& a successor activity must
eIceed t.e &inis. o& t.e preceding activity by at least K;.
/tart)to)start leads
,.e successor activity cannot start until ?or0 on t.e preceding activity .as been
under?ay by at least t.e prescribed lead time M;;N.
(inish)to)finish leads
,.e successor activity must .ave at least KK periods o& ?or0 remaining at t.e
completion o& t.e preceding activity.
/tart)to)finish leads
,.e successor activity must .ave at least ;K periods o& ?or0 remaining at t.e start
o& t.e preceding activity.
A.ile t.e eig.t precedence relations.ips in ,able 1+<' are all possible t.e most common
precedence relations.ip is t.e straig.t&or?ard direct precedence bet?een t.e &inis. o& a
preceding activity and t.e start o& t.e successor activity ?it. no re!uired gap Mso K; ] +N.
TA<"& 15)3 Eig.t *ossible 2ctivity *recedence 3elations.ips
3elations.ip EIplanation
(inish)to)start "ead
Latest Kinis. o& *redecessor Earliest ;tart o& ;uccessor _ K;
(inish)to)start "ag
Latest Kinis. o& *redecessor Earliest ;tart o& ;uccessor _ K;
/tart)to)start "ead
Earliest ;tart o& *redecessor Earliest ;tart o& ;uccessor _ ;;
/tart)to)start "ag
Earliest ;tart o& *redecessor Earliest ;tart o& ;uccessor _ ;;
(inish)to)finish "ead
Latest Kinis. o& *redecessor Earliest Kinis. o& ;uccessor _ KK
(inish)to)finish "ag
Latest Kinis. o& *redecessor Earliest Kinis. o& ;uccessor _ KK
/tart)to)finish "ead
Earliest ;tart o& *redecessor Earliest Kinis. o& ;uccessor _ ;K
/tart)to)finish "ag
Earliest ;tart o& *redecessor Earliest Kinis. o& ;uccessor _ ;K
,.e computations ?it. t.ese lead and lag constraints are some?.at more complicated
variations on t.e basic calculations de&ined in ,able 1+<1 &or critical pat. sc.eduling. Kor
eIample a start<to<start lead ?ould modi&y t.e calculation o& t.e earliest start time to
consider ?.et.er or not t.e necessary lead constraint ?as metD
1+.12
?.ere ;;
iB
represents a start<to<start lead bet?een activity MiBN and any o& t.e activities
starting at event B.
,.e possibility o& interrupting or splitting activities into t?o ?or0 segments can be
particularly important to insure &easible sc.edules in t.e case o& numerous lead or lag
constraints. Ait. activity splitting an activity is divided into t?o sub<activities ?it. a
possible gap or idle time bet?een ?or0s on t.e t?o subactivities. ,.e computations &or
sc.eduling treat eac. sub<activity separately a&ter a split is made. ;plitting is per&ormed
to re&lect available sc.eduling &leIibility or to allo? t.e development o& a &easible
sc.edule. Kor eIample splitting may permit sc.eduling t.e early &inis. o& a successor
activity at a date later t.an t.e earliest start o& t.e successor plus its duration. $n e&&ect
t.e successor activity is split into t?o segments ?it. t.e later segment sc.eduled to &inis.
a&ter a particular time. 4ost commonly t.is occurs ?.en a constraint involving t.e &inis.
time o& t?o activities determines t.e re!uired &inis. time o& t.e successor. A.en t.is
situation occurs it is advantageous to split t.e successor activity into t?o so t.e &irst part
o& t.e successor activity can start earlier but still &inis. in accordance ?it. t.e applicable
&inis.<to<&inis. constraint.
Kinally t.e de&inition o& activity windows can be eItremely use&ul. 2n activity ?indo?
de&ines a permissible period in ?.ic. a particularly activity may be sc.eduled. ,o impose
a ?indo? constraint a planner could speci&y an earliest possible start time &or an activity
MAE;N or a latest possible completion time MALKN. Latest possible starts MAL;N and
earliest possible &inis.es MAEKN mig.t also be imposed. $n t.e eItreme a re!uired start
time mig.t be insured by setting t.e earliest and latest ?indo? start times e!ual MAE; ]
AL;N. ,.ese ?indo? constraints ?ould be in addition to t.e time constraints imposed by
precedence relations.ips among t.e various proBect activities. Aindo? constraints are
particularly use&ul in en&orcing milestone completion re!uirements on proBect activities.
Kor eIample a milestone activity may be de&ined ?it. no duration but a latest possible
completion time. 2ny activities preceding t.is milestone activity cannot be sc.eduled &or
completion a&ter t.e milestone date. Aindo? constraints are actually a special case o& t.e
ot.er precedence constraints summarized aboveD ?indo?s are constraints in ?.ic. t.e
precedecessor activity is t.e proBect start. ,.us an earliest possible start time ?indo?
MAE;N is a start<to<start lead.
One related issue is t.e selection o& an appropriate net?or0 representation. 6enerally t.e
activity<on<branc. representation ?ill lead to a more compact diagram and is also
consistent ?it. ot.er engineering net?or0 representations o& structures or circuits. R3S Kor
eIample t.e nine activities s.o?n in Kigure 1+<4 result in an activity<on<branc. net?or0
?it. siI nodes and nine branc.es. $n contrast t.e comparable activity<on<node net?or0
s.o?n in Kigure )<# .as eleven nodes M?it. t.e addition o& a node &or proBect start and
completionN and &i&teen branc.es. ,.e activity<on<node diagram is more complicated and
more di&&icult to dra? particularly since branc.es must be dra?n crossing one anot.er.
1espite t.is larger size an important practical reason to select activity<on<node diagrams
is t.at numerous types o& precedence relations.ips are easier to represent in t.ese
diagrams. Kor eIample di&&erent symbols mig.t be used on eac. o& t.e branc.es in
Kigure )<# to represent direct precedences start<to<start precedences start<to<&inis.
precedences etc. 2lternatively t.e beginning and end points o& t.e precedence lin0s can
indicate t.e type o& lead or lag precedence relations.ip. 2not.er advantage o& activity<on<
node representations is t.at t.e introduction o& dummy lin0s as in Kigure 1+<1 is not
re!uired. Eit.er representation can be used &or t.e critical pat. sc.eduling computations
described earlier. $n t.e absence o& lead and lag precedence relations.ips it is more
common to select t.e compact activity<on<branc. diagram alt.oug. a uni&ied model &or
t.is purpose is described in (.apter 11. O& course one reason to pic0 activity<on<branc.
or activity<on<node representations is t.at particular computer sc.eduling programs
available at a site are based on one representation or t.e ot.er. ;ince bot. representations
are in common use proBect managers s.ould be &amiliar ?it. eit.er net?or0
representation.
4any commercially available computer sc.eduling programs include t.e necessary
computational procedures to incorporate ?indo?s and many o& t.e various precedence
relations.ips described above. $ndeed t.e term Jprecedence diagrammingJ and t.e
calculations associated ?it. t.ese lags seem to .ave &irst appeared in t.e userHs manual
&or a computer sc.eduling program. R4S
$& t.e construction plan suggests t.at suc. complicated lags are important t.en t.ese
sc.eduling algorit.ms s.ould be adopted. $n t.e neIt section t.e various computations
associated ?it. critical pat. sc.eduling ?it. several types o& leads lags and ?indo?s are
presented.
15.1 Calculations for /cheduling with "eads, "ags and
7indows
,able 1+<) contains an algorit.mic description o& t.e calculations re!uired &or critical
pat. sc.eduling ?it. leads lags and ?indo?s. ,.is description assumes an activity-on-
node proBect net?or0 representation since t.is representation is muc. easier to use ?it.
complicated precedence relations.ips. ,.e possible precedence relations.ips
accommodated by t.e procedure contained in ,able 1+<) are &inis.<to<start leads start<to<
start leads &inis.<to<&inis. lags and start<to<&inis. lags. Aindo?s &or earliest starts or
latest &inis.es are also accommodated. $ncorporating ot.er precedence and ?indo? types
in a sc.eduling procedure is also possible as described in (.apter 11. Ait. an activity<
on<node representation ?e assume t.at an initiation and a termination activity are
included to mar0 t.e beginning and end o& t.e proBect. ,.e set o& procedures described in
,able 1+<) does not provide &or automatic splitting o& activities.
TA<"& 15)4 (ritical *at. ;c.eduling 2lgorit.ms ?it. Leads Lags and Aindo?s
M2ctivity<on<5ode 3epresentationsN
Actiity Mum>ering Algorithm
#tep 1D 6ive t.e starting activity number +.
#tep CD 6ive t.e neIt number to any unnumbered activity ?.ose predecessor activities
are eac. already numbered.
3epeat ;tep 2 until all activities are numbered.
(orward Pass Computations
#tep D ;et t.e earliest start and t.e earliest &inis. o& t.e initial activity to zeroD
ME;M+N ] EKM+N ] +N.
3epeat t.e &ollo?ing steps &or eac. activity 0 ] +12...mD
#tep 1D (ompute t.e earliest start time ME;M0NN o& activity 0D
E;M0N ] 4aIimum a+O AE;M0N &or t.e earliest start ?indo? time
AEKM0N < 1M0N &or t.e earliest &inis. ?indo? timeO
EKMiN _ K;Mi0N &or eac. preceding activity ?it. a K<; constraintO
E;MiN _ ;;Mi0N &or eac. preceding activity ?it. a ;<; constraintO
EKMiN _ KKMi0N < 1M0N &or eac. preceding activity ?it. a K<K constraintO
E;MiN _ ;KMi0N < 1M0N &or eac. preceding activity ?it. a ;<K constraint.b
#tep 2D (ompute t.e earliest &inis. time EKM0N o& activity 0D
EKM0N ] E;M0N _ 1M0N.
<ac:ward Pass Computations
#tep D ;et t.e latest &inis. and latest start o& t.e terminal activity to t.e early start timeD
LKMmN ] L;MmN ] E;MmN ] EKMmN
3epeat t.e &ollo?ing steps &or eac. activity in reverse order 0 ] m<1m<2...21+D #tep 1D
(ompute t.e latest &inis. time &or activity 0D
LKM0N ] 4ina LKMmN ALKM0N &or t.e latest &inis. ?indo? timeO
AL;M0N _ 1M0N &or t.e latest start ?indo? timeO
L;MBN < K;M0BN &or eac. succeeding activity ?it. a K<; constraintO
LKMBN < KKM0BN &or eac. succeeding activity ?it. a KK constraintO
L;MBN < ;;M0BN _ 1M0N &or eac. succeeding activity ?it. a ;; constraintO
LKMBN < ;KM0BN _ 1M0N &or eac. succeeding activity ?it. a ;K constraint.b
#tep 2D (ompute t.e latest start time &or activity 0D
L;M0N ] LKM0N < 1M0N
,.e &irst step in t.e sc.eduling algorit.m is to sort activities suc. t.at no .ig.er
numbered activity precedes a lo?er numbered activity. Ait. numbered activities
durations can be denoted 1M0N ?.ere 0 is t.e number o& an activity. Ot.er activity
in&ormation can also be re&erenced by t.e activity number. 5ote t.at node events used in
activity-on-)ranch representations are not re!uired in t.is case.
,.e &or?ard pass calculations compute an earliest start time ME;M0NN and an earliest &inis.
time MEKM0NN &or eac. activity in turn M,able 1+<)N. $n computing t.e earliest start time o&
an activity 0 t.e earliest start ?indo? time MAE;N t.e earliest &inis. ?indo? time
MAEKN and eac. o& t.e various precedence relations.ips must be considered. (onstraints
on &inis. times are included by identi&ying minimum &inis. times and t.en subtracting t.e
activity duration. 2 de&ault earliest start time o& day + is also insured &or all activities. 2
second step in t.e procedure is to identi&y eac. activityHs earliest &inis. time MEKM0NN.
,.e bac0?ard pass calculations proceed in a manner very similar to t.ose o& t.e &or?ard
pass M,able 1+<)N. $n t.e bac0?ard pass t.e latest &inis. and t.e latest start times &or eac.
activity are calculated. $n computing t.e latest &inis. time t.e latest start time is
identi&ied ?.ic. is consistent ?it. precedence constraints on an activityHs starting time.
,.is computation re!uires a minimization over applicable ?indo? times and all
successor activities. 2 c.ec0 &or a &easible activity sc.edule can also be imposed at t.is
pointD i& t.e late start time is less t.an t.e early start time ML;M0N [ E;M0NN t.en t.e
activity sc.edule is not possible.
,.e result o& t.e &or?ard and bac0?ard pass calculations are t.e earliest start time t.e
latest start time t.e earliest &inis. time and t.e latest &inis. time &or eac. activity. ,.e
activity &loat is computed as t.e latest start time less t.e earliest start time. 5ote t.at
?indo? constraints may be instrumental in setting t.e amount o& &loat so t.at activities
?it.out any &loat may eit.er lie on t.e critical pat. or be constrained by an allo?able
?indo?.
,o consider t.e possibility o& activity splitting t.e various &ormulas &or t.e &or?ard and
bac0?ard passes in ,able 1+<) must be modi&ied. Kor eIample in considering t.e
possibility o& activity splitting due to start<to<start lead M;;N it is important to ensure t.at
t.e preceding activity .as been under?ay &or at least t.e re!uired lead period. $& t.e
preceding activity ?as split and t.e &irst sub<activity ?as not under?ay &or a su&&iciently
long period t.en t.e &ollo?ing activity cannot start until t.e &irst plus t.e second sub<
activities .ave been under?ay &or a period e!ual to ;;Mi0N. ,.us in setting t.e earliest
start time &or an activity t.e calculation ta0es into account t.e duration o& t.e &irst
subactivity M12MiNN &or preceding activities involving a start<to<start lead. 2lgebraically
t.e term in t.e earliest start time calculation pertaining to start<to<start precedence
constraints ME;MiN _ ;;Mi0NN .as t?o parts ?it. t.e possibility o& activity splittingD
M1+.13N E;MiN _ ;;Mi0N
M1+.14N EKMiN < 1MiN _ ;;Mi0N &or split preceding activities ?it. 12MiN [ ;;Mi0N
?.ere 12MiN is t.e duration o& t.e &irst sub<activity o& t.e preceding activity.
,.e computation o& earliest &inis. time involves similar considerations eIcept t.at t.e
&inis.<to<&inis. and start<to<&inis. lag constraints are involved. $n t.is case maIimization
over t.e &ollo?ing terms is re!uiredD
M1+.1"N
EKM0N ] 4aIimumaE;M0N _ 1M0N
EKMiN _ KKMi0N &or eac. preceding activity ?it. a KK precedence
E;MiN _ ;KMi0N &or eac. preceding activity ?it. a ;K precedence
and ?.ic. is not split
EKMiN < 1MiN _ ;KMi0N &or eac. preceding activity ?it. a ;K
precedence and ?.ic. is splitb
Kinally t.e necessity to split an activity is also considered. $& t.e earliest possible &inis.
time is greater t.an t.e earliest start time plus t.e activity duration t.en t.e activity must
be split.
2not.er possible eItension o& t.e sc.eduling computations in ,able 1+<) ?ould be to
include a duration modi&ication capability during t.e &or?ard and bac0?ard passes. ,.is
capability ?ould permit alternative ?or0 calendars &or di&&erent activities or &or
modi&ications to re&lect e&&ects o& time o& t.e year on activity durations. Kor eIample t.e
duration o& outside ?or0 during ?inter mont.s ?ould be increased. 2s anot.er eIample
activities ?it. ?ee0end ?or0 permitted mig.t .ave t.eir ?ee0day durations s.ortened to
re&lect ?ee0end ?or0 accomplis.ments.
&9ample 15)-* $mpacts of precedence relationships and windows
,o illustrate t.e impacts o& di&&erent precedence relations.ips consider a proBect
consisting o& only t?o activities in addition to t.e start and &inis.. ,.e start is numbered
activity + t.e &irst activity is number 1 t.e second activity is number 2 and t.e &inis. is
activity 3. Eac. activity is assumed to .ave duration o& &ive days. Ait. a direct &inis.<to<
start precedence relations.ip ?it.out a lag t.e critical pat. calculations revealD
E;M+N ] +
E;M1N ] +
EKM1N ] E;M1N _ 1M1N ] + _ " ] "
E;M2N ] EKM1N _ K;M12N ] " _ + ] "
EKM2N ] E;M2N _ 1M2N ] " _ " ] 1+
E;M3N ] EKM2N _ K;M23N ] 1+ _ + ] 1+ ] EKM3N
;o t.e earliest proBect completion time is ten days.
Ait. a start<to<start precedence constraint ?it. a t?o day lead t.e sc.eduling
calculations areD
E;M+N ] +
E;M1N ] +
EKM1N ] E;M1N _ 1M1N ] + _ " ] "
E;M2N ] E;M1N _ ;;M12N ] + _ 2 ] 2
EKM2N ] E;M2N _ 1M2N ] 2 _ " ] %
E;M3N ] EKM2N _ K;M23N ] % _ + ] %.
$n t.is case activity 2 can begin t?o days a&ter t.e start o& activity 1 and proceed in
parallel ?it. activity 1. ,.e result is t.at t.e proBect completion date drops &rom ten days
to seven days.
Kinally suppose t.at a &inis.<to<&inis. precedence relations.ip eIists bet?een activity 1
and activity 2 ?it. a t?o day lag. ,.e sc.eduling calculations areD
E;M+N ] + ] EKM+N
E;M1N ] EKM+N _ K;M+1N ] + _ + ] +
EKM1N ] E;M1N _ 1M1N ] + _ " ] "
E;M2N ] EKM1N _ KKM12N < 1M2N ] " _ 2 < " ] 2
EKM2N ] E;M2N _ 1M2N ] 2 _ " ] %
E;M3N ] EKM2N _ K;M23N ] % _ + ] % ] EKM3N
$n t.is case t.e earliest &inis. &or activity 2 is on day seven to allo? t.e necessary t?o
day lag &rom t.e completion o& activity 1. ,.e minimum proBect completion time is again
seven days.
&9ample 15).* /cheduling in the presence of leads and windows.
2s a second eIample o& t.e sc.eduling computations involved in t.e presence o& leads
lags and ?indo?s ?e s.all per&orm t.e calculations re!uired &or t.e proBect s.o?n in
Kigure 1+<1". ;tart and end activities are included in t.e proBect diagram ma0ing a total
o& eleven activities. ,.e various ?indo?s and durations &or t.e activities are summarized
in ,able 1+<1+ and t.e precedence relations.ips appear in ,able 1+<11. Only earliest start
MAE;N and latest &inis. MALKN ?indo? constraints are included in t.is eIample problem.
2ll &our types o& precedence relations.ips are included in t.is proBect. 5ote t.at t?o
activities may .ave more t.an one type o& precedence relations.ip at t.e same timeO in
t.is case activities 2 and " .ave bot. ;<; and K<K precedences. $n Kigure 1+<1" t.e
di&&erent precedence relations.ips are s.o?n by lin0s connecting t.e activity nodes. ,.e
type o& precedence relations.ip is indicated by t.e beginning or end point o& eac. arro?.
Kor eIample start<to<start precedences go &rom t.e le&t portion o& t.e preceding activity
to t.e le&t portion o& t.e &ollo?ing activity. 2pplication o& t.e activity sorting algorit.m
M,able 1+<)N reveals t.at t.e eIisting activity numbers are appropriate &or t.e critical pat.
algorit.m. ,.ese activity numbers ?ill be used in t.e &or?ard and bac0?ard pass
calculations.
(igure 15)1. EIample *roBect 5et?or0 ?it. Lead *recedences
TA<"& 15)15 *redecessors ;uccessors Aindo?s and 1urations &or an EIample *roBect
2ctivity
5umber *redecessors ;uccessors
Earliest ;tart
Aindo?
Latest Kinis.
Aindo?
2ctivity
1uration
5
1
!
+
-
.
0
1
3
4
15
)))
5
5
1
5
!, !
1, +
-, .
-, .
0, 1
3, 4
1, !, -
+, -, 0
.
0
1, 3
1, 3
4
4
15
15
)))
)))
)))
)))
!
)))
)))
0
)))
)))
)))
)))
)))
)))
)))
)))
)))
10
10
)))
)))
10
)))
5
!
.
-
+
.
0
!
-
.
5
TA<"& 15)11 *recedences in a Eleven 2ctivity *roBect EIample
*redecessor ;uccessor ,ype Lead
5 1 (/ 5
5
5
1
1
1
!
!
+
-
-
.
.
0
1
3
4
!
-
+
-
0
.
.
0
1
3
1
3
4
4
15
15
(/
(/
//
/(
(/
//
((
(/
//
(/
(/
//
((
(/
(/
(/
5
5
1
1
!
!
!
5
!
5
1
+
-
5
5
5
1uring t.e &or?ard pass calculations M,able 1+<)N t.e earliest start and earliest &inis.
times are computed &or eac. activity. ,.e relevant calculations areD
E;M+N ] EKM+N ] +
E;M1N ] 4aIa+O EKM+N _ K;M+1Nb ] 4aI a+O + _ +b ] +.
EKM1N ] E;M1N _ 1M1N ] + _ 2 ] 2
E;M2N ] 4aIa+O EKM+N _ K;M+1Nb ] 4aIa+O + _ +b ] +.
EKM2N ] E;M2N _ 1M2N ] + _ " ] "
E;M3N ] 4aIa+O AE;M3NO E;M1N _ ;;M13Nb ] 4aIa+O 2O + _ 1b ] 2.
EKM3N ] E;M3N _ 1M3N ] 2 _ 4 ] #
5ote t.at in t.e calculation o& t.e earliest start &or activity 3 t.e start ?as delayed to be
consistent ?it. t.e earliest start time ?indo?.
E;M4N ] 4aIa+O E;M+N _ K;M+1NO E;M1N _ ;KM14N < 1M4Nb ] 4aIa+O + _ +O +_1<3b ] +.
EKM4N ] E;M4N _ 1M4N ] + _ 3 ] 3
E;M"N ] 4aIa+O E;M2N _ ;;M2"NO EKM2N _ KKM2"N < 1M"Nb ] 4aIa+O +_2O "_2<"b ] 2
EKM"N ] E;M"N _ 1M"N ] 2 _ " ] %
E;M#N ] 4aIa+O AE;M#NO EKM1N _ K;M1#NO EKM3N _ K;M3#Nb ] 4aIa+O #O 2_2O #_+b ] #
EKM#N ] E;M#N _ 1M#N ] # _ # ] 12
E;M%N ] 4aIa+O E;M4N _ ;;M4%NO EKM"N _ K;M"%Nb ] 4aIa+O +_2O %_1b ] '
EKM%N ] E;M%N _ 1M%N ] ' _ 2 ] 1+
E;M'N ] 4aIa+O EKM4N _ K;M4'NO E;M"N _ ;;M"'Nb ] 4aIa+O 3_+O 2_3b ] "
EKM'N ] E;M'N _ 1M'N ] " _ 4 ] )
E;M)N ] 4aIa+O EKM%N _ K;M%)NO EKM#N _ KKM#)N < 1M)Nb ] 4aIa+O 1+_+O 12_4<"b ] 11
EKM)N ] E;M)N _ 1M)N ] 11 _ " ] 1#
E;M1+N ] 4aIa+O EKM'N _ K;M'1+NO EKM)N _ K;M)1+Nb ] 4aIa+O )_+O 1#_+b ] 1#
EKM1+N ] E;M1+N _ 1M1+N ] 1#
2s t.e result o& t.ese computations t.e earliest proBect completion time is &ound to be 1#
days.
,.e bac0?ard pass computations result in t.e latest &inis. and latest start times &or eac.
activity. ,.ese calculations areD
LKM1+N ] L;M1+N ] E;M1+N ] EKM1+N ] 1#
LKM)N ] 4inaALKM)NO LKM1+NOL;M1+N < K;M)1+Nb ] 4ina1#O1#O 1#<+b ] 1#
L;M)N ] LKM)N < 1M)N ] 1# < " ] 11
LKM'N ] 4inaLKM1+NO L;M1+N < K;M'1+Nb ] 4ina1#O 1#<+b ] 1#
L;M'N ] LKM'N < 1M'N ] 1# < 4 ] 12
LKM%N ] 4inaLKM1+NO L;M)N < K;M%)Nb ] 4ina1#O 11<+b ] 11
L;M%N ] LKM%N < 1M%N ] 11 < 2 ] )
LKM#N ] 4inaLKM1+NO ALKM#NO LKM)N < KKM#)Nb ] 4ina1#O 1#O 1#<4b ] 12
L;M#N ] LKM#N < 1M#N ] 12 < # ] #
LKM"N ] 4inaLKM1+NO ALKM1+NO L;M%N < K;M"%NO L;M'N < ;;M"'N _ 1M'Nb ] 4ina1#O 1#O
)<1O 12<3_4b ] '
L;M"N ] LKM"N < 1M"N ] ' < " ] 3
LKM4N ] 4inaLKM1+NO L;M'N < K;M4'NO L;M%N < ;;M4%N _ 1M%Nb ] 4ina1#O 12<+O )<2_2b
] )
L;M4N ] LKM4N < 1M4N ] ) < 3 ] #
LKM3N ] 4inaLKM1+NO L;M#N < K;M3#Nb ] 4ina1#O #<+b ] #
L;M3N ] LKM3N < 1M3N ] # < 4 ] 2
LKM2N ] 4inaLKM1+NO LKM"N < KKM2"NO L;M"N < ;;M2"N _ 1M"Nb ] 4ina1#O '<2O 3<2_"b ]
#
L;M2N ] LKM2N < 1M2N ] # < " ] 1
LKM1N ] 4inaLKM1+NO L;M#N < K;M1#NO L;M3N < ;;M13N _ 1M3NO L&M4N < ;KM14N _ 1M4Nb
L;M1N ] LKM1N < 1M1N ] 2 <2 ] +
LKM+N ] 4inaLKM1+NO L;M1N < K;M+1NO L;M2N < K;M+2NO L;M4N < K;M+4Nb ] 4ina1#O +<+O
1<+O #<+b ] +
L;M+N ] LKM+N < 1M+N ] +
,.e earliest and latest start times &or eac. o& t.e activities are summarized in ,able 1+<
12. 2ctivities ?it.out &loat are + 1 # ) and 1+. ,.ese activities also constitute t.e
critical pat. in t.e proBect. 5ote t.at activities # and ) are related by a &inis.<to<&inis.
precedence ?it. a 4 day lag. 1ecreasing t.is lag ?ould result in a reduction in t.e overall
proBect duration.
TA<"& 15)1! ;ummary o& 2ctivity ;tart and Kinis. ,imes &or an EIample *roblem
2ctivity Earliest ;tart Latest ;tart Kloat
5 5 5 5
1
!
+
-
.
0
1
3
4
15
5
5
5
5
!
0
3
.
11
10
5
1
!
0
+
0
4
1!
11
10
5
1
!
0
1
5
1
1
5
5
15.3 2esource Oriented /cheduling
3esource constrained sc.eduling s.ould be applied ?.enever t.ere are limited resources
available &or a proBect and t.e competition &or t.ese resources among t.e proBect
activities is 0een. $n e&&ect delays are liable to occur in suc. cases as activities must ?ait
until common resources become available. ,o t.e eItent t.at resources are limited and
demand &or t.e resource is .ig. t.is ?aiting may be considerable. $n turn t.e congestion
associated ?it. t.ese ?aits represents increased costs poor productivity and in t.e end
proBect delays. ;c.edules made ?it.out consideration &or suc. bottlenec0s can be
completely unrealistic.
3esource constrained sc.eduling is o& particular importance in managing multiple
proBects ?it. &iIed resources o& sta&& or e!uipment. Kor eIample a design o&&ice .as an
identi&iable sta&& ?.ic. must be assigned to particular proBects and design activities.
A.en t.e ?or0load is .eavy t.e designers may &all be.ind on completing t.eir
assignments. 6overnment agencies are particularly prone to t.e problems o& &iIed
sta&&ing levels alt.oug. some &leIibility in accomplis.ing tas0s is possible t.roug. t.e
mec.anism o& contracting ?or0 to outside &irms. (onstruction activities are less
susceptible to t.is type o& problem since it is easier and less costly to .ire additional
personnel &or t.e MrelativelyN s.ort duration o& a construction proBect. Overtime or double
s.i&t ?or0 also provide some &leIibility.
3esource oriented sc.eduling also is appropriate in cases in ?.ic. uni!ue resources are
to be used. Kor eIample sc.eduling eIcavation operations ?.en one only eIcavator is
available is simply a process o& assigning ?or0 tas0s or Bob segments on a day by day
basis ?.ile insuring t.at appropriate precedence relations.ips are maintained. Even ?it.
more t.an one resource t.is manual assignment process may be !uite ade!uate.
/o?ever a planner s.ould be care&ul to insure t.at necessary precedences are
maintained.
3esource constrained sc.eduling represents a considerable c.allenge and source o&
&rustration to researc.ers in mat.ematics and operations researc.. A.ile algorit.ms &or
optimal solution o& t.e resource constrained problem eIist t.ey are generally too
computationally eIpensive to be practical &or all but small net?or0s Mo& less t.an about
1++ nodesN. R"S ,.e di&&iculty o& t.e resource constrained proBect sc.eduling problem
arises &rom t.e combinatorial eIplosion o& di&&erent resource assignments ?.ic. can be
made and t.e &act t.at t.e decision variables are integer values representing all<or<
not.ing assignments o& a particular resource to a particular activity. $n contrast simple
critical pat. sc.eduling deals ?it. continuous time variables. (onstruction proBects
typically involve many activities so optimal solution tec.ni!ues &or resource allocation
are not practical.
One possible simpli&ication o& t.e resource oriented sc.eduling problem is to ignore
precedence relations.ips. $n some applications it may be impossible or unnecessary to
consider precedence constraints among activities. $n t.ese cases t.e &ocus o& sc.eduling
is usually on e&&icient utilization o& proBect resources. ,o insure minimum cost and delay
a proBect manager attempts to minimize t.e amount o& time t.at resources are unused and
to minimize t.e ?aiting time &or scarce resources. ,.is resource oriented sc.eduling is
o&ten &ormalized as a problem o& JBob s.opJ sc.eduling in ?.ic. numerous tas0s are to
be sc.eduled &or completion and a variety o& discrete resources need to per&orm
operations to complete t.e tas0s. 3e&lecting t.e original orientation to?ards
manu&acturing applications tas0s are usually re&erred to as JBobsJ and resources to be
sc.eduled are designated Jmac.ines.J $n t.e provision o& constructed &acilities an
analogy ?ould be an arc.itecturalUengineering design o&&ice in ?.ic. numerous designs
related tas0s are to be accomplis.ed by individual pro&essionals in di&&erent departments.
,.e sc.eduling problem is to insure e&&icient use o& t.e individual pro&essionals Mi.e. t.e
resourcesN and to complete speci&ic tas0s in a timely manner.
,.e simplest &orm o& resource oriented sc.eduling is a reservation system &or particular
resources. $n t.is case competing activities or users o& a resource pre<arrange use o& t.e
resource &or a particular time period. ;ince t.e resource assignment is 0no?n in advance
ot.er users o& t.e resource can sc.edule t.eir activities more e&&ectively. ,.e result is less
?aiting or J!ueuingJ &or a resource. $t is also possible to inaugurate a pre&erence system
?it.in t.e reservation process so t.at .ig.<priority activities can be accommodated
directly.
$n t.e more general case o& multiple resources and specialized tas0s practical resource
constrained sc.eduling procedures rely on .euristic procedures to develop good but not
necessarily optimal sc.edules. A.ile t.is is t.e occasion &or considerable anguis. among
researc.ers t.e .euristic met.ods ?ill typically give &airly good results. 2n eIample
.euristic met.od is provided in t.e neIt section. 4anual met.ods in ?.ic. a .uman
sc.eduler revises a critical pat. sc.edule in lig.t o& resource constraints can also ?or0
relatively ?ell. 6iven t.at muc. o& t.e data and t.e net?or0 representation used in
&orming a proBect sc.edule are uncertain t.e results o& applying .euristic procedures may
be !uite ade!uate in practice.
&9ample 15)0* A 2eseration /ystem R#S
2 recent construction proBect &or a .ig.<rise building compleI in 5e? 9or0 (ity ?as
severely limited in t.e space available &or staging materials &or .auling up t.e building.
On t.e &our building site t.irty<eig.t separate cranes and elevators ?ere available but
t.e number o& movements o& men materials and e!uipment ?as eIpected to 0eep t.e
e!uipment very busy. Ait. numerous sub<contractors desiring t.e use o& t.is e!uipment
t.e potential &or delays and ?aiting in t.e limited staging area ?as considerable. :y
implementing a crane reservation system t.ese problems ?ere nearly entirely avoided.
,.e reservation system re!uired contractors to telep.one one or more days in advance to
reserve time on a particular crane. ,ime ?as available on a &irst<come &irst<served basis
Mi.e. &irst call &irst c.oice o& available slotsN. *enalties ?ere imposed &or ma0ing an
unused reservation. ,.e reservation system ?as also computerized to permit rapid
modi&ication and updating o& in&ormation as ?ell as t.e provision o& standard reservation
sc.edules to be distributed to all participants.
&9ample 15)1* Aeuristic 2esource Allocation
;uppose t.at a proBect manager .as eleven pipe sections &or ?.ic. necessary support
structures and materials are available in a particular ?ee0. ,o ?or0 on t.ese eleven pipe
sections &ive cre?s are available. ,.e allocation problem is to assign t.e cre?s to t.e
eleven pipe sections. ,.is allocation ?ould consist o& a list o& pipe sections allocated to
eac. cre? &or ?or0 plus a recommendation on t.e appropriate se!uence to underta0e t.e
?or0. ,.e proBect manager mig.t ma0e assignments to minimize completion time to
insure continuous ?or0 on t.e pipeline Mso t.at one section on a pipeline run is not le&t
incompleteN to reduce travel time bet?een pipe sections to avoid congestion among t.e
di&&erent cre?s and to balance t.e ?or0load among t.e cre?s. 5umerous trial solutions
could be rapidly generated especially ?it. t.e aid o& an electronic spreads.eet. Kor
eIample i& t.e nine sections .ad estimated ?or0 durations &or eac. o& t.e &ire cre?s as
s.o?n in ,able 1+<13 t.en t.e allocations s.o?n in Kigure 1+<1# ?ould result in a
minimum completion time.
TA<"& 15)1+ Estimated 3e!uired ,ime &or Eac. Aor0 ,as0 in a 3esource 2llocation *roblem
/ection 7or: ;uration
A
<
C
;
&
(
C
A
$
F
N
4
4
3
3
1
1
0
0
0
.
.
(igure 15)10 EIample 2llocation o& (re?s to Aor0 ,as0s
&9ample 15)3* Algorithms for 2esource Allocation with <ottlenec: 2esources
$n t.e previous eIample suppose t.at a mat.ematical model and solution ?as desired.
Kor t.is purpose ?e de&ine a binary Mi.e. + or 1 valuedN decision variable &or eac. pipe
section and cre? I
iB
?.ere I
iB
] 1 implies t.at section i ?as assigned to cre? B and I
iB
] +
implied t.at section i ?as not assigned to cre? B. ,.e time re!uired to complete eac.
section is t
i
. ,.e overall time to complete t.e nine sections is denoted z. $n t.is case t.e
problem o& minimizing overall completion time isD
subBect to t.e constraintsD

&or eac. section i
:
ij
is + or 1
?.ere t.e constraints simply insure t.at eac. section is assigned to one and only one
cre?. 2 modi&ication permits a more conventional mat.ematical &ormulation resulting in
a generalized bottlenec0 assignment problemD
4inimize z
subBect to t.e constraintsD &or eac. cre? B
&or eac. section i
:
ij
is + or 1
,.is problem can be solved as an integer programming problem alt.oug. at considerable
computational eIpense. 2 common eItension to t.is problem ?ould occur ?it.
di&&erential productivities &or eac. cre? so t.at t.e time to complete an activity t
iB

?ould be de&ined &or eac. cre?. 2not.er modi&ication to t.is problem ?ould substitute a
cost &actor c
B
&or t.e time &actor t
B
and attempt to minimize overall costs rat.er t.an
completion time.
15.4 /cheduling with 2esource Constraints and
Precedences
,.e previous section outlined resource oriented approac.es to t.e sc.eduling problem. $n
t.is section ?e s.all revie? some general approac.es to integrating bot. concerns in
sc.eduling.
,?o problems arise in developing a resource constrained proBect sc.edule. Kirst it is not
necessarily t.e case t.at a critical pat. sc.edule is &easible. :ecause one or more
resources mig.t be needed by numerous activities it can easily be t.e case t.at t.e
s.ortest proBect duration identi&ied by t.e critical pat. sc.eduling calculation is
impossible. ,.e di&&iculty arises because critical pat. sc.eduling assumes t.at no
resource availability problems or bottlenec0s ?ill arise. Kinding a &easible or possible
sc.edule is t.e &irst problem in resource constrained sc.eduling. O& course t.ere may be
a numerous possible sc.edules ?.ic. con&orm to time and resource constraints. 2s a
second problem it is also desirable to determine sc.edules ?.ic. .ave lo? costs or
ideally t.e lo?est cost.
5umerous .euristic met.ods .ave been suggested &or resource constrained sc.eduling.
4any begin &rom critical pat. sc.edules ?.ic. are modi&ied in lig.t o& t.e resource
constraints. Ot.ers begin in t.e opposite &as.ion by introducing resource constraints and
t.en imposing precedence constraints on t.e activities. ;till ot.ers begin ?it. a ran0ing
or classi&ication o& activities into priority groups &or special attention in sc.eduling. R%S
One type o& .euristic may be better t.an anot.er &or di&&erent types o& problems.
(ertainly proBects in ?.ic. only an occasional resource constraint eIists mig.t be best
sc.eduled starting &rom a critical pat. sc.edule. 2t t.e ot.er eItreme proBects ?it.
numerous important resource constraints mig.t be best sc.eduled by considering critical
resources &irst. 2 miIed approac. ?ould be to proceed simultaneously considering
precedence and resource constraints.
2 simple modi&ication to critical pat. sc.eduling .as been s.o?n to be e&&ective &or a
number o& sc.eduling problems and is simple to implement. Kor t.is .euristic procedure
critical pat. sc.eduling is applied initially. ,.e result is t.e &amiliar set o& possible early
and late start times &or eac. activity. ;c.eduling eac. activity to begin at its earliest
possible start time may result in more t.an one activity re!uiring a particular resource at
t.e same time. /ence t.e initial sc.edule may not be &easible. ,.e .euristic proceeds by
identi&ying cases in ?.ic. activities compete &or a resource and selecting one activity to
proceed. ,.e start time o& ot.er activities are t.en s.i&ted later in time. 2 simple rule &or
c.oosing ?.ic. activity .as priority is to select t.e activity ?it. t.e earliest (*4 late
start time Mcalculated as L;MiBN ] LMBN<1
iB
N among t.ose activities ?.ic. are bot. &easible
Min t.at all t.eir precedence re!uirements are satis&iedN and competing &or t.e resource.
,.is decision rule is applied &rom t.e start o& t.e proBect until t.e end &or eac. type o&
resource in turn.
,.e order in ?.ic. resources are considered in t.is sc.eduling process may in&luence t.e
ultimate sc.edule. 2 good .euristic to employ in deciding t.e order in ?.ic. resources
are to be considered is to consider more important resources &irst. 4ore important
resources are t.ose t.at .ave .ig. costs or t.at are li0ely to represent an important
bottlenec0 &or proBect completion. Once important resources are sc.eduled ot.er
resource allocations tend to be muc. easier. ,.e resulting sc.eduling procedure is
described in ,able 1+<14.
,.e late start time .euristic described in ,able 1+<14 is only one o& many possible
sc.eduling rules. $t .as t.e advantage o& giving priority to activities ?.ic. must start
sooner to &inis. t.e proBect on time. /o?ever it is myopic in t.at it doesnHt consider
trade<o&&s among resource types nor t.e c.anges in t.e late start time t.at ?ill be
occurring as activities are s.i&ted later in time. 4ore complicated rules can be devised to
incorporate broader 0no?ledge o& t.e proBect sc.edule. ,.ese complicated rules re!uire
greater computational e&&ort and may or may not result in sc.eduling improvements in
t.e end.
TA<"& 15)1- 2 3esource<Oriented ;c.eduling *rocedure
#tep 1D
3an0 all resources &rom t.e most important to t.e least important and number
t.e resources i ] 123...m.
#tep CD
;et t.e sc.eduled start time &or eac. activity to t.e earliest start time.
Kor eac. resource i ] 123...m in turnD
#tep DD
;tart at t.e proBect beginning so set t ] +.
#tep ED
(ompute t.e demand &or resource i at time t by summing up t.e re!uirements
&or resource i &or all activities sc.eduled to be under?ay at time t.
$& demand &or resource i in time t is greater t.an t.e resource availability t.en
select t.e activity ?it. t.e greatest late start time re!uiring resource i at time
t and s.i&t its sc.eduled start time to time t_1.
3epeat ;tep 4 until t.e resource constraint at time t &or resource i is satis&ied.
#tep @D
3epeat step 4 &or eac. proBect period in turn setting t ] t_1.
&9ample 15)4* 2esource constrained scheduling with nine actiities.
2s an eIample o& resource constrained sc.eduling ?e s.all re<eIamine t.e nine activity
proBect discussed in ;ection 1+.3. ,o begin ?it. suppose t.at &our ?or0ers and t?o
pieces o& e!uipment suc. as bac0.oes are available &or t.e proBect. ,.e re!uired
resources &or eac. o& t.e nine proBect activities are summarized in ,able 1+<1". 6rap.s o&
resource re!uirements over t.e 3+ day proBect duration are s.o?n in Kigure 1+<1%.
E!uipment availability in t.is sc.edule is not a problem. /o?ever on t?o occasions
more t.an t.e &our available ?or0ers are sc.eduled &or ?or0. ,.us t.e eIisting proBect
sc.edule is in&easible and s.ould be altered.
TA<"& 15)1. 3esources 3e!uired and ;tarting ,imes &or a 5ine 2ctivity *roBect
2ctivity
Aor0ers
3e!uired
E!uipment
3e!uired
Earliest ;tart
,ime
Latest ;tart
,ime 1uration
A
<
C
;
&
(
C
A
$
!
!
!
!
!
!
!
!
-
5
1
1
1
1
5
1
1
1
5
5
-
-
1!
1!
!1
!1
!-
5
4
-
1.
1+
1!
!!
!.
!-
-
+
3
1
4
1!
!
.
0
(igure 15)11 3esources 3e!uired over ,ime &or 5ine 2ctivity *roBectD ;c.edule $
,.e &irst resource problem occurs on day 21 ?.en activity K is under?ay and activities 6
and / are sc.eduled to start. 2pplying t.e latest start time .euristic to decide ?.ic.
activity s.ould start t.e manager s.ould re<sc.edule activity / since it .as a later value
o& L;MiBN i.e. day 2" versus day 22 as seen in ,able 1+<1". ,?o ?or0ers become
available on day 23 a&ter t.e completion o& activity 6. ;ince activity / is t.e only
activity ?.ic. is &easible at t.at time it is sc.eduled to begin. ,?o ?or0ers also become
available on day 24 at t.e completion o& activity K. 2t t.is point activity $ is available &or
starting. $& possible it ?ould be sc.eduled to begin ?it. only t?o ?or0ers until t.e
completion o& activity / on day 2'. $& all 4 ?or0ers ?ere de&initely re!uired t.en activity
$ ?ould be sc.eduled to begin on day 2'. $n t.is latter case t.e proBect duration ?ould be
34 days representing a 4 day increase due to t.e limited number o& ?or0ers available.
&9ample 15)15* Additional resource constraints.
2s anot.er eIample suppose t.at only one piece o& e!uipment ?as available &or t.e
proBect. 2s seen in Kigure 1+<1% t.e original sc.edule ?ould .ave to be signi&icantly
modi&ied in t.is case. 2pplication o& t.e resource constrained sc.eduling .euristic
proceeds as &ollo?s as applied to t.e original proBect sc.eduleD
1. On day 4 activities 1 and ( are bot. sc.eduled to begin. ;ince activity 1 .as a
larger value o& late start time it s.ould be re<sc.eduled.
2. On day 12 activities 1 and E are available &or starting. 2gain based on a later
value o& late start time M1" versus 13N activity 1 is de&erred.
3. On day 21 activity E is completed. 2t t.is point activity 1 is t.e only &easible
activity and it is sc.eduled &or starting.
4. On day 2' t.e planner can start eit.er activity 6 or activity /. :ased on t.e later
start time .euristic activity 6 is c.osen to start.
". On completion o& activity 6 at day 3+ activity / is sc.eduled to begin.
,.e resulting pro&ile o& resource use is s.o?n in Kigure 1+<1'. 5ote t.at activities K and $
?ere not considered in applying t.e .euristic since t.ese activities did not re!uire t.e
special e!uipment being considered. $n t.e &igure activity $ is sc.eduled a&ter t.e
completion o& activity / due to t.e re!uirement o& 4 ?or0ers &or t.is activity. 2s a result
t.e proBect duration .as increased to 41 days. 1uring muc. o& t.is time all &our ?or0ers
are not assigned to an activity. 2t t.is point a prudent planner ?ould consider ?.et.er or
not it ?ould be cost e&&ective to obtain an additional piece o& e!uipment &or t.e proBect.
(igure 15)13 3esources 3e!uired over ,ime &or 5ine 2ctivity *roBectD ;c.edule $$
15.15 2eferences
1. 2u ,. -ntroduction to #ystems Engineering--&eterministic 'odels 2ddison<
Aesley 3eading 42 1)%3 (.apter '.
2. :a0er Q. "n -ntroduction to #e9uencing and #cheduling Po.n Ailey 1)%4.
3. Pac0son 4.P. $omputers in $onstruction !lanning and $ontrol% 2llen W Un?in
1)'#.
4. 4oder P. (. *.illips and E. 1avis !roject 'anagement with $!'% !ER, and
!recedence &iagramming 8an 5ostrand 3ein.old (ompany ,.ird
Edition1)'3.
". Aillis E. 4. #cheduling $onstruction !rojects Po.n Ailey W ;ons 1)'#.
15.11 Pro>lems
1 to 4.
(onstruct an activity<on<branc. net?or0 &rom t.e precedence relations.ips o&
activities in t.e proBect given in t.e table &or t.e problem ,ables 1+<1# to 1+<1).
TA<"& 15)10
2ctivity 2 : ( 1 E K 6 / $ P Q L 4 5 O
*redecessors <<< 2 2 <<< : (1 (1 1 / K EP K 6$ 6$ L5
1uration # % 1 14 " ' ) 3 " 3 4 12 # 2 %
TA<"& 15)11
2ctivity 2 : ( 1 E K 6 / $ P Q L 4 5
*redecessors <<< 2 : ( 16 2 KP <<< / $ KP / L Q4
1uration " # 3 4 " ' 3 3 2 % 2 % 4 3
TA<"& 15)13
2ctivity 2 : ( 1 E K 6 / $ P Q L
*redecessors <<< <<< <<< 2 : ( :1 (E K K E6$ /P
1uration # 12 1# " 3 1+ ) 4 " 3 1+ #
TA<"& 15)14
2ctivity 2 : ( 1 E K 6 / $ P Q L 4
*redecessors <<< <<< <<< ( ( :E 2K :E :E :E 1P 6/ $QL
1uration 3 # 2 3 ' " % 1+ # # ' 3 4
" to '.
1etermine t.e critical pat. and all slac0s &or t.e proBects in ,ables 1+<1# to 1+<1).
). ;uppose t.at t.e precedence relations.ips &or *roblem 1 in ,able 1+<1# are all
direct &inis.<to<start relations.ips ?it. no lags eIcept &or t.e &ollo?ingD
o : to ED ;<; ?it. a lag o& 2.
o 1 to /D K<K ?it. a lag o& 3.
o K to LD ;<; ?it. a lag o& 2.
o 6 to 5D ;<; ?it. a lag o& 1.
o 6 to 4D ;<; ?it. a lag o& 2.
Kormulate an activity<on<node net?or0 representation and recompute t.e critical
pat. ?it. t.ese precedence relations.ips.
1+. ;uppose t.at t.e precedence relations.ips &or *roblem 2 in ,able 1+<1% are all
direct &inis.<to<start relations.ips ?it. no lags eIcept &or t.e &ollo?ingD
o ( to 1D ;<; ?it. a lag o& 1
o 1 to ED K<K ?it. a lag o& 3
o 2 to KD ;<; ?it. a lag o& 2
o / to $D K<K ?it. a lag o& 4
o L to 4D ;<; ?it. a lag o& 1
Kormulate an activity<on<node net?or0 representation and recompute t.e critical
pat. ?it. t.ese precedence relations.ips.
11 to 12.
Kor t.e proBects described in ,ables 1+<2+ and 1+<21 respectively suggest a
proBect sc.edule t.at ?ould complete t.e proBect in minimum time and result in
relatively constant or level re!uirements &or labor over t.e course o& t.e proBect.
TA<"& 15)!5
2ctivity 2 : ( 1 E K 6 / $ P Q
*redecessors <<< <<< <<< 2 : : ( ( 1E K6 /
1uration 3 " 1 1 % # 4 3 # 4 3
Aor0ers *er 1ay ) # 4 1+ 1# ) " ' 2 3 %
TA<"& 15)!1
2ctivity 2 : ( 1 E K 6 / $ P Q L 4 5
*redecessors <<< <<< <<< 2 2 2 : : ( K6 /$L K6 1P EQ
1uration " 1 % 2 # 4 3 2 # 4 " 1 4 "
Aor0ers *er 1ay + 3 + ) " 4 2 14 1+ 4 1 2 % 3
13. 1evelop a spreads.eet template t.at lists activity name duration re!uired
resources earliest possible start latest possible start and sc.eduled start in
separate columns &or a maIimum o& t?enty activities. :y means o& &ormulas also
develop t.e re!uired resources &or eac. day o& t.e proBect based on t.e activitiesH
sc.eduled start eIpected durations and re!uired resources. Use t.e spreads.eet
grap.ics &acility to plot t.e re!uired resources over time. Use your template to
solve *roblems 11 and 12 by altering sc.eduled start times. M/intD One ?ay to
prepare suc. a template is to use a column to represent a single day ?it. eac. cell
in t.e column indicating resources re!uired by a particular activity on t.e
particular dayN.
14. 1evelop an eIample o& a proBect net?or0 ?it. t.ree critical pat.s.
1". Kor t.e proBect de&ined in ,able 1+<2+ suppose t.at you are limited to a
maIimum o& 2+ ?or0ers at any given time. 1etermine a desirable sc.edule &or t.e
proBect using t.e late start time .euristic described in ;ection 1+.).
1#. Kor t.e proBect de&ined in ,able 1+<21 suppose t.at you are limited to a
maIimum o& 1" ?or0ers at any given time. 1etermine a desirable sc.edule &or t.e
proBect using t.e late start time .euristic described in ;ection 1+.).
1%. ,.e eIamples and problems presented in t.is c.apter generally ma0e use o&
activity duration and proBect durations as measured in ?or0ing days &rom t.e
beginning o& t.e proBect. Outline t.e procedures by ?.ic. time measured in
?or0ing days ?ould be converted into calendar days ?it. single< or double<s.i&t
?or0. (ould your procedure be modi&ied to allo? some but not all activities to be
under?ay on ?ee0endsX
15.1! (ootnotes
1. ;ee 2u ,. -ntroduction to #ystems Engineering% &eterministic 'odels 2ddison<
Aesley *ublis.ing (ompany 3eading 42 1)%3 &or a detailed description o& linear
programming as a &orm o& mat.ematical optimization.
2. ;ee Q.(. (randall J*roBect *lanning ?it. *recedence LeadULag KactorsJ !roject
'anagement Quarterly 8ol. 4 5o. 3 ;ept. 1)%3 pp. 1'<2% or P.P. 4oder (.3. *.illips
and E.A. 1avis !roject 'anagement with $!'% !ER, and !recedence &iagramming
5e? 9or0D 8an 5ostrand 3ein.old (ompany t.ird edition 1)'3 c.apter 4.
3. ;ee (.,. /endric0son and :.5. Panson J2 (ommon 5et?or0 Kormulation o& ;everal
(ivil Engineering *roblemsJ $ivil Engineering #ystems 8ol. 1 5o. 4 1)'4 pp. 1)"<
2+3.
4. ;ee $:4 !roject 'anagement #ystem% "pplication &escription 'anual M/2+<+21+N
$:4 1)#'.
". 2 variety o& mat.ematical programming tec.ni!ues .ave been proposed &or t.is
problem. Kor a revie? and comparison see P./. *atterson J2 (omparison o& EIact
2pproac.es &or ;olving t.e 4ultiple (onstrained 3esource *roBect ;c.eduling *roblemJ
'anagement #cience 8ol. 3+ 5o. % 1)'4 pp. '"4<'#%.
#. ,.is eIample is adapted &rom /. ;mallo?itz J(onstruction by (omputerJ $ivil
Engineering Pune 1)'# pp. %1<%3.
%. Kor discussions and comparisons o& alternative .euristic algorit.ms see E.4. 1avies
J2n eIperimental investigation o& resource allocation in multiactivity proBectsJ
*perational Research Quarterly 8ol. 24 5o. 11 Puly 1)%# pp. 11'#<11)4O P.1. Aiest
and K.Q. Levy " 'anagement 5uide to !ER,B$!' *rentice</all 5e? Persey 1)%%O or
;.3. La?rence " $omputational $omparison of (euristic #cheduling ,echni9ues%
,ec.nical 3eport 6raduate ;c.ool o& $ndustrial 2dministration (arnegie<4ellon
University 1)'" 2dministration (arnegie<4ellon University 1)'"
11. Adanced /cheduling Techniques
11.1 =se of Adanced /cheduling Techniques
(onstruction proBect sc.eduling is a topic t.at .as received eItensive researc. over a
number o& decades. ,.e previous c.apter described t.e &undamental sc.eduling
tec.ni!ues ?idely used and supported by numerous commercial sc.eduling systems. 2
variety o& special tec.ni!ues .ave also been developed to address speci&ic circumstances
or problems. Ait. t.e availability o& more po?er&ul computers and so&t?are t.e use o&
advanced sc.eduling tec.ni!ues is becoming easier and o& greater relevance to practice.
$n t.is c.apter ?e survey some o& t.e tec.ni!ues t.at can be employed in t.is regard.
,.ese tec.ni!ues address some important practical problems suc. asD
sc.eduling in t.e &ace o& uncertain estimates on activity durations
integrated planning o& sc.eduling and resource allocation
sc.eduling in unstructured or poorly &ormulated circumstances.
2 &inal section in t.e c.apter describes some possible improvements in t.e proBect
sc.eduling process. $n (.apter 14 ?e consider issues o& computer based implementation
o& sc.eduling procedures particularly in t.e conteIt o& integrating sc.eduling ?it. ot.er
proBect management procedures.
11.! /cheduling with =ncertain ;urations
;ection 1+.3 described t.e application o& critical path scheduling &or t.e situation in
?.ic. activity durations are &iIed and 0no?n. Un&ortunately activity durations are
estimates o& t.e actual time re!uired and t.ere is liable to be a signi&icant amount o&
uncertainty associated ?it. t.e actual durations. 1uring t.e preliminary planning stages
&or a proBect t.e uncertainty in activity durations is particularly large since t.e scope and
obstacles to t.e proBect are still unde&ined. 2ctivities t.at are outside o& t.e control o& t.e
o?ner are li0ely to be more uncertain. Kor eIample t.e time re!uired to gain regulatory
approval &or proBects may vary tremendously. Ot.er eIternal events suc. as adverse
?eat.er trenc. collapses or labor stri0es ma0e duration estimates particularly uncertain.
,?o simple approac.es to dealing ?it. t.e uncertainty in activity durations ?arrant some
discussion be&ore introducing more &ormal sc.eduling procedures to deal ?it.
uncertainty. Kirst t.e uncertainty in activity durations may simply be ignored and
sc.eduling done using t.e eIpected or most li0ely time duration &or eac. activity. ;ince
only one duration estimate needs to be made &or eac. activity t.is approac. reduces t.e
re!uired ?or0 in setting up t.e original sc.edule. Kormal met.ods o& introducing
uncertainty into t.e sc.eduling process re!uire more ?or0 and assumptions. A.ile t.is
simple approac. mig.t be de&ended it .as t?o dra?bac0s. Kirst t.e use o& eIpected
activity durations typically results in overly optimistic sc.edules &or completionO a
numerical eIample o& t.is optimism appears belo?. ;econd t.e use o& single activity
durations o&ten produces a rigid in&leIible mindset on t.e part o& sc.edulers. 2s &ield
managers appreciate activity durations vary considerable and can be in&luenced by good
leaders.ip and close attention. 2s a result &ield managers may loose con&idence in t.e
realism o& a sc.edule based upon &iIed activity durations. (learly t.e use o& &iIed
activity durations in setting up a sc.edule ma0es a continual process o& monitoring and
updating t.e sc.edule in lig.t o& actual eIperience imperative. Ot.er?ise t.e proBect
sc.edule is rapidly outdated.
2 second simple approac. to incorporation uncertainty also deserves mention. 4any
managers recognize t.at t.e use o& eIpected durations may result in overly optimistic
sc.edules so t.ey include a contingency allo?ance in t.eir estimate o& activity durations.
Kor eIample an activity ?it. an eIpected duration o& t?o days mig.t be sc.eduled &or a
period o& 2.2 days including a ten percent contingency. ;ystematic application o& t.is
contingency ?ould result in a ten percent increase in t.e eIpected time to complete t.e
proBect. A.ile t.e use o& t.is rule<o&<t.umb or heuristic contingency &actor can result in
more accurate sc.edules it is li0ely t.at &ormal sc.eduling met.ods t.at incorporate
uncertainty more &ormally are use&ul as a means o& obtaining greater accuracy or in
understanding t.e e&&ects o& activity delays.
,.e most common &ormal approac. to incorporate uncertainty in t.e sc.eduling process
is to apply t.e critical pat. sc.eduling process Mas described in ;ection 1+.3N and t.en
analyze t.e results &rom a probabilistic perspective. ,.is process is usually re&erred to as
t.e *E3, sc.eduling or evaluation met.od. R1S 2s noted earlier t.e duration o& t.e
critical pat. represents t.e minimum time re!uired to complete t.e proBect. Using
eIpected activity durations and critical pat. sc.eduling a critical pat. o& activities can be
identi&ied. ,.is critical pat. is t.en used to analyze t.e duration o& t.e proBect
incorporating t.e uncertainty o& t.e activity durations along t.e critical pat.. ,.e
eIpected proBect duration is e!ual to t.e sum o& t.e eIpected durations o& t.e activities
along t.e critical pat.. 2ssuming t.at activity durations are independent random
variables t.e variance or variation in t.e duration o& t.is critical pat. is calculated as t.e
sum o& t.e variances along t.e critical pat.. Ait. t.e mean and variance o& t.e identi&ied
critical pat. 0no?n t.e distribution o& activity durations can also be computed.
,.e mean and variance &or eac. activity duration are typically computed &rom estimates
o& JoptimisticJ Ma
iB
N Jmost li0elyJ Mm
iB
N and JpessimisticJ Mb
iB
N activity durations using
t.e &ormulasD
11.1
2ndD
11.2
?.ere and are t.e mean duration and its variance respectively o& an
activity MiBN. ,.ree activity durations estimates Mi.e. optimistic most li0ely and
pessimistic durationsN are re!uired in t.e calculation. ,.e use o& t.ese optimistic most
li0ely and pessimistic estimates stems &rom t.e &act t.at t.ese are t.oug.t to be easier &or
managers to estimate subBectively. ,.e &ormulas &or calculating t.e mean and variance
are derived by assuming t.at t.e activity durations &ollo? a probabilistic beta distribution
under a restrictive condition. R2S ,.e probability density &unction o& beta distributions &or
a random variable I is given byD
11.3 O O
?.ere 0 is a constant ?.ic. can be eIpressed in terms o& and . ;everal beta
distributions &or di&&erent sets o& values o& and are s.o?n in Kigure 11<1. Kor a beta
distribution in t.e interval .aving a modal value m t.e mean is given byD
11.4
$& _ ] 4 t.en E!. M11.4N ?ill result in E!. M11.1N. ,.us t.e use o& E!s. M11.1N and
M11.2N impose an additional condition on t.e beta distribution. $n particular t.e restriction
t.at ] Mb < aNU# is imposed.
(igure 11)1 $llustration o& ;everal :eta 1istributions
;ince absolute limits on t.e optimistic and pessimistic activity durations are eItremely
di&&icult to estimate &rom .istorical data a common practice is to use t.e ninety<&i&t.
percentile o& activity durations &or t.ese points. ,.us t.e optimistic time ?ould be suc.
t.at t.ere is only a one in t?enty M&ive percentN c.ance t.at t.e actual duration ?ould be
less t.an t.e estimated optimistic time. ;imilarly t.e pessimistic time is c.osen so t.at
t.ere is only a &ive percent c.ance o& eIceeding t.is duration. ,.us t.ere is a ninety
percent c.ance o& .aving t.e actual duration o& an activity &all bet?een t.e optimistic and
pessimistic duration time estimates. Ait. t.e use o& ninety<&i&t. percentile values &or t.e
optimistic and pessimistic activity duration t.e calculation o& t.e eIpected duration
according to E!. M11.1N is unc.anged but t.e &ormula &or calculating t.e activity variance
becomesD
11."
,.e di&&erence bet?een E!s. M11.2N and M11."N comes only in t.e value o& t.e divisor
?it. 3# used &or absolute limits and 1+ used &or ninety<&ive percentile limits. ,.is
di&&erence mig.t be eIpected since t.e di&&erence bet?een b
iB
and a
iB
?ould be larger &or
absolute limits t.an &or t.e ninety<&i&t. percentile limits.
A.ile t.e *E3, met.od .as been made ?idely available it su&&ers &rom t.ree maBor
problems. Kirst t.e procedure &ocuses upon a single critical pat. ?.en many pat.s mig.t
become critical due to random &luctuations. Kor eIample suppose t.at t.e critical pat.
?it. longest eIpected time .appened to be completed early. Un&ortunately t.is does not
necessarily mean t.at t.e proBect is completed early since anot.er pat. or se!uence o&
activities mig.t ta0e longer. ;imilarly a longer t.an eIpected duration &or an activity not
on t.e critical pat. mig.t result in t.at activity suddenly becoming critical. 2s a result o&
t.e &ocus on only a single pat. t.e *E3, met.od typically underestimates t.e actual
proBect duration.
2s a second problem ?it. t.e *E3, procedure it is incorrect to assume t.at most
construction activity durations are independent random variables. $n practice durations
are correlated ?it. one anot.er. Kor eIample i& problems are encountered in t.e delivery
o& concrete &or a proBect t.is problem is li0ely to in&luence t.e eIpected duration o&
numerous activities involving concrete pours on a proBect. *ositive correlations o& t.is
type bet?een activity durations imply t.at t.e *E3, met.od underestimates t.e variance
o& t.e critical pat. and t.ereby produces over<optimistic eIpectations o& t.e probability o&
meeting a particular proBect completion deadline.
Kinally t.e *E3, met.od re!uires t.ree duration estimates &or eac. activity rat.er t.an
t.e single estimate developed &or critical pat. sc.eduling. ,.us t.e di&&iculty and labor
o& estimating activity c.aracteristics is multiplied t.ree&old.
2s an alternative to t.e *E3, procedure a straig.t&or?ard met.od o& obtaining
in&ormation about t.e distri)ution o& proBect completion times Mas ?ell as ot.er sc.edule
in&ormationN is t.roug. t.e use o& 4onte (arlo simulation. ,.is tec.ni!ue calculates sets
o& arti&icial Mbut realisticN activity duration times and t.en applies a deterministic
sc.eduling procedure to eac. set o& durations. 5umerous calculations are re!uired in t.is
process since simulated activity durations must be calculated and t.e sc.eduling
procedure applied many times. Kor realistic proBect net?or0s 4+ to 1+++ separate sets o&
activity durations mig.t be used in a single sc.eduling simulation. ,.e calculations
associated ?it. 4onte (arlo simulation are described in t.e &ollo?ing section.
2 number o& di&&erent indicators o& t.e proBect sc.edule can be estimated &rom t.e results
o& a 4onte (arlo simulationD
Estimates o& t.e eIpected time and variance o& t.e proBect completion.
2n estimate o& t.e distribution o& completion times so t.at t.e probability o&
meeting a particular completion date can be estimated.
,.e probability t.at a particular activity ?ill lie on t.e critical pat.. ,.is is o&
interest since t.e longest or critical pat. t.roug. t.e net?or0 may c.ange as
activity durations c.ange.
,.e disadvantage o& 4onte (arlo simulation results &rom t.e additional in&ormation
about activity durations t.at is re!uired and t.e computational e&&ort involved in
numerous sc.eduling applications &or eac. set o& simulated durations. Kor eac. activity
t.e distribution o& possible durations as ?ell as t.e parameters o& t.is distribution must be
speci&ied. Kor eIample durations mig.t be assumed or estimated to be uni&ormly
distributed bet?een a lo?er and upper value. $n addition correlations bet?een activity
durations s.ould be speci&ied. Kor eIample i& t?o activities involve assembling &orms in
di&&erent locations and at di&&erent times &or a proBect t.en t.e time re!uired &or eac.
activity is li0ely to be closely related. $& t.e &orms pose some problems t.en assembling
t.em on bot. occasions mig.t ta0e longer t.an eIpected. ,.is is an eIample o& a positive
correlation in activity times. $n application suc. correlations are commonly ignored
leading to errors in results. 2s a &inal problem and discouragement easy to use so&t?are
systems &or 4onte (arlo simulation o& proBect sc.edules are not generally available. ,.is
is particularly t.e case ?.en correlations bet?een activity durations are desired.
2not.er approac. to t.e simulation o& di&&erent activity durations is to develop speci&ic
scenarios o& events and determine t.e e&&ect on t.e overall proBect sc.edule. ,.is is a type
o& J?.at<i&J problem solving in ?.ic. a manager simulates events t.at mig.t occur and
sees t.e result. Kor eIample t.e e&&ects o& di&&erent ?eat.er patterns on activity durations
could be estimated and t.e resulting sc.edules &or t.e di&&erent ?eat.er patterns
compared. One met.od o& obtaining in&ormation about t.e range o& possible sc.edules is
to apply t.e sc.eduling procedure using all optimistic all most li0ely and t.en all
pessimistic activity durations. ,.e result is t.ree proBect sc.edules representing a range o&
possible outcomes. ,.is process o& J?.at<i&J analysis is similar to t.at underta0en during
t.e process o& construction planning or during analysis o& proBect crashing.
&9ample 11)1* /cheduling actiities with uncertain time durations.
;uppose t.at t.e nine activity eIample proBect s.o?n in ,able 1+<2 and Kigure 1+<4 o&
(.apter 1+ ?as t.oug.t to .ave very uncertain activity time durations. 2s a result proBect
sc.eduling considering t.is uncertainty is desired. 2ll t.ree met.ods M*E3, 4onte
(arlo simulation and JA.at<i&J simulationN ?ill be applied.
,able 11<1 s.o?s t.e estimated optimistic most li0ely and pessimistic durations &or t.e
nine activities. Krom t.ese estimates t.e mean variance and standard deviation are
calculated. $n t.is calculation ninety<&i&t. percentile estimates o& optimistic and
pessimistic duration times are assumed so t.at E!uation M11."N is applied. ,.e critical
pat. &or t.is proBect ignoring uncertainty in activity durations consists o& activities 2 (
K and $ as &ound in ,able 1+<3 M;ection 1+.3N. 2pplying t.e *E3, analysis procedure
suggests t.at t.e duration o& t.e proBect ?ould be approIimately normally distributed.
,.e sum o& t.e means &or t.e critical activities is 4.+ _ '.+ _ 12.+ _ #.+ ] 3+.+ days and
t.e sum o& t.e variances is +.4 _ 1.# _ 1.# _ 1.# ] ".2 leading to a standard deviation o&
2.3 days.
Ait. a normally distributed proBect duration t.e probability o& meeting a proBect deadline
is e!ual to t.e probability t.at t.e standard normal distribution is less t.an or e!ual to
M*1 <
1
Nd
1
?.ere *1 is t.e proBect deadline
1
is t.e eIpected duration and
1
is
t.e standard deviation o& proBect duration. Kor eIample t.e probability o& proBect
completion ?it.in 3" days isD
?.ere z is t.e standard normal distribution tabulated value o& t.e cumulative standard
distribution appears in ,able :.1 o& 2ppendiI :.
4onte (arlo simulation results provide slig.tly di&&erent estimates o& t.e proBect duration
c.aracteristics. 2ssuming t.at activity durations are independent and approIimately
normally distributed random variables ?it. t.e mean and variances s.o?n in ,able 11<1
a simulation can be per&ormed by obtaining simulated duration realization &or eac. o& t.e
nine activities and applying critical pat. sc.eduling to t.e resulting net?or0. 2pplying
t.is procedure "++ times t.e average proBect duration is &ound to be 3+.) days ?it. a
standard deviation o& 2." days. ,.e *E3, result is less t.an t.is estimate by +.) days or
t.ree percent. 2lso t.e critical pat. considered in t.e *E3, procedure Mconsisting o&
activities 2 ( K and $N is &ound to be t.e critical pat. in t.e simulated net?or0s less t.an
.al& t.e time.
TA<"& 11)1 2ctivity 1uration Estimates &or a 5ine 2ctivity *roBect
2ctivity Optimistic 1uration 4ost Li0ely 1uration *essimistic 1uration 4ean 8ariance
2
:
(
1
E
3
2
#
"
#
4
3
'
%
)
"
"
1+
'
14
4.+
3.2
'.+
#.'
).3
+.4
+.)
1.#
+.)
#.4
K
6
/
$
1+
2
4
4
12
2
"
#
14
4
'
'
12.+
2.3
".3
#.+
1.#
+.4
1.#
1.#
$& t.ere are correlations among t.e activity durations t.en signi&icantly di&&erent results
can be obtained. Kor eIample suppose t.at activities ( E 6 and / are all positively
correlated random variables ?it. a correlation o& +." &or eac. pair o& variables. 2pplying
4onte (arlo simulation using "++ activity net?or0 simulations results in an average
proBect duration o& 3#." days and a standard deviation o& 4.) days. ,.is estimated average
duration is #." days or 2+ percent longer t.an t.e *E3, estimate or t.e estimate obtained
ignoring uncertainty in durations. $& correlations li0e t.is eIist t.ese met.ods can
seriously underestimate t.e actual proBect duration.
Kinally t.e proBect durations obtained by assuming all optimistic and all pessimistic
activity durations are 23 and 41 days respectively. Ot.er J?.at<i&J simulations mig.t be
conducted &or cases in ?.ic. peculiar soil c.aracteristics mig.t ma0e eIcavation
di&&icultO t.ese soil peculiarities mig.t be responsible &or t.e correlations o& eIcavation
activity durations described aboveD 3esults &rom t.e di&&erent met.ods are summarized in
,able 11<2. 5ote t.at positive correlations among some activity durations results in
relatively large increases in t.e eIpected proBect duration and variability.
TA<"& 11)! *roBect 1uration 3esults &rom 8arious ,ec.ni!ues and 2ssumptions &or an
EIample
*rocedure and 2ssumptions *roBect 1uration MdaysN
;tandard 1eviation
o& *roBect 1uration MdaysN
(ritical *at. 4et.od
*E3, 4et.od
4onte (arlo ;imulation
5o 1uration (orrelations
*ositive 1uration (orrelations
JA.at<i&J ;imulations
Optimistic
4ost Li0ely
*essimistic
3+.+
3+.+
3+.)
3#."
23.+
3+.+
41.+
52
2.3
2."
4.)
52
52
52
11.+ Calculations for ,onte Carlo /chedule /imulation
$n t.is section ?e outline t.e procedures re!uired to per&orm 4onte (arlo simulation &or
t.e purpose o& sc.edule analysis. ,.ese procedures presume t.at t.e various steps
involved in &orming a net?or0 plan and estimating t.e c.aracteristics o& t.e probability
distributions &or t.e various activities .ave been completed. 6iven a plan and t.e activity
duration distributions t.e .eart o& t.e 4onte (arlo simulation procedure is t.e derivation
o& a reali+ation or synt.etic outcome o& t.e relevant activity durations. Once t.ese
realizations are generated standard sc.eduling tec.ni!ues can be applied. Ae s.all
present t.e &ormulas associated ?it. t.e generation o& normally distributed activity
durations and t.en comment on t.e re!uirements &or ot.er distributions in an eIample.
,o generate normally distributed realizations o& activity durations ?e can use a t?o step
procedure. Kirst ?e generate uni&ormly distributed random variables u
i
in t.e interval
&rom zero to one. 5umerous tec.ni!ues can be used &or t.is purpose. Kor eIample a
general &ormula &or random number generation can be o& t.e &ormD
11.#
?.ere ] 3.141")2#" and u
i<1
?as t.e previously generated random number or a pre<
selected beginning or seed number. Kor eIample a seed o& u
+
] +.21" in E!. M11.#N results
in u
1
] +.+'2+ and by applying t.is value o& u
1
t.e result is u
2
] +.1+2). ,.is &ormula is
a special case o& t.e miIed congruential met.od o& random number generation. A.ile
E!uation M11.#N ?ill result in a series o& numbers t.at .ave t.e appearance and t.e
necessary statistical properties o& true random numbers ?e s.ould note t.at t.ese are
actually JpseudoJ random numbers since t.e se!uence o& numbers ?ill repeat given a
long enoug. time.
Ait. a met.od o& generating uni&ormly distributed random numbers ?e can generate
normally distributed random numbers using t?o uni&ormly distributed realizations ?it.
t.e e!uationsD R3S
11.%
Ait.D andD
?.ere I
0
is t.e normal realization
I
is t.e mean o& I
I
is t.e standard deviation o& I
and u
1
and u
2
are t.e t?o uni&ormly distributed random variable realizations. Kor t.e case
in ?.ic. t.e mean o& an activity is 2." days and t.e standard deviation o& t.e duration is
1." days a corresponding realization o& t.e duration is s ] 2.23#" t ] +.#4#" and I
0
]
2."2" days using t.e t?o uni&orm random numbers generated &rom a seed o& +.21"
above.
(orrelated random number realizations may be generated ma0ing use o& conditional
distributions. Kor eIample suppose t.at t.e duration o& an activity d is normally
distributed and correlated ?it. a second normally distributed random variable I ?.ic.
may be anot.er activity duration or a separate &actor suc. as a ?eat.er e&&ect. 6iven a
realization I
0
o& I t.e conditional distribution o& d is still normal but it is a &unction o&
t.e value I
0
. $n particular t.e conditional mean M H
d
dI ] I
0
N and standard deviation M H
d
d
I ] I
0
N o& a normally distributed variable given a realization o& t.e second variable isD
11.'
?.ere
dI
is t.e correlation coe&&icient bet?een d and I. Once I
0
is 0no?n t.e
conditional mean and standard deviation can be calculated &rom E!. M11.'N and t.en a
realization o& d obtained by applying E!uation M11.%N.
(orrelation coe&&icients indicate t.e eItent to ?.ic. t?o random variables ?ill tend to
vary toget.er. *ositive correlation coe&&icients indicate one random variable ?ill tend to
eIceed its mean ?.en t.e ot.er random variable does t.e same. Krom a set o& n .istorical
observations o& t?o random variables I and y t.e correlation coe&&icient can be
estimated asD
11.)
,.e value o&
Iy
can range &rom one to minus one ?it. values near one indicating a
positive near linear relations.ip bet?een t.e t?o random variables.
$t is also possible to develop &ormulas &or t.e conditional distribution o& a random
variable correlated ?it. numerous ot.er variablesO t.is is termed a multi<variate
distribution. R4S 3andom number generations &rom ot.er types o& distributions are also
possible. R"S Once a set o& random variable distributions is obtained t.en t.e process o&
applying a sc.eduling algorit.m is re!uired as described in previous sections.
&9ample 11)!* A Three)Actiity Pro%ect &9ample
;uppose t.at ?e ?is. to apply a 4onte (arlo simulation procedure to a simple proBect
involving t.ree activities in series. 2s a result t.e critical pat. &or t.e proBect includes all
t.ree activities. Ae assume t.at t.e durations o& t.e activities are normally distributed
?it. t.e &ollo?ing parametersD
2ctivity 4ean M1aysN ;tandard 1eviation M1aysN
2 2." 1."
:
(
".#
2.4
2.4
2.+
,o simulate t.e sc.edule e&&ects ?e generate t.e duration realizations s.o?n in ,able
11<3 and calculate t.e proBect duration &or eac. set o& t.ree activity duration realizations.
Kor t.e t?elve sets o& realizations s.o?n in t.e table t.e mean and standard deviation o&
t.e proBect duration can be estimated to be 1+.4) days and 4.+# days respectively. $n t.is
simple case ?e can also obtain an analytic solution &or t.is duration since it is only t.e
sum o& t.ree independent normally distributed variables. ,.e actual proBect duration .as a
mean o& 1+." days and a standard deviation o&
days. Ait. only a limited number o& simulations t.e mean obtained &rom simulations is
close to t.e actual mean ?.ile t.e estimated standard deviation &rom t.e simulation
di&&ers signi&icantly &rom t.e actual value. ,.is latter di&&erence can be attributed to t.e
nature o& t.e set o& realizations used in t.e simulationsO using a larger number o&
simulated durations ?ould result in a more accurate estimate o& t.e standard deviation.
TA<"& 11)+ 1uration 3ealizations &or a 4onte (arlo ;c.edule ;imulation
;imulation 5umber 2ctivity 2 2ctivity : 2ctivity ( *roBect 1uration
1
2
3
4
"
#
%
'
)
1+
11
12
1."3
2.#%
3.3#
+.3)
2."+
2.%%
3.'3
3.%3
1.+#
1.1%
1.#'
+.3%
#.)4
4.'3
#.'#
%.#"
".'2
'.%1
2.+"
1+."%
3.#'
+.'#
).4%
#.##
1.+4
2.1%
"."#
2.1%
1.%4
4.+3
1.1+
3.24
2.4%
1.3%
+.13
1.%+
)."1
).##
1".%'
1+.22
1+.+#
1"."1
#.)#
1%."3
%.22
3.4+
11.2%
'.%2
Estimated 4ean *roBect 1uration ] 1+.4)
Estimated ;tandard 1eviation o& *roBect 1uration ] 4.+#
5oteD 2ll durations in days.
&9ample 11)+* Ceneration of 2eali6ations from Triangular ;istri>utions
,o simpli&y calculations &or 4onte (arlo simulation o& sc.edules t.e use o& a triangular
distribution is advantageous compared to t.e normal or t.e beta distributions. ,riangular
distributions also .ave t.e advantage relative to t.e normal distribution t.at negative
durations cannot be estimated. 2s illustrated in Kigure 11<2 t.e triangular distribution
can be s0e?ed to t.e rig.t or le&t and .as &inite limits li0e t.e beta distribution. $& a is t.e
lo?er limit b t.e upper limit and m t.e most li0ely value t.en t.e mean and standard
deviation o& a triangular distribution areD
11.1+
11.11
,.e cumulative probability &unction &or t.e triangular distribution isD
11.12
?.ere KMIN is t.e probability t.at t.e random variable is less t.an or e!ual to t.e value o&
I.
(igure 11)! $llustration o& ,?o ,riangular 2ctivity 1uration 1istributions
6enerating a random variable &rom t.is distribution can be accomplis.ed ?it. a single
uni&orm random variable realization using t.e inversion met.od. $n t.is met.od a
realization o& t.e cumulative probability &unction KMIN is generated and t.e
corresponding value o& I is calculated. ;ince t.e cumulative probability &unction varies
&rom zero to one t.e density &unction realization can be obtained &rom t.e uni&orm value
random number generator E!uation M11.#N. ,.e calculation o& t.e corresponding value o&
I is obtained &rom inverting E!uation M11.12ND
11.13
Kor eIample i& a ] 3.2 m ] 4." and b ] #.+ t.en
I
] 4.' and
I
] 2.%. Ait. a
uni&orm realization o& u ] +.21" t.en &or Mm<aNUMb<aN +.21" I ?ill lie bet?een a and m
and is &ound to .ave a value o& 4.1 &rom E!uation M11.13N.
11.- Crashing and TimeKCost Tradeoffs
,.e previous sections discussed t.e duration o& activities as eit.er &iIed or random
numbers ?it. 0no?n c.aracteristics. /o?ever activity durations can o&ten vary
depending upon t.e type and amount o& resources t.at are applied. 2ssigning more
?or0ers to a particular activity ?ill normally result in a s.orter duration. R#S 6reater
speed may result in .ig.er costs and lo?er !uality .o?ever. $n t.is section ?e s.all
consider t.e impacts o& time cost and !uality tradeo&&s in activity durations. $n t.is
process ?e s.all discuss t.e procedure o& project crashing as described belo?.
2 simple representation o& t.e possible relations.ip bet?een t.e duration o& an activity
and its direct costs appears in Kigure 11<3. (onsidering only t.is activity in isolation and
?it.out re&erence to t.e proBect completion deadline a manager ?ould undoubtedly
c.oose a duration ?.ic. implies minimum direct cost represented by 1
iB
and (
iB
in t.e
&igure. Un&ortunately i& eac. activity ?as sc.eduled &or t.e duration t.at resulted in t.e
minimum direct cost in t.is ?ay t.e time to complete t.e entire proBect mig.t be too long
and substantial penalties associated ?it. t.e late proBect start<up mig.t be incurred. ,.is
is a small eIample o& su)-optimi+ation in ?.ic. a small component o& a proBect is
optimized or improved to t.e detriment o& t.e entire proBect per&ormance. 2voiding t.is
problem o& sub<optimization is a &undamental concern o& proBect managers.
(igure 11)+ $llustration o& a Linear ,imeU(ost ,radeo&& &or an 2ctivity
2t t.e ot.er eItreme a manager mig.t c.oose to complete t.e activity in t.e minimum
possible time 1
c
iB
but at a .ig.er cost (
c
iB
. ,.is minimum completion time is commonly
called t.e activity crash time. ,.e linear relations.ip s.o?n in t.e &igure bet?een t.ese
t?o points implies t.at any intermediate duration could also be c.osen. $t is possible t.at
some intermediate point may represent t.e ideal or optimal trade<o&& bet?een time and
cost &or t.is activity.
A.at is t.e reason &or an increase in direct cost as t.e activity duration is reducedX 2
simple case arises in t.e use o& overtime ?or0. :y sc.eduling ?ee0end or evening ?or0
t.e completion time &or an activity as measured in calendar days ?ill be reduced.
/o?ever premium ?ages must be paid &or suc. overtime ?or0 so t.e cost ?ill increase.
2lso overtime ?or0 is more prone to accidents and !uality problems t.at must be
corrected so indirect costs may also increase. 4ore generally ?e mig.t not eIpect a
linear relations.ip bet?een duration and direct cost but some conveI &unction suc. as
t.e nonlinear curve or t.e step &unction s.o?n in Kigure 11<4. 2 linear &unction may be a
good approIimation to t.e actual curve .o?ever and results in considerable analytical
simplicity. R%S
(igure 11)- $llustration o& 5on<linear ,imeU(ost ,radeo&&s &or an 2ctivity
Ait. a linear relations.ip bet?een cost and duration t.e critical pat. timeUcost tradeo&&
problem can be de&ined as a linear programming optimization problem. $n particular let
3
iB
represent t.e rate o& c.ange o& cost as duration is decreased illustrated by t.e absolute
value o& t.e slope o& t.e line in Kigure 11<3. ,.en t.e direct cost o& completing an
activity isD
11.14
?.ere t.e lo?er case c
iB
and d
iB
represent t.e sc.eduled duration and resulting cost o& t.e
activity iB. ,.e actual duration o& an activity must &all bet?een t.e minimum cost time
M1
iB
N and t.e cras. time M1
c
iB
N. 2lso precedence constraints must be imposed as described
earlier &or eac. activity. Kinally t.e re!uired completion time &or t.e proBect or
alternatively t.e costs associated ?it. di&&erent completion times must be de&ined. ,.us
t.e entire sc.eduling problem is to minimize total cost Me!ual to t.e sum o& t.e c
iB
values
&or all activitiesN subBect to constraints arising &rom M1N t.e desired proBect duration *1
M2N t.e minimum and maIimum activity duration possibilities and M3N constraints
associated ?it. t.e precedence or completion times o& activities. 2lgebraically t.is isD
11.1"
subBect to t.e constraintsD
?.ere t.e notation is de&ined above and t.e decision variables are t.e activity durations
d
iB
and event times IM0N. ,.e appropriate sc.edules &or di&&erent proBect durations can be
&ound by repeatedly solving t.is problem &or di&&erent proBect durations *1. ,.e entire
problem can be solved by linear programming or more e&&icient algorit.ms ?.ic. ta0e
advantage o& t.e special net?or0 &orm o& t.e problem constraints.
One solution to t.e time<cost tradeo&& problem is o& particular interest and deserves
mention .ere. ,.e minimum time to complete a proBect is called t.e project-crash time.
,.is minimum completion time can be &ound by applying critical pat. sc.eduling ?it. all
activity durations set to t.eir minimum values M1
c
iB
N. ,.is minimum completion time &or
t.e proBect can t.en be used in t.e time<cost sc.eduling problem described above to
determine t.e minimum project-crash cost. 5ote t.at t.e proBect cras. cost is not &ound
by setting eac. activity to its cras. duration and summing up t.e resulting costsO t.is
solution is called t.e all-crash cost. ;ince t.ere are some activities not on t.e critical pat.
t.at can be assigned longer duration ?it.out delaying t.e proBect it is advantageous to
c.ange t.e all<cras. sc.edule and t.ereby reduce costs.
/euristic approac.es are also possible to t.e timeUcost tradeo&& problem. $n particular a
simple approac. is to &irst apply critical pat. sc.eduling ?it. all activity durations
assumed to be at minimum cost M1
iB
N. 5eIt t.e planner can eIamine activities on t.e
critical pat. and reduce t.e sc.eduled duration o& activities ?.ic. .ave t.e lo?est
resulting increase in costs. $n essence t.e planner develops a list o& activities on t.e
critical pat. ran0ed in accordance ?it. t.e unit c.ange in cost &or a reduction in t.e
activity duration. ,.e .euristic solution proceeds by s.ortening activities in t.e order o&
t.eir lo?est impact on costs. 2s t.e duration o& activities on t.e s.ortest pat. are
s.ortened t.e proBect duration is also reduced. Eventually anot.er pat. becomes critical
and a ne? list o& activities on t.e critical pat. must be prepared. :y manual or automatic
adBustments o& t.is 0ind good but not necessarily optimal sc.edules can be identi&ied.
Optimal or best sc.edules can only be assured by eIamining c.anges in combinations o&
activities as ?ell as c.anges to single activities. /o?ever by alternating bet?een
adBustments in particular activity durations Mand t.eir costsN and a critical pat. sc.eduling
procedure a planner can &airly rapidly devise a s.orter sc.edule to meet a particular
proBect deadline or in t.e ?orst case &ind t.at t.e deadline is impossible o&
accomplis.ment.
,.is type o& .euristic approac. to time<cost tradeo&&s is essential ?.en t.e time<cost
tradeo&&s &or eac. activity are not 0no?n in advance or in t.e case o& resource constraints
on t.e proBect. $n t.ese cases .euristic eIplorations may be use&ul to determine i& greater
e&&ort s.ould be spent on estimating time<cost tradeo&&s or i& additional resources s.ould
be retained &or t.e proBect. $n many cases t.e basic timeUcost tradeo&& mig.t not be a
smoot. curve as s.o?n in Kigure 11<4 but only a series o& particular resource and
sc.edule combinations ?.ic. produce particular durations. Kor eIample a planner mig.t
.ave t.e option o& assigning eit.er one or t?o cre?s to a particular activityO in t.is case
t.ere are only t?o possible durations o& interest.
&9ample 11)-* TimeKCost Trade)offs
,.e construction o& a permanent transit ?ay on an eIpress?ay median illustrates t.e
possibilities &or timeUcost trade<o&&s in construction ?or0. R'S One section o& 1+ miles o&
transit?ay ?as built in 1)'" and 1)'# to replace an eIisting contra<&lo? lane system Min
?.ic. one lane in t.e eIpress?ay ?as reversed eac. day to provide additional capacity in
t.e pea0 &lo? directionN. ,.ree engineersH estimates &or ?or0 time ?ere preparedD
)%" calendar day based on %"+ ?or0ing days at " daysU?ee0 and ' .oursUday o&
?or0 plus 3+ days &or bad ?eat.er ?ee0ends and .olidays.
%+2 calendar days based on "4+ ?or0ing days at # daysU?ee0 and 1+ .oursUday
o& ?or0.
3#+ calendar days based on % daysU?ee0 and 24 .oursUday o& ?or0.
,.e savings &rom early completion due to operating savings in t.e contra<&lo? lane and
contract administration costs ?ere estimated to be G"+++ per day.
$n accepting bids &or t.is construction ?or0 t.e o?ner re!uired bot. a dollar amount and
a completion date. ,.e bidderHs completion date ?as re!uired to &all bet?een 3#+ and "4+
days. $n evaluating contract bids a G"+++ credit ?as allo?ed &or eac. day less t.an "4+
days t.at a bidder speci&ied &or completion. $n t.e end t.e success&ul bidder completed
t.e proBect in 2%+ days receiving a bonus o& "+++cM"4+<2%+N ] G4"++++ in t.e
G'2+++++ contract. /o?ever t.e contractor eIperienced &i&teen to t.irty percent .ig.er
costs to maintain t.e continuous ?or0 sc.edule.
&9ample 11).* Time cost trade)offs and pro%ect crashing
2s an eIample o& timeUcost trade<o&&s and proBect cras.ing suppose t.at ?e needed to
reduce t.e proBect completion time &or a seven activity product delivery proBect &irst
analyzed in ;ection 1+.3 as s.o?n in ,able 1+<4 and Kigure 1+<%. ,able 11<4 gives
in&ormation pertaining to possible reductions in time ?.ic. mig.t be accomplis.ed &or
t.e various activities. Using t.e minimum cost durations Mas s.o?n in column 2 o& ,able
11<4N t.e critical pat. includes activities (EK6 plus a dummy activity ^. ,.e proBect
duration is 32 days in t.is case and t.e proBect cost is G%++++.
TA<"& 11)- 2ctivity 1urations and (osts &or a ;even 2ctivity *roBect
2ctivity 4inimum (ost 5ormal 1uration (ras. (ost (ras. 1uration
(.ange in
(ost per 1ay
2
:
(
1
E
K
6
'
4
'
1+
1+
2+
1+
#
1
'
"
)
12
3
14
4
24
24
1'
3#
1'
4
1
4
3
"
#
2
3
<<<
4
%
2
2.%
'
EIamining t.e unit c.ange in cost 3
iB
s.o?n in column # o& ,able 11<4 t.e lo?est rate
o& c.ange occurs &or activity E. 2ccordingly a good .euristic strategy mig.t be to begin
by cras.ing t.is activity. ,.e result is t.at t.e duration o& activity E goes &rom ) days to "
days and t.e total proBect cost increases by G'+++. 2&ter ma0ing t.is c.ange t.e proBect
duration drops to 2' days and t?o critical pat.s eIistD M1N activities (^EK and 6 and
M2N activities ( 1 K and 6.
EIamining t.e unit c.anges in cost again activity K .as t.e lo?est value o& 3
iB
B. (ras.ing
t.is activity results in an additional time savings o& # days in t.e proBect duration an
increase in proBect cost o& G1#+++ but no c.ange in t.e critical pat.s. ,.e activity on t.e
critical pat. ?it. t.e neIt lo?est unit c.ange in cost is activity (. (ras.ing t.is activity
to its minimum completion time ?ould reduce its duration by 4 days at a cost increase o&
G1#+++. /o?ever t.is reduction does not result in a reduction in t.e duration o& t.e
proBect by 4 days. 2&ter activity ( is reduced to % days t.en t.e alternate se!uence o&
activities 2 and : lie on t.e critical pat. and &urt.er reductions in t.e duration o& activity
( alone do not result in proBect time savings. 2ccordingly our .euristic corrections mig.t
be limited to reducing activity ( by only 1 day t.ereby increasing costs by G4+++ and
reducing t.e proBect duration by 1 day.
2t t.is point our c.oices &or reducing t.e proBect duration are &airly limited. Ae can
eit.er reduce t.e duration o& activity 6 or alternatively reduce activity ( and eit.er
activity 2 or activity : by an identical amount. $nspection o& ,able 11<4 and Kigure 1+<4
suggest t.at reducing activity 2 and activity ( is t.e best alternative. 2ccordingly ?e
can s.orten activity 2 to its cras. duration M&rom # days to 4 daysN and s.orten t.e
duration o& activity ( M&rom % days to " daysN at an additional cost o& G#+++ _ G'+++ ]
G14+++. ,.e result is a reduction in t.e proBect duration o& 2 days.
Our last option &or reducing t.e proBect duration is to cras. activity 6 &rom 3 days to 2
days at an increase in cost o& G'+++. 5o &urt.er reductions are possible in t.is time since
eac. activity along a critical pat. Mcomprised o& activities 2 : E K and 6N are at
minimum durations. 2t t.is point t.e proBect duration is 1' days and t.e proBect cost is
G12++++. representing a &i&ty percent reduction in proBect duration and a seventy percent
increase in cost. 5ote t.at not all t.e activities .ave been cras.ed. 2ctivity ( .as been
reduced in duration to " days Mrat.er t.an its 4 day cras. durationN ?.ile activity 1 .as
not been c.anged at all. $& all activities .ad been cras.ed t.e total proBect cost ?ould
.ave been G13'+++ representing a useless eIpenditure o& G1'+++. ,.e c.ange in proBect
cost ?it. di&&erent proBect durations is s.o?n grap.ically in Kigure 11<".
(igure 11). *roBect (ost 8ersus ,ime &or a ;even 2ctivity *roBect
&9ample 11)3* ,athematical (ormulation of Time)Cost Trade)offs
,.e same results obtained in t.e previous eIample could be obtained using a &ormal
optimization program and t.e data appearing in ,ables 1+<4 and 11<4. $n t.is case t.e
.euristic approac. used above .as obtained t.e optimal solution at eac. stage. Using E!.
M11.1"N t.e linear programming problem &ormulation ?ould beD
4inimize z
] R'_3M#<d
2
NS _ R4S _ R'_4M'<d
(
NS _ R1+_%M"<d
1
NS
_ R1+_2M)<d
E
NS _ R2+_2.%M)<d
K
NS _ R1+_2M3<d
6
NS
subBect to t.e constraints
IM#N ] *1 IM+N _ d
2
IM2N
IM+N _ d
(
IM1N
IM1N IM3N
IM2N _ d
:
IM4N
IM1N _ d
1
IM4N
IM2N _ d
E
IM4N
IM4N _ d
K
IM"N
IM"N _ d
6
IM#N
IM+N ] +
4 d
2
#
1 d
:
1
4 d
(
'
3 d
1
"
" d
E
)
# d
K
12
2 d
6
3
?.ic. can be solved &or di&&erent values o& proBect duration *1 using a linear
programming algorit.m or a net?or0 &lo? algorit.m. 5ote t.at even ?it. only seven
activities t.e resulting linear programming problem is &airly large.
11.. /cheduling in Poorly /tructured Pro>lems
,.e previous discussion o& activity sc.eduling suggested t.at t.e general structure o& t.e
construction plan ?as 0no?n in advance. Ait. previously de&ined activities relations.ips
among activities and re!uired resources t.e sc.eduling problem could be represented as
a mat.ematical optimization problem. Even in t.e case in ?.ic. durations are uncertain
?e assumed t.at t.e underlying probability distribution o& durations is 0no?n and applied
analytical tec.ni!ues to investigate sc.edules.
A.ile t.ese various sc.eduling tec.ni!ues .ave been eIceedingly use&ul t.ey do not
cover t.e range o& sc.eduling problems encountered in practice. $n particular t.ere are
many cases in ?.ic. costs and durations depend upon ot.er activities due to congestion
on t.e site. $n contrast t.e sc.eduling tec.ni!ues discussed previously assume t.at
durations o& activities are generally independent o& eac. ot.er. 2 second problem stems
&rom t.e compleIity o& construction tec.nologies. $n t.e course o& resource allocations
numerous additional constraints or obBectives may eIist t.at are di&&icult to represent
analytically. Kor eIample di&&erent ?or0ers may .ave specialized in one type o& activity
or anot.er. Ait. greater eIperience t.e ?or0 e&&iciency &or particular cre?s may
substantially increase. Un&ortunately representing suc. e&&ects in t.e sc.eduling process
can be very di&&icult. 2not.er case o& compleIity occurs ?.en activity durations and
sc.edules are negotiated among t.e di&&erent parties in a proBect so t.ere is no single
overall planner.
2 practical approac. to t.ese types o& concerns is to insure t.at all sc.edules are
revie?ed and modi&ied by eIperienced proBect managers be&ore implementation. ,.is
manual revie? permits t.e incorporation o& global constraints or consideration o&
peculiarities o& ?or0ers and e!uipment. $ndeed interactive sc.edule revision to
accommodate resource constraints is o&ten superior to any computer based .euristic. Ait.
improved grap.ic representations and in&ormation availability man<mac.ine interaction
is li0ely to improve as a sc.eduling procedure.
4ore generally t.e solution procedures &or sc.eduling in t.ese more complicated
situations cannot be reduced to mat.ematical algorit.ms. ,.e best solution approac. is
li0ely to be a Jgenerate<and<testJ cycle &or alternative plans and sc.edules. $n t.is
process a possible sc.edule is .ypot.esized or generated. ,.is sc.edule is tested &or
&easibility ?it. respect to relevant constraints Msuc. as available resources or time
.orizonsN and desireability ?it. respect to di&&erent obBectives. $deally t.e process o&
evaluating an alternative ?ill suggest directions &or improvements or identi&y particular
trouble spots. ,.ese results are t.en used in t.e generation o& a ne? test alternative. ,.is
process continues until a satis&actory plan is obtained.
,?o important problems must be borne in mind in applying a Jgenerate<and<testJ
strategy. Kirst t.e number o& possible plans and sc.edules is enormous so considerable
insig.t to t.e problem must be used in generating reasonable alternatives. ;econdly
evaluating alternatives also may involve considerable e&&ort and Budgment. 2s a result
t.e number o& actual cycles o& alternative testing t.at can be accommodated is limited.
One .ope &or computer tec.nology in t.is regard is t.at t.e burdensome calculations
associated ?it. t.is type o& planning may be assumed by t.e computer t.ereby reducing
t.e cost and re!uired time &or t.e planning e&&ort. ;ome mec.anisms along t.ese lines are
described in (.apter 1".
&9ample 11)4* ,an)machine $nteractie /cheduling
2n interactive system &or sc.eduling ?it. resource constraints mig.t .ave t.e &ollo?ing
c.aracteristicsD R)S
grap.ic displays o& bar c.arts resource use over time activity net?or0s and ot.er
grap.ic images available in di&&erent ?indo?s o& a screen simultaneously
descriptions o& particular activities including allocated resources and c.osen
tec.nologies available in ?indo?s as desired by a user
a t.ree dimensional animation o& t.e construction process t.at can be stopped to
s.o? t.e progress o& construction on t.e &acility at any time
easy<to<use met.ods &or c.anging start times and allocated resources and
utilities to run relevant sc.eduling algorit.ms suc. as t.e critical pat. met.od at
any time.
Kigure 11<# s.o?s an eIample o& a screen &or t.is system. $n Kigure 11<# a bar c.art
appears in one ?indo? a description o& an activity in anot.er ?indo? and a grap. o& t.e
use o& a particular resource over time appears in a t.ird ?indo?. ,.ese di&&erent
J?indo?sJ appear as sections on a computer screen displaying di&&erent types o&
in&ormation. Ait. t.ese capabilities a proBect manager can call up di&&erent pictures o&
t.e construction plan and ma0e c.anges to accommodate obBectives or constraints t.at are
not &ormally represented. Ait. rapid response to suc. c.anges t.e e&&ects can be
immediately evaluated.
(igure 11)0 EIample o& a :ar (.art and Ot.er Aindo?s &or $nteractive ;c.eduling
11.0 $mproing the /cheduling Process
1espite considerable attention by researc.ers and practitioners t.e process o&
construction planning and sc.eduling still presents problems and opportunities &or
improvement. ,.e importance o& sc.eduling in insuring t.e e&&ective coordination o&
?or0 and t.e attainment o& proBect deadlines is indisputable. Kor large proBects ?it. many
parties involved t.e use o& &ormal sc.edules is indispensable.
,.e net?or0 model &or representing proBect activities .as been provided as an important
conceptual and computational &rame?or0 &or planning and sc.eduling. 5et?or0s not
only communicate t.e basic precedence relations.ips bet?een activities t.ey also &orm
t.e basis &or most sc.eduling computations.
2s a practical matter most proBect sc.eduling is per&ormed ?it. t.e critical pat.
sc.eduling met.od supplemented by .euristic procedures used in proBect cras. analysis
or resource constrained sc.eduling. 4any commercial so&t?are programs are available to
per&orm t.ese tas0s. *robabilistic sc.eduling or t.e use o& optimization so&t?are to
per&orm timeUcost trade<o&&s is rat.er more in&re!uently applied but t.ere are so&t?are
programs available to per&orm t.ese tas0s i& desired.
3at.er t.an concentrating upon more elaborate solution algorit.ms t.e most important
innovations in construction sc.eduling are li0ely to appear in t.e areas o& data storage
ease o& use data representation communication and diagnostic or interpretation aids.
$ntegration o& sc.eduling in&ormation ?it. accounting and design in&ormation t.roug.
t.e means o& database systems is one bene&icial innovationO many sc.eduling systems do
not provide suc. integration o& in&ormation. ,.e tec.ni!ues discussed in (.apter 14 are
particularly use&ul in t.is regard.
Ait. regard to ease o& use t.e introduction o& interactive sc.eduling systems grap.ical
output devices and automated data ac!uisition s.ould produce a very di&&erent
environment t.an .as eIisted. $n t.e past sc.eduling ?as per&ormed as a batc. operation
?it. output contained in lengt.y tables o& numbers. Updating o& ?or0 progress and
revising activity duration ?as a time consuming manual tas0. $t is no surprise t.at
managers vie?ed sc.eduling as eItremely burdensome in t.is environment. ,.e lo?er
costs associated ?it. computer systems as ?ell as improved so&t?are ma0e Juser
&riendlyJ environments a real possibility &or &ield operations on large proBects.
Kinally in&ormation representation is an area ?.ic. can result in substantial
improvements. A.ile t.e net?or0 model o& proBect activities is an eItremely use&ul
device to represent a proBect many aspects o& proBect plans and activity inter<
relations.ips cannot or .ave not been represented in net?or0 models. Kor eIample t.e
similarity o& processes among di&&erent activities is usually unrecorded in t.e &ormal
proBect representation. 2s a result updating a proBect net?or0 in response to ne?
in&ormation about a process suc. as concrete pours can be tedious. A.at is needed is a
muc. more &leIible and complete representation o& proBect in&ormation. ;ome avenues
&or c.ange along t.ese lines are discussed in (.apter 1".
11.1 2eferences
1. :ratley *aul :ennett L. KoI and Linus E. ;c.rage " 5uide to #imulation
;pringer<8erlag 1)%3.
2. Elmag.raby ;.E. "ctivity Networks3 !roject !lanning and $ontrol )y Network
'odels Po.n Ailey 5e? 9or0 1)%%.
3. Pac0son 4.P. $omputers in $onstruction !lanning and $ontrol% 2llen W Un?in
London 1)'#.
4. 4oder P. (. *.illips and E. 1avis !roject 'anagement with $!'% !ER, and
!recedence &iagramming ,.ird Edition 8an 5ostrand 3ein.old (ompany
1)'3.
11.3 Pro>lems
1. Kor t.e proBect de&ined in *roblem 1 &rom (.apter 1+ suppose t.at t.e early
most li0ely and late time sc.edules are desired. 2ssume t.at t.e activity durations
are approIimately normally distributed ?it. means as given in ,able 1+<1# and
t.e &ollo?ing standard deviationsD 2D 4O :D 1+O (D 1O 1D 1"O ED #O KD 12O 6D )O /D 2O
$D 4O PD "O QD 1O LD 12O 4D 2O 5D 1O OD ". MaN Kind t.e early most li0ely and late
time sc.edules and MbN estimate t.e probability t.at t.e proBect re!uires 2"V
more time t.an t.e eIpected duration.
2. Kor t.e proBect de&ined in *roblem 2 &rom (.apter 1+ suppose t.at t.e early
most li0ely and late time sc.edules are desired. 2ssume t.at t.e activity durations
are approIimately normally distributed ?it. means as given in ,able 1+<1% and
t.e &ollo?ing standard deviationsD 2D 2 :D 2 (D 1 1D + ED + KD 2O 6D + /D + $D
+ PD 3O QD + LD 3O 4D 2O 5D 1. MaN Kind t.e early most li0ely and late time
sc.edules and MbN estimate t.e probability t.at t.e proBect re!uires 2"V more
time t.an t.e eIpected duration.
3 to #
,.e time<cost tradeo&& data corresponding to eac. o& t.e *roblems 1 to 4 Min
(.apter 1+N respectively are given in t.e table &or t.e problem M,ables 11<" to
11<'N. 1etermine t.e all<cras. and t.e proBect cras. durations and cost based on
t.e early time sc.edule &or t.e proBect. 2lso suggest a combination o& activity
durations ?.ic. ?ill lead to a proBect completion time e!ual to t.ree days longer
t.an t.e proBect cras. time but ?ould result in t.e MapproIimatelyN maIimum
savings.
TA<"& 11).
2ctivity 2 : ( 1 E K 6 / $ P Q L 4 5 O
;.ortest
*ossible
3 " 1 1+ 4 # # 2 4 3 3 3 2 2 "
(ompletion
,ime
5ormal
(ompletion
,ime (ost 1"+ 2"+ '+ 4++ 22+ 3++ 2#+ 12+ 2++ 1'+ 22+ "++ 1++ 12+ "++
(.ange in (ost
*er 1ay
Earlier
(ompletion 2+ 3+ $n&inity 1" 2+ 2" 1+ 3" 2+ $n&inity 2" 1" 3+ $n&inity 1+
TA<"& 11)3
2ctivity 2 : ( 1 E K 6 / $ P Q L 4
;.ortest *ossible
(ompletion ,ime 3 " 2 2 " 3 " # # 4 " 2 2
5ormal (ompletion
,ime (ost "+ 1"+ )+ 12" 3++ 24+ '+ 2%+ 12+ #++ 3++ '+ 14+
(.ange in (ost *er 1ay
Earlier (ompletion $n&inity "+ $n&inity 4+ 3+ 2+ 1" 3+ $n&inity 4+ "+ 4+ 4+
% to 1+
1evelop a proBect completion time versus cost tradeo&& curve &or t.e proBects in
*roblems 3 to #. M5oteD a linear programming computer program or more
specialized programs can reduce t.e calculating ?or0 involved in t.ese
problemseN
11. ;uppose t.at t.e proBect described in *roblem " &rom (.apter 1+ proceeds
normally on an earliest time sc.edule ?it. all activities sc.eduled &or t.eir normal
completion time. /o?ever suppose t.at activity 6 re!uires 2+ days rat.er t.an
t.e eIpected ". A.at mig.t a proBect manager do to insure completion o& t.e
proBect by t.e originally planned completion timeX
12. Kor t.e proBect de&ined in *roblem 1 &rom (.apter 1+ suppose t.at a 4onte (arlo
simulation ?it. ten repetitions is desired. ;uppose &urt.er t.at t.e activity
durations .ave a triangular distribution ?it. t.e &ollo?ing lo?er and upper
boundsD 2D4'O :D4) (D +."2O 1D 1+2+O ED 4%O KD %1+O 6D ' 12O /D 24O $D 4%O
PD 24O QD 2#O LD 1+ 1"O 4D 2)O 5D 14O OD 411.
MaN (alculate t.e value o& m &or eac. activity given t.e upper and lo?er bounds
and t.e eIpected duration s.o?n in ,able 1+<1#.
MbN 6enerate a set o& realizations &or eac. activity and calculate t.e resulting
proBect duration.
McN 3epeat part MbN &ive times and estimate t.e mean and standard deviation o& t.e
proBect duration.
13. ;uppose t.at t?o variables bot. .ave triangular distributions and are correlated.
,.e resulting multi<variable probability density &unction .as a triangular s.ape.
1evelop t.e &ormula &or t.e conditional distribution o& one variable given t.e
corresponding realization o& t.e ot.er variable.
11.4 (ootnotes
1. ;ee 1. 6. 4alcolm P./. 3osenbloom (.E. (lar0 and A. Kazar J2pplications o& a
,ec.ni!ue &or 3 and 1 *rogram EvaluationJ *perations Research 8ol. % 5o. " 1)")
pp. #4#<##).
2. ;ee 4.A. ;asieni J2 5ote on *E3, ,imesJ 'anagement #cience 8ol. 32 5o. 12 p
1)'# p. 1#"2<1#"3 and ,.Q. Little&ield and *./. 3andolp. J2n 2ns?er to ;asieniHs
Luestion on *ert ,imesJ 'anagement #cience 8ol. 33 5o. 1+ 1)'% pp. 13"%<13").
Kor a general discussion o& t.e :eta distribution see 5.L. Po.nson and ;. Qotz
$ontinuous 0nivariate &istri)utions-C Po.n Ailey W ;ons 1)%+ (.apter 24.
3. ;ee ,. 2u 3.4. ;.ane and L.2. /oel 7undamentals of #ystems Engineering -
!ro)a)ilistic 'odels 2ddison<Aesley *ublis.ing (ompany 1)%2.
4. ;ee 5.L. Po.nson and ;. Qotz &istri)utions in #tatistics3 $ontinuous 'ultivariate
&istri)utions% Po.n Ailey W ;ons 5e? 9or0 1)%3.
". ;ee &or eIample *. :ratley :. L. KoI and L.E. ;c.rage " 5uide to #imulation
;pringer<8erlag 5e? 9or0 1)'3.
#. ,.ere are eIceptions to t.is rule t.oug.. 4ore ?or0ers may also mean additional
training burdens and more problems o& communication and management. ;ome activities
cannot be easily bro0en into tas0s &or numerous individualsO some aspects o& computer
programming provide notable eIamples. $ndeed so&t?are programming can be so
perverse t.at eIamples eIist o& additional ?or0ers resulting in slo?er proBect completion.
;ee K.*. :roo0s Br. ,he 'ythical 'an-'onth 2ddison Aesley 3eading 42 1)%".
%. Kor a discussion o& solution procedures and analogies o& t.e general &unction timeUcost
tradeo&& problem see (. /endric0son and :.5. Panson J2 (ommon 5et?or0 Klo?
Kormulation &or ;everal (ivil Engineering *roblemsJ $ivil Engineering #ystems 8ol. 1
5o. 4 1)'4 pp. 1)"<2+3.
'. ,.is eIample ?as abstracted &rom ?or0 per&ormed in /ouston and reported in U.
O&&icer JUsing 2ccelerated (ontracts ?it. $ncentive *rovisions &or ,ransit?ay
(onstruction in /oustonJ *aper *resented at t.e Panuary 1)'# ,ransportation 3esearc.
:oard 2nnual (on&erence Aas.ington 1.(.
). ,.is description is based on an interactive sc.eduling system developed at (arnegie
4ellon University and described in (. /endric0son (. Yozaya<6orostiza 1. 3e.a0 E.
:aracco<4iller and *. Lim J2n EIpert ;ystem &or (onstruction *lanningJ "#$E
2ournal of $omputing% 8ol. 1 5o. 4 1)'% pp. 2"3<2#).
1!. Cost Control, ,onitoring and
Accounting
1!.1 The Cost Control Pro>lem
1uring t.e eIecution o& a proBect procedures &or proBect control and record 0eeping
become indispensable tools to managers and ot.er participants in t.e construction
process. ,.ese tools serve t.e dual purpose o& recording t.e &inancial transactions t.at
occur as ?ell as giving managers an indication o& t.e progress and problems associated
?it. a proBect. ,.e problems o& proBect control are aptly summed up in an old de&inition
o& a proBect as Jany collection o& vaguely related activities t.at are ninety percent
complete over budget and late.J R1S ,.e tas0 o& proBect control systems is to give a &air
indication o& t.e eIistence and t.e eItent o& suc. problems.
$n t.is c.apter ?e consider t.e problems associated ?it. resource utilization accounting
monitoring and control during a proBect. $n t.is discussion ?e emp.asize t.e proBect
management uses o& accounting in&ormation. $nterpretation o& proBect accounts is
generally not straig.t&or?ard until a proBect is completed and t.en it is too late to
in&luence proBect management. Even a&ter completion o& a proBect t.e accounting results
may be con&using. /ence managers need to 0no? .o? to interpret accounting
in&ormation &or t.e purpose o& proBect management. $n t.e process o& considering
management problems .o?ever ?e s.all discuss some o& t.e common accounting
systems and conventions alt.oug. our purpose is not to provide a compre.ensive survey
o& accounting procedures.
,.e limited obBective o& proBect control deserves emp.asis. *roBect control procedures are
primarily intended to identi&y deviations &rom t.e proBect plan rat.er t.an to suggest
possible areas &or cost savings. ,.is c.aracteristic re&lects t.e advanced stage at ?.ic.
proBect control becomes important. ,.e time at ?.ic. maBor cost savings can be ac.ieved
is during planning and design &or t.e proBect. 1uring t.e actual construction c.anges are
li0ely to delay t.e proBect and lead to inordinate cost increases. 2s a result t.e &ocus o&
proBect control is on &ul&illing t.e original design plans or indicating deviations &rom
t.ese plans rat.er t.an on searc.ing &or signi&icant improvements and cost savings. $t is
only ?.en a rescue operation is re!uired t.at maBor c.anges ?ill normally occurring in
t.e construction plan.
Kinally t.e issues associated ?it. integration o& in&ormation ?ill re!uire some
discussion. *roBect management activities and &unctional concerns are intimately lin0ed
yet t.e tec.ni!ues used in many instances do not &acilitate compre.ensive or integrated
consideration o& proBect activities. Kor eIample sc.edule in&ormation and cost accounts
are usually 0ept separately. 2s a result proBect managers t.emselves must synt.esize a
compre.ensive vie? &rom t.e di&&erent reports on t.e proBect plus t.eir o?n &ield
observations. $n particular managers are o&ten &orced to in&er t.e cost impacts o&
sc.edule c.anges rat.er t.an being provided ?it. aids &or t.is process. (ommunication
or integration o& various types o& in&ormation can serve a number o& use&ul purposes
alt.oug. it does re!uire special attention in t.e establis.ment o& proBect control
procedures.
1!.! The Pro%ect <udget
Kor cost control on a proBect t.e construction plan and t.e associated cas. &lo? estimates
can provide t.e baseline re&erence &or subse!uent proBect monitoring and control. Kor
sc.edules progress on individual activities and t.e ac.ievement o& milestone
completions can be compared ?it. t.e proBect sc.edule to monitor t.e progress o&
activities. (ontract and Bob speci&ications provide t.e criteria by ?.ic. to assess and
assure t.e re!uired !uality o& construction. ,.e &inal or detailed cost estimate provides a
baseline &or t.e assessment o& &inancial per&ormance during t.e proBect. ,o t.e eItent t.at
costs are ?it.in t.e detailed cost estimate t.en t.e proBect is t.oug.t to be under
financial control. Overruns in particular cost categories signal t.e possibility o& problems
and give an indication o& eIactly ?.at problems are being encountered. EIpense oriented
construction planning and control &ocuses upon t.e categories included in t.e &inal cost
estimation. ,.is &ocus is particular relevant &or proBects ?it. &e? activities and
considerable repetition suc. as grading and paving road?ays.
Kor control and monitoring purposes t.e original detailed cost estimate is typically
converted to a project )udget and t.e proBect budget is used subse!uently as a guide &or
management. ;peci&ic items in t.e detailed cost estimate become Bob cost elements.
EIpenses incurred during t.e course o& a proBect are recorded in speci&ic Bob cost
accounts to be compared ?it. t.e original cost estimates in eac. category. ,.us
individual Bob cost accounts generally represent t.e basic unit &or cost control.
2lternatively Bob cost accounts may be disaggregated or divided into work elements
?.ic. are related bot. to particular sc.eduled activities and to particular cost accounts.
Aor0 element divisions ?ill be described in ;ection 12.'.
$n addition to cost amounts in&ormation on material !uantities and labor inputs ?it.in
eac. Bob account is also typically retained in t.e proBect budget. Ait. t.is in&ormation
actual materials usage and labor employed can be compared to t.e eIpected
re!uirements. 2s a result cost overruns or savings on particular items can be identi&ied as
due to c.anges in unit prices labor productivity or in t.e amount o& material consumed.
,.e number o& cost accounts associated ?it. a particular proBect can vary considerably.
Kor constructors on t.e order o& &our .undred separate cost accounts mig.t be used on a
small proBect. R2S ,.ese accounts record all t.e transactions associated ?it. a proBect.
,.us separate accounts mig.t eIist &or di&&erent types o& materials e!uipment use
payroll proBect o&&ice etc. :ot. p.ysical and non<p.ysical resources are represented
including over.ead items suc. as computer use or interest c.arges. ,able 12<1
summarizes a typical set o& cost accounts t.at mig.t be used in building construction. R3S
5ote t.at t.is set o& accounts is organized .ierarc.ically ?it. seven maBor divisions
Maccounts 2+1 to 2+%N and numerous sub<divisions under eac. division. ,.is .ierarc.ical
structure &acilitates aggregation o& costs into pre<de&ined categoriesO &or eIample costs
associated ?it. t.e superstructure Maccount 2+4N ?ould be t.e sum o& t.e underlying
subdivisions Mie. 2+4.1 2+4.2 etc.N or &iner levels o& detail M2+4.#1 2+4.#2 etc.N. ,.e
sub<division accounts in ,able 12<1 could be &urt.er divided into personnel material and
ot.er resource costs &or t.e purpose o& &inancial accounting as described in ;ection 12.4.
TA<"& 1!)1 $llustrative ;et o& *roBect (ost 2ccounts
2+1 (learing and *reparing ;ite
2+2
2+2.1
2+2.2
2+2.3
2+2.31
2+2.32
;ubstructure
EIcavation and ;.oring
*iling
(oncrete 4asonry
4iIing and *lacing
Korm?or0
2+2.33 3ein&orcing
2+3 Outside Utilities M?ater gas se?er etc.N
2+4
2+4.1
2+4.2
2+4.3
2+4.4
2+4."
2+4.#
2+4.#1
2+4.#2
2+4.#3
2+4.#4
2+4.#"
2+4.##
2+4.#%
2+4.#'
2+4.#)
2+4.%
2+4.%1
2+4.%2
2+4.%3
2+4.%4
2+4.%2
;uperstructure
4asonry (onstruction
;tructural ;teel
Aood Kraming *artitions etc.
EIterior Kinis.es Mbric0?or0 terra cotta cut stone etc.N
3oo&ing 1rains 6utters Klas.ing etc.
$nterior Kinis. and ,rim
Kinis. Klooring ;tairs 1oors ,rim
6lass Aindo?s 6lazing
4arble ,ile ,errazzo
Lat.ing and *lastering
;oundproo&ing and $nsulation
Kinis. /ard?are
*ainting and 1ecorating
Aaterproo&ing
;prin0lers and Kire *rotection
;ervice Aor0
Electrical Aor0
/eating and 8entilating
*lumbing and ;e?age
2ir (onditioning
Kire 2larm ,elep.one ;ecurity 4iscellaneous
2+" *aving (urbs Aal0s
2+# $nstalled E!uipment Melevators revolving doors mailc.utes etc.N
2+% Kencing
$n developing or implementing a system o& cost accounts an appropriate numbering or
coding system is essential to &acilitate communication o& in&ormation and proper
aggregation o& cost in&ormation. *articular cost accounts are used to indicate t.e
eIpenditures associated ?it. speci&ic proBects and to indicate t.e eIpenditures on
particular items t.roug.out an organization. ,.ese are eIamples o& di&&erent perspectives
on t.e same in&ormation in ?.ic. t.e same in&ormation may be summarized in di&&erent
?ays &or speci&ic purposes. ,.us more t.an one aggregation o& t.e cost in&ormation and
more t.an one application program can use a particular cost account. ;eparate identi&iers
o& t.e type o& cost account and t.e speci&ic proBect must be provided &or proBect cost
accounts or &or &inancial transactions. 2s a result a standard set o& cost codes suc. as t.e
42;,E3KO342, codes described in (.apter ) may be adopted to identi&y cost
accounts along ?it. proBect identi&iers and eItensions to indicate organization or Bob
speci&ic needs. ;imilarly t.e use o& databases or at a minimum inter<communicating
applications programs &acilitate access to cost in&ormation as described in (.apter 14.
(onverting a &inal cost estimate into a proBect budget compatible ?it. an organizationHs
cost accounts is not al?ays a straig.t&or?ard tas0. 2s described in (.apter " cost
estimates are generally disaggregated into appropriate functional or resource )ased
proBect categories. Kor eIample labor and material !uantities mig.t be included &or eac.
o& several p.ysical components o& a proBect. Kor cost accounting purposes labor and
material !uantities are aggregated by type no matter &or ?.ic. p.ysical component t.ey
are employed. Kor eIample particular types o& ?or0ers or materials mig.t be used on
numerous di&&erent p.ysical components o& a &acility. 4oreover t.e categories o& cost
accounts establis.ed ?it.in an organization may bear little resemblance to t.e !uantities
included in a &inal cost estimate. ,.is is particularly true ?.en &inal cost estimates are
prepared in accordance ?it. an eIternal reporting re!uirement rat.er t.an in vie? o& t.e
eIisting cost accounts ?it.in an organization.
One particular problem in &orming a proBect budget in terms o& cost accounts is t.e
treatment o& contingency amounts. ,.ese allo?ances are included in proBect cost
estimates to accommodate un&oreseen events and t.e resulting costs. /o?ever in
advance o& proBect completion t.e source o& contingency eIpenses is not 0no?n.
3ealistically a budget accounting item &or contingency allowance s.ould be establis.ed
?.enever a contingency amount ?as included in t.e &inal cost estimate.
2 second problem in &orming a proBect budget is t.e treatment o& in&lation. ,ypically
&inal cost estimates are &ormed in terms o& real dollars and an item re&lecting in&lation
costs is added on as a percentage or lump sum. ,.is in&lation allo?ance ?ould t.en be
allocated to individual cost items in relation to t.e actual eIpected in&lation over t.e
period &or ?.ic. costs ?ill be incurred.
&9ample 1!)1* Pro%ect <udget for a ;esign Office
2n eIample o& a small proBect budget is s.o?n in ,able 12<2. ,.is budget mig.t be used
by a design &irm &or a speci&ic design proBect. A.ile t.is budget mig.t represent all t.e
?or0 &or t.is &irm on t.e proBect numerous ot.er organizations ?ould be involved ?it.
t.eir o?n budgets. $n ,able 12<2 a summary budget is s.o?n as ?ell as a detailed listing
o& costs &or individuals in t.e Engineering 1ivision. Kor t.e purpose o& consistency ?it.
cost accounts and managerial control labor costs are aggregated into t.ree groupsD t.e
engineering arc.itectural and environmental divisions. ,.e detailed budget s.o?n in
,able 12<2 applies only to t.e engineering division laborO ot.er detailed budgets amounts
&or categories suc. as supplies and t.e ot.er ?or0 divisions ?ould also be prepared. 5ote
t.at t.e salary costs associated ?it. individuals are aggregated to obtain t.e total labor
costs in t.e engineering group &or t.e proBect. ,o per&orm t.is aggregation some means
o& identi&ying individuals ?it.in organizational groups is re!uired. 2ccompanying a
budget o& t.is nature some estimate o& t.e actual man<.ours o& labor re!uired by proBect
tas0 ?ould also be prepared. Kinally t.is budget mig.t be used &or internal purposes
alone. $n submitting &inancial bills and reports to t.e client over.ead and contingency
amounts mig.t be combined ?it. t.e direct labor costs to establis. an aggregate billing
rate per .our. $n t.is case t.e over.ead contingency and pro&it ?ould represent
allocated costs based on t.e direct labor costs.
TA<"& 1!)! EIample o& a ;mall *roBect :udget &or a 1esign Kirm
*ersonnel
2rc.itectural 1ivision
<udget /ummary
G #%2"1.++
Engineering
Environmental 1ivision
,otal
Ot.er 1irect EIpenses
,ravel
;upplies
(ommunication
(omputer ;ervices
,otal
Over.ead
(ontingency and *ro&it
,otal
4"3%2.++
2'23".++
G14+'"'.++
24++.++
1"++.++
#++.++
12++.++
G "%++.++
G 1%"'#).#+
G )"%++.++
G 41'12%.#+
;enior Engineer
2ssociate Engineer
Engineer ,ec.nician
,otal
&ngineering Personnel ;etail
G 11"#2.++
213#".++
12#"4.++
G 4"3%2.++
&9ample 1!)!* Pro%ect <udget for a Constructor
,able 12<3 illustrates a summary budget &or a constructor. ,.is budget is developed &rom
a proBect to construct a ?.ar&. 2s ?it. t.e eIample design o&&ice budget above costs are
divided into direct and indirect eIpenses. Ait.in direct costs eIpenses are divided into
material subcontract temporary ?or0 and mac.inery costs. ,.is budget indicates
aggregate amounts &or t.e various categories. (ost details associated ?it. particular cost
accounts ?ould supplement and support t.e aggregate budget s.o?n in ,able 12<3. 2
pro&it and a contingency amount mig.t be added to t.e basic budget o& G1%1"14% s.o?n
in ,able 12<3 &or completeness.
TA<"& 1!)+ 2n EIample o& a *roBect :udget &or a A.ar& *roBect M2mounts in
,.ousands o& 1ollarsN
4aterial
(ost
;ubcontract
Aor0
,emporary
Aor0
4ac.inery
(ost ,otal (ost
;teel *iling
,ie<rod
2nc.or<Aall
G2)21%2
''233
13+2'1
G12)1%'
2)2"4
#+'%3
G1#3')
+
+
G+
+
+
G43%%3)
11%4'%
1)11"4
:ac0&ill
(oping
1redging
Kender
Ot.er
;ub<total
24223+
42''+
+
4'))#
"+++
G'4)'++
2%)1)
223+%
111#"+
1+344
322"+
G423%%"
+
131%1
+
+
+
G2)"#+
+
+
+
1%"+
+
G1%"+
3++14)
%'3"'
111#"+
#1+)+
3%2"+
G13+4''"
/ummary
,otal o& direct cost
$ndirect (ost
(ommon ,emporary Aor0
(ommon 4ac.inery
,ransportation
O&&ice Operating (osts
,otal o& $ndirect (ost
,otal *roBect (ost
G13+4''"
1)32+
'+)34
1"""+
2)44"'
41+2#2.
G1%1"14%
1!.+ (orecasting for Actiity Cost Control
Kor t.e purpose o& proBect management and control it is not su&&icient to consider only
t.e past record o& costs and revenues incurred in a proBect. 6ood managers s.ould &ocus
upon &uture revenues &uture costs and tec.nical problems. Kor t.is purpose traditional
&inancial accounting sc.emes are not ade!uate to re&lect t.e dynamic nature o& a proBect.
2ccounts typically &ocus on recording routine costs and past eIpenditures associated ?it.
activities. R4S 6enerally past eIpenditures represent sunk costs t.at cannot be altered in
t.e &uture and may or may not be relevant in t.e &uture. Kor eIample a&ter t.e completion
o& some activity it may be discovered t.at some !uality &la? renders t.e ?or0 useless.
Un&ortunately t.e resources eIpended on t.e &la?ed construction ?ill generally be sunk
and cannot be recovered &or re<construction Malt.oug. it may be possible to c.ange t.e
burden o& ?.o pays &or t.ese resources by &inancial ?it..olding or c.argesO o?ners ?ill
typically attempt to .ave constructors or designers pay &or c.anges due to !uality &la?sN.
;ince &inancial accounts are .istorical in nature some means o& &orecasting or proBecting
t.e &uture course o& a proBect is essential &or management control. $n t.is section some
met.ods &or cost control and simple &orecasts are described.
2n eIample o& &orecasting used to assess t.e proBect status is s.o?n in ,able 12<4. $n t.is
eIample costs are reported in &ive categories representing t.e sum o& all t.e various cost
accounts associated ?it. eac. categoryD
<udgeted CostD ,.e budgeted cost is derived &rom t.e detailed cost
estimate prepared at t.e start o& t.e proBect. EIamples o& proBect budgets ?ere
presented in ;ection 12.2. ,.e &actors o& cost ?ould be re&erenced by cost account
and by a prose description.
&stimated total costD ,.e estimated or &orecast total cost in eac. category
is t.e current best estimate o& costs based on progress and any c.anges since t.e
budget ?as &ormed. Estimated total costs are t.e sum o& cost to date
commitments and eIposure. 4et.ods &or estimating total costs are described
belo?.
Cost Committed and Cost &9posureeeD Estimated cost to completion in eac.
category in divided into &irm commitments and estimated additional cost or
e:posure4 (ommitments may represent material orders or subcontracts &or ?.ic.
&irm dollar amounts .ave been committed.
Cost to ;ateD ,.e actual cost incurred to date is recorded in column # and
can be derived &rom t.e &inancial record 0eeping accounts.
Oer or D=nderED 2 &inal column in ,able 12<4 indicates t.e amount over or
under t.e budget &or eac. category. ,.is column is an indicator o& t.e eItent o&
variance &rom t.e proBect budgetO items ?it. unusually large overruns ?ould
represent a particular managerial concern. 5ote t.at variance is used in t.e
terminology o& proBect control to indicate a di&&erence bet?een budgeted and
actual eIpenditures. ,.e term is de&ined and used !uite di&&erently in statistics or
mat.ematical analysis. $n ,able 12<4 labor costs are running .ig.er t.an
eIpected ?.ereas subcontracts are less t.an eIpected.
,.e current status o& t.e proBect is a &orecast budget overrun o& G")"+. ?it. 23 percent o&
t.e budgeted proBect costs incurred to date.
TA<"& 1!)- $llustration o& a Pob ;tatus 3eport
Kactor
:udgeted
(ost
Estimated
,otal (ost
(ost
(ommitted
(ost
EIposure
(ost ,o
1ate
Over or
MUnderN
Labor
4aterial
;ubcontracts
E!uipment
Ot.er
,otal
G))4+#
''4))
1)'4"'
3%"43
%2#)3
4)#"+)
G1+2342
''4))
1)#323
3%"43
'1432
"+#13)
G4)")#
42"+#
'33"2
23#23
4)3"#
24'433
<<<
4"))3
)%'32
<<<
<<<
143'2"
G"2%4#
<<<
1"13)
13)2+
32+%#
113''1
G2)3#
+
M213"N
+
'%3)
")"+
Kor proBect control managers ?ould &ocus particular attention on items indicating
substantial deviation &rom budgeted amounts. $n particular t.e cost overruns in t.e labor
and in t.e Jot.er eIpense category ?ould be ?ort.y o& attention by a proBect manager in
,able 12<4. 2 neIt step ?ould be to loo0 in greater detail at t.e various components o&
t.ese categories. Overruns in cost mig.t be due to lo?er t.an eIpected productivity
.ig.er t.an eIpected ?age rates .ig.er t.an eIpected material costs or ot.er &actors.
Even &urt.er lo? productivity mig.t be caused by inade!uate training lac0 o& re!uired
resources suc. as e!uipment or tools or inordinate amounts o& re<?or0 to correct !uality
problems. 3evie? o& a Bob status report is only t.e &irst step in proBect control.
,.e Bob status report illustrated in ,able 12<4 employs eIplicit estimates o& ultimate cost
in eac. category o& eIpense. ,.ese estimates are used to identi&y t.e actual progress and
status o& an eIpense category. Estimates mig.t be made &rom simple linear eItrapolations
o& t.e productivity or cost o& t.e ?or0 to date on eac. proBect item. 2lgebraically a linear
estimation &ormula is generally one o& t?o &orms. Using a linear eItrapolation o& costs
t.e &orecast total cost (
&
isD
12.1
?.ere (
t
is t.e cost incurred to time t and p
t
is t.e proportion o& t.e activity completed at
time t. Kor eIample an activity ?.ic. is "+ percent complete ?it. a cost o& G4++++
?ould be estimated to .ave a total cost o& G4++++U+." ] G'++++. 4ore elaborate
met.ods o& &orecasting costs ?ould disaggregate costs into di&&erent categories ?it. t.e
total cost t.e sum o& t.e &orecast costs in eac. category.
2lternatively t.e use o& measured unit cost amounts can be used &or &orecasting total
cost. ,.e basic &ormula &or &orecasting cost &rom unit costs isD
12.2
?.ere (
&
is t.e &orecast total cost A is t.e total units o& ?or0 and c
t
is t.e average cost
per unit o& ?or0 eIperienced up to time t. $& t.e average unit cost is G"+ per unit o& ?or0
on a particular activity and 1#++ units o& ?or0 eIist t.en t.e eIpected cost is M1#++N
M"+N ] G'++++ &or completion.
,.e unit cost in E!uation M12.2N may be replaced ?it. t.e .ourly productivity and t.e
unit cost per .our Mor ot.er appropriate time periodN resulting in t.e e!uationD
12.3
?.ere t.e cost per ?or0 unit Mc
t
N is replaced by t.e time per unit .
t
divided by t.e cost
per unit o& time u
t
.
4ore elaborate &orecasting systems mig.t recognize peculiar problems associated ?it.
?or0 on particular items and modi&y t.ese simple proportional cost estimates. Kor
eIample i& productivity is improving as ?or0ers and managers become more &amiliar
?it. t.e proBect activities t.e estimate o& total costs &or an item mig.t be revised
do?n?ard. $n t.is case t.e estimating e!uation ?ould becomeD
12.4
?.ere &orecast total cost (
&
is t.e sum o& cost incurred to date (
t
and t.e cost resulting
&rom t.e remaining ?or0 MA < A
t
N multiplied by t.e eIpected cost per unit time period
&or t.e remainder o& t.e activity c
t
.
2s a numerical eIample suppose t.at t.e average unit cost .as been G"+ per unit o&
?or0 but t.e most recent &igure during a proBect is G4" per unit o& ?or0. $& t.e proBect
manager ?as assured t.at t.e improved productivity could be maintained &or t.e
remainder o& t.e proBect Mconsisting o& '++ units o& ?or0 out o& a total o& 1#++ units o&
?or0N t.e cost estimate ?ould be M"+NM'++N _ M4"NM'++N ] G%#+++ &or completion o& t.e
activity. 5ote t.at t.is &orecast uses t.e actual average productivity ac.ieved on t.e &irst
'++ units and uses a &orecast o& productivity &or t.e remaining ?or0. /istorical c.anges
in productivity mig.t also be used to represent t.is type o& non<linear c.anges in ?or0
productivity on particular activities over time.
$n addition to c.anges in productivities ot.er components o& t.e estimating &ormula can
be adBusted or more detailed estimates substituted. Kor eIample t.e c.ange in unit prices
due to ne? labor contracts or material supplierHs prices mig.t be re&lected in estimating
&uture eIpenditures. $n essence t.e same problems encountered in preparing t.e detailed
cost estimate are &aced in t.e process o& preparing eIposure estimates alt.oug. t.e
number and eItent o& uncertainties in t.e proBect environment decline as ?or0 progresses.
,.e only eIception to t.is rule is t.e danger o& !uality problems in completed ?or0
?.ic. ?ould re!uire re<construction.
Eac. o& t.e estimating met.ods described above re!uire current in&ormation on t.e state
o& ?or0 accomplis.ment &or particular activities. ,.ere are several possible met.ods to
develop suc. estimates including R"SD
=nits of 7or: CompletedD Kor easily measured !uantities t.e actual proportion
o& completed ?or0 amounts can be measured. Kor eIample t.e linear &eet o&
piping installed can be compared to t.e re!uired amount o& piping to estimate t.e
percentage o& piping ?or0 completed.
$ncremental ,ilestonesD *articular activities can be sub<divided or
JdecomposedJ into a series o& milestones and t.e milestones can be used to
indicate t.e percentage o& ?or0 complete based on .istorical averages. Kor
eIample t.e ?or0 e&&ort involved ?it. installation o& standard piping mig.t be
divided into &our milestonesD
o ;pool in placeD 2+V o& ?or0 and 2+V o& cumulative ?or0.
o Ends ?eldedD 4+V o& ?or0 and #+V o& cumulative ?or0.
o /angars and ,rim (ompleteD 3+V o& ?or0 and )+V o& cumulative ?or0.
o /ydrotested and (ompleteD 1+V o& ?or0 and 1++V o& cumulative ?or0.
,.us a pipe section &or ?.ic. t.e ends .ave been ?elded ?ould be reported as
#+V complete.
OpinionD ;ubBective Budgments o& t.e percentage complete can be prepared
by inspectors supervisors or proBect managers t.emselves. (learly t.is estimated
tec.ni!ue can be biased by optimism pessimism or inaccurate observations.
Qno?ledgeable estimaters and ade!uate &ield observations are re!uired to obtain
su&&icient accuracy ?it. t.is met.od.
Cost 2atioD ,.e cost incurred to date can also be used to estimate t.e ?or0
progress. Kor eIample i& an activity ?as budgeted to cost G2++++ and t.e cost
incurred at a particular date ?as G1++++ t.en t.e estimated percentage complete
under t.e cost ratio met.od ?ould be 1++++U2++++ ] +." or &i&ty percent. ,.is
met.od provides no independent in&ormation on t.e actual percentage complete or
any possible errors in t.e activity budgetD t.e cost &orecast ?ill al?ays be t.e
budgeted amount. (onse!uently managers must use t.e estimated costs to
complete an activity derived &rom t.e cost ratio met.od ?it. eItreme caution.
;ystematic application o& t.ese di&&erent estimating met.ods to t.e various proBect
activities enables calculation o& t.e percentage complete or t.e productivity estimates
used in preparing Bob status reports.
$n some cases automated data ac!uisition &or ?or0 accomplis.ments mig.t be instituted.
Kor eIample transponders mig.t be moved to t.e ne? ?or0 limits a&ter eac. dayHs
activity and t.e ne? locations automatically computed and compared ?it. proBect plans.
,.ese measurements o& actual progress s.ould be stored in a central database and t.en
processed &or updating t.e proBect sc.edule. ,.e use o& database management systems in
t.is &as.ion is described in (.apter 14.
&9ample 1!)+* &stimated Total Cost to Complete an Actiity
;uppose t.at ?e ?is. to estimate t.e total cost to complete piping construction activities
on a proBect. ,.e piping construction involves 1+++ linear &eet o& piping ?.ic. .as been
divided into "+ sections &or management convenience. 2t t.is time 4++ linear &eet o&
piping .as been installed at a cost o& G4++++ and "++ man<.ours o& labor. ,.e original
budget estimate ?as G)++++ ?it. a productivity o& one &oot per man<.our a unit cost o&
G#+ per man .our and a total material cost o& G 3++++. Kirm commitments o& material
delivery &or t.e G3++++ estimated cost .ave been received.
,.e &irst tas0 is to estimate t.e proportion o& ?or0 completed. ,?o estimates are readily
available. Kirst 4++ linear &eet o& pipe is in place out o& a total o& 1+++ linear &eet so t.e
proportion o& ?or0 completed is 4++U1+++ ] +.4 or 4+V. ,.is is t.e Junits o& ?or0
completedJ estimation met.od. ;econd t.e cost ratio met.od ?ould estimate t.e ?or0
complete as t.e cost<to<date divided by t.e cost estimate or G4++++UG )++++ ] +.44 or
44V. ,.ird t.e Jincremental milestonesJ met.od ?ould be applied by eIamining eac.
pipe section and estimating a percentage complete and t.en aggregating to determine t.e
total percentage complete. Kor eIample suppose t.e &ollo?ing !uantities o& piping &ell
into &our categories o& completenessD
(omplete M1++VN
/angars and trim complete M)+VN
Ends ?elded M#+VN
;pool in place M2+VN
3'+ &t
2+ &t
" &t
+ &t
,.en using t.e incremental milestones s.o?n above t.e estimate o& completed ?or0
?ould be 3'+ _ M2+NM+.)N _ M"NM+.#N _ + ] 4+1 &t and t.e proportion complete ?ould be
4+1 &tU1+++ &t ] +.4+1 or 4+V a&ter rounding.
Once an estimate o& ?or0 completed is available t.en t.e estimated cost to complete t.e
activity can be calculated. Kirst a simple linear eItrapolation o& cost results in an estimate
o& G4++++U+.4 ] G1+++++. &or t.e piping construction using t.e 4+V estimate o& ?or0
completed. ,.is estimate proBects a cost overrun o& 1+++++ < )++++ ] G1++++.
;econd a linear eItrapolation o& productivity results in an estimate o& M1+++ &t.NM"++
.rsU4++ &t.NMG#+U.rN _ 3++++ ] G1+"+++. &or completion o& t.e piping construction. ,.is
estimate suggests a variance o& 1+"+++ < )++++ ] G1"+++ above t.e activity estimate.
$n ma0ing t.is estimate labor and material costs entered separately ?.ereas t.e t?o
?ere implicitly combined in t.e simple linear cost &orecast above. ,.e source o& t.e
variance can also be identi&ied in t.is calculationD compared to t.e original estimate t.e
labor productivity is 1.2" .ours per &oot or 2"V .ig.er t.an t.e original estimate.
&9ample 1!)-* &stimated Total Cost for Completion
,.e &orecasting procedures described above assumed linear eItrapolations o& &uture costs
based eit.er on t.e complete eIperience on t.e activity or t.e recent eIperience. Kor
activities ?it. good .istorical records it can be t.e case t.at a typically non<linear pro&ile
o& cost eIpenditures and completion proportions can be estimated. Kigure 12<1 illustrates
one possible non<linear relations.ips derived &rom eIperience in some particular activity.
,.e progress on a ne? Bob can be compared to t.is .istorical record. Kor eIample point
2 in Kigure 12<1 suggests a .ig.er eIpenditure t.an is normal &or t.e completion
proportion. ,.is point represents 4+V o& ?or0 completed ?it. an eIpenditure o& #+V o&
t.e budget. ;ince t.e .istorical record suggests only "+V o& t.e budget s.ould be
eIpended at time o& 4+V completion a #+ < "+ ] 1+V overrun in cost is eIpected even i&
?or0 e&&iciency can be increased to .istorical averages. $& comparable cost overruns
continue to accumulate t.en t.e cost<to<complete ?ill be even .ig.er.
(igure 1!)1 $llustration o& *roportion (ompletion versus EIpenditure &or an 2ctivity
1!.- (inancial Accounting /ystems and Cost Accounts
,.e cost accounts described in t.e previous sections provide only one o& t.e various
components in a &inancial accounting system. :e&ore &urt.er discussing t.e use o& cost
accounts in proBect control t.e relations.ip o& proBect and &inancial accounting deserves
mention. 2ccounting in&ormation is generally used &or t.ree distinct purposesD
$nternal reporting to proBect managers &or day<to<day planning monitoring and
control.
$nternal reporting to managers &or aiding strategic planning.
EIternal reporting to o?ners government regulators and ot.er outside parties.
EIternal reports are constrained to particular &orms and procedures by contractual
reporting re!uirements or by generally accepted accounting practices. *reparation o& suc.
eIternal reports is re&erred to as financial accounting. $n contrast cost or managerial
accounting is intended to aid internal managers in t.eir responsibilities o& planning
monitoring and control.
*roBect costs are al?ays included in t.e system o& &inancial accounts associated ?it. an
organization. 2t t.e .eart o& t.is system all eIpense transactions are recorded in a
general ledger. ,.e general ledger o& accounts &orms t.e basis &or management reports on
particular proBects as ?ell as t.e &inancial accounts &or an entire organization. Ot.er
components o& a &inancial accounting system includeD
The accounts paya>le %ournal is intended to provide records o& bills received
&rom vendors material suppliers subcontractors and ot.er outside parties.
$nvoices o& c.arges are recorded in t.is system as are c.ec0s issued in payment.
(.arges to individual cost accounts are relayed or posted to t.e 6eneral Ledger.
Accounts receia>le %ournals provide t.e opposite &unction to t.at o& accounts
payable. $n t.is Bournal billings to clients are recorded as ?ell as receipts.
3evenues received are relayed to t.e general ledger.
Fo> cost ledgers summarize t.e c.arges associated ?it. particular proBects
arranged in t.e various cost accounts used &or t.e proBect budget.
$nentory records are maintained to identi&y t.e amount o& materials available at
any time.
$n traditional boo00eeping systems day to day transactions are &irst recorded in Bournals.
Ait. double<entry boo00eeping eac. transaction is recorded as bot. a debit and a credit
to particular accounts in t.e ledger. Kor eIample payment o& a supplierHs bill represents a
debit or increase to a proBect cost account and a credit or reduction to t.e companyHs cas.
account. *eriodically t.e transaction in&ormation is summarized and trans&erred to ledger
accounts. ,.is process is called posting and may be done instantaneously or daily in
computerized systems.
$n revie?ing accounting in&ormation t.e concepts o& flows and stocks s.ould be 0ept in
mind. 1aily transactions typically re&lect &lo?s o& dollar amounts entering or leaving t.e
organization. ;imilarly use or receipt o& particular materials represent &lo?s &rom or to
inventory. 2n account balance represents t.e stock or cumulative amount o& &unds
resulting &rom t.ese daily &lo?s. $n&ormation on bot. &lo?s and stoc0s are needed to give
an accurate vie? o& an organizationHs state. $n addition &orecasts o& &uture c.anges are
needed &or e&&ective management.
$n&ormation &rom t.e general ledger is assembled &or t.e organizationHs &inancial reports
including balance s.eets and income statements &or eac. period. ,.ese reports are t.e
basic products o& t.e &inancial accounting process and are o&ten used to assess t.e
per&ormance o& an organization. ,able12<" s.o?s a typical income statement &or a small
construction &irm indicating a net pro&it o& G 33++++ a&ter taIes. ,.is statement
summarizes t.e &lo?s o& transactions ?it.in a year. ,able 12<# s.o?s t.e comparable
balance s.eet indicated a net increase in retained earnings e!ual to t.e net pro&it. ,.e
balance s.eet re&lects t.e e&&ects o& income &lo?s during t.e year on t.e overall ?ort. o&
t.e organization.
TA<"& 1!). $llustration o& an 2ccounting ;tatement o& $ncome
$ncome /tatement
&or t.e year ended 1ecember 31 1)II
6ross proBect revenues G%2+++++
1irect proBect costs on contracts
1epreciation o& e!uipment
Estimating
2dministrative and ot.er eIpenses
;ubtotal o& cost and eIpenses
Operating $ncome
$nterest EIpense net
$ncome be&ore taIes
$ncome taI
5et income a&ter taI
(as. dividends
3etained earnings current year
3etention at beginning o& year
3etained earnings at end o& year
""+++++
2+++++
1"++++
#"++++
#"+++++
%+++++
1"++++
""++++
22++++
33++++
1+++++
23++++
#"++++
G''++++.[U[ td\
TA<"& 1!)0 $llustration o& an 2ccounting :alance ;.eet
<alance /heet
1ecember 31 1)II
Assets 2mount
(as.
*ayments 3eceivable
Aor0 in progress not claimed
Aor0 in progress retention
E!uipment at cost less accumulated depreciation
,otal assets
G1"++++
%"++++
%+++++
2+++++
14+++++
G32+++++
"ia>ilities and &quity
Liabilities
2ccounts payable
Ot.er items payable MtaIes ?ages etc.N
Long term debts
;ubtotal
;.are.oldersH &unds
4++++ s.ares o& common stoc0
M$ncluding paid<in capitalN
G)"++++
"++++
"+++++
1"+++++
'2++++
3etained Earnings
;ubtotal
,otal Liabilities and E!uity
''++++
1%+++++
G32+++++
$n t.e conteIt o& private construction &irms particular problems arise in t.e treatment o&
uncompleted contracts in &inancial reports. Under t.e Jcompleted<contractJ met.od
income is only reported &or completed proBects. Aor0 on proBects under?ay is only
reported on t.e balance s.eet representing an asset i& contract billings eIceed costs or a
liability i& costs eIceed billings. A.en a proBect is completed t.e total net pro&it Mor lossN
is reported in t.e &inal period as income. Under t.e Jpercentage<o&<completionJ met.od
actual costs are reported on t.e income statement plus a proportion o& all proBect revenues
Mor billingsN e!ual to t.e proportion o& ?or0 completed during t.e period. ,.e proportion
o& ?or0 completed is computed as t.e ratio o& costs incurred to date and t.e total
estimated cost o& t.e proBect. ,.us i& t?enty percent o& a proBect ?as completed in a
particular period at a direct cost o& G1'++++ and on a proBect ?it. eIpected revenues o&
G1++++++ t.en t.e contract revenues earned ?ould be calculated as G1++++++M+.2N ]
G2+++++. ,.is &igure represents a pro&it and contribution to over.ead o& G2+++++ <
G1'++++ ] G2++++ &or t.e period. 5ote t.at billings and actual receipts mig.t be in
eIcess or less t.an t.e calculated revenues o& G2+++++. On t.e balance s.eet o& an
organization using t.e percentage<o&<completion met.od an asset is usually reported to
re&lect billings and t.e estimated or calculated earnings in eIcess o& actual billings.
2s anot.er eIample o& t.e di&&erence in t.e Jpercentage<o&<completionJ and t.e
Jcompleted<contractJ met.ods consider a t.ree year proBect to construct a plant ?it. t.e
&ollo?ing cas. &lo? &or a contractorD
9ear (ontract EIpenses *ayments 3eceived
1
2
3
,otal
G%+++++
1'++++
32++++
G12+++++
G)+++++
2"++++
1"++++
G13+++++
,.e supervising arc.itect determines t.at #+V o& t.e &acility is complete in year 1 and
%"V in year 2. Under t.e Jpercentage<o&<completionJ met.od t.e net income in year 1 is
G%'++++ M#+V o& G13+++++N less t.e G%+++++ in eIpenses or G'++++. Under t.e
Jcompleted<contractJ met.od t.e entire pro&it o& G1+++++ ?ould be reported in year 3.
,.e Jpercentage<o&<completionJ met.od o& reporting period earnings .as t.e advantage
o& representing t.e actual estimated earnings in eac. period. 2s a result t.e income
stream and resulting pro&its are less susceptible to precipitate s?ings on t.e completion o&
a proBect as can occur ?it. t.e Jcompleted contract met.odJ o& calculating income.
/o?ever t.e Jpercentage<o&<completionJ .as t.e disadvantage o& relying upon estimates
?.ic. can be manipulated to obscure t.e actual position o& a company or ?.ic. are
di&&icult to reproduce by outside observers. ,.ere are also subtleties suc. as t.e de&erral
o& all calculated income &rom a proBect until a minimum t.res.old o& t.e proBect is
completed. 2s a result interpretation o& t.e income statement and balance s.eet o& a
private organization is not al?ays straig.t&or?ard. Kinally t.ere are taI disadvantages
&rom using t.e Jpercentage<o&<completionJ met.od since corporate taIes on eIpected
pro&its may become due during t.e proBect rat.er t.an being de&erred until t.e proBect
completion. 2s an eIample o& taI implications o& t.e t?o reporting met.ods a study o&
&orty<seven construction &irms conducted by t.e 6eneral 2ccounting O&&ice &ound t.at
G2'+ million in taIes ?ere de&erred &rom 1)'+ to 1)'4 t.roug. use o& t.e Jcompleted<
contractJ met.od. R#S
$t s.ould be apparent t.at t.e Jpercentage<o&<completionJ accounting provides only a
roug. estimate o& t.e actual pro&it or status o& a proBect. 2lso t.e Jcompleted contractJ
met.od o& accounting is entirely retrospective and provides no guidance &or management.
,.is is only one eIample o& t.e types o& allocations t.at are introduced to correspond to
generally accepted accounting practices yet may not &urt.er t.e cause o& good proBect
management. 2not.er common eIample is t.e use o& e!uipment depreciation sc.edules
to allocate e!uipment purc.ase costs. 2llocations o& costs or revenues to particular
periods ?it.in a proBect may cause severe c.anges in particular indicators but .ave no
real meaning &or good management or pro&it over t.e entire course o& a proBect. 2s
Po.nson and Qaplan argueD R%S
,odayHs management accounting in&ormation driven by t.e procedures and cycle o& t.e
organizationHs &inancial reporting system is too late too aggregated and too distorted to
be relevant &or managersH planning and control decisions....
4anagement accounting reports are o& little .elp to operating managers as t.ey attempt to
reduce costs and improve productivity. Kre!uently t.e reports decrease productivity
because t.ey re!uire operating managers to spend time attempting to understand and
eIplain reported variances t.at .ave little to do ?it. t.e economic and tec.nological
reality o& t.eir operations...
,.e management accounting system also &ails to provide accurate product costs. (ost are
distributed to products by simplistic and arbitrary measures usually direct labor based
t.at do not represent t.e demands made by eac. product on t.e &irmHs resources.
2s a result complementary procedures to t.ose used in traditional &inancial accounting
are re!uired to accomplis. e&&ective proBect control as described in t.e preceding and
&ollo?ing sections. A.ile &inancial statements provide consistent and essential
in&ormation on t.e condition o& an entire organization t.ey need considerable
interpretation and supplementation to be use&ul &or proBect management.
&9ample 1!).* Calculating net profit
2s an eIample o& t.e calculation o& net pro&it suppose t.at a company began siI Bobs in a
year completing t.ree Bobs and .aving t.ree Bobs still under?ay at t.e end o& t.e year.
1etails o& t.e siI Bobs are s.o?n in ,able 12<%. A.at ?ould be t.e companyHs net pro&it
under &irst t.e Jpercentage<o&<completionJ and second t.e Jcompleted contract
met.odJ accounting conventionsX
TA<"& 1!)1 EIample o& Kinancial 3ecords o& *roBects
Met Profit on Completed Contracts DAmounts in thousands of dollarsE
Pob 1
Pob 2
Pob 3
,otal 5et *ro&it on (ompleted Pobs
G143#.++
3"#.++
< %3'.++
G1+"4.++
/tatus of Fo>s =nderway Pob 4 Pob " Pob #
Original (ontract *rice
(ontract (.anges M(.ange Orders etc.N
,otal (ost to 1ate
*ayments 3eceived or 1ue to 1ate
Estimated (ost to (omplete
G42++
4++
3#++
3"2+
"++
G3'++
#++
1%1+
1'3+
23++
G"#3+
< 3++
#2+
34+
"+++
2s s.o?n in ,able 12<% a net pro&it o& G1+"4+++ ?as earned on t.e t.ree completed
Bobs. Under t.e Jcompleted contractJ met.od t.is total ?ould be total pro&it. Under t.e
percentage<o& completion met.od t.e yearHs eIpected pro&it on t.e proBects under?ay
?ould be added to t.is amount. Kor Bob 4 t.e eIpected pro&its are calculated as &ollo?sD
(urrent contract price ] Original contract price _ (ontract (.anges
] 42++ _ 4++ _ 4#++
(redit or debit to date ] ,otal costs to date < *ayments received or due to date
] 3#++ < 3"2+ ] < '+
(ontract value o& uncompleted
?or0
] (urrent contract price < *ayments received or due
] 4#++ < 3"2+ ] 1+'+
(redit or debit to come ] (ontract value o& uncompleted ?or0 < Estimated (ost
to (omplete
] 1+'+ < "++ ] "'+
Estimated &inal gross pro&it ] (redit or debit to date _ (redit or debit to come
] < '+. _ "'+. ] "++
Estimated total proBect costs ] (ontract price < 6ross pro&it
] 4#++ < "++ ] 41++
Estimated *ro&it to date ] Estimated &inal gross pro&it I *roportion o& ?or0
complete
] "++. M3#++U41++NN ] 43)
;imilar calculations &or t.e ot.er Bobs under?ay indicate estimated pro&its to date o&
G1##+++ &or Pob " and <G32+++ &or Pob #. 2s a result t.e net pro&it using t.e
Jpercentage<o&<completionJ met.od ?ould be G1#2%+++ &or t.e year. 5ote t.at t.is
&igure ?ould be altered in t.e event o& multi<year proBects in ?.ic. net pro&its on proBects
completed or under?ay in t.is year ?ere claimed in earlier periods.
1!.. Control of Pro%ect Cash (lows
;ection 12.3 described t.e development o& in&ormation &or t.e control o& proBect costs
?it. respect to t.e various &unctional activities appearing in t.e proBect budget. *roBect
managers also are involved ?it. assessment o& t.e overall status o& t.e proBect including
t.e status o& activities &inancing payments and receipts. ,.ese various items comprise
t.e proBect and &inancing cas. &lo?s described in earlier c.apters. ,.ese components
include costs incurred Mas described aboveN billings and receipts &or billings to o?ners
M&or contractorsN payable amounts to suppliers and contractors &inancing plan cas. &lo?s
M&or bonds or ot.er &inancial instrumentsN etc.
2s an eIample o& cas. &lo? control consider t.e report s.o?n in ,able 12<'. $n t.is case
costs are not divided into &unctional categories as in ,able 12<4 suc. as labor material
or e!uipment. ,able 12<' represents a summary o& t.e proBect status as vie?ed &rom
different components of the accounting system4 ,.us t.e aggregation o& di&&erent 0inds o&
cost eIposure or cost commitment s.o?n in ,able 12<+ .as not been per&ormed. ,.e
elements in ,able 12<' includeD
Costs
,.is is a summary o& c.arges as re&lected by t.e Bob cost accounts including
eIpenditures and estimated costs. ,.is ro? provides an aggregate summary o& t.e
detailed activity cost in&ormation described in t.e previous section. Kor t.is eIample t.e
total costs as o& Puly 2 M%U+2N ?ere G '%"4"1# and t.e original cost estimate ?as
G#"'#3+)2 so t.e approIimate percentage complete ?as '%"4"1#U#"'#3+)2 or
13.2)2V. /o?ever t.e proBect manager no? proBects a cost o& G##"4"2#3 &or t.e
proBect representing an increase o& G#'21%1 over t.e original estimate. ,.is ne?
estimate ?ould re&lect t.e actual percentage o& ?or0 completed as ?ell as ot.er e&&ects
suc. as c.anges in unit prices &or labor or materials. 5eedless to say t.is increase in
eIpected costs is not a ?elcome c.ange to t.e proBect manager.
<illings
,.is ro? summarizes t.e state o& cas. &lo?s ?it. respect to t.e o?ner o& t.e &acilityO t.is
ro? ?ould not be included &or reports to o?ners. ,.e contract amount ?as G#%"11#+2
and a total o& G)2%##21 or 13.%41V o& t.e contract .as been billed. ,.e amount o&
allo?able billing is speci&ied under t.e terms o& t.e contract bet?een an o?ner and an
engineering arc.itect or constructor. $n t.is case total billings .ave eIceeded t.e
estimated proBect completion proportion. ,.e &inal column includes t.e currently
proBected net earnings o& G)##33). ,.is &igure is calculated as t.e contract amount less
proBected costsD #%"11#+2 < ##"4"2#3 ] G)##33). 5ote t.at t.is pro&it &igure does not
re&lect t.e time value o& money or discounting.
Paya>les
,.e *ayables ro? summarizes t.e amount o?ed by t.e contractor to material suppliers
labor or sub<contractors. 2t t.e time o& t.is report G#%1)1+3 .ad been paid to
subcontractors material suppliers and ot.ers. $nvoices o& G13+++') .ave accumulated
but .ave not yet been paid. 3etention o& G3)1#%1 .as been imposed on subcontractors
and G343#"3 in direct labor eIpenses .as been occurred. ,.e total o& payables is e!ual to
t.e total proBect eIpenses s.o?n in t.e &irst ro? o& costs.
2eceia>les
,.is ro? summarizes t.e cas. &lo? o& receipts &rom t.e o?ner. 5ote t.at t.e actual
receipts &rom t.e o?ner may di&&er &rom t.e amounts billed due to delayed payments or
retainage on t.e part o& t.e o?ner. ,.e net<billed e!uals t.e gross billed less retention by
t.e o?ner. $n t.is case gross billed is G)2%##21 Mas s.o?n in t.e billings ro?N t.e net
billed is G'%#1#%3 and t.e retention is G"14)4'. Un&ortunately only G%2+)344 .as
been received &rom t.e o?ner so t.e open receivable amount is a MsubstantialeN
G2+#%2%% due &rom t.e o?ner.
Cash Position
,.is ro? summarizes t.e cas. position o& t.e proBect as i& all eIpenses and receipts &or
t.e proBect ?ere combined in a single account. ,.e actual eIpenditures .ave been
G%+#2%"# Mcalculated as t.e total costs o& G'%"4"1# less subcontractor retentions o&
G3)1#%1 and unpaid bills o& G13+++')N and G %2+)344 .as been received &rom t.e
o?ner. 2s a result a net cas. balance o& G14#"'' eIists ?.ic. can be used in an interest
earning ban0 account or to &inance de&icits on ot.er proBects.
Eac. o& t.e ro?s s.o?n in ,able 12<' ?ould be derived &rom di&&erent sets o& &inancial
accounts. 2dditional reports could be prepared on t.e &inancing cas. &lo?s &or bonds or
interest c.arges in an overdra&t account.
TA<"& 1!)3 2n EIample o& a (as. Klo? ;tatus 3eport
(osts
%U+2
(.arges
'%"4"1#
Estimated
#"'#3+)2
V (omplete
13.2)2
*roBected
##"4"2#3
(.ange
#'21%1
:illings
%U+1
(ontract
#%"11#+2
6ross :ill
)2%##21
V :illed
13.%41
*ro&it
)##33)
*ayables
%U+1
*aid
#%1)1+3
Open
13+++')
3etention
3)1#%1
Labor
343#"3
Total
'%"4"1#
3eceivable
%U+2
5et :ill
'%#1#%3
3eceived
%2+)344
3etention
"14)4'
Open
2+#%2%%
(as. *osition *aid
%+#2%"#
3eceived
%2+)344
*osition
14#"''
,.e overall status o& t.e proBect re!uires synt.esizing t.e di&&erent pieces o& in&ormation
summarized in ,able 12<'. Eac. o& t.e di&&erent accounting systems contributing to t.is
table provides a di&&erent vie? o& t.e status o& t.e proBect. $n t.is eIample t.e budget
in&ormation indicates t.at costs are .ig.er t.an eIpected ?.ic. could be troubling.
/o?ever a pro&it is still eIpected &or t.e proBect. 2 substantial amount o& money is due
&rom t.e o?ner and t.is could turn out to be a problem i& t.e o?ner continues to lag in
payment. Kinally t.e positive cas. position &or t.e proBect is .ig.ly desirable since
&inancing c.arges can be avoided.
,.e Bob status reports illustrated in t.is and t.e previous sections provide a primary tool
&or proBect cost control. 1i&&erent reports ?it. varying amounts o& detail and item reports
?ould be prepared &or di&&erent individuals involved in a proBect. 3eports to upper
management ?ould be summaries reports to particular sta&& individuals ?ould emp.asize
t.eir responsibilities Meg. purc.asing payroll etc.N and detailed reports ?ould be
provided to t.e individual proBect managers. (oupled ?it. sc.eduling reports described
in (.apter 1+ t.ese reports provide a snaps.ot vie? o& .o? a proBect is doing. O& course
t.ese sc.edule and cost reports ?ould .ave to be tempered by t.e actual
accomplis.ments and problems occurring in t.e &ield. Kor eIample i& ?or0 already
completed is o& sub<standard !uality t.ese reports ?ould not reveal suc. a problem.
Even t.oug. t.e reports indicated a proBect on time and on budget t.e possibility o& re<
?or0 or inade!uate &acility per&ormance due to !uality problems ?ould !uic0ly reverse
t.at rosy situation.
1!.0 /chedule Control
$n addition to cost control proBect managers must also give considerable attention to
monitoring sc.edules. (onstruction typically involves a deadline &or ?or0 completion so
contractual agreements ?ill &orce attention to sc.edules. 4ore generally delays in
construction represent additional costs due to late &acility occupancy or ot.er &actors. Pust
as costs incurred are compared to budgeted costs actual activity durations may be
compared to eIpected durations. $n t.is process &orecasting t.e time to complete
particular activities may be re!uiredO t.e met.ods used &or &orecasting completion times
o& activities are directly analogous to t.ose used &or cost &orecasting. Kor eIample a
typical estimating &ormula mig.t beD
12."
?.ere 1
&
is t.e &orecast duration A is t.e amount o& ?or0 and .
t
is t.e observed
productivity to time t. 2s ?it. cost control it is important to devise e&&icient and cost
e&&ective met.ods &or gat.ering in&ormation on actual proBect accomplis.ments.
6enerally observations o& ?or0 completed are made by inspectors and proBect managers
and t.en ?or0 completed is estimated as described in ;ection 12.3. Once estimates o&
?or0 complete and time eIpended on particular activities is available deviations &rom
t.e original duration estimate can be estimated. ,.e calculations &or ma0ing duration
estimates are !uite similar to t.ose used in ma0ing cost estimates in ;ection 12.3.
Kor eIample Kigure 12<2 s.o?s t.e originally sc.eduled proBect progress versus t.e
actual progress on a proBect. ,.is &igure is constructed by summing up t.e percentage o&
eac. activity ?.ic. is complete at di&&erent points in timeO t.is summation can be
?eig.ted by t.e magnitude o& e&&ort associated ?it. eac. activity. $n Kigure 12<2 t.e
proBect ?as a.ead o& t.e original sc.edule &or a period including point 2 but is no? late
at point : by an amount e!ual to t.e .orizontal distance bet?een t.e planned progress
and t.e actual progress observed to date.
(igure 1!)! $llustration o& *lanned versus 2ctual *rogress over ,ime on a *roBect
;c.edule ad.erence and t.e current status o& a proBect can also be represented on
geometric models o& a &acility. Kor eIample an animation o& t.e construction se!uence
can be s.o?n on a computer screen ?it. di&&erent colors or ot.er coding sc.eme
indicating t.e type o& activity under?ay on eac. component o& t.e &acility. 1eviations
&rom t.e planned sc.edule can also be portrayed by color coding. ,.e result is a
mec.anism to bot. indicate ?or0 in progress and sc.edule ad.erence speci&ic to
individual components in t.e &acility.
$n evaluating sc.edule progress it is important to bear in mind t.at some activities
possess &loat or sc.eduling lee?ay ?.ereas delays in activities on t.e critical pat. ?ill
cause proBect delays. $n particular t.e delay in planned progress at time t may be soa0ed
up in activitiesH &loat Mt.ereby causing no overall delay in t.e proBect completionN or may
cause a proBect delay. 2s a result o& t.is ambiguity it is pre&erable to update t.e proBect
sc.edule to devise an accurate protrayal o& t.e sc.edule ad.erence. 2&ter applying a
sc.eduling algorit.m a ne? proBect sc.edule can be obtained. Kor cas. &lo? planning
purposes a grap. or report similar to t.at s.o?n in Kigure 12<3 can be constructed to
compare actual eIpenditures to planned eIpenditures at any time. ,.is process o& re<
sc.eduling to indicate t.e sc.edule ad.erence is only one o& many instances in ?.ic.
sc.edule and budget updating may be appropriate as discussed in t.e neIt section.
(igure 1!)+ $llustration o& *lanned versus 2ctual EIpenditures on a *roBect
1!.1 /chedule and <udget =pdates
;c.eduling and proBect planning is an activity t.at continues t.roug.out t.e li&etime o& a
proBect. 2s c.anges or discrepancies bet?een t.e plan and t.e realization occur t.e
proBect sc.edule and cost estimates s.ould be modi&ied and ne? sc.edules devised. ,oo
o&ten t.e sc.edule is devised once by a planner in t.e central o&&ice and t.en revisions or
modi&ications are done incompletely or only sporadically. ,.e result is t.e lac0 o&
e&&ective proBect monitoring and t.e possibility o& eventual c.aos on t.e proBect site.
On J&ast trac0J proBects initial construction activities are begun even be&ore t.e &acility
design is &inalized. $n t.is case special attention must be placed on t.e coordinated
sc.eduling o& design and construction activities. Even in proBects &or ?.ic. t.e design is
&inalized be&ore construction begins change orders representing c.anges in t.e J&inalJ
design are o&ten issued to incorporate c.anges desired by t.e o?ner.
*eriodic updating o& &uture activity durations and budgets is especially important to avoid
eIcessive optimism in proBects eIperiencing problems. $& one type o& activity eIperiences
delays on a proBect t.en related activities are also li0ely to be delayed unless managerial
c.anges are made. (onstruction proBects normally involve numerous activities ?.ic. are
closely related due to t.e use o& similar materials e!uipment ?or0ers or site
c.aracteristics. EIpected cost c.anges s.ould also be propagated t.oug.out a proBect
plan. $n essence duration and cost estimates &or &uture activities s.ould be revised in lig.t
o& t.e actual eIperience on t.e Bob. Ait.out t.is updating proBect sc.edules slip more
and more as time progresses. ,o per&orm t.is type o& updating proBect managers need
access to original estimates and estimating assumptions.
Un&ortunately most proBect cost control and sc.eduling systems do not provide many
aids &or suc. updating. A.at is re!uired is a means o& identi&ying discrepancies
diagnosing t.e cause &orecasting t.e e&&ect and propagating t.is e&&ect to all related
activities. A.ile t.ese steps can be underta0en manually computers aids to support
interactive updating or even automatic updating ?ould be .elp&ul. R'S
:eyond t.e direct updating o& activity durations and cost estimates proBect managers
s.ould .ave mec.anisms available &or evaluating any type o& sc.edule c.ange. Updating
activity duration estimations c.anging sc.eduled start times modi&ying t.e estimates o&
resources re!uired &or eac. activity and even c.anging t.e proBect net?or0 logic Mby
inserting ne? activities or ot.er c.angesN s.ould all be easily accomplis.ed. $n e&&ect
sc.eduling aids s.ould be directly available to proBect managers. R)S Kortunately local
computers are commonly available on site &or t.is purpose.
&9ample 1!)0* /chedule =pdates in a /mall Pro%ect
2s an eIample o& t.e type o& c.anges t.at mig.t be re!uired consider t.e nine activity
proBect described in ;ection 1+.3 and appearing in Kigure 12<4. 2lso suppose t.at t.e
proBect is &our days under?ay ?it. t.e current activity sc.edule and progress as s.o?n
in Kigure 12<". 2 &e? problems or c.anges t.at mig.t be encountered include t.e
&ollo?ingD
1. 2n underground ?aterline t.at ?as previously un0no?n ?as ruptured during t.e
&i&t. day o& t.e proBect. 2n eItra day ?as re!uired to replace t.e ruptured section
and anot.er day ?ill be re!uired &or clean<up. A.at is t.e impact on t.e proBect
durationX
o ,o analyze t.is c.ange ?it. t.e critical pat. sc.eduling procedure t.e
manager .as t.e options o& M1N c.anging t.e eIpected duration o& activity
( 6eneral EIcavation to t.e ne? eIpected duration o& 1+ days or M2N
splitting activity ( into t?o tas0s Mcorresponding to t.e ?or0 done prior to
t.e ?aterline brea0 and t.at to be done a&terN and adding a ne? activity
representing repair and clean<up &rom t.e ?aterline brea0. ,.e second
approac. .as t.e advantage t.at any delays to ot.er activities Msuc. as
activities 1 and EN could also be indicated by precedence constraints.
o 2ssuming t.at no ot.er activities are a&&ected t.e manager decides to
increase t.e eIpected duration o& activity ( to 1+ days. ;ince activity ( is
on t.e critical pat. t.e proBect duration also increases by 2 days. 2pplying
t.e critical pat. sc.eduling procedure ?ould con&irm t.is c.ange and also
give a ne? set o& earliest and latest starting times &or t.e various activities.
2. 2&ter ' days on t.e proBect t.e o?ner as0s t.at a ne? drain be installed in
addition to t.e se?er line sc.eduled &or activity 6. ,.e proBect manager
determines t.at a ne? activity could be added to install t.e drain in parallel ?it.
2ctivity 6 and re!uiring 2 days. A.at is t.e e&&ect on t.e sc.eduleX
o $nserting a ne? activity in t.e proBect net?or0 bet?een nodes 3 and 4
violates t.e activity<on<branc. convention t.at only one activity can be
de&ined bet?een any t?o nodes. /ence a ne? node and a dummy activity
must be inserted in addition to t.e drain installation activity. 2s a result
t.e nodes must be re<numbered and t.e critical pat. sc.edule developed
again. *er&orming t.ese operations reveals t.at no c.ange in t.e proBect
duration ?ould occur and t.e ne? activity .as a total &loat o& 1 day.
o ,o avoid t.e labor associated ?it. modi&ying t.e net?or0 and re<
numbering nodes suppose t.at t.e proBect manager simply re<de&ined
activity 6 as installation o& se?er and drain lines re!uiring 4 days. $n t.is
case activity 6 ?ould appear on t.e critical pat. and t.e proBect duration
?ould increase. 2dding an additional cre? so t.at t.e t?o installations
could proceed in parallel mig.t reduce t.e duration o& activity 6 bac0 to 2
days and t.ereby avoid t.e increase in t.e proBect duration.
3. 2t day 12 o& t.e proBect t.e eIcavated trenc.es collapse during 2ctivity E. 2n
additional " days ?ill be re!uired &or t.is activity. A.at is t.e e&&ect on t.e
proBect sc.eduleX A.at c.anges s.ould be made to insure meeting t.e completion
deadlineX
o 2ctivity E .as a total &loat o& only 1 day. Ait. t.e c.ange in t.is activityHs
duration it ?ill lie on t.e critical pat. and t.e proBect duration ?ill
increase.
o 2nalysis o& possible time savings in subse!uent activities is no? re!uired
using t.e procedures described in ;ection 1+.).
(igure 1!)- 2 5ine 2ctivity EIample *roBect
(igure 1!). (urrent ;c.edule &or an EIample *roBect *resented as a :ar (.art
2s can be imagined it is not at all uncommon to encounter c.anges during t.e course o&
a proBect t.at re!uire modi&ication o& durations c.anges in t.e net?or0 logic o&
precedence relations.ips or additions and deletions o& activities. (onse!uently t.e
sc.eduling process s.ould be readily available as t.e proBect is under?ay.
1!.3 2elating Cost and /chedule $nformation
,.e previous sections &ocused upon t.e identi&ication o& t.e budgetary and sc.edule
status o& proBects. 2ctual proBects involve a compleI inter<relations.ip bet?een time and
cost. 2s proBects proceed delays in&luence costs and budgetary problems may in turn
re!uire adBustments to activity sc.edules. ,rade<o&&s bet?een time and costs ?ere
discussed in ;ection 1+.) in t.e conteIt o& proBect planning in ?.ic. additional resources
applied to a proBect activity mig.t result in a s.orter duration but .ig.er costs.
Unanticipated events mig.t result in increases in bot. time and cost to complete an
activity. Kor eIample eIcavation problems may easily lead to muc. lo?er t.an
anticipated productivity on activities re!uiring digging.
A.ile proBect managers implicitly recognize t.e inter<play bet?een time and cost on
proBects it is rare to &ind e&&ective proBect control systems ?.ic. include bot. elements.
Usually proBect costs and sc.edules are recorded and reported by separate application
programs. *roBect managers must t.en per&orm t.e tedious tas0 o& relating t.e t?o sets o&
in&ormation.
,.e di&&iculty o& integrating sc.edule and cost in&ormation stems primarily &rom t.e level
o& detail re!uired &or e&&ective integration. Usually a single proBect activity ?ill involve
numerous cost account categories. Kor eIample an activity &or t.e preparation o& a
&oundation ?ould involve laborers cement ?or0ers concrete &orms concrete
rein&orcement transportation o& materials and ot.er resources. Even a more
disaggregated activity de&inition suc. as erection o& &oundation &orms ?ould involve
numerous resources suc. as &orms nails carpenters laborers and material transportation.
2gain di&&erent cost accounts ?ould normally be used to record t.ese various resources.
;imilarly numerous activities mig.t involve eIpenses associated ?it. particular cost
accounts. Kor eIample a particular material suc. as standard piping mig.t be used in
numerous di&&erent sc.edule activities. ,o integrate cost and sc.edule in&ormation t.e
disaggregated c.arges &or speci&ic activities and speci&ic cost accounts must be t.e basis
o& analysis.
2 straig.t&or?ard means o& relating time and cost in&ormation is to de&ine individual
work elements representing t.e resources in a particular cost category associated ?it. a
particular proBect activity. Aor0 elements ?ould represent an element in a t?o<
dimensional matriI o& activities and cost accounts as illustrated in Kigure 12<#. 2
numbering or identi&ying system &or ?or0 elements ?ould include bot. t.e relevant cost
account and t.e associated activity. $n some cases it mig.t also be desirable to identi&y
?or0 elements by t.e responsible organization or individual. $n t.is case a t.ree
dimensional representation o& ?or0 elements is re!uired ?it. t.e t.ird dimension
corresponding to responsible individuals. R1+S 4ore generally modern computerized
databases can accommodate a &leIible structure o& data representation to support
aggregation ?it. respect to numerous di&&erent perspectivesO t.is type o& system ?ill be
discussed in (.apter 14.
Ait. t.is organization o& in&ormation a number o& management reports or vie?s could
be generated. $n particular t.e costs associated ?it. speci&ic activities could be obtained
as t.e sum o& t.e ?or0 elements appearing in any ro? in Kigure 12<#. ,.ese costs could
be used to evaluate alternate tec.nologies to accomplis. particular activities or to derive
t.e eIpected proBect cas. &lo? over time as t.e sc.edule c.anges. Krom a management
perspective problems developing &rom particular activities could be rapidly identi&ied
since costs ?ould be accumulated at suc. a disaggregated level. 2s a result proBect
control becomes at once more precise and detailed.
(igure 1!)0 $llustration o& a (ost 2ccount and *roBect 2ctivity 4atriI
Un&ortunately t.e development and maintenance o& a ?or0 element database can
represent a large data collection and organization e&&ort. 2s noted earlier &our .undred
separate cost accounts and &our .undred activities ?ould not be unusual &or a
construction proBect. ,.e result ?ould be up to 4++I4++ ] 1#++++ separate ?or0
elements. O& course not all activities involve eac. cost account. /o?ever even a density
o& t?o percent Mso t.at eac. activity ?ould .ave eig.t cost accounts and eac. account
?ould .ave eig.t associated activities on t.e averageN ?ould involve nearly t.irteen
t.ousand ?or0 elements. $nitially preparing t.is database represents a considerable
burden but it is also t.e case t.at proBect boo00eepers must record proBect events ?it.in
eac. o& t.ese various ?or0 elements. $mplementations o& t.e J?or0 elementJ proBect
control systems .ave typically &ondered on t.e burden o& data collection storage and
boo0<0eeping.
Until data collection is better automated t.e use o& ?or0 elements to control activities in
large proBects is li0ely to be di&&icult to implement. /o?ever certain segments o& proBect
activities can pro&it tremendously &rom t.is type o& organization. $n particular material
re!uirements can be trac0ed in t.is &as.ion. 4aterials involve only a subset o& all cost
accounts and proBect activities so t.e burden o& data collection and control is muc.
smaller t.an &or an entire system. 4oreover t.e bene&its &rom integration o& sc.edule and
cost in&ormation are particularly noticeable in materials control since delivery sc.edules
are directly a&&ected and bul0 order discounts mig.t be identi&ied. (onse!uently
materials control systems can reasonably encompass a J?or0 elementJ accounting
system.
$n t.e absence o& a ?or0 element accounting system costs associated ?it. particular
activities are usually estimated by summing eIpenses in all cost accounts directly related
to an activity plus a proportion o& eIpenses in cost accounts used Bointly by t?o or more
activities. ,.e basis o& cost allocation ?ould typically be t.e level o& e&&ort or resource
re!uired by t.e di&&erent activities. Kor eIample costs associated ?it. supervision mig.t
be allocated to di&&erent concreting activities on t.e basis o& t.e amount o& ?or0
Mmeasured in cubic yards o& concreteN in t.e di&&erent activities. Ait. t.ese allocations
cost estimates &or particular ?or0 activities can be obtained.
1!.4 2eferences
1. 2merican ;ociety o& (ivil Engineers J(onstruction (ost (ontrolJ 2;(E
4anuals and 3eports o& Engineering *ractice 5o. #" 3ev. Ed. 1)'".
2. (oombs A.E. and A.P. *almer $onstruction "ccounting and 7inancial
'anagement 4c6ra?</ill 5e? 9or0 1)%%.
3. /alpin 1. A. 7inancial and $ost $oncepts for $onstruction 'anagement Po.n
Ailey W ;ons 5e? 9or0 1)'".
4. Po.nson /. ,.omas and 3obert ;. Qaplan Relevance .ost% ,he Rise and 7all of
'anagement "ccounting /arvard :usiness ;c.ool *ress :oston 42 1)'%.
". 4ueller K.A. -ntegrated $ost and #chedule $ontrol for $onstruction !rojects
8an 5ostrand 3ein.old (ompany 5e? 9or0 1)'#.
#. ,ersine 3.P. !rinciples of -nventory and 'aterials 'anagement% 5ort. /olland
1)'2.
1!.15 Pro>lems
1. ;uppose t.at t.e eIpected eIpenditure o& &unds in a particular category ?as
eIpected to be.ave in a piece?ise linear &as.ion over t.e course o& t.e proBect. $n
particular t.e &ollo?ing points .ave been establis.ed &rom .istorical records &or
t.e percentage o& completion versus t.e eIpected eIpenditure Mas a percentage o&
t.e budgetND
*ercentage o& (ompletion EIpected EIpenditure
+V
2+V
4+V
#+V
'+V
1++V
+V
1+V
2"V
""V
)+V
1++V
a. 6rap. t.e relations.ip bet?een percentage complete and eIpected eIpenditure.
>. 1evelop a &ormula or set o& &ormulas &or &orecasting t.e ultimate eIpenditure on t.is
activity given t.e percentage o& completion. 2ssume t.at any over or under eIpenditure
?ill continue to gro? proportionately during t.e course o& t.e proBect.
c. Using your &ormula ?.at is t.e eIpected eIpenditure as a percentage o& t.e activity
budget i&D
i. 1"V o& &unds .ave been eIpended and 1"V o& t.e activity is complete.
ii. 3+V o& &unds .ave been eIpended and 3+V o& t.e activity is complete.
iii. '+V o& &unds .ave been eIpended and '+V o& t.e activity is complete.
2. 3epeat *roblem 1 parts MbN and McN assuming t.at any over or under eIpenditure
?ill not continue to gro? during t.e course o& t.e proBect.
3. ;uppose t.at you .ave been as0ed to ta0e over as proBect manager on a small
proBect involving installation o& "+++ linear &eet MLKN o& metal duct?or0 in a
building. ,.e Bob ?as originally estimated to ta0e ten ?ee0s and you are
assuming your duties a&ter t.ree ?ee0s on t.e proBect. ,.e original estimate
assumed t.at eac. linear &oot o& duct?or0 ?ould cost G1+ representing G# in
labor costs and G4 in material cost. ,.e eIpected production rate ?as "++ linear
&eet o& duct?or0 per ?ee0. 2ppearing belo? is t.e data concerning t.is proBect
available &rom your &irmHs Bob control in&ormation systemD
Aee0
Aee0ly Unit (osts MGUL&N Luantity *laced ML&N ,otal (ost
Labor 4aterials ,otal Aee0 ,o 1ate Aee0 ,o 1ate
1
2
3
12.++
'."%
#.#%
4.++
4.++
4.++
1#.++
12."%
1+.#%
2"+
3"+
4"+
2"+
#++
1+"+
4+++
44++
4'++
4+++
'4++
132++
a. :ased on an eItrapolation using t.e average productivity and cost &or all t.ree ?ee0s
&orecast t.e completion time cost and variance &rom original estimates.
>. ;uppose t.at you assume t.at t.e productivity ac.ieved in ?ee0 3 ?ould continue &or
t.e remainder o& t.e proBect. /o? ?ould t.is a&&ect your &orecasts in MaNX *repare ne?
&orecasts based on t.is assumption.
4. A.at criticisms could you ma0e o& t.e Bob status report in t.e previous problem
&rom t.e vie?point o& good proBect managementX
". ;uppose t.at t.e &ollo?ing estimate ?as made &or eIcavation o& 12++++ cubic
yards on a siteD
3esource Luantity (ost
4ac.ines
Labor
,ruc0s
,otal
12++ .ours
#+++ .ours
24++ .ours
G#++++
1"++++
%"+++
G2'"+++
2&ter )"+++ cubic yards o& eIcavation ?as completed t.e &ollo?ing eIpenditures .ad
been recordedD
3esource Luantity (ost
4ac.ines
Labor
,ruc0s
,otal
1+#3 .ours
%13' .ours
1"++ .ours
G4%'3"
142"2%
4#'%"
G23%23%
a. (alculate estimated and eIperienced productivity Mcubic yards per .ourN and unit cost
Mcost per cubic yardN &or eac. resource.
>. :ased on straig.t line eItrapolation do you see any problem ?it. t.is activityX $& so
can you suggest a reason &or t.e problem based on your &indings in MaNX
#. ;uppose t.e &ollo?ing costs and units o& ?or0 completed ?ere recorded on an
activityD
4ont.
4ont.ly
EIpenditure
5umber o&
Aor0 Units (ompleted
1
2
3
4
"
#
G12++
G12"+
G12#+
G12'+
G12)+
G12'+
3+
32
3'
42
42
42
2ns?er t.e &ollo?ing !uestionsD
a. Kor eac. mont. determine t.e cumulative cost t.e cumulative ?or0 completed t.e
average cumulative cost per unit o& ?or0 and t.e mont.ly cost per unit o& ?or0.
>. Kor eac. mont. prepare a &orecast o& t.e eventual cost<to<complete t.e activity based
on t.e proportion o& ?or0 completed.
c. Kor eac. mont. prepare a &orecast o& t.e eventual cost<to<complete t.e activity based
on t.e average productivity eIperienced on t.e activity.
d. Kor eac. mont. prepare a &orecast o& t.e eventual cost<to<complete t.e activity based
on t.e productivity eIperienced in t.e previous mont..
e. A.ic. &orecasting met.od Mb c or dN is pre&erable &or t.is activityX A.yX
%. 3epeat *roblem # &or t.e &ollo?ing eIpenditure patternD
4ont.
4ont.ly
EIpenditure
5umber o&
Aor0 Units (ompleted
1
2
3
4
"
#
G12++
G12"+
G12#+
G12'+
G12)+
G13++
3+
3"
4"
4'
"2
"4
'. A.y is it di&&icult to integrate sc.eduling and cost accounting in&ormation in
proBect recordsX
). *repare a sc.edule progress report on planned versus actual eIpenditure on a
proBect Msimilar to t.at in Kigure 12<"N &or t.e proBect described in EIample 12<#.
1+. ;uppose t.at t.e &ollo?ing ten activities ?ere agreed upon in a contract bet?een
an o?ner and an engineer.
Original Aor0 *lan $n&ormation
2ctivity 1uration Mmont.sN *redecessors Estimated (ost MG t.ousandsN
2
:
(
1
E
K
6
/
$
P
2
"
"
2
3
'
4
4
11
2
<<<
<<<
:
(
:
<<<
E K
E K
:
E K
%
)
'
4
1
%
#
"
1+
%
Original (ontract $n&ormation
,otal 1irect (ost
Over.ead
,otal 1irect and Over.ead
G#4
#4
12'
*ro&it
,otal (ontract 2mount
12.'
G14+.'
Kirst 9ear (as. Klo?
EIpenditures
3eceipts
G"#+++
G#+'++
,.e mar0up on t.e activitiesH costs included 1++V over.ead and a pro&it o& 1+V on all
costs Mincluding over.eadN. ,.is Bob ?as suspended &or one year a&ter completion o& t.e
&irst &our activities and t.e o?ner paid a total o& G#+'++ to t.e engineer. 5o? t.e o?ner
?is.es to re<commence t.e Bob. /o?ever general in&lation .as increased costs by ten
percent in t.e intervening year. ,.e engineerHs discount rate is 1" percent per year Min
current year dollarsN. Kor simplicity you may assume t.at all cas. transactions occur at
t.e end o& t.e year in ma0ing discounting calculations in ans?ering t.e &ollo?ing
!uestionsD
a. /o? long ?ill be remaining siI activities re!uire &or &inis. t.e proBect in time and
costX
>. ;uppose t.at t.e o?ner agrees to ma0e a lump sum payment o& t.e remaining original
contract at t.e completion o& t.e proBect. Aould t.e engineer still ma0e a pro&it on t.e
BobX $& so .o? muc.X
c. 6iven t.at t.e engineer ?ould receive a lump sum payment at t.e end o& t.e proBect
?.at amount s.ould .e re!uest in order to earn .is desired ten percent pro&it on all costsX
d. A.at is t.e net &uture value o& t.e entire proBect at t.e end assuming t.at t.e lump
sum payment you calculated in McN is obtainedX
11. :ased on your 0no?ledge o& coding systems suc. as 42;,E3KO342, and
estimating tec.ni!ues outline t.e procedures t.at mig.t be implemented to
accomplis.D
a. automated updating o& duration and cost estimates o& activities in lig.t o& eIperience
on earlier similar activities.
>. interactive computer based aids to .elp a proBect manager to accomplis. t.e same tas0.
1!.11 (ootnotes
1. (ited in Yoll *eter K. J1atabase ;tructures &or *roBect 4anagementJ !roceedings of
the #eventh $onference on Electronic $omputation% 2;(E 1)%).
2. ,.omas 6ibb reports a median number o& 4++ cost accounts &or a t?o<million dollar
proBects in a sample o& 3+ contractors in 1)%". ;ee ,.A. 6ibb Pr. J:uilding
(onstruction in ;out.eastern United ;tatesJ ;c.ool o& (ivil Engineering 6eorgia
$nstitute o& ,ec.nology 1)%" reported in 1.A. /alpin 7inancial and $ost $oncepts for
$onstruction 'anagement Po.n Ailey and ;ons 1)'".
3. ,.is illustrative set o& accounts ?as adapted &rom an 2;(E 4anual o& *racticeD
$onstruction $ost $ontrol% ,as0 (ommittee on 3evision o& (onstruction (ost (ontrol
4anual 2;(E 5e? 9or0 1)'".
4. Kor a &uller eIposition o& t.is point see A./. Lucas and ,.L. 4orrison J4anagement
2ccounting &or (onstruction (ontractsJ 'anagement "ccounting 1)'1 pp. ")<#".
". Kor a description o& t.ese met.ods and eIamples as used by a sample o& construction
companies see L.;. 3iggs $ost and #chedule $ontrol in -ndustrial $onstruction% 3eport
to ,.e (onstruction $ndustry $nstitute 1ec. 1)'#.
#. 2s reported in t.e 1all #treet 2ournal Keb. 1) 1)'# pg. 21 c. 4.
%. /.,. Po.nson and 3.;. Qaplan Relevance .ost% ,he Rise and 7all of 'anagement
"ccounting% /arvard :usiness ;c.ool *ress pg. 1 1)'%.
'. One eIperimental program directed at t.is problem is a 0no?ledge based eIpert
system described in 3.E. Levitt and P.(. Qunz JUsing Qno?ledge o& (onstruction and
*roBect 4anagement &or 2utomated ;c.edule UpdatingJ !roject 'anagement 2ournal
8ol. 1# 1)'" pp. "%<%#.
). Kor an eIample o& a prototype interactive proBect management environment t.at
includes grap.ical displays and sc.eduling algorit.ms see 3. Qromer J$nteractive
2ctivity 5et?or0 2nalysis Using a *ersonal (omputerJ Unpublis.ed 4; ,.esis
1epartment o& (ivil Engineering (arnegie<4ellon University *ittsburg. *2 1)'4.
1+. 2 t.ree dimensional ?or0 element de&inition ?as proposed by P.4. 5eil J2 ;ystem
&or $ntegrated *roBect 4anagementJ !roceedings of the $onference on $urrent !ractice
in $ost Estimating and $ost $ontrol% "#$E 2ustin ,eIas 13'<14# 2pril 1)'3.
1+. Iuality Control and /afety ;uring
Construction
1+.1 Iuality and /afety Concerns in Construction
Luality control and sa&ety represent increasingly important concerns &or proBect
managers. 1e&ects or &ailures in constructed &acilities can result in very large costs. Even
?it. minor de&ects re<construction may be re!uired and &acility operations impaired.
$ncreased costs and delays are t.e result. $n t.e ?orst case &ailures may cause personal
inBuries or &atalities. 2ccidents during t.e construction process can similarly result in
personal inBuries and large costs. $ndirect costs o& insurance inspection and regulation are
increasing rapidly due to t.ese increased direct costs. 6ood proBect managers try to
ensure t.at t.e Bob is done rig.t t.e &irst time and t.at no maBor accidents occur on t.e
proBect.
2s ?it. cost control t.e most important decisions regarding t.e !uality o& a completed
&acility are made during t.e design and planning stages rat.er t.an during construction. $t
is during t.ese preliminary stages t.at component con&igurations material speci&ications
and &unctional per&ormance are decided. Luality control during construction consists
largely o& insuring conformance to t.is original design and planning decisions.
A.ile con&ormance to eIisting design decisions is t.e primary &ocus o& !uality control
t.ere are eIceptions to t.is rule. Kirst un&oreseen circumstances incorrect design
decisions or c.anges desired by an o?ner in t.e &acility &unction may re!uire re<
evaluation o& design decisions during t.e course o& construction. A.ile t.ese c.anges
may be motivated by t.e concern &or !uality t.ey represent occasions &or re<design ?it.
all t.e attendant obBectives and constraints. 2s a second case some designs rely upon
in&ormed and appropriate decision ma0ing during t.e construction process itsel&. Kor
eIample some tunneling met.ods ma0e decisions about t.e amount o& s.oring re!uired
at di&&erent locations based upon observation o& soil conditions during t.e tunneling
process. ;ince suc. decisions are based on better in&ormation concerning actual site
conditions t.e &acility design may be more cost e&&ective as a result. 2ny special case o&
re<design during construction re!uires t.e various considerations discussed in (.apter 3.
Ait. t.e attention to con&ormance as t.e measure o& !uality during t.e construction
process t.e speci&ication o& !uality re!uirements in t.e design and contract
documentation becomes eItremely important. Luality re!uirements s.ould be clear and
veri&iable so t.at all parties in t.e proBect can understand t.e re!uirements &or
con&ormance. 4uc. o& t.e discussion in t.is c.apter relates to t.e development and t.e
implications o& di&&erent !uality re!uirements &or construction as ?ell as t.e issues
associated ?it. insuring con&ormance.
;a&ety during t.e construction proBect is also in&luenced in large part by decisions made
during t.e planning and design process. ;ome designs or construction plans are
in.erently di&&icult and dangerous to implement ?.ereas ot.er comparable plans may
considerably reduce t.e possibility o& accidents. Kor eIample clear separation o& tra&&ic
&rom construction zones during road?ay re.abilitation can greatly reduce t.e possibility
o& accidental collisions. :eyond t.ese design decisions sa&ety largely depends upon
education vigilance and cooperation during t.e construction process. Aor0ers s.ould be
constantly alert to t.e possibilities o& accidents and avoid ta0en unnecessary ris0s.
1+.! Organi6ing for Iuality and /afety
2 variety o& di&&erent organizations are possible &or !uality and sa&ety control during
construction. One common model is to .ave a group responsible &or !uality assurance
and anot.er group primarily responsible &or sa&ety ?it.in an organization. $n large
organizations departments dedicated to !uality assurance and to sa&ety mig.t assign
speci&ic individuals to assume responsibility &or t.ese &unctions on particular proBects.
Kor smaller proBects t.e proBect manager or an assistant mig.t assume t.ese and ot.er
responsibilities. $n eit.er case insuring sa&e and !uality construction is a concern o& t.e
proBect manager in overall c.arge o& t.e proBect in addition to t.e concerns o& personnel
cost time and ot.er management issues.
$nspectors and !uality assurance personnel ?ill be involved in a proBect to represent a
variety o& di&&erent organizations. Eac. o& t.e parties directly concerned ?it. t.e proBect
may .ave t.eir o?n !uality and sa&ety inspectors including t.e o?ner t.e
engineerUarc.itect and t.e various constructor &irms. ,.ese inspectors may be contractors
&rom specialized !uality assurance organizations. $n addition to on<site inspections
samples o& materials ?ill commonly be tested by specialized laboratories to insure
compliance. $nspectors to insure compliance ?it. regulatory re!uirements ?ill also be
involved. (ommon eIamples are inspectors &or t.e local governmentHs building
department &or environmental agencies and &or occupational .ealt. and sa&ety agencies.
,.e U; Occupational ;a&ety and /ealt. 2dministration MO;/2N routinely conduct site
visits o& ?or0 places in conBunction ?it. approved state inspection agencies. O;/2
inspectors are re!uired by la? to issue citations &or all standard violations observed.
;a&ety standards prescribe a variety o& mec.anical sa&eguards and proceduresO &or
eIample ladder sa&ety is covered by over 14+ regulations. $n cases o& eItreme non<
compliance ?it. standards O;/2 inspectors can stop ?or0 on a proBect. /o?ever only
a small &raction o& construction sites are visited by O;/2 inspectors and most
construction site accidents are not caused by violations o& eIisting standards. 2s a result
sa&ety is largely t.e responsibility o& t.e managers on site rat.er t.an t.at o& public
inspectors.
A.ile t.e multitude o& participants involved in t.e construction process re!uire t.e
services o& inspectors it cannot be emp.asized too strongly t.at inspectors are only a
&ormal c.ec0 on !uality control. Luality control s.ould be a primary obBective &or all t.e
members o& a proBect team. 4anagers s.ould ta0e responsibility &or maintaining and
improving !uality control. Employee participation in !uality control s.ould be soug.t and
re?arded including t.e introduction o& ne? ideas. 4ost important o& all !uality
improvement can serve as a catalyst &or improved productivity. :y suggesting ne? ?or0
met.ods by avoiding re?or0 and by avoiding long term problems good !uality control
can pay &or itsel&. O?ners s.ould promote good !uality control and see0 out contractors
?.o maintain suc. standards.
$n addition to t.e various organizational bodies involved in !uality control issues o&
!uality control arise in virtually all t.e &unctional areas o& construction activities. Kor
eIample insuring accurate and use&ul in&ormation is an important part o& maintaining
!uality per&ormance. Ot.er aspects o& !uality control include document control
Mincluding c.anges during t.e construction processN procurement &ield inspection and
testing and &inal c.ec0out o& t.e &acility.
1+.+ 7or: and ,aterial /pecifications
;peci&ications o& ?or0 !uality are an important &eature o& &acility designs. ;peci&ications
o& re!uired !uality and components represent part o& t.e necessary documentation to
describe a &acility. ,ypically t.is documentation includes any special provisions o& t.e
&acility design as ?ell as re&erences to generally accepted speci&ications to be used during
construction.
6eneral speci&ications o& ?or0 !uality are available in numerous &ields and are issued in
publications o& organizations suc. as t.e 2merican ;ociety &or ,esting and 4aterials
M2;,4N t.e 2merican 5ational ;tandards $nstitute M25;$N or t.e (onstruction
;peci&ications $nstitute M(;$N. 1istinct speci&ications are &ormalized &or particular types
o& construction activities suc. as ?elding standards issued by t.e 2merican Aelding
;ociety or &or particular &acility types suc. as t.e #tandard #pecifications for (ighway
/ridges issued by t.e 2merican 2ssociation o& ;tate /ig.?ay and ,ransportation
O&&icials. ,.ese general speci&ications must be modi&ied to re&lect local conditions
policies available materials local regulations and ot.er special circumstances.
(onstruction speci&ications normally consist o& a series o& instructions or pro.ibitions &or
speci&ic operations. Kor eIample t.e &ollo?ing passage illustrates a typical speci&ication
in t.is case &or eIcavation &or structuresD
(on&orm to elevations and dimensions s.o?n on plan ?it.in a tolerance o& plus or minus
+.1+ &oot and eItending a su&&icient distance &rom &ootings and &oundations to permit
placing and removal o& concrete &orm?or0 installation o& services ot.er construction
and &or inspection. $n eIcavating &or &ootings and &oundations ta0e care not to disturb
bottom o& eIcavation. EIcavate by .and to &inal grade Bust be&ore concrete rein&orcement
is placed. ,rim bottoms to re!uired lines and grades to leave solid base to receive
concrete.
,.is set o& speci&ications re!uires Budgment in application since some items are not
precisely speci&ied. Kor eIample eIcavation must eItend a Jsu&&icientJ distance to permit
inspection and ot.er activities. Obviously t.e term Jsu&&icientJ in t.is case may be
subBect to varying interpretations. $n contrast a speci&ication t.at tolerances are ?it.in
plus or minus a tent. o& a &oot is subBect to direct measurement. /o?ever speci&ic
re!uirements o& t.e &acility or c.aracteristics o& t.e site may ma0e t.e standard tolerance
o& a tent. o& a &oot inappropriate. Ariting speci&ications typically re!uires a trade<o&&
bet?een assuming reasonable be.avior on t.e part o& all t.e parties concerned in
interpreting ?ords suc. as Jsu&&icientJ versus t.e e&&ort and possible inaccuracy in pre<
speci&ying all operations.
$n recent years performance specifications .ave been developed &or many construction
operations. 3at.er t.an speci&ying t.e re!uired construction process% t.ese speci&ications
re&er to t.e re!uired per&ormance or !uality o& t.e &inis.ed &acility. ,.e eIact met.od by
?.ic. t.is per&ormance is obtained is le&t to t.e construction contractor. Kor eIample
traditional speci&ications &or asp.alt pavement speci&ied t.e composition o& t.e asp.alt
material t.e asp.alt temperature during paving and compacting procedures. $n contrast
a per&ormance speci&ication &or asp.alt ?ould detail t.e desired per&ormance o& t.e
pavement ?it. respect to impermeability strengt. etc. /o? t.e desired per&ormance
level ?as attained ?ould be up to t.e paving contractor. $n some cases t.e payment &or
asp.alt paving mig.t increase ?it. better !uality o& asp.alt beyond some minimum level
o& per&ormance.
&9ample 1+)1* Concrete Paement /trength
(oncrete pavements o& superior strengt. result in cost savings by delaying t.e time at
?.ic. repairs or re<construction is re!uired. $n contrast concrete o& lo?er !uality ?ill
necessitate more &re!uent overlays or ot.er repair procedures. (ontract provisions ?it.
adBustments to t.e amount o& a contractorHs compensation based on pavement !uality
.ave become increasingly common in recognition o& t.e cost savings associated ?it.
.ig.er !uality construction. Even i& a pavement does not meet t.e JultimateJ design
standard it is still ?ort. using t.e lo?er !uality pavement and re<sur&acing later rat.er
t.an completely reBecting t.e pavement. :ased on t.ese li&e cycle cost considerations a
typical pay sc.edule mig.t beD R1S
"oad 2atio Pay (actor
[+."+
+."+<+.#)
+.%+<+.')
+.)+<1.+)
1.1+<1.2)
1.3+<1.4)
\1."+
3eBect
+.)+
+.)"
1.++
1.+"
1.1+
1.12
$n t.is table t.e Load 3atio is t.e ratio o& t.e actual pavement strengt. to t.e desired
design strengt. and t.e *ay Kactor is a &raction by ?.ic. t.e total pavement contract
amount is multiplied to obtain t.e appropriate compensation to t.e contractor. Kor
eIample i& a contractor ac.ieves concrete strengt. t?enty percent greater t.an t.e design
speci&ication t.en t.e load ratio is 1.2+ and t.e appropriate pay &actor is 1.+" so t.e
contractor receives a &ive percent bonus. Load &actors are computed a&ter tests on t.e
concrete actually used in a pavement. 5ote t.at a )+V pay &actor eIists in t.is case ?it.
even pavement !uality only "+V o& t.at originally desired. ,.is .ig. pay &actor even
?it. ?ea0 concrete strengt. mig.t eIist since muc. o& t.e costs o& pavements are
incurred in preparing t.e pavement &oundation. (oncrete strengt.s o& less t.en "+V are
cause &or complete reBection in t.is case .o?ever.
1+.- Total Iuality Control
Luality control in construction typically involves insuring compliance ?it. minimum
standards o& material and ?or0mans.ip in order to insure t.e per&ormance o& t.e &acility
according to t.e design. ,.ese minimum standards are contained in t.e speci&ications
described in t.e previous section. Kor t.e purpose o& insuring compliance random
samples and statistical met.ods are commonly used as t.e basis &or accepting or reBecting
?or0 completed and batc.es o& materials. 3eBection o& a batc. is based on non<
con&ormance or violation o& t.e relevant design speci&ications. *rocedures &or t.is !uality
control practice are described in t.e &ollo?ing sections.
2n implicit assumption in t.ese traditional !uality control practices is t.e notion o& an
accepta)le 9uality level ?.ic. is an allo?able &raction o& de&ective items. 4aterials
obtained &rom suppliers or ?or0 per&ormed by an organization is inspected and passed as
acceptable i& t.e estimated de&ective percentage is ?it.in t.e acceptable !uality level.
*roblems ?it. materials or goods are corrected a&ter delivery o& t.e product.
$n contrast to t.is traditional approac. o& !uality control is t.e goal o& total 9uality
control. $n t.is system no de&ective items are allo?ed any?.ere in t.e construction
process. A.ile t.e zero de&ects goal can never be permanently obtained it provides a
goal so t.at an organization is never satis&ied ?it. its !uality control program even i&
de&ects are reduced by substantial amounts year a&ter year. ,.is concept and approac. to
!uality control ?as &irst developed in manu&acturing &irms in Papan and Europe but .as
since spread to many construction companies. ,.e best 0no?n &ormal certi&ication &or
!uality improvement is t.e $nternational Organization &or ;tandardizationHs $;O )+++
standard. $;O )+++ emp.asizes good documentation !uality goals and a series o& cycles
o& planning implementation and revie?.
,otal !uality control is a commitment to !uality eIpressed in all parts o& an organization
and typically involves many elements. 1esign revie?s to insure sa&e and e&&ective
construction procedures are a maBor element. Ot.er elements include eItensive training
&or personnel s.i&ting t.e responsibility &or detecting de&ects &rom !uality control
inspectors to ?or0ers and continually maintaining e!uipment. Aor0er involvement in
improved !uality control is o&ten &ormalized in 9uality circles in ?.ic. groups o& ?or0ers
meet regularly to ma0e suggestions &or !uality improvement. 4aterial suppliers are also
re!uired to insure zero de&ects in delivered goods. $nitially all materials &rom a supplier
are inspected and batc.es o& goods ?it. any de&ective items are returned. ;uppliers ?it.
good records can be certi&ied and not subBect to complete inspection subse!uently.
,.e traditional microeconomic vie? o& !uality control is t.at t.ere are an JoptimumJ
proportion o& de&ective items. ,rying to ac.ieve greater !uality t.an t.is optimum ?ould
substantially increase costs o& inspection and reduce ?or0er productivity. /o?ever many
companies .ave &ound t.at commitment to total !uality control .as substantial economic
bene&its t.at .ad been unappreciated in traditional approac.es. EIpenses associated ?it.
inventory re?or0 scrap and ?arranties ?ere reduced. Aor0er ent.usiasm and
commitment improved. (ustomers o&ten appreciated .ig.er !uality ?or0 and ?ould pay
a premium &or good !uality. 2s a result improved !uality control became a competitive
advantage.
O& course total !uality control is di&&icult to apply particular in construction. ,.e uni!ue
nature o& eac. &acility t.e variability in t.e ?or0&orce t.e multitude o& subcontractors
and t.e cost o& ma0ing necessary investments in education and procedures ma0e
programs o& total !uality control in construction di&&icult. 5evert.eless a commitment to
improved !uality even ?it.out endorsing t.e goal o& zero de&ects can pay real dividends
to organizations.
&9ample 1+)!* &9perience with Iuality Circles
Luality circles represent a group o& &ive to &i&teen ?or0ers ?.o meet on a &re!uent basis
to identi&y discuss and solve productivity and !uality problems. 2 circle leader acts as
liaison bet?een t.e ?or0ers in t.e group and upper levels o& management. 2ppearing
belo? are some eIamples o& reported !uality circle accomplis.ments in constructionD R2S
1. On a .ig.?ay proBect under construction by ,aisei (orporation it ?as &ound t.at
t.e loss rate o& ready<miIed concrete ?as too .ig.. 2 !uality circle composed o&
cement masons &ound out t.at t.e most important reason &or t.is ?as due to an
inaccurate c.ec0ing met.od. :y applying t.e circleHs recommendations t.e loss
rate ?as reduced by 11.4V.
2. $n a building proBect by ;.imizu (onstruction (ompany may cases o& &aulty
rein&orced concrete ?or0 ?ere reported. ,.e iron ?or0ers !uality circle eIamined
t.eir ?or0 t.oroug.ly and soon t.e &aulty ?or0mans.ip disappeared. 2 1+V
increase in productivity ?as also ac.ieved.
1+.. Iuality Control >y /tatistical ,ethods
2n ideal !uality control program mig.t test all materials and ?or0 on a particular &acility.
Kor eIample non<destructive tec.ni!ues suc. as I<ray inspection o& ?elds can be used
t.roug.out a &acility. 2n on<site inspector can ?itness t.e appropriateness and ade!uacy
o& construction met.ods at all times. Even better individual cra&tsmen can per&orm
continuing inspection o& materials and t.eir o?n ?or0. EI.austive or 1++V testing o& all
materials and ?or0 by inspectors can be eIceedingly eIpensive .o?ever. $n many
instances testing re!uires t.e destruction o& a material sample so eI.austive testing is
not even possible. 2s a result small samples are used to establis. t.e basis o& accepting
or reBecting a particular ?or0 item or s.ipment o& materials. ;tatistical met.ods are used
to interpret t.e results o& test on a small sample to reac. a conclusion concerning t.e
acceptability o& an entire lot or batc. o& materials or ?or0 products.
,.e use o& statistics is essential in interpreting t.e results o& testing on a small sample.
Ait.out ade!uate interpretation small sample testing results can be !uite misleading. 2s
an eIample suppose t.at t.ere are ten de&ective pieces o& material in a lot o& one
.undred. $n ta0ing a sample o& &ive pieces t.e inspector mig.t not &ind any de&ective
pieces or mig.t .ave all sample pieces de&ective. 1ra?ing a direct in&erence t.at none or
all pieces in t.e population are de&ective on t.e basis o& t.ese samples ?ould be incorrect.
1ue to t.is random nature o& t.e sample selection process testing results can vary
substantially. $t is only ?it. statistical met.ods t.at issues suc. as t.e c.ance o& di&&erent
levels o& de&ective items in t.e &ull lot can be &ully analyzed &rom a small sample test.
,.ere are t?o types o& statistical sampling ?.ic. are commonly used &or t.e purpose o&
!uality control in batc.es o& ?or0 or materialsD
1. ,.e acceptance or reBection o& a lot is based on t.e number o& de&ective MbadN or
non de&ective MgoodN items in t.e sample. ,.is is re&erred to as sampling )y
attri)utes.
2. $nstead o& using de&ective and non de&ective classi&ications &or an item a
!uantitative !uality measure or t.e value o& a measured variable is used as a
!uality indicator. ,.is testing procedure is re&erred to as sampling )y varia)les.
A.atever sampling plan is used in testing it is al?ays assumed t.at t.e samples are
representative o& t.e entire population under consideration. ;amples are eIpected to be
c.osen randomly so t.at eac. member o& t.e population is e!ually li0ely to be c.osen.
(onvenient sampling plans suc. as sampling every t?entiet. piece c.oosing a sample
every t?o .ours or pic0ing t.e top piece on a delivery truc0 may be ade!uate to insure a
random sample i& pieces are randomly miIed in a stac0 or in use. /o?ever some
convenient sampling plans can be inappropriate. Kor eIample c.ec0ing only easily
accessible Boints in a building component is inappropriate since Boints t.at are .ard to
reac. may be more li0ely to .ave erection or &abrication problems.
2not.er assumption implicit in statistical !uality control procedures is t.at t.e !uality o&
materials or ?or0 is eIpected to vary &rom one piece to anot.er. ,.is is certainly true in
t.e &ield o& construction. A.ile a designer may assume t.at all concrete is eIactly t.e
same in a building t.e variations in material properties manu&acturing .andling
pouring and temperature during setting insure t.at concrete is actually .eterogeneous in
!uality. 3educing suc. variations to a minimum is one aspect o& !uality construction.
$nsuring t.at t.e materials actually placed ac.ieve some minimum !uality level ?it.
respect to average properties or &raction o& de&ectives is t.e tas0 o& !uality control.
1+.0 /tatistical Iuality Control with /ampling >y
Attri>utes
;ampling by attributes is a ?idely applied !uality control met.od. ,.e procedure is
intended to determine ?.et.er or not a particular group o& materials or ?or0 products is
acceptable. $n t.e literature o& statistical !uality control a group o& materials or ?or0
items to be tested is called a lot or )atch. 2n assumption in t.e procedure is t.at eac.
item in a batc. can be tested and classi&ied as eit.er acceptable or de&icient based upon
mutually acceptable testing procedures and acceptance criteria. Eac. lot is tested to
determine i& it satis&ies a minimum acceptable !uality level M2LLN eIpressed as t.e
maIimum percentage o& de&ective items in a lot or process.
$n its basic &orm sampling by attributes is applied by testing a pre<de&ined number o&
sample items &rom a lot. $& t.e number o& de&ective items is greater t.an a trigger level
t.en t.e lot is reBected as being li0ely to be o& unacceptable !uality. Ot.er?ise t.e lot is
accepted. 1eveloping t.is type o& sampling plan re!uires consideration o& probability
statistics and acceptable ris0 levels on t.e part o& t.e supplier and consumer o& t.e lot.
3e&inements to t.is basic application procedure are also possible. Kor eIample i& t.e
number o& de&ectives is greater t.an some pre<de&ined number t.en additional sampling
may be started rat.er t.an immediate reBection o& t.e lot. $n many cases t.e trigger level
is a single de&ective item in t.e sample. $n t.e remainder o& t.is section t.e mat.ematical
basis &or interpreting t.is type o& sampling plan is developed.
4ore &ormally a lot is de&ined as acceptable i& it contains a &raction p
1
or less de&ective
items. ;imilarly a lot is de&ined as unacceptable i& it contains a &raction p
2
or more
de&ective units. 6enerally t.e acceptance &raction is less t.an or e!ual to t.e reBection
&raction p
1
p
2
and t.e t?o &ractions are o&ten e!ual so t.at t.ere is no ambiguous range
o& lot acceptability bet?een p
1
and p
2
. 6iven a sample size and a trigger level &or lot
reBection or acceptance ?e ?ould li0e to determine t.e probabilities t.at acceptable lots
mig.t be incorrectly reBected Mtermed producer>s riskN or t.at de&icient lots mig.t be
incorrectly accepted Mtermed consumer>s riskN.
(onsider a lot o& &inite number 5 in ?.ic. m items are de&ective MbadN and t.e remaining
M5<mN items are non<de&ective MgoodN. $& a random sample o& n items is ta0en &rom t.is
lot t.en ?e can determine t.e probability o& .aving di&&erent numbers o& de&ective items
in t.e sample. Ait. a pre<de&ined acceptable number o& de&ective items ?e can t.en
develop t.e probability o& accepting a lot as a &unction o& t.e sample size t.e allo?able
number o& de&ective items and t.e actual &raction o& de&ective items. ,.is derivation
appears belo?.
,.e number o& di&&erent samples o& size n t.at can be selected &rom a &inite population 5
is termed a mat.ematical com)ination and is computed asD
13.1
?.ere a &actorial ne is ncMn<1NcMn<2N...M1N and zero &actorial M+eN is one by convention.
,.e number o& possible samples ?it. eIactly I de&ectives is t.e combination associated
?it. obtaining I de&ectives &rom m possible de&ective items and n<I good items &rom 5<
m good itemsD
13.2
6iven t.ese possible numbers o& samples t.e probability o& .aving eIactly I de&ective
items in t.e sample is given by t.e ratio as t.e .ypergeometric seriesD
13.3
Ait. t.is &unction ?e can calculate t.e probability o& obtaining di&&erent numbers o&
de&ectives in a sample o& a given size.
;uppose t.at t.e actual &raction o& de&ectives in t.e lot is p and t.e actual &raction o&
nonde&ectives is ! t.en p plus ! is one resulting in m ] 5p and 5 < m ] 5!. ,.en a
&unction gMpN representing t.e probability o& .aving r or less de&ective items in a sample
o& size n is obtained by substituting m and 5 into E!. M13.3N and summing over t.e
acceptable de&ective number o& itemsD
13.4
$& t.e number o& items in t.e lot 5 is large in comparison ?it. t.e sample size n t.en
t.e &unction gMpN can be approIimated by t.e binomial distributionD
13."
orD
13.#
,.e &unction gMpN indicates t.e probability o& accepting a lot given t.e sample size n and
t.e number o& allo?able de&ective items in t.e sample r. ,.e &unction gMpN can be
represented grap.ical &or eac. combination o& sample size n and number o& allo?able
de&ective items r as s.o?n in Kigure 13<1. Eac. curve is re&erred to as t.e operating
c.aracteristic curve MO( curveN in t.is grap.. Kor t.e special case o& a single sample
Mn]1N t.e &unction gMpN can be simpli&iedD
13.%
so t.at t.e probability o& accepting a lot is e!ual to t.e &raction o& acceptable items in t.e
lot. Kor eIample t.ere is a probability o& +." t.at t.e lot may be accepted &rom a single
sample test even i& &i&ty percent o& t.e lot is de&ective.
(igure 1+)1 EIample Operating (.aracteristic (urves $ndicating *robability o& Lot 2cceptance
Kor any combination o& n and r ?e can read o&& t.e value o& gMpN &or a given p &rom t.e
corresponding O( curve. Kor eIample n ] 1" is speci&ied in Kigure 13<1. ,.en &or
various values o& r ?e &indD
r ] +
r ] +
r ] 1
r ] 1
* ] 24V
p ] 4V
p ] 24V
p ] 4V
gMpN 2V
gMpN "4V
gMpN 1+V
gMpN ''V
,.e producerHs and consumerHs ris0 can be related to various points on an operating
c.aracteristic curve. *roducerHs ris0 is t.e c.ance t.at ot.er?ise accepta)le lots &ail t.e
sampling plan Mie. .ave more t.an t.e allo?able number o& de&ective items in t.e sampleN
solely due to random &luctuations in t.e selection o& t.e sample. $n contrast consumerHs
ris0 is t.e c.ance t.at an unacceptable lot is acceptable Mie. .as less t.an t.e allo?able
number o& de&ective items in t.e sampleN due to a better t.an average !uality in t.e
sample. Kor eIample suppose t.at a sample size o& 1" is c.osen ?it. a trigger level &or
reBection o& one item. Ait. a &our percent acceptable level and a greater t.an &our percent
de&ective &raction t.e consumerHs ris0 is at most eig.ty<eig.t percent. $n contrast ?it. a
&our percent acceptable level and a &our percent de&ective &raction t.e producerHs ris0 is
at most 1 < +.'' ] +.12 or t?elve percent.
$n speci&ying t.e sampling plan implicit in t.e operating c.aracteristic curve t.e supplier
and consumer o& materials or ?or0 must agree on t.e levels o& ris0 acceptable to
t.emselves. $& t.e lot is o& acceptable !uality t.e supplier ?ould li0e to minimize t.e
c.ance or ris0 t.at a lot is reBected solely on t.e basis o& a lo?er t.an average !uality
sample. ;imilarly t.e consumer ?ould li0e to minimize t.e ris0 o& accepting under t.e
sampling plan a de&icient lot. $n addition bot. parties presumably ?ould li0e to minimize
t.e costs and delays associated ?it. testing. 1evising an acceptable sampling plan
re!uires trade o&& t.e obBectives o& ris0 minimization among t.e parties involved and t.e
cost o& testing.
&9ample 1+)+* Acceptance pro>a>ility calculation
;uppose t.at t.e sample size is &ive Mn]"N &rom a lot o& one .undred items M5]1++N. ,.e
lot o& materials is to be reBected i& any o& t.e &ive samples is de&ective Mr ] +N. $n t.is case
t.e probability o& acceptance as a &unction o& t.e actual number o& de&ective items can be
computed by noting t.at &or r ] + only one term MI ] +N need be considered in E!. M13.4N.
,.us &or 5 ] 1++ and n ] "D
Kor a t?o percent de&ective &raction Mp ] +.+2N t.e resulting acceptance value isD
Using t.e binomial approIimation in E!. M13."N t.e comparable calculation ?ould beD
?.ic. is a di&&erence o& +.++1) or +.21 percent &rom t.e actual value o& +.)+2+ &ound
above.
$& t.e acceptable de&ective proportion ?as t?o percent Mso p
1
] p
2
] +.+2N t.en t.e c.ance
o& an incorrect reBection Mor producerHs ris0N is 1 < gM+.+2N ] 1 < +.) ] +.1 or ten percent.
5ote t.at a prudent producer s.ould insure better t.an minimum !uality products to
reduce t.e probability or c.ance o& reBection under t.is sampling plan. $& t.e actual
proportion o& de&ectives ?as one percent t.en t.e producerHs ris0 ?ould be only &ive
percent ?it. t.is sampling plan.
&9ample 1+)-* ;esigning a /ampling Plan
;uppose t.at an o?ner Mor product JconsumerJ in t.e terminology o& !uality controlN
?is.es to .ave zero de&ective items in a &acility ?it. "+++ items o& a particular 0ind.
A.at ?ould be t.e di&&erent amounts o& consumerHs ris0 &or di&&erent sampling plansX
Ait. an acceptable !uality level o& no de&ective items Mso p
1
] +N t.e allo?able de&ective
items in t.e sample is zero Mso r ] +N in t.e sampling plan. Using t.e binomial
approIimation t.e probability o& accepting t.e "+++ items as a &unction o& t.e &raction
o& actual de&ective items and t.e sample size isD
,o insure a ninety percent c.ance o& reBecting a lot ?it. an actual percentage de&ective o&
one percent Mp ] +.+1N t.e re!uired sample size ?ould be calculated asD
,.en
2s can be seen large sample sizes are re!uired to insure relatively large probabilities o&
zero de&ective items.
1+.1 /tatistical Iuality Control with /ampling >y
'aria>les
2s described in t.e previous section sampling by attributes is based on a classi&ication o&
items as good or defective. 4any ?or0 and material attributes possess continuous
properties suc. as strengt. density or lengt.. Ait. t.e sampling by attributes procedure
a particular level o& a variable !uantity must be de&ined as acceptable !uality. 4ore
generally t?o items classi&ied as good mig.t .ave !uite di&&erent strengt.s or ot.er
attributes. $ntuitively it seems reasonable t.at some JcreditJ s.ould be provided &or
eIceptionally good items in a sample. ;ampling by variables ?as developed &or
application to continuously measurable !uantities o& t.is type. ,.e procedure uses
measured values o& an attribute in a sample to determine t.e overall acceptability o& a
batc. or lot. ;ampling by variables .as t.e advantage o& using more in&ormation &rom
tests since it is based on actual measured values rat.er t.an a simple classi&ication. 2s a
result acceptance sampling by variables can be more e&&icient t.an sampling by attributes
in t.e sense t.at &e?er samples are re!uired to obtain a desired level o& !uality control.
$n applying sampling by variables an acceptable lot !uality can be de&ined ?it. respect
to an upper limit U a lo?er limit L or bot.. Ait. t.ese boundary conditions an
acceptable !uality level can be de&ined as a maIimum allo?able &raction o& de&ective
items 4. $n Kigure 13<2 t.e probability distribution o& item attribute I is illustrated.
Ait. an upper limit U t.e &raction o& de&ective items is e!ual to t.e area under t.e
distribution &unction to t.e rig.t o& U Mso t.at I UN. ,.is &raction o& de&ective items
?ould be compared to t.e allo?able &raction 4 to determine t.e acceptability o& a lot.
Ait. bot. a lo?er and an upper limit on acceptable !uality t.e &raction de&ective ?ould
be t.e &raction o& items greater t.an t.e upper limit or less t.an t.e lo?er limit.
2lternatively t.e limits could be imposed upon t.e acceptable average level o& t.e
variable
(igure 1+)! 8ariable *robability 1istributions and 2cceptance 3egions
$n sampling by variables t.e &raction o& de&ective items is estimated by using measured
values &rom a sample o& items. 2s ?it. sampling by attributes t.e procedure assumes a
random sample o& a give size is obtained &rom a lot or batc.. $n t.e application o&
sampling by variables plans t.e measured c.aracteristic is virtually al?ays assumed to
be normally distri)uted as illustrated in Kigure 13<2. ,.e normal distribution is li0ely to
be a reasonably good assumption &or many measured c.aracteristics suc. as material
density or degree o& soil compaction. ,.e (entral Limit ,.eorem provides a general
support &or t.e assumptionD i& t.e source o& variations is a large number o& small and
independent random e&&ects t.en t.e resulting distribution o& values ?ill approIimate t.e
normal distribution. $& t.e distribution o& measured values is not li0ely to be
approIimately normal t.en sampling by attributes s.ould be adopted. 1eviations &rom
normal distributions may appear as skewed or non<symmetric distributions or as
distributions ?it. &iIed upper and lo?er limits.
,.e &raction o& de&ective items in a sample or t.e c.ance t.at t.e population average .as
di&&erent values is estimated &rom t?o statistics obtained &rom t.e sampleD t.e sample
mean and standard deviation. 4at.ematically let n be t.e number o& items in t.e sample
and I
i
i ] 123...n be t.e measured values o& t.e variable c.aracteristic I. ,.en an
estimate o& t.e overall population mean is t.e sample mean D
13.'
2n estimate o& t.e population standard deviation is s t.e s!uare root o& t.e sample
variance statisticD
13.)
:ased on t.ese t?o estimated parameters and t.e desired limits t.e various &ractions o&
interest &or t.e population can be calculated.
,.e probability t.at t.e average value o& a population is greater t.an a particular lo?er
limit is calculated &rom t.e test statisticD
13.1+
?.ic. is t<distributed ?it. n<1 degrees o& &reedom. $& t.e population standard deviation is
0no?n in advance t.en t.is 0no?n value is substituted &or t.e estimate s and t.e
resulting test statistic ?ould be normally distributed. ,.e t distribution is similar in
appearance to a standard normal distribution alt.oug. t.e spread or variability in t.e
&unction decreases as t.e degrees o& &reedom parameter increases. 2s t.e number o&
degrees o& &reedom becomes very large t.e t<distribution coincides ?it. t.e normal
distribution.
Ait. an upper limit t.e calculations are similar and t.e probability t.at t.e average
value o& a population is less t.an a particular upper limit can be calculated &rom t.e test
statisticD
13.11
Ait. bot. upper and lo?er limits t.e sum o& t.e probabilities o& being above t.e upper
limit or belo? t.e lo?er limit can be calculated.
,.e calculations to estimate t.e &raction o& items above an upper limit or belo? a lo?er
limit are very similar to t.ose &or t.e population average. ,.e only di&&erence is t.at t.e
s!uare root o& t.e number o& samples does not appear in t.e test statistic &ormulasD
13.12
andD
13.13
?.ere t
2L
is t.e test statistic &or all items ?it. a lo?er limit and t
2U
is t.e test statistic &or
all items ?it. an upper limit. Kor eIample t.e test statistic &or items above an upper limit
o& "." ?it. ] 4.+ s ] 3.+ and n ] " is t
2U
] M'." < 4.+NU3.+ ] 1." ?it. n < 1 ] 4 degrees
o& &reedom.
$nstead o& using sampling plans t.at speci&y an allo?able &raction o& de&ective items it
saves computations to simply ?rite speci&ications in terms o& t.e allo?able test statistic
values t.emselves. ,.is procedure is e!uivalent to re!uiring t.at t.e sample average be at
least a pre<speci&ied number o& standard deviations a?ay &rom an upper or lo?er limit.
Kor eIample ?it. ] 4.+ U ] '." s ] 3.+ and n ] 41 t.e sample mean is only about
M'." < 4.+NU3.+ ] 1." standard deviations a?ay &rom t.e upper limit.
,o summarize t.e application o& sampling by variables re!uires t.e speci&ication o& a
sample size t.e relevant upper or limits and eit.er M1N t.e allo?able &raction o& items
&alling outside t.e designated limits or M2N t.e allo?able probability t.at t.e population
average &alls outside t.e designated limit. 3andom samples are dra?n &rom a pre<de&ined
population and tested to obtained measured values o& a variable attribute. Krom t.ese
measurements t.e sample mean standard deviation and !uality control test statistic are
calculated. Kinally t.e test statistic is compared to t.e allo?able trigger level and t.e lot
is eit.er accepted or reBected. $t is also possible to apply se!uential sampling in t.is
procedure so t.at a batc. may be subBected to additional sampling and testing to &urt.er
re&ine t.e test statistic values.
Ait. sampling by variables it is notable t.at a producer o& material or ?or0 can adopt
t?o general strategies &or meeting t.e re!uired speci&ications. Kirst a producer may
insure t.at t.e average !uality level is !uite .ig. even i& t.e variability among items is
.ig.. ,.is strategy is illustrated in Kigure 13<3 as a J.ig. !uality averageJ strategy.
;econd a producer may meet a desired !uality target by reducing t.e varia)ility ?it.in
eac. batc.. $n Kigure 13<3 t.is is labeled t.e Jlo? variabilityJ strategy. $n eit.er case a
producer s.ould maintain .ig. standards to avoid reBection o& a batc..
(igure 1+)+ ,esting &or 1e&ective (omponent ;trengt.s
&9ample 1+).* Testing for defectie component strengths
;uppose t.at an inspector ta0es eig.t strengt. measurements ?it. t.e &ollo?ing resultsD
4.3 4.' 4.# 4.% 4.4 4.# 4.% 4.#
$n t.is case t.e sample mean and standard deviation can be calculated using E!uations
M13.'N and M13.)ND
] 1U'M4.3 _ 4.' _ 4.# _ 4.% _ 4.4 _ 4.# _ 4.% _ 4.#N ] 4.")
s
2
]R1UM'<1NSRM4.3 < 4.")N
2
_ M4.' < 4.")N
2
_ M4.# < 4.")N
2
_ M4.% < 4.")N
2
_ M4.4 < 4.")N
2
_ M4.#
< 4.")N
2
_ M4.% < 4.")N
2
_ M4.# < 4.")N
2
S ] +.1#
,.e percentage o& items belo? a lo?er !uality limit o& L ] 4.3 are estimated &rom t.e test
statistic t
2L
in E!uation M13.12ND
1+.3 /afety
(onstruction is a relatively .azardous underta0ing. 2s ,able 13<1 illustrates t.ere are
signi&icantly more inBuries and lost ?or0days due to inBuries or illnesses in construction
t.an in virtually any ot.er industry. ,.ese ?or0 related inBuries and illnesses are
eIceedingly costly. ,.e $onstruction -ndustry $ost Effectiveness !roject estimated t.at
accidents cost G'.) billion or nearly seven percent o& t.e G13% billion Min 1)%) dollarsN
spent annually &or industrial utility and commercial construction in t.e United ;tates. R3S
$ncluded in t.is total are direct costs Mmedical costs premiums &or ?or0ersH compensation
bene&its liability and property lossesN as ?ell as indirect costs Mreduced ?or0er
productivity delays in proBects administrative time and damage to e!uipment and t.e
&acilityN. $n contrast to most industrial accidents innocent bystanders may also be in
Buried by construction accidents. ;everal crane collapses &rom .ig. rise buildings under
construction .ave resulted in &atalities to passerbys. *rudent proBect managers and o?ners
?ould li0e to reduce accidents inBuries and illnesses as muc. as possible.
TA<"& 1+)1 5on&atal Occupational $nBury and $llness $ncidence 3ates
$ndustry 1))# 1))% 1)))
2griculture &orestry &is.ing
4ining
(onstruction
4anu&acturing
,ransportationUpublic utilities
A.olesale and retail trade
Kinance insurance real estate
;ervices
'.%
".4
).)
1+.#
'.%
#.'
2.4
#.+
'.4
".)
)."
1+.3
'.2
#.%
2.2
".#
%.3
4.4
'.#
).2
%.3
#.1
1.'
4.)
5oteD 1ata represent total number o& cases per 1++ &ull<time employees
;ourceD U.;. :ureau o& Labor ;tatistics *ccupational injuries and -llnesses in the 0nited
#tates )y -ndustry annual
2s ?it. all t.e ot.er costs o& construction it is a mista0e &or o?ners to ignore a
signi&icant category o& costs suc. as inBury and illnesses. A.ile contractors may pay
insurance premiums directly t.ese costs are re&lected in bid prices or contract amounts.
1elays caused by inBuries and illnesses can present signi&icant opportunity costs to
o?ners. $n t.e long run t.e o?ners o& constructed &acilities must pay all t.e costs o&
construction. Kor t.e case o& inBuries and illnesses t.is general principle mig.t be slig.tly
!uali&ied since signi&icant costs are borne by ?or0ers t.emselves or society at large.
/o?ever court Budgements and insurance payments compensate &or individual losses and
are ultimately borne by t.e o?ners.
,.e causes o& inBuries in construction are numerous. ,able 13<2 lists t.e reported causes
o& accidents in t.e U; construction industry in 1))%. 2 similar catalogue o& causes ?ould
eIist &or ot.er countries. ,.e largest single category &or bot. inBuries and &atalities are
individual &alls. /andling goods and transportation are also a signi&icant cause o& inBuries.
Krom a management perspective .o?ever t.ese reported causes do not really provide a
use&ul prescription &or sa&ety policies. 2n individual &all may be caused by a series o&
coincidencesD a railing mig.t not be secure a ?or0er mig.t be inattentive t.e &ooting
may be slippery etc. 3emoving any one o& t.ese compound causes mig.t serve to
prevent any particular accident. /o?ever it is clear t.at conditions suc. as unsecured
railings ?ill normally increase t.e ris0 o& accidents. ,able 13<3 provides a more detailed
list o& causes o& &atalities &or construction sites alone but again eac. &atality may .ave
multiple causes.
TA<"& 1+)! Katal Occupational $nBuries in
(onstruction 1))% and 1)))
2ll accidents 11+% 11)+
3ate per 1+++++
?or0ers
14 14
(ause *ercentage
,ransportation
incidents
2ssaultsUviolent acts
(ontact ?it. obBects
Kalls
EIposure
2#V
3
1'
34
1%
2%V
2
21
32
1"
TA<"& 1+)+ Katality (auses in (onstruction 1))'
(ause 1eat.s *ercentage
Kall &romUt.roug. roo&
Kall &romU?it. structure Mot.er t.an roo&N
Electric s.oc0 by e!uipment contacting po?er source
##
#4
"'
1+.#V
1+.2
).3
(rus.edUrun over non<operator by operating construction e!uipment
Electric s.oc0 by e!uipment installation or tool use
;truc0 by &alling obBect or proBectile Mincluding tip<oversN
Li&ting operation
Kall &romU?it. ladder Mincludes collapseU&all o& ladderN
(rus.edUrun overUtrapped operator by operating construction
e!uipment
,renc. collapse
(rus.edUrun over by .ig.?ay ve.icle
"3
4"
2)
2%
2%
2"
24
22
'."
%.2
4.#
4.3
4.3
4.+
3.'
3."
;ourceD (onstruction 3esource 2nalysis
8arious measures are available to improve Bobsite sa&ety in construction. ;everal o& t.e
most important occur be&ore construction is underta0en. ,.ese include design c.oice o&
tec.nology and education. :y altering &acility designs particular structures can be sa&er
or more .azardous to construct. Kor eIample parapets can be designed to appropriate
.eig.ts &or construction ?or0er sa&ety rat.er t.an t.e minimum .eig.t re!uired by
building codes.
(.oice o& tec.nology can also be critical in determining t.e sa&ety o& a Bobsite.
;a&eguards built into mac.inery can noti&y operators o& problems or prevent inBuries. Kor
eIample simple s?itc.es can prevent e!uipment &rom being operating ?.en protective
s.ields are not in place. Ait. t.e availability o& on<board electronics Mincluding computer
c.ipsN and sensors t.e possibilities &or sop.isticated mac.ine controllers and monitors
.as greatly eIpanded &or construction e!uipment and tools. 4aterials and ?or0 process
c.oices also in&luence t.e sa&ety o& construction. Kor eIample substitution o& alternative
materials &or asbestos can reduce or eliminate t.e prospects o& long term illnesses suc. as
as)estosis.
Educating ?or0ers and managers in proper procedures and .azards can .ave a direct
impact on Bobsite sa&ety. ,.e realization o& t.e large costs involved in construction
inBuries and illnesses provides a considerable motivation &or a?areness and education.
3egular sa&ety inspections and sa&ety meetings .ave become standard practices on most
Bob sites.
*re<!uali&ication o& contractors and sub<contractors ?it. regard to sa&ety is anot.er
important avenue &or sa&ety improvement. $& contractors are only invited to bid or enter
negotiations i& t.ey .ave an acceptable record o& sa&ety Mas ?ell as !uality per&ormanceN
t.en a direct incentive is provided to insure ade!uate sa&ety on t.e part o& contractors.
1uring t.e construction process itsel& t.e most important sa&ety related measures are to
insure vigilance and cooperation on t.e part o& managers inspectors and ?or0ers.
8igilance involves considering t.e ris0s o& di&&erent ?or0ing practices. $n also involves
maintaining temporary p.ysical sa&eguards suc. as barricades braces guy lines railings
toeboards and t.e li0e. ;ets o& standard practices are also important suc. asD R4S
re!uiring .ard .ats on site.
re!uiring eye protection on site.
re!uiring .earing protection near loud e!uipment.
insuring sa&ety s.oes &or ?or0ers.
providing &irst<aid supplies and trained personnel on site
A.ile eliminating accidents and ?or0 related illnesses is a ?ort.?.ile goal it ?ill never
be attained. (onstruction .as a number o& c.aracteristics ma0ing it in.erently .azardous.
Large &orces are involved in many operations. ,.e Bobsite is continually c.anging as
construction proceeds. Aor0ers do not .ave &iIed ?or0sites and must move around a
structure under construction. ,.e tenure o& a ?or0er on a site is s.ort so t.e ?or0erHs
&amiliarity and t.e employer<employee relations.ip are less settled t.an in manu&acturing
settings. 1espite t.ese peculiarities and as a result o& eIactly t.ese special problems
improving ?or0site sa&ety is a very important proBect management concern.
&9ample 1+)0* Trench collapse R"S
,o replace 12++ &eet o& a se?er line a trenc. o& bet?een 12." and 1' &eet deep ?as
re!uired do?n t.e center o& a &our lane street. ,.e contractor c.ose to begin eIcavation
o& t.e trenc. &rom t.e s.allo?er end re!uiring a 12." deep trenc.. $nitially t.e contractor
used a nine &oot .ig. &our &oot ?ide steel trenc. boI &or soil support. 2 trenc. boI is a
rigid steel &rame consisting o& t?o ?alls supported by ?elded struts ?it. open sides and
ends. ,.is met.od .ad t.e advantage t.at tra&&ic could be maintained in at least t?o lanes
during t.e reconstruction ?or0.
$n t.e s.allo? parts o& t.e trenc. t.e trenc. boI seemed to ade!uately support t.e
eIcavation. /o?ever as t.e trenc. got deeper more soil ?as unsupported belo? t.e
trenc. boI. $ntermittent soil collapses in t.e trenc. began to occur. Eventually an old
parallel siI inc. ?ater main collapsed t.ereby saturating t.e soil and leading to massive
soil collapse at t.e bottom o& t.e trenc.. 3eplacement o& t.e ?ater main ?as added to t.e
initial contract. 2t t.is point t.e contractor began sloping t.e sides o& t.e trenc. t.ereby
re!uiring t.e closure o& t.e entire street.
,.e initial use o& t.e trenc. boI ?as convenient but it ?as clearly inade!uate and unsa&e.
Aor0ers in t.e trenc. ?ere in continuing danger o& accidents stemming &rom soil
collapse. 1isruption to surrounding &acilities suc. as t.e parallel ?ater main ?as .ig.ly
li0ely. 2doption o& a tongue and groove vertical s.eeting system over t.e &ull .eig.t o&
t.e trenc. or alternatively t.e sloping eIcavation eventually adopted is clearly
pre&erable.
1+.4 2eferences
1. 2ng 2./.;. and A./. ,ang !ro)a)ility $oncepts in Engineering !lanning and
&esign3 ;olume - - /asic !rinciples Po.n Ailey and ;ons $nc. 5e? 9or0 1)%".
2. 2u ,. 3.4. ;.ane and L.2. /oel 7undamentals of #ystems Engineering3
!ro)a)ilistic 'odels 2ddison<Aesley *ublis.ing (o. 3eading 42 1)%2
3. :o?0er 2./. and Liebermann 6. P. Engineering #tatistics *rentice</all 1)%2.
4. KoI 2.P. and (ornell /.2. MedsN Quality in the $onstructed !roject% 2merican
;ociety o& (ivil Engineers 5e? 9or0 1)'4.
". $nternational Organization &or ;tandardization J;ampling *rocedures and (.arts
&or $nspection by 8ariables &or *ercent 1e&ective $;O 3)"1<1)'1 MENJ #tatistical
'ethods $;O ;tandard /andboo0 3 $nternational Organization &or
;tandardization *aris Krance 1)'1.
#. ;0ibnie?s0i 4. and /endric0son (. 'ethods to -mprove the #afety
!erformance of the 04#4 $onstruction -ndustry% ,ec.nical 3eport 1epartment o&
(ivil Engineering (arnegie 4ellon University 1)'3.
%. United ;tates 1epartment o& 1e&ense #ampling !rocedures and ,a)les for
-nspection )y ;aria)les M4ilitary ;tandard 414N Aas.ington 1.(.D U.;.
6overnment *rinting O&&ice 1)"%.
'. United ;tates 1epartment o& 1e&ense #ampling !rocedures and ,a)les for
-nspection )y "ttri)utes M4ilitary ;tandard 1+"1N Aas.ington 1.(.D U.;.
6overnment *rinting O&&ice 1)#3.
1+.15 Pro>lems
1. (onsider t.e &ollo?ing speci&ication. Aould you consider it to be a process or
per&ormance speci&icationX A.yX
JAater used in miIing or curing s.all be reasonably clean and &ree o& oil salt
acid al0ali sugar vegetable or ot.er substance inBurious to t.e &inis.ed
product...Aater 0no?n to be potable !uality may be used ?it.out test. A.ere t.e
source o& ?ater is relatively s.allo? t.e inta0e s.all be so enclosed as to eIclude
silt mud grass or ot.er &oreign materials.J R#S
2. ;uppose t.at a sampling plan calls &or a sample o& size n ] "+. ,o be acceptable
only t.ree or &e?er samples can be de&ective. Estimate t.e probability o&
accepting t.e lot i& t.e average de&ective percentage is MaN 1"V MbN "V or McN 2V.
1o not use an approIimation in t.is calculation.
3. 3epeat *roblem 2 using t.e binomial approIimation.
4. ;uppose t.at a proBect manager tested t.e strengt. o& one tile out o& a batc. o&
3+++ to be used on a building. ,.is one sample measurement ?as compared ?it.
t.e design speci&ication and in t.is case t.e sampled tileHs strengt. eIceeded t.at
o& t.e speci&ication. On t.is basis t.e proBect manager accepted t.e tile s.ipment.
$& t.e sampled tile ?as de&ective M?it. a strengt. less t.an t.e speci&icationN t.e
proBect manager ?ould .ave reBected t.e lot.
a. A.at is t.e probability t.at ninety percent o& t.e tiles are substandard even
t.oug. t.e proBect managerHs sample gave a satis&actory resultX
>. ;0etc. out t.e operating c.aracteristic curve &or t.is sampling plan as a
&unction o& t.e actual &raction o& de&ective tiles.
". 3epeat *roblem 4 &or sample sizes o& MaN " MbN 1+ and McN 2+.
#. ;uppose t.at a sampling<by<attributes plan is speci&ied in ?.ic. ten samples are
ta0en at random &rom a large lot M5]1++N and at most one sample item is allo?ed
to be de&ective &or t.e lot to be acceptable.
a. $& t.e actual percentage de&ective is &ive percent ?.at is t.e probability o& lot
acceptanceX M5oteD you may use relevant approIimations in t.is calculation.N
>. A.at is t.e consumerHs ris0 i& an acceptable !uality level is &i&teen percent
de&ective and t.e actual &raction de&ective is &ive percentX
c. A.at is t.e producerHs ris0 ?it. t.is sampling plan and an eig.t percent
de&ective percentageX
%. ,.e yield stress o& a random sample o& 2" pieces o& steel ?as measured yielding
a mean o& "2'++ psi. and an estimated standard deviation o& s ] 4#++ psi.
a. A.at is t.e probability t.at t.e population mean is less t.an "++++ psiX
>. A.at is t.e estimated &raction o& pieces ?it. yield strengt. less t.an "++++
psiX
c. $s t.is sampling procedure sampling<by<attributes or sampling<by<variableX
'. ;uppose t.at a contract speci&ies a sampling<by<attributes plan in ?.ic. ten
samples are ta0en at random &rom a large lot M5]1++N and at most one sample is
allo?ed to be de&ective &or t.e lot to be acceptable.
a. $& t.e actual percentage de&ective is &ive percent ?.at is t.e probability o& lot
acceptanceX M5oteD you may use relevant approIimations in t.is calculationN.
>. A.at is t.e consumerHs ris0 i& an acceptable !uality level is &i&teen percent
de&ective and t.e actual &raction de&ective is +.+"X
c. A.at is t.e producerHs ris0 ?it. t.is sampling plan and an 'V de&ective
percentageX
). $n a random sample o& 4+ bloc0s c.osen &rom a production line t.e mean lengt.
?as 1+.#3 inc.es and t.e estimated standard deviation ?as +.4 inc.. :et?een
?.at lengt.s can it be said t.at )'V o& bloc0 lengt.s ?ill lieX
1+.11 (ootnotes
1. ,.is illustrative pay &actor sc.edule is adapted &rom 3.4. Aeed J1evelopment o&
4ultic.aracteristic 2cceptance *rocedures &or 3igid *avementJ ,ransportation
Research Record 88@ 1)'2 pp. 2"<3#.
2. :.2. 6illy 2. ,ouran and ,. 2sai JLuality (ontrol (ircles in (onstructionJ "#$E
2ournal of $onstruction Engineering and 'anagement 8ol. 113 5o. 3 1)'% pg 432.
3. ;ee -mproving $onstruction #afety !erformance 3eport 2<3 ,.e :usiness
3oundtable 5e? 9or0 59 and Panuary 1)'2.
4. /inze Pimmie A. $onstruction #afety% *rentice</all 1))%.
". ,.is eIample ?as adapted &rom E. Elins0i E:ternal -mpacts of Reconstruction and
Reha)ilitation !rojects with -mplications for !roject 'anagement% Unpublis.ed 4;
,.esis 1epartment o& (ivil Engineering (arnegie 4ellon University 1)'".
#. 2merican 2ssociation o& ;tate /ig.?ay and ,ransportation O&&icials 5uide
#pecifications for (ighway $onstruction Aas.ington 1.(. ;ection %14.+1 pg. 244.
1-. Organi6ation and =se of Pro%ect
$nformation
1-.1 Types of Pro%ect $nformation
(onstruction proBects inevitably generate enormous and compleI sets o& in&ormation.
E&&ectively managing t.is bul0 o& in&ormation to insure its availability and accuracy is an
important managerial tas0. *oor or missing in&ormation can readily lead to proBect delays
uneconomical decisions or even t.e complete &ailure o& t.e desired &acility. *ity t.e
o?ner and proBect manager ?.o suddenly discover on t.e eIpected delivery date t.at
important &acility components .ave not yet been &abricated and cannot be delivered &or
siI mont.se Ait. better in&ormation t.e problem could .ave been identi&ied earlier so
t.at alternative suppliers mig.t .ave been located or sc.edules arranged. :ot. proBect
design and control are crucially dependent upon accurate and timely in&ormation as ?ell
as t.e ability to use t.is in&ormation e&&ectively. 2t t.e same time too muc. unorganized
in&ormation presented to managers can result in con&usion and paralysis o& decision
ma0ing.
2s a proBect proceeds t.e types and eItent o& t.e in&ormation used by t.e various
organizations involved ?ill c.ange. 2 listing o& t.e most important in&ormation sets
?ould includeD
cas. &lo? and procurement accounts &or eac. organization
intermediate analysis results during planning and design
design documents including dra?ings and speci&ications
construction sc.edules and cost estimates
!uality control and assurance records
c.ronological &iles o& proBect correspondence and memorandum
construction &ield activity and inspection logs
legal contracts and regulatory documents.
;ome o& t.ese sets o& in&ormation evolve as t.e proBect proceeds. ,.e &inancial accounts
o& payments over t.e entire course o& t.e proBect are an eIample o& overall gro?t.. ,.e
passage o& time results in steady additions in t.ese accounts ?.ereas t.e addition o& a
ne? actor suc. as a contractor leads to a sudden Bump in t.e number o& accounts. ;ome
in&ormation sets are important at one stage o& t.e process but may t.en be ignored.
(ommon eIamples include planning or structural analysis databases ?.ic. are not
ordinarily used during construction or operation. /o?ever it may be necessary at later
stages in t.e proBect to re<do analyses to consider desired c.anges. $n t.is case arc.ival
in&ormation storage and retrieval become important. Even a&ter t.e completion o&
construction an .istorical record may be important &or use during operation to assess
responsibilities in case o& &acility &ailures or &or planning similar proBects else?.ere.
,.e control and &lo? o& in&ormation is also important &or collaborative ?or0
environments ?.ere many pro&essionals are ?or0ing on di&&erent aspects o& a proBect
and s.aring in&ormation. (ollaborative ?or0 environments provide &acilities &or s.aring
data&iles tracing decisions and communication via electronic mail or video
con&erencing. ,.e datastores in t.ese collaborative ?or0 environments may become very
large.
:ased on several construction proBects 4aged 2bdelsayed o& ,ardi& 4urray W 2ssoc
MLuebec (anadaN estimated t.e &ollo?ing average &igures &or a typical proBect o& U;G1+
millionD
5umber o& participants McompaniesND 42+ Mincluding all suppliers and sub<sub<
contractorsN
5umber o& participants MindividualsND '"+
5umber o& di&&erent types o& documents generatedD "+
5umber o& pages o& documentsD "#+++
5umber o& ban0ers boIes to .old proBect documentsD 2"
5umber o& 4 dra?ers &iling cabinetsD #
5umber o& 2+inc. diameter 2+ year old "+ &eet .ig. trees used to generate t.is
volume o& paperD #
E!uivalent number o& 4ega :ytes o& electronic data to .old t.is volume o& paper
MscannedND 3+++ 4:
E!uivalent number o& compact discs M(1sND #
A.ile t.ere may be substantial costs due to inaccurate or missing in&ormation t.ere are
also signi&icant costs associated ?it. t.e generation storage trans&er retrieval and ot.er
manipulation o& in&ormation. $n addition to t.e costs o& clerical ?or0 and providing aids
suc. as computers t.e organization and revie? o& in&ormation command an inordinate
amount o& t.e attention o& proBect managers ?.ic. may be t.e scarcest resource on any
construction proBect. $t is use&ul t.ere&ore to understand t.e scope and alternatives &or
organizing proBect in&ormation.
1-.! Accuracy and =se of $nformation
5umerous sources o& error are eIpected &or proBect in&ormation. A.ile numerical values
are o&ten reported to t.e nearest cent or values o& e!uivalent precision it is rare t.at t.e
actual values are so accurately 0no?n. Living ?it. some uncertainty is an inescapable
situation and a prudent manager s.ould .ave an understanding o& t.e uncertainty in
di&&erent types o& in&ormation and t.e possibility o& dra?ing misleading conclusions.
Ae .ave already discussed t.e uncertainty in.erent in ma0ing &orecasts o& proBect costs
and durations sometime in t.e &uture. Korecast uncertainty also eIists in t.e s.ort term.
Kor eIample consider estimates o& ?or0 completed. Every proBect manager is &amiliar
?it. situations in ?.ic. t.e &inal &e? bits o& ?or0 &or a tas0 ta0e an inordinate amount o&
time. Un&oreseen problems inade!uate !uality on already completed ?or0 lac0 o&
attention accidents or postponing t.e most di&&icult ?or0 problems to t.e end can all
contribute to ma0ing t.e &inal portion o& an activity actually re!uire &ar more time and
e&&ort t.an eIpected. ,.e net result is t.at estimates o& t.e actual proportion o& ?or0
completed are o&ten inaccurate.
;ome inaccuracy in reports and estimates can arise &rom conscious c.oices made by
?or0ers &oremen or managers. $& t.e value o& insuring accuracy is t.oug.t to be lo? or
noneIistent t.en a rational ?or0er ?ill not eIpend e&&ort or time to gat.er or to report
in&ormation accurately. 4any proBect sc.eduling systems &lounder on eIactly t.is type o&
non<reporting or mis<reporting. ,.e original sc.edule can !uic0ly become eItremely
misleading ?it.out accurate updatinge Only i& all parties concerned .ave speci&ic
mandates or incentives to report accurately ?ill t.e data be reliable.
2not.er source o& inaccuracy comes &rom transcription errors o& various sorts.
,ypograp.ical errors incorrect measurements &rom reading e!uipment or ot.er
recording and calculation errors may creep into t.e sets o& in&ormation ?.ic. are used in
proBect management. 1espite intensive e&&orts to c.ec0 and eliminate suc. errors t.eir
complete eradication is virtually impossible.
One met.od o& indicating t.e relative accuracy o& numerical data is to report ranges or
eIpected deviations o& an estimate or measurement. Kor eIample a measurement mig.t
be reported as 1)' &t. _ 2 &t. ,.ere are t?o common interpretations o& t.ese deviations.
Kirst a range Msuc. as _ 2N mig.t be c.osen so t.at t.e actual value is certain to be ?it.in
t.e indicated range. $n t.e case above t.e actual lengt. ?ould be some?.ere bet?een
1)# and 2++ &eet ?it. t.is convention. 2lternatively t.is deviation mig.t indicate t.e
typical range o& t.e estimate or measurement. $n t.is case t.e eIample above mig.t
imply t.at t.ere is say a t?o<t.irds c.ance t.at t.e actual lengt. is bet?een 1)# and 2++.
A.en t.e absolute range o& a !uantity is very large or un0no?n t.e use o& a statistical
standard deviation as a measure o& uncertainty may be use&ul. $& a !uantity is measured n
times resulting is a set o& values I
i
Mi ] 12...nN t.en t.e average or mean value t.en t.e
average or mean value is given byD
14.1
,.e standard deviation can be estimated as t.e s!uare root s o& t.e sample variance s
2

i.e. ?.ereD
14.2
,.e standard deviation is a direct indicator o& t.e spread or variability in a
measurement in t.e same units as t.e measurement itsel&. /ig.er values o& t.e standard
deviation indicate greater and greater uncertainty about t.e eIact value o& t.e
measurement. Kor t.e commonly encountered normal distri)ution o& a random variable
t.e average value plus or minus one standard deviation _ ?ill include about t?o<
t.irds o&I t.e actual occurrences. 2 related measure o& random variability is t.e
coe&&icient o& variation de&ined as t.e ratio o& t.e standard deviation to t.e meanD
14.3
,.us a coe&&icient o& variation indicates t.e variability as a proportion o& t.e eIpected
value. 2 coe&&icient o& variation e!ual to one Mc ] 1N represents substantial uncertainty
?.ereas a value suc. as c ] +.1 or ten percent indicates muc. smaller variability.
4ore generally even in&ormation ?.ic. is gat.ered and reported correctly may be
interpreted incorrectly. A.ile t.e actual in&ormation mig.t be correct ?it.in t.e terms o&
t.e data gat.ering and recording system it may be !uite misleading &or managerial
purposes. 2 &e? eIamples can illustrate t.e problems ?.ic. may arise in naively
interpreting recorded in&ormation ?it.out involving any conceptual understanding o&
.o? t.e in&ormation is actually gat.ered stored and recorded or .o? ?or0 on t.e proBect
actually proceeds.
&9ample 1-)1* /ources of ;elay and Cost Accounts
$t is common in construction activity in&ormation to ma0e detailed records o& costs
incurred and ?or0 progress. $t is less common to 0eep detailed records o& delays and t.eir
causes even t.oug. t.ese delays may be t.e actual cause o& increased costs and lo?er
productivity. R1S *aying eIclusive attention to cost accounts in suc. situations may be
misleading. Kor eIample suppose t.at t.e accounts &or e!uipment and material
inventories s.o? cost savings relative to original estimates ?.ereas t.e costs associated
?it. particular construction activities s.o? .ig.er t.an estimated eIpenditures. $n t.is
situation it is not necessarily t.e case t.at t.e inventory &unction is per&orming ?ell
?.ereas t.e &ield ?or0ers are t.e cause o& cost overrun problems. $t may be t.at
construction activities are delayed by lac0 o& e!uipment or materials t.us causing cost
increases. Qeeping a larger inventory o& materials and e!uipment mig.t increase t.e
inventory account totals but lead to lo?er overall costs on t.e proBect. :etter yet more
closely matc.ing demands and supplies mig.t reduce delay costs ?it.out concurrent
inventory cost increases. ,.us simply eIamining cost account in&ormation may not lead
to a correct diagnosis o& a problem or to t.e correct managerial responses.
&9ample 1-)!* $nterest Charges
Kinancial or interest c.arges are usually accumulated in a separate account &or proBects
?.ile t.e accounts associated ?it. particular activities represent actual eIpenditures. Kor
eIample planning activities mig.t cost G1++++ &or a small proBect during t.e &irst year o&
a t?o year proBect. ;ince dollar eIpenditures .ave a time value t.is G1++++ cost in year
1 is not e!uivalent in value to a G1++++ cost in year 2. $n particular &inancing t.e early
G1++++ involves payment o& interest or similarly t.e loss o& investment opportunities. $&
t.e borro?ing rate ?as 1+V t.en &inancing t.e &irst year G1++++ eIpenditure ?ould
re!uire G1++++ I +.1+ ] G1+++ and t.e value o& t.e eIpenditure by t.e end o& t.e second
year o& t.e proBect ?ould be G11+++. ,.us some portion o& t.e overall interest c.arges
represents a cost associated ?it. planning activities. 3ecognizing t.e true value o&
eIpenditures made at di&&erent periods o& time is an important element in devising
rational planning and management strategies.
1-.+ Computeri6ed Organi6ation and =se of
$nformation
5umerous &ormal met.ods and possible organizations eIist &or t.e in&ormation re!uired
&or proBect management. :e&ore discussing t.e details o& computations and in&ormation
representation it ?ill be use&ul to describe a record 0eeping implementation including
some o& t.e practical concerns in design and implementation. $n t.is section ?e s.all
describe a computer based system to provide construction yard and ?are.ouse
management in&ormation &rom t.e point o& vie? o& t.e system users. R2S $n t.e process
t.e use&ulness o& computerized databases can be illustrated.
2 yard or ?are.ouse is used by most construction &irms to store e!uipment and to
provide an inventory o& materials and parts needed &or proBects. Large &irms may .ave
several ?are.ouses at di&&erent locations so as to reduce transit time bet?een proBect sites
and materials supplies. $n addition local JyardsJ or Je!uipment s.edsJ are commonly
provided on t.e Bob site. EIamples o& e!uipment in a yard ?ould be drills sa?s o&&ice
trailers graders bac0 .oes concrete pumps and cranes. 4aterial items mig.t include
nails ply?ood ?ire mes. &orming lumber etc.
$n typical construction ?are.ouses ?ritten records are 0ept by ?are.ouse cler0s to
record trans&er or return o& e!uipment to Bob sites dispatc. o& material to Bobs and
maintenance .istories o& particular pieces o& e!uipment. $n turn t.ese records are used as
t.e basis &or billing proBects &or t.e use o& e!uipment and materials. Kor eIample a daily
c.arge ?ould be made to a proBect &or using a concrete pump. 1uring t.e course o& a
mont. t.e concrete pump mig.t spend several days at di&&erent Bob sites so eac. proBect
?ould be c.arged &or its use. ,.e record 0eeping system is also used to monitor materials
and e!uipment movements bet?een sites so t.at e!uipment can be located.
One common mec.anism to organize record 0eeping is to &ill out cards recording t.e
trans&er o& items to or &rom a Bob site. ,able 14<1 illustrates one possible trans&er record.
$n t.is case seven items ?ere re!uested &or t.e (arnegie<4ellon Bob site MproBect number
'3<1""%N. ,.ese seven items ?ould be loaded on a delivery truc0 along ?it. a copy o&
t.e trans&er record. ;.o?n in ,able 14<1 is a code number identi&ying eac. item
M+#+).+2 +#+).+3 etc.N t.e !uantity o& eac. item re!uested an item description and a
unit price. Kor e!uipment items an e!uipment number identi&ying t.e individual piece o&
e!uipment used is also recorded suc. as grinder 5o. 4"1% in ,able 14<1O a unit price is
not speci&ied &or e!uipment but a daily rental c.arge mig.t be imposed.
TA<"& 1-)1 $llustration o& a (onstruction Aare.ouse ,rans&er 3ecord
,325;KE3 ;/EE, 5U4:E3 1++311
1eliver ,oD (arnegie<4ellon Pob. 5o. '3<1""%
3eceived KromD *ittsburg. Aare.ouse Pob 5o. ))<*$,,
$,E4 5O. EL. 5O. L,9 1E;(3$*,$O5 U5$, *3$(E
+#+).+2
+#+).+3
+1''.21
+))#.+1
+#+%.+3
+1%2.++
+1'1."3
4"1%
2++
2++
1
3
4
1
1
/ilti *ins 5Q2%
/ilti *ins 5Q2%
Qiel :oI o& 12
*aint ;pray
*ly?ood 4 I ' I 1U4J
6rinder
6rinding A.eel #J (up
G+.3#
+.3#
#."3
"."%
11.#2
14.)%
*reparerD 8ic0i 1ateD IUIIUII
,rans&er s.eets are numbered Msuc. as 5o. 1++311 in ,able 14<1N dated and t.e preparer
identi&ied to &acilitate control o& t.e record 0eeping process. 1uring t.e course o& a
mont. numerous trans&er records o& t.is type are accumulated. 2t t.e end o& a mont.
eac. o& t.e trans&er records is eIamined to compile t.e various items or e!uipment used
at a proBect and t.e appropriate c.arges. (onstructing t.ese bills ?ould be a tedious
manual tas0. E!uipment movements ?ould .ave to be trac0ed individually days at eac.
site counted and t.e daily c.arge accumulated &or eac. proBect. Kor eIample ,able 14<1
records t.e trans&er o& grinder 5o. 4"1% to a Bob site. ,.is proBect ?ould be c.arged a
daily rental rate until t.e grinder ?as returned. /undreds or t.ousands o& individual item
trans&ers ?ould .ave to be eIamined and t.e process o& preparing bills could easily
re!uire a ?ee0 or t?o o& e&&ort.
$n addition to generating billing in&ormation a variety o& reports ?ould be use&ul in t.e
process o& managing a companyHs e!uipment and individual proBects. 3ecords o& t.e
.istory o& use o& particular pieces o& e!uipment are use&ul &or planning maintenance and
deciding on t.e sale or scrapping o& e!uipment. 3eports on t.e cumulative amount o&
materials and e!uipment delivered to a Bob site ?ould be o& obvious bene&it to proBect
managers. (omposite reports on t.e amount location and use o& pieces o& e!uipment o&
particular types are also use&ul in ma0ing decisions about t.e purc.ase o& ne? e!uipment
inventory control or &or proBect planning. Un&ortunately producing eac. o& t.ese reports
re!uires manually si&ting t.roug. a large number o& trans&er cards. 2lternatively record
0eeping &or t.ese speci&ic proBects could .ave to proceed by 0eeping multiple records o&
t.e same in&ormation. Kor eIample e!uipment trans&ers mig.t be recorded on M1N a &ile
&or a particular piece o& e!uipment and M2N a &ile &or a particular proBect in addition to t.e
basic trans&er &orm illustrated in ,able 14<1. Even ?it. t.ese redundant records
producing t.e various desired reports ?ould be time consuming.
Organizing t.is inventory in&ormation in a computer program is a practical and desirable
innovation. $n addition to speeding up billing Mand t.ereby reducing borro?ing costsN
application programs can readily provide various reports or views o& t.e basic inventory
in&ormation described above. $n&ormation can be entered directly to t.e computer
program as needed. Kor eIample t.e trans&er record s.o?n in ,able 14<1 is based upon
an input screen to a computer program ?.ic. in turn .ad been designed to duplicate t.e
manual &orm used prior to computerization. Use o& t.e computer also allo?s some
interactive aids in preparing t.e trans&er &orm. ,.is type o& aid &ollo?s a simple ruleD
J1onHt ma0e t.e user provide in&ormation t.at t.e system already 0no?s.J R3S $n using
t.e &orm s.o?n in ,able 14<1 a cler0 need only enter t.e code and !uantity &or an itemO
t.e verbal description and unit cost o& t.e item t.en appear automatically. 2 copy o& t.e
trans&er &orm can be printed locally ?.ile t.e data is stored in t.e computer &or
subse!uent processing. 2s a result preparing trans&er &orms and record 0eeping are
rapidly and e&&ectively per&ormed.
4ore dramatically t.e computerized in&ormation allo?s ?are.ouse personnel bot. to as0
!uestions about e!uipment management and to readily generate t.e re!uisite data &or
ans?ering suc. !uestions. ,.e records o& trans&ers can be readily processed by computer
programs to develop bills and ot.er reports. Kor eIample proposals to purc.ase ne?
pieces o& e!uipment can be rapidly and critically revie?ed a&ter summarizing t.e actual
usage o& eIisting e!uipment. Ultimately good organization o& in&ormation ?ill typically
lead to t.e desire to store ne? types o& data and to provide ne? vie?s o& t.is in&ormation
as standard managerial tools.
O& course implementing an in&ormation system suc. as t.e ?are.ouse inventory
database re!uires considerable care to insure t.at t.e resulting program is capable o&
accomplis.ing t.e desired tas0. $n t.e ?are.ouse inventory system a variety o& details
are re!uired to ma0e t.e computerized system an acceptable alternative to a long standing
manual record 0eeping procedure. (oping ?it. t.ese details ma0es a big di&&erence in t.e
systemHs use&ulness. Kor eIample c.anges to t.e status o& e!uipment are generally made
by recording trans&ers as illustrated in ,able 14<1. /o?ever a &e? status c.anges are not
accomplis.ed by p.ysical movement. One eIample is a c.arge &or air conditioning in
&ield trailersD even t.oug. t.e air conditioners may be le&t in t.e &ield t.e construction
proBect s.ould not be c.arged &or t.e air conditioner a&ter it .as been turned o&& during t.e
cold ?eat.er mont.s. 2 special status c.ange report may be re!uired &or suc. details.
Ot.er details o& record 0eeping re!uire similar special controls.
Even ?it. a capable program simplicity o& design &or users is a critical &actor a&&ecting
t.e success&ul implementation o& a system. $n t.e ?are.ouse inventory system described
above input &orms and initial reports ?ere designed to duplicate t.e eIisting manual
paper<based records. 2s a result ?are.ouse cler0s could readily understand ?.at
in&ormation ?as re!uired and its ultimate use. 2 good rule to &ollo? is t.e *rinciple o&
Least 2stonis.mentD ma0e communications ?it. users as consistent and predictable as
possible in designing programs.
Kinally &leIibility o& systems &or c.anges is an important design and implementation
concern. 5e? reports or vie?s o& t.e data are a common re!uirement as t.e system is
used. Kor eIample t.e introduction o& a ne? accounting system ?ould re!uire c.anges in
t.e communications procedure &rom t.e ?are.ouse inventory system to record c.anges
and ot.er cost items.
$n sum computerizing t.e ?are.ouse inventory system could save considerable labor
speed up billing and &acilitate better management control. 2gainst t.ese advantages must
be placed t.e cost o& introducing computer .ard?are and so&t?are in t.e ?are.ouse.
1-.- Organi6ing $nformation in ;ata>ases
6iven t.e bul0 o& in&ormation associated ?it. construction proBects &ormal organization
o& t.e in&ormation is essential so as to avoid c.aos. 8irtually all maBor &irms in t.e arena
o& proBect management .ave computer based organization o& cost accounts and ot.er
data. Ait. t.e advent o& micro<computer database managers it is possible to develop
&ormal computerized databases &or even small organizations and proBects. $n t.is section
?e ?ill discuss t.e c.aracteristics o& suc. &ormal databases. E!uivalent organization o&
in&ormation &or manual manipulation is possible but tedious. (omputer based
in&ormation systems also .ave t.e signi&icant advantage o& rapid retrieval &or immediate
use and in most instances lo?er overall costs. Kor eIample computerized speci&ications
?riting systems .ave resulted in ?ell documented savings. ,.ese systems .ave records o&
common speci&ication p.rases or paragrap.s ?.ic. can be tailored to speci&ic proBect
applications. R4S
Kormally a database is a collection o& stored operational in&ormation used by t.e
management and application systems o& some particular enterprise. R"S ,.is stored
in&ormation .as eIplicit associations or relations.ips depending upon t.e content and
de&inition o& t.e stored data and t.ese associations may t.emselves be considered to be
part o& t.e database. Kigure 14<1 illustrates some o& t.e typical elements o& a database.
,.e internal model is t.e actual location and representation o& t.e stored data. 2t some
level o& detail it consists o& t.e strings o& JbitsJ ?.ic. are stored in a computerHs
memory on t.e trac0s o& a recording dis0 on a tape or on some ot.er storage device.
(igure 1-)1 $llustration o& 1atabase 4anagement ;ystem 2rc.itecture
2 manager need not be concerned ?it. t.e details o& data storage since t.is internal
representation and manipulation is regulated by t.e &ata)ase 'anager !rogram M1:4N.
,.e 1:4 is t.e so&t?are program t.at directs t.e storage maintenance manipulation
and retrieval o& data. Users retrieve or store data by issuing speci&ic re!uests to t.e 1:4.
,.e obBective o& introducing a 1:4 is to &ree t.e user &rom t.e detail o& eIactly .o?
data are stored and manipulated. 2t t.e same time many di&&erent users ?it. a ?ide
variety o& needs can use t.e same database by calling on t.e 1:4. Usually t.e 1:4 ?ill
be available to a user by means o& a special !uery language. Kor eIample a manager
mig.t as0 a 1:4 to report on all proBect tas0s ?.ic. are sc.eduled to be under?ay on a
particular date. ,.e desirable properties o& a 1:4 include t.e ability to provide t.e user
?it. ready access to t.e stored data and to maintain t.e integrity and security o& t.e data.
5umerous commercial 1:4 eIist ?.ic. provide t.ese capabilities and can be readily
adopted to proBect management applications.
A.ile t.e actual storage o& t.e in&ormation in a database ?ill depend upon t.e particular
mac.ine and storage media employed a $onceptual &ata 'odel eIists ?.ic. provides
t.e user ?it. an idea or abstract representation o& t.e data organization. M4ore &ormally
t.e overall con&iguration o& t.e in&ormation in t.e database is called t.e conceptual
schema.N Kor eIample a piece o& data mig.t be vie?ed as a particular value ?it.in a
record o& a data&ile. $n t.is conceptual model a data&ile &or an application system consists
o& a series o& records ?it. pre<de&ined variables ?it.in eac. record. 2 record is simply a
se!uence o& variable values ?.ic. may be teIt c.aracters or numerals. ,.is data&ile
model is one o& t.e earliest and most important data organization structures. :ut ot.er
vie?s o& data organization eIist and can be eIceedingly use&ul. ,.e neIt section
describes one suc. general model called t.e relational model.
(ontinuing ?it. t.e elements in Kigure 14<1 t.e data dictionary contains t.e de&initions
o& t.e in&ormation in t.e database. $n some systems data dictionaries are limited to
descriptions o& t.e items in t.e database. 4ore general systems employ t.e data
dictionary as t.e in&ormation source &or anyt.ing dealing ?it. t.e database systems. $t
documents t.e design o& t.e databaseD ?.at data are stored .o? t.e data is related ?.at
are t.e allo?able values &or data items etc. ,.e data dictionary may also contain user
aut.orizations speci&ying ?.o may .ave access to particular pieces o& in&ormation.
2not.er important element o& t.e data dictionary is a speci&ication o& allo?able ranges
&or pieces o& dataO by pro.ibiting t.e input o& erroneous data t.e accuracy o& t.e database
improves.
E:ternal models are t.e means by ?.ic. t.e users vie? t.e database. O& all t.e
in&ormation in t.e database one particular userHs vie? may be Bust a subset o& t.e total. 2
particular vie? may also re!uire speci&ic translation or manipulation o& t.e in&ormation in
t.e database. Kor eIample t.e e:ternal model &or a payc.ec0 ?riting program mig.t
consist solely o& a list o& employee names and salary totals even i& t.e underlying
database ?ould include employee .ours and .ourly pay rates. 2s &ar as t.at program is
concerned no ot.er data eIists in t.e database. ,.e 1:4 provides a means o& translating
particular eIternal models or vie?s into t.e overall data model. 1i&&erent users can view
t.e data in !uite distinct &as.ions yet t.e data itsel& can be centrally stored and need not
be copied separately &or eac. user. EIternal models provide t.e &ormat by ?.ic. any
speci&ic in&ormation needed is retrieved. 1atabase JusersJ can be .uman operators or
ot.er application programs suc. as t.e payc.ec0 ?riting program mentioned above.
Kinally t.e &ata)ase "dministrator is an individual or group c.arged ?it. t.e
maintenance and design o& t.e database including approving access to t.e stored
in&ormation. ,.e assignment o& t.e database administrator s.ould not be ta0en lig.tly.
Especially in large organizations ?it. many users t.e database administrator is vital to
t.e success o& t.e database system. Kor small proBects t.e database administrator mig.t
be an assistant proBect manager or even t.e proBect manager.
1-.. 2elational ,odel of ;ata>ases
2s an eIample o& .o? data can be organized conceptually ?e s.all describe t.e
relational data model. $n t.is conceptual model t.e data in t.e database is vie?ed as
being organized into a series o& relations or tables o& data ?.ic. are associated in ?ays
de&ined in t.e data dictionary. 2 relation consists o& ro?s o& data ?it. columns
containing particular attributes. ,.e term JrelationalJ derives &rom t.e mat.ematical
t.eory o& relations ?.ic. provides a t.eoretical &rame?or0 &or t.is type o& data model.
/ere t.e terms JrelationJ and data JtableJ ?ill be used interc.angeably. ,able 14<2
de&ines one possible relation to record unit cost data associated ?it. particular activities.
$ncluded in t.e database ?ould be one ro? Mor tupleN &or eac. o& t.e various items
involved in construction or ot.er proBect activities. ,.e unit cost in&ormation associated
?it. eac. item is t.en stored in t.e &orm o& t.e relation de&ined in ,able 14<2.
TA<"& 1-)! $llustration o& a 3elation 1escriptionD Unit *rice $n&ormation 2ttributes
2ttribute 5ame 2ttribute 1escription 2ttribute ,ype Qey
$,E4Z(O1E
1E;(3$*,$O5
AO3QZU5$,
$tem (ode 5umber
$tem 1escription
;tandard Unit o&
Aor0 &or t.e $tem
*re<de&ined (ode
,eIt
,eIt
Mrestricted to allo?able
9es
5o
5o
(3EAZ(O1E
OU,*U,
,$4EZU5$,
42,LZU5$,Z(O;,
12,E4(O;
$5;,(O;,
12,E$(O;
;tandard (re? (ode &or 2ctivity
2verage *roductivity o& (re?
;tandard Unit o& OU,*U,
4aterial Unit (ost
1ate o& 42,LZU5$,Z(O;,
$nstallation Unit (ost
1ate o& $5;,(O;,
unitsN
*re<de&ined (ode
5umerical
,eIt
5umerical
1ate ,eIt
5umerical
1ate ,eIt
5o
5o
5o
5o
5o
5o
5o
Using ,able 14<2 a typical unit cost entry &or an activity in construction mig.t beD
$,E4Z(O1ED +4.2<##<+2"
1E;(3$*,$O5D common bric0 masonry 12J t.ic0 ?all 1).+ bric0s per ;.K.
AO3QZU5$,D 1+++ bric0s
(3EAZ(O1ED +4.2<3
OU,*U,D 1.)
,$4EZU5$,D ;.i&t
42,LZU5$,Z(O;,D 124
12,E4(O;D Pune<+)<%)
$5;,(O;,D 2"%
12,E$(O;D 2ugust<23<%)
,.is entry summarizes t.e unit costs associated ?it. construction o& 12J t.ic0 bric0
masonry ?alls as indicated by t.e item 1E;(3$*,$O5. ,.e $,E4Z(O1E is a
numerical code identi&ying a particular activity. ,.is code mig.t identi&y general
categories as ?ellO in t.is case +4.2 re&er to general masonry ?or0. $,E4Z(O1E mig.t
be based on t.e 42;,E3KO342, or ot.er coding sc.eme. ,.e (3EAZ(O1E entry
identi&ies t.e standard cre? ?.ic. ?ould be involved in t.e activity. ,.e actual
composition o& t.e standard cre? ?ould be &ound in a (3EA 3EL2,$O5 under t.e
entry +4.2<3 ?.ic. is t.e t.ird standard cre? involved in masonry ?or0 M+4.2N. ,.is
ability to point to ot.er relations reduces t.e redundancy or duplication o& in&ormation in
t.e database. $n t.is case standard cre? number +4.2<3 mig.t be used &or numerous
masonry construction tas0s but t.e de&inition o& t.is cre? need only appear once.
AO3QZU5$, OU,*U, and ,$4EZU5$, summarize t.e eIpected output &or t.is tas0
?it. a standard cre? and de&ine t.e standard unit o& measurement &or t.e item. $n t.is
case costs are given per t.ousand bric0s per s.i&t. Kinally material
M42,LZU5$,Z(O;,N and installation M$5;,(O;,;N costs are recorded along ?it. t.e
date M12,E4(O; and 12,E$(O;N at ?.ic. t.e prices ?ere available and entered in
t.e database. ,.e date o& entry is use&ul to insure t.at any in&lation in costs can be
considered during use o& t.e data.
,.e data recorded in eac. ro? could be obtained by survey during bid preparations &rom
past proBect eIperience or &rom commercial services. Kor eIample t.e data recorded in
t.e ,able 14<2 relation could be obtained as nation?ide averages &rom commercial
sources.
2n advantage o& t.e relational database model is t.at t.e number o& attributes and ro?s in
eac. relation can be eIpanded as desired. Kor eIample a manager mig.t ?is. to divide
material costs M42,LZU5$,Z(O;,N into attributes &or speci&ic materials suc. as
cement aggregate and ot.er ingredients o& concrete in t.e unit cost relation de&ined in
,able 14<2. 2s additional items are de&ined or needed t.eir associated data can be
entered in t.e database as anot.er ro? Mor tupleN in t.e unit cost relation. 2lso ne?
relations can be de&ined as t.e need arises. /ence t.e relational model o& database
organization can be !uite &leIible in application. $n practice t.is is a crucial advantage.
2pplication systems can be eIpected to c.ange radically over time and a &leIible system
is .ig.ly desirable.
Ait. a relational database it is straig.t&or?ard to issue !ueries &or particular data items
or to combine data &rom di&&erent relations. Kor eIample a manager mig.t ?is. to
produce a report o& t.e cre? composition needed on a site to accomplis. a given list o&
tas0s. 2ssembling t.is report ?ould re!uire accessing t.e unit price in&ormation to &ind
t.e standard cre? and t.en combining in&ormation about t.e construction activity or item
Meg. !uantity desiredN ?it. cre? in&ormation. /o?ever to e&&ectively accomplis. t.is
type o& manipulation re!uires t.e de&inition o& a J0eyJ in eac. relation.
$n ,able 14<2 t.e $,E4(O1E provides a uni!ue identi&ier or key &or eac. ro?. 5o ot.er
ro? s.ould .ave t.e same $,E4(O1E in any one relation. /aving a uni!ue 0ey reduces
t.e redundancy o& data since only one ro? is included in t.e database &or eac. activity. $t
also avoids error. Kor eIample suppose one !ueried t.e database to &ind t.e material cost
entered on a particular date. ,.is response mig.t be misleading since more t.an one
material cost could .ave been entered on t.e same date. ;imilarly i& t.ere are multiple
ro?s ?it. t.e same $,E4(O1E value t.en a !uery mig.t give erroneous responses i&
one o& t.e ro?s ?as out o& date. Kinally eac. ro? .as only a single entry &or eac.
attribute. R#S
,.e ability to combine or separate relations into ne? arrangements permits t.e de&inition
o& alternative views or eIternal models o& t.e in&ormation. ;ince t.ere are usually a
number o& di&&erent users o& databases t.is can be very use&ul. Kor eIample t.e payroll
division o& an organization ?ould normally desire a !uite di&&erent organization o&
in&ormation about employees t.an ?ould a proBect manager. :y eIplicitly de&ining t.e
type and organization o& in&ormation a particular user group or application re!uires a
speci&ic vie? or subset o& t.e entire database can be constructed. ,.is organization is
illustrated in Kig. 14<1 ?it. t.e 12,2 1$(,$O5239 serving as a translator bet?een t.e
eIternal data models and t.e database management system.
:e.ind t.e operations associated ?it. !uerying and manipulating relations is an eIplicit
algebraic t.eory. ,.is algebra de&ines t.e various operations t.at can be per&ormed on
relations suc. as union Mconsisting o& all ro?s belonging to one or t.e ot.er o& t?o
relationsN intersection Mconsisting o& all ro?s belonging to bot. o& t?o relationsN minus
Mconsisting o& all ro?s belonging to one relation and not anot.erN or proBection
Mconsisting o& a subset o& t.e attributes &rom a relationN. ,.e algebraic underpinnings o&
relational databases permit rigorous de&initions and con&idence t.at operations ?ill be
accomplis.ed in t.e desired &as.ion. R%S
&9ample 1-)+* A /u>contractor 2elation
2s an illustration o& t.e preceding discussion consider t.e problem o& developing a
database o& possible subcontractors &or construction proBects. ,.is database mig.t be
desired by t.e cost estimation department o& a general contractor to identi&y
subcontractors to as0 to bid on parts o& a proBect. 2ppropriate subcontractors appearing in
t.e database could be contacted to prepare bids &or speci&ic proBects. ,able 14<3 lists t.e
various attributes ?.ic. mig.t be re!uired &or suc. a list and an eIample entry including
t.e subcontractorHs name contact person address size Mlarge medium or smallN and
capabilities.
TA<"& 1-)+ ;ubcontractor 3elation EIample
2ttribute EIample
524E
(O5,2(,
*/O5E
;,3EE,
($,9
;,2,E
Y$*(O1E
;$YE
(O5(3E,E
ELE(,3$(2L
42;O539
etc.
^9Y Electrical (o.
:etty ^9Y
M412N III<IIII
III 4ulberry ;t.
*ittsburg.
*2
1"2II
large
no
yes
no
,o use t.is relation a cost estimator mig.t be interested in identi&ying large electrical
subcontractors in t.e database. 2 !uery typed into t.e 1:4 suc. asD
;ELE(, &rom ;U:(O5,32(,O3;
?.ere ;$YE ] Large and ELE(,3$(2L ] 9es
?ould result in t.e selection o& all large subcontractors per&orming electrical ?or0 in t.e
subcontractorHs relation. 4ore speci&ically t.e estimator mig.t ?ant to &ind
subcontractors in a particular stateD
;ELE(, &rom ;U:(O5,32(,O3;
?.ere ;$YE ] Large and ELE(,3$(2L ] 9es and ;,2,E ] 8$.
$n addition to providing a list o& t.e desired subcontractorsH names and addresses a utility
application program could also be ?ritten ?.ic. ?ould print mailing labels &or t.e
selected &irms.
Ot.er portions o& t.e general contracting &irm mig.t also ?is. to use t.is list. Kor
eIample t.e accounting department mig.t use t.is relation to record t.e addresses o&
subcontractors &or payment o& invoices t.ereby avoiding t.e necessity to maintain
duplicate &iles. $n t.is case t.e accounting code number associated ?it. eac.
subcontractor mig.t be entered as an additional attribute in t.e relation and t.e
accounting department could &ind addresses directly.
&9ample 1-)-* Aistorical <ridge 7or: 2elation
2s anot.er simple eIample o& a data table consider t.e relation s.o?n in ,able 14<+
?.ic. mig.t record .istorical eIperience ?it. di&&erent types o& bridges accumulated by a
particular agency. ,.e actual instances or ro?s o& data in ,able 14<4 are .ypot.etical.
,.e attributes o& t.is relation areD
*3OPE(, 5U4:E3 < a #<digit code identi&ying t.e particular proBect.
,9*E OK :3$16E < a teIt &ield describing t.e bridge type. MKor retrieval
purposes a numerical code mig.t also be used to describe bridge type to avoid
any di&&erences in terminology to describe similar bridgesN.
LO(2,$O5 < ,.e location o& t.e proBect.
(3O;;$56 < A.at t.e bridge crosses over eg. a river.
;$,E (O51$,$O5; < 2 brie& description o& t.e site peculiarities.
E3E(,$O5 ,$4E < ,ime re!uired to erect a bridge in mont.s.
;*25 < ;pan o& t.e bridge in &eet.
12,E < 9ear o& bridge completion.
2(,U2L<E;,$42,E1 (O;,; < 1i&&erence o& actual &rom estimated costs.
,.ese attributes could be used to ans?er a variety o& !uestions concerning construction
eIperience use&ul during preliminary planning.
TA<"& 1-)- EIample o& :ridge Aor0 3elation
*roBect
5umber
,ype o&
:ridge Location (rossing ;ite (onditions
Erection ,ime
M4ont.sN
;pan
M&t.N
Estimated less
2ctual (ost
1#)13%
1%+14"
1)%1+'
;teel *late
6irder
(oncrete
2rc.
;teel ,russ
2ltoona
*ittsburg.
2llento?n
3ailroad
3iver
/ig.?ay
2++H 8alley
Limestone
2"+H /ig. ;andy
Loam
13"H 1eep *ile
Koundation
"
%
'
24+
2%'
2"#
<G"++++
<2%"++
3"+++
2s an eIample suppose t.at a bridge is to be built ?it. a span o& 2"+ &eet located in
*ittsburg. *2 and crossing a river ?it. limestone sub<strata. $n initial or preliminary
planning a designer mig.t !uery t.e database &our separate times as &ollo?sD
;ELE(, &rom :3$16EAO3Q ?.ere ;*25 \ 2++ and ;*25 [ 3++ and ?.ere
(3O;;$56 ] JriverJ
;ELE(, &rom :3$16EAO3Q ?.ere ;*25 \ 2++ and ;*25 [ 3++ and ?.ere
;$,E (O51$,$O5; ] JLimestoneJ
;ELE(, &rom :3$16EAO3Q ?.ere ,9*E OK :3$16E ] J;teel *late 6irderJ
and LO(2,$O5 ] J*2J
;ELE(, &rom :3$16EAO3Q ?.ere ;*25 [ 3++ and ;*25 \ 2++ and
E;,$42,E1 LE;; 2(,U2L (O;, [ 1+++++.
Eac. ;ELE(, operation ?ould yield t.e bridge eIamples in t.e database ?.ic.
corresponds to t.e desired selection criteria. $n practice an inputUoutput interpreter
program s.ould be available to translate t.ese in!uiries to and &rom t.e 1:4 and an
appropriate problem oriented language.
,.e &our !ueries may represent subse!uent t.oug.ts o& a designer &aced ?it. t.ese
problem conditions. /e or s.e may &irst as0 JA.at eIperience .ave ?e .ad ?it. bridges
o& t.is span over riversXJ JA.at eIperience .ave ?e .ad ?it. bridges o& t.is span ?it.
t.ese site conditionsX A.at is our eIperience ?it. steel girder bridges in *ennsylvaniaX
Kor bridges o& t.is span .o? many and ?.ic. ?ere erected ?it.out a sizable cost
overrunX Ae could pose many more !uestions o& t.is general type using only t.e small
data table s.o?n in ,able 14<4.
1-.0 Other Conceptual ,odels of ;ata>ases
A.ile t.e relational model o&&ers a considerable amount o& &leIibility and preserves
considerable e&&iciency t.ere are several alternative models &or organizing databases
including net?or0 and .ierarc.ical models. ,.e .ierarc.ical model is a tree structure in
?.ic. in&ormation is organized as branc.es and nodes &rom a particular base. R'S 2s an
eIample Kigure 14<2 illustrates a .ierarc.ical structure &or rented e!uipment costs. $n
t.is case eac. piece o& e!uipment belongs to a particular supplier and .as a cost ?.ic.
mig.t vary by t.e duration o& use. ,o &ind t.e cost o& a particular piece o& e!uipment
&rom a particular supplier a !uery ?ould &irst &ind t.e supplier t.en t.e piece o&
e!uipment and t.en t.e relevant price.
,.e .ierarc.ical model .as t.e c.aracteristic t.at eac. item .as a single predecessor and
a variable number o& subordinate data items. ,.is structure is natural &or many
applications suc. as t.e e!uipment cost in&ormation described above. /o?ever it mig.t
be necessary to construct similar .ierarc.ies &or eac. proBect to record t.e e!uipment
used or &or eac. piece o& e!uipment to record possible suppliers. Ot.er?ise generating
t.ese lists o& assignments &rom t.e database illustrated in Kigure 14<2 ?ould be di&&icult.
Kor eIample &inding t.e least eIpensive supplier o& a crane mig.t involve searc.ing
every supplier and every e!uipment node in t.e database to &ind all crane prices.
(igure 1-)! /ierarc.ical 1ata Organization
,.e net?or0 model or database organization retains t.e organization o& in&ormation on
branc.es and nodes but does not re!uire a tree o& structure suc. as t.e one in Kigure 14<
2. R)S ,.is gives greater &leIibility but does not necessarily provide ease o& access to all
data items. Kor eIample Kigure 14<3 s.o?s a portion o& a net?or0 model database &or a
building. ,.e structural member s.o?n in t.e &igure is related to &our adBoining members
data on t.e Boints designed &or eac. end an assembly related to a room and an
aggregation &or similar members to record member speci&ications.
(igure 1-)+ EIample o& a 5et?or0 1ata 4odel
A.ile t.e early large databases ?ere based on t.e .ierarc.ical or net?or0 organizations
t.e relational model is no? pre&erred in many applications due to its &leIibility and
conceptual simplicity. 3elational databases &orm t.e 0ernel &or large systems suc. as
O32(LE or ;2*. /o?ever databases distributed among numerous servers may .ave a
net?or0 structure Mas in Kigure 14<3N ?it. &ull relational databases contained at one or
more nodes. ;imilarly Jdata ?are.ouseJ organizations may contain several di&&erent
types o& databases and in&ormation &iles. Kor t.ese data ?are.ouses more complicated
searc. approac.es are essential suc. as automatic indeIing o& multi<media &iles suc. as
p.otograp.s.
4ore recently some ne? &orms o& organized databases .ave appeared spurred in part by
?or0 in arti&icial intelligence. Kor eIample Kigure 14<4 illustrates a frame data structure
used to represent a building design element. ,.is &rame describes t.e location type cost
material sc.eduled ?or0 time etc. &or a particular concrete &ooting. 2 &rame is a general
purpose data representation sc.eme in ?.ic. in&ormation is arranged in slots ?it.in a
named &rame. ;lots may contain lists values teIt procedural statements Msuc. as
calculation rulesN pointers or ot.er entities. Krames can be inter<connected so t.at
in&ormation may be inherited bet?een slots. Kigure 14<" illustrates a set o& inter<
connected &rames used to describe a building design and construction plan. R1+S *)ject
oriented data representation is similar in t.at very &leIible local arrangements o& data are
permitted. A.ile t.ese types o& data storage organizations are active areas o& researc.
commercial database systems based on t.ese organizations are not yet available.
(igure 1-)- $llustration o& 1ata ;tored in a Krame
(igure 1-). $llustration o& a Krame :ased 1ata ;torage /ierarc.y
1-.1 Centrali6ed ;ata>ase ,anagement /ystems
A.ic.ever conceptual model or database management system is adopted t.e use o& a
central database management system .as a number o& advantages and some costs
compared to t.e commonly employed special purpose data&iles. 2 data&ile consists o& a
set o& records arranged and de&ined &or a single application system. 3elational
in&ormation bet?een items in a record or bet?een records is not eIplicitly described or
available to ot.er application systems. Kor eIample a &ile o& proBect activity durations
and sc.eduled times mig.t be assembled and manipulated by a proBect sc.eduling
system. ,.is data&ile ?ould not necessarily be available to t.e accounting system or to
corporate planners.
2 centralized 1:4 .as several advantages over suc. stand<alone systemsD R11S
2educed redundancy good planning can allo? duplicate or similar data stored in
di&&erent &iles &or di&&erent applications to be combined and stored only once.
$mproed aaila>ility in&ormation may be made available to any application
program t.roug. t.e use o& t.e 1:4
2educed inconsistency i& t.e same data is stored in more t.an one place t.en
updating in one place and not every?.ere can lead to inconsistencies in t.e
database.
&nforced data security aut.orization to use in&ormation can be centralized.
Kor t.e purpose o& proBect management t.e issue o& improved availability is particularly
important. 4ost application programs create and own particular data&iles in t.e sense t.at
in&ormation is di&&icult to obtain directly &or ot.er applications. (ommon problems in
attempting to trans&er data bet?een suc. special purpose &iles are missing data items
unusable &ormats and un0no?n &ormats.
2s an eIample suppose t.at t.e *urc.asing 1epartment 0eeps records o& e!uipment
rental costs on eac. proBect under?ay. ,.is data is arranged so t.at payment o& invoices
can be .andled eIpeditiously and proBect accounts are properly debited. ,.e records are
arranged by individual suppliers &or t.is purpose. ,.ese records mig.t not be particularly
use&ul &or t.e purpose o& preparing cost estimates sinceD
;ome suppliers mig.t not eIist in t.e .istorical record.
Kinding t.e lo?est cost supplier &or particular pieces o& e!uipment ?ould be
eIceedingly tedious since every record ?ould .ave to be read to &ind t.e desired
piece o& e!uipment and t.e cost.
5o direct ?ay o& abstracting t.e e!uipment codes and prices mig.t eIist.
2n alternative arrangement mig.t be to separately record e!uipment rental costs in M1N
t.e *urc.asing 1epartment 3ecords M2N t.e (ost Estimating 1ivision and M3N t.e
(ompany ?are.ouse. A.ile t.ese multiple databases mig.t eac. be designed &or t.e
individual use t.ey represent considerable redundancy and could easily result in
inconsistencies as prices c.ange over time. Ait. a central 1:4 desired vie?s &or eac.
o& t.ese t.ree users could be developed &rom a single database o& e!uipment costs.
2 manager need not conclude &rom t.is discussion t.at initiating a &ormal database ?ill
be a panacea. Li&e is never so simple. $nstalling and maintaining databases is a costly and
time consuming endeavor. 2 single database is particularly vulnerable to e!uipment
&ailure. 4oreover a central database system may be so eIpensive and cumbersome t.at it
becomes ine&&ectiveO ?e ?ill discuss some possibilities &or trans&erring in&ormation
bet?een databases in a later section. :ut lac0 o& good in&ormation and manual
in&ormation management can also be eIpensive.
One mig.t also contrast t.e operation o& a &ormal computerized database ?it. t.at o& a
manual &iling system. Kor t.e e!uipment supplier eIample cited above an eIperienced
purc.asing cler0 mig.t be able to immediately &ind t.e lo?est cost supplier o& a particular
piece o& e!uipment. 4a0ing t.is identi&ication mig.t ?ell occur in spite o& t.e &ormal
organization o& t.e records by supplier organization. ,.e eIperienced cler0 ?ill .ave .is
Mor .erN o?n subBective conceptual model o& t.e available in&ormation. ,.is subBective
model can be remar0ably po?er&ul. Un&ortunately t.e mass o& in&ormation re!uired t.e
continuing introduction o& ne? employees and t.e need &or consistency on large proBects
ma0e suc. manual systems less e&&ective and reliable.
1-.3 ;ata>ases and Applications Programs
,.e use&ulness o& a database organization is particularly evident in integrated design or
management environments. $n t.ese systems numerous applications programs s.are a
common store o& in&ormation. 1ata is dra?n &rom t.e central database as needed by
individual programs. $n&ormation re!uests are typically per&ormed by including pre<
de&ined &unction calls to t.e database management system ?it.in an application program.
3esults &rom one program are stored in t.e database and can be used by subse!uent
programs ?it.out specialized translation routines. 2dditionally a user interface usually
eIists by ?.ic. a proBect manager can directly ma0e !ueries to t.e database. Kigure 14<#
illustrates t.e role o& an integrated database in t.is regard as t.e central data store.
(igure 1-)0 $llustration o& an $ntegrated 2pplications ;ystem
2n arc.itectural system &or design can provide an eIample o& an integrated system. R12S
Kirst a database can serve t.e role o& storing a library o& in&ormation on standard
arc.itectural &eatures and component properties. ,.ese standard components can be
called &rom t.e database library and introduced into a ne? design. ,.e database can also
store t.e description o& a ne? design suc. as t.e number type and location o& individual
building components. ,.e design itsel& can be composed using an interactive grap.ics
program. ,.is program ?ould .ave t.e capability to store a ne? or modi&ied design in t.e
database. 2 grap.ics program typically .as t.e capability to compose numerous t?o or
t.ree dimensional vie?s o& a design to introduce s.ading Mto represent s.ado?s and
provide greater realism to a perspectiveN and to allo? editing Mincluding moving
replicating or sizing individual componentsN. Once a design is completed and its
description stored in a database numerous analysis programs can be applied suc. asD
structural analysis
daylig.t contour programs to produce plots o& available daylig.t in eac. room
a .eat loss computation program
area volume and materials !uantities calculations.
*roduction in&ormation can also be obtained &rom t.e integrated system suc. asD
dimensioned plans sections and elevations
component speci&ications
construction detail speci&ications
electrical layout
system isometric dra?ings
bills o& !uantities and materials.
,.e advantage o& an integrated system o& t.is sort is t.at eac. program need only be
designed to communicate ?it. a single database. 2ccomplis.ing appropriate
trans&ormations o& data bet?een eac. pair o& programs ?ould be muc. more di&&icult.
4oreover as ne? applications are re!uired t.ey can be added into an integrated system
?it.out eItensive modi&ications to eIisting programs. Kor eIample a library o&
speci&ications language or a program &or Boint design mig.t be included in t.e design
system described above. ;imilarly a construction planning and cost estimating system
mig.t also be added.
,.e use o& integrated systems ?it. open access to a database is not common &or
construction activities at t.e current time. ,ypically commercial systems .ave a closed
arc.itecture ?it. simple data&iles or a JcaptiveJ inaccessible database management
system. /o?ever t.e bene&its o& an open arc.itecture ?it. an accessible database are
considerable as ne? programs and re!uirements become available over time.
&9ample 1-).* An $ntegrated /ystem ;esign
2s an eIample Kigure 14<% illustrates t.e computer aided engineering M(2EN system
envisioned &or t.e 0no?ledge and in&ormation<intensive construction industry o& t.e
&uture. R13S $n t.is system compre.ensive engineering and JbusinessJ databases support
di&&erent &unctions t.roug.out t.e li&e time o& a proBect. ,.e construction p.ase itsel&
includes overlapping design and construction &unctions. 1uring t.is construction p.ase
computer aided design M(21N and computer aided manu&acturing M(24N aids are
available to t.e proBect manager. 1atabases recording t.e Jas<builtJ geometry and
speci&ications o& a &acility as ?ell as t.e subse!uent .istory can be particularly use&ul
during t.e use and maintenance li&e cycle p.ase o& t.e &acility. 2s c.anges or repairs are
needed plans &or t.e &acility can be accessed &rom t.e database.
(igure 1-)1 (omputer 2ided Engineering in t.e (onstruction $ndustry
M3eprinted ?it. permission &rom 9. O.as0i and 4. 4u0imo J(omputer<2ided
Engineering in t.e (onstruction $ndustryJ Engineering with $omputers% ;ol4 1% no4 C%
198@4
1-.4 $nformation Transfer and (low
,.e previous sections outlined t.e c.aracteristics o& a computerized database. $n an
overabundance o& optimism or ent.usiasm it mig.t be tempting to conclude t.at all
in&ormation pertaining to a proBect mig.t be stored in a single database. ,.is .as never
been ac.ieved and is bot. unli0ely to occur and undesirable in itsel&. 2mong t.e
di&&iculties o& suc. eIcessive centralization areD
&9istence of multiple firms or agencies inoled in any pro%ect. Eac.
organization must retain its o?n records o& activities ?.et.er or not ot.er
in&ormation is centralized. 6eograp.ic dispersion o& ?or0 even ?it.in t.e same
&irm can also be advantageous. Ait. design o&&ices around t.e globe &ast trac0
proBects can .ave ?or0 under?ay by di&&erent o&&ices 24 .ours a day.
Adantages of distri>uted processing. (urrent computer tec.nology suggests
t.at using a number o& computers at t.e various points t.at ?or0 is per&ormed is
more cost e&&ective t.an using a single centralized main&rame computer. *ersonal
computers not only .ave cost and access advantages t.ey also provide a degree o&
desired redundancy and increased reliability.
;ynamic changes in information needs. 2s a proBect evolves t.e level o& detail
and t.e types o& in&ormation re!uired ?ill vary greatly.
;ata>ase diseconomies of scale. 2s any database gets larger it becomes less and
less e&&icient to &ind desired in&ormation.
$ncompati>le user perspecties. 1e&ining a single data organization involves
trade<o&&s bet?een di&&erent groups o& users and application systems. 2 good
organization &or one group may be poor &or anot.er.
$n addition to t.ese problems t.ere ?ill al?ays be a set o& untidy in&ormation ?.ic.
cannot be easily de&ined or &ormalized to t.e eItent necessary &or storage in a database.
A.ile a single database may be undesirable it is also apparent t.at it is desirable to
structure independent application systems or databases so t.at measurement in&ormation
need only be manually recorded once and communication bet?een t.e database mig.t
eIist. (onsider t.e &ollo?ing eIamples illustrating t.e desirability o& communication
bet?een independent application systems or databases. A.ile some progress .as
occurred t.e level o& integration and eIisting mec.anisms &or in&ormation &lo? in proBect
management is &airly primitive. :y and large in&ormation &lo? relies primarily on
tal0ing ?ritten teIts o& reports and speci&ications and dra?ings.
&9ample 1-)0* Time Cards
,ime card in&ormation o& labor is used to determine t.e amount ?.ic. employees are to
be paid and to provide records o& ?or0 per&ormed by activity. $n many &irms t.e system
o& payroll accounts and t.e database o& proBect management accounts Mi.e. eIpenditure
by activityN are maintained independently. 2s a result t.e in&ormation available &rom
time cards is o&ten recorded t?ice in mutually incompatible &ormats. ,.is repetition
increases costs and t.e possibility o& transcription errors. ,.e use o& a preprocessor
system to c.ec0 &or errors and inconsistencies and to &ormat t.e in&ormation &rom eac.
card &or t.e various systems involved is li0ely to be a signi&icant improvement MKigure
14<'N. 2lternatively a communications &acility bet?een t?o databases o& payroll and
proBect management accounts mig.t be developed.
(igure 1-)3 2pplication o& an $nput *re<processor
&9ample 1-)1* (inal Cost &stimation, /cheduling and ,onitoring
4any &irms maintain essentially independent systems &or &inal cost estimation and proBect
activity sc.eduling and monitoring. 2s a result t.e detailed brea0do?n o& t.e proBect into
speci&ic Bob related activities must be completely re<done &or sc.eduling and monitoring.
:y providing a means o& rolling-over or trans&erring t.e &inal cost estimate some o& t.is
eIpensive and time<consuming planning e&&ort could be avoided.
&9ample 1-)3* ;esign 2epresentation
$n many areas o& engineering design t.e use o& computer analysis tools applied to &acility
models .as become prevalent and remar0ably e&&ective. /o?ever t.ese computer<based
&acility models are o&ten separately developed or encoded by eac. &irm involved in t.e
design process. ,.us t.e arc.itect structural engineer mec.anical engineer steel
&abricator construction manager and ot.ers mig.t all .ave separate computer<based
representations o& a &acility. (ommunication by means o& reproduced &acility plans and
prose speci&ications is traditional among t.ese groups. A.ile trans&er o& t.is in&ormation
in a &orm suitable &or direct computer processing is di&&icult it o&&ers obvious advantages
in avoiding repetition o& ?or0 delays and transcription errors. 2 de &acto standard &or
trans&er o& geometric in&ormation emerged ?it. t.e dominance o& t.e 2U,O(21 design
system in t.e 2UEU( industry. $n&ormation trans&er ?as accomplis.ed by copying
2U,O(21 &iles &rom user to user including uses on construction sites to visualize t.e
design. 4ore &leIible and eItensive standards &or design in&ormation trans&er also eIist
suc. as t.e $ndustry Koundation (lasses M$K(N standard developed by t.e $nternational
2lliance &or $nteroperability M;ee .ttpDUU???.iai<international.orgUiaiZinternationalUN and
t.e JKully $ntegrated and 2utomated *roBect *rocessesJ developed by K$2,E(/ Msee
.ttpDUU???.&iatec..orgUN
1-.15 2eferences
1. 2u ,. (. /endric0son and 2. *as!uale J$ntroduction o& a 3elational 1atabase
Ait.in a (ost Estimating ;ystemJ ,ransportation Research Record 1+"+ pp. "%<
#2 1)'#.
2. :osserman :.E. and 4.E. Kord J1evelopment o& (omputerized ;peci&icationsJ
"#$E 2ournal of $onstruction Engineering and 'anagement% 8ol. 11+ 5o.
(O3 1)'4 pp. 3%"<3'4.
3. 1ate (.P. "n -ntroduction to &ata)ase #ystems 3rd Ed. 2ddison<Aesley 1)'1.
4. Qim A. J3elational 1atabase ;ystemsJ "$' $omputing #urveys 8ol. 11 5o.
3 1)%) pp. 1'"<211.
". 4itc.ell Ailliam P. $omputer "ided "rchitectural &esign 8an 5ostrand
3ein.old (o. 5e? 9or0 1)%%.
#. 8ieceli 2.4. J(ommunication and (oding o& (omputerized (onstruction
*roBect $n&ormationJ Unpublis.ed 4; ,.esis 1epartment o& (ivil Engineering
(arnegie 4ellon University *ittsburg. *2 1)'4.
%. Ail0inson 3.A. J(omputerized ;peci&ications on a ;mall *roBectJ "#$E
2ournal of $onstruction Engineering and 'anagement% 8ol. 11+ 5o. (O3 1)'4
**. 33%<34".
'. Latimer 1e?itt and (.ris /endric0son >1igital 2rc.ival o& (onstruction *roBect
$n&ormation@ *roceedings o& t.e $nternational ;ymposium on 2utomation and
3obotics &or (onstruction 2++2.J
1-.11 Pro>lems
1. ;uppose ?e ?is. to develop a database consisting o& contractor names addresses
and particular specialties as in ,able 14<3.
o ;uggest t?o hierarchical organizations o& t.is data.
o ;uggest an alternative relational organization &or t.is data.
o A.ic. organization ?ould you recommend &or implementation o& a
databaseX
2. ;uggest &our reports ?.ic. could be obtained &rom t.e ?are.ouse inventory
system described in ;ection 14.3 and describe ?.at eac. report mig.t be used &or
and by ?.om.
3. ;uppose t.at a general contractor ?is.ed to 0eep a .istorical database o& t.e
results o& bid competitions. ;uggest MaN t.e in&ormation t.at mig.t be stored and
MbN a possible organization o& t.is in&ormation.
4. Kor your suggested database &rom *roblem 3 implement a prototype system on a
spreads.eet so&t?are program.
". 1escribe a relational database t.at ?ould be use&ul in storing t.e beginning
ending and all intermediate stages &or bloc0?orld robot movements as described
in *roblem # in (.apter ).
#. 1escribe a relational database t.at ?ould be appropriate &or maintaining activity
sc.eduling in&ormation during proBect monitoring. :e eIplicit about ?.at
relations ?ould be de&ined t.e attributes in eac. relation and allo?able ranges o&
values.

1-.1! (ootnotes
1. ;ee 1.K. 3ogge J1elay 3eporting Ait.in (ost 2ccounting ;ystemJ "#$E 2ournal of
$onstruction Engineering and 'anagement% 8ol. 11+ 5o. 2 1)'4 pp. 2')<2)2.
2. ,.e system is based loosely upon a success&ul construction yard management system
originally &or 4ellon<;tuart (ompany *ittsburg. *2. in 1)'3. ,.e aut.ors are indebted
to 2. *as!uale &or providing t.e in&ormation and operating eIperience o& t.e system.
3. 2ttributed to 3. Lemons in P. :entley J*rogramming *earlsJ $ommunications of the
"$' 8ol. 2' 5o. ) 1)'" pp. ')#<')).
4. ;ee Ail0inson 3.A. J(omputerized ;peci&ications on a ;mall *roBectJ "#$E
2ournal of $onstruction Engineering and 'anagement% 8ol. 11+ 5o. (O3 1)'4 pp.
33%<34".
". ;ee (.P. 1ate "n -ntroduction to &ata)ase #ystems 3rd ed. 2ddison<Aesley
*ublis.ing (ompany 3eading 42 1)'1.
#. ,.is is one eIample o& a normalization in relational databases. Kor more &ormal
discussions o& t.e normali+ations o& relational databases and t.e eIplicit algebra ?.ic.
can be used on suc. relations see 1ate op cit.
%. Kor a discussion o& relational algebra see E.K. (odd J3elational (ompleteness o&
1ata :ase ;ublanguagesJ $ourant $omputer #cience #ymposia #eries% 8ol. # *rentice<
/all l)%2.
'. ;ee 1.(. ,ric.ritzis and K./. Loc.ovs0y J/ierarc.ical 1ata<:ase 4anagementJ
"$' $omputing #urveys 8ol. ' 5o. 1 1)%# pp. 1+"<123.
). Kor a more eItensive comparison see 2.;. 4ic.aels :. 4ittman and (.3. (arlson
J2 (omparison o& 3elational and (O12;9L 2pproac.es to 1ata<:ase 4anagementJ
"$' $omputing #urveys 8ol. ' 5o. 1 1)%# pp. 12"<1"%.
1+. ,.is organization is used &or t.e central data store in an integrated building design
environment. ;ee Kenves ;. U. Klemming (. /endric0son 4. 4a.er and 6. ;c.mitt
J2n $ntegrated ;o&t?are Environment &or :uilding 1esign and (onstructionJ !roc4 of
the 7ifth "#$E $onference on $omputing in $ivil Engineering 1)'%
11. Kor a discussion see 1.3. 3e.a0 and L.2. Lopez $omputer "ided Engineering
!ro)lems and !rospects% (ivil Engr. ;ystems Lab. Univ. o& $llinois Urbana $L 1)'1.
12. ;ee A.P. 4itc.ell $omputer-"ided "rchitectural &esign% 8an 5ostrand 3ein.old
(o. 5e? 9or0 1)%%.
13. ,.is &igure ?as adapted &rom 9. O.sa0i and 4. 4i0umo J(omputer<aided
Engineering in t.e (onstruction $ndustryJ Engineering with $omputers vol. 1 no. 2
1)'" pp. '%<1+2.