Contents

1. 2.

Introduction ...................................................................................................................... 1 Financial crisis and Economic crisis ............................................................................... 2 2.1. Analysis of current financial crisis ............................................................................. 2 2.2. The impact of the financial crisis on the construction industry .................................. 4

3.

Quantity surveyors competencies.................................................................................... 8 3.1. The quantity surveyors in public and private sectors............................................... 11
3.1.1. Private Sector........................................................................................................... 11 3.1.2. Public Sector ............................................................................................................ 11

4. 5.

The key role of quantity surveyors for public sector organisations .......................... 12 Conclusion ....................................................................................................................... 18

References:.............................................................................................................................. 19 Bibliography: .......................................................................................................................... 21 Appendix 1 .............................................................................................................................. 22

List of Illustrations

Chart1. Number of house buildings: permanent dwellings started and completed.................7 Figure1. Sequence of events in a financial crisis......................................................................3 Table1. Number of house buildings: permanent dwellings started and completed.................6

Importance of the Quantity Surveyors for public sector organisations

1.

Introduction

The global economy is experiencing the worst crisis since the Great Depression. The financial crisis spread from the U.S. to Europe and beyond in 2008 and makes tightening credit markets, crashing stock markets, rising unemployment and falling corporate profits. The UK as a whole officially entered recession in January 2009. GDP fell in the end of 2008 and is predicted to fall more in 2009, which makes the growing concern over its impact on the economy. (International construction intelligence, 2009). Since the Second World War, it is the worst downturn that has been seen because firstly; it is a worldwide crisis and secondly, has resulted in huge fake debts. (Peston, 2008) Construction as well as most other sectors is entering a phase of deflation. According to Office of National Statistics (2008), construction output fell by 1.1% in the fourth quarter of 2008 in the UK and thus it is expected that a massive number of jobs will be lost in next two years. However, the industry needs to be prepared to contribute to the recovery by retraining workers, maintaining the highest of standards of quality and supporting innovation.(CIOB, 2009). This report attempts to examine empirically the importance of quantity surveyors and quantity surveying profession in the construction industry as the effective drives to help the industry in the prevailing recession. Next sections provide a comprehensive definition of financial crisis, its transformation to economic crisis, and its impact on the construction industry. The role of Quantity Surveyors in the construction industry is described and finally importance of the quantity surveyors in the current financial crisis is examined and highlighted.

Importance of the Quantity Surveyors for public sector organisations

2.

Financial crisis and Economic crisis

Before discussing how and why financial crisis occurs and what its relationship to economic crisis is, it is necessary to have a precise definition of financial crisis. According to Mishkin (1992), A financial crisis is a disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities. (pp.117-118) Schwartz (1986) proposed another definition as Financial crisis is where there is a threat to countrys money supply. Therefore, financial crisis causes the failure of financial markets to function effectively and efficiently, which lead to a sharp reduction in economic activities. Five primary factors cause financial crisis namely 1- Increases in interest rates, 2- Stock market declines, 3- Increases in uncertainty, 4- Bank panics, and 5- Unanticipated declines in the aggregate price level.(Mishkin, 1992). In Appendix 1, full description of each aforementioned factor is provided. Figure 1 shows the sequence of events that happen during a financial crisis and its development to an economic crisis.

2.1. Analysis of current financial crisis The current financial crisis began from the US in the third quarter of 2007 when investors lost their confident in the value of mortgages. Losses of sub-prime loans resulted in a liquidity crisis amongst the banks leading a bank panic which eventually developed into an economic crisis. As Peston (2008) describes, the UK, Europe and the US borrowed from Asia and Middle East in the form of loans. The loans used to buy houses, support property

Importance of the Quantity Surveyors for public sector organisations

development etc, resulted in a sharp rise in the value of assets. This increase in the value was encouraging more lending which caused further rise of asset prices. Increase in interest rate Stock market decline Increase in uncertainty

Adverse selection and moral hazard problems worsen Decline in aggregate economic activity Typical Financial Bank panic Crisis

Adverse selection and moral hazard problems worsen Decline in aggregate economic activity

Price level decline Debt-Deflation

Adverse selection and moral hazard problems worsen Decline in aggregate economic activity

Fig.1. Sequence of events in a financial crisis. The sequence of events above the dashed line are those that occur in almost financial crisis, while the events below the dashed line occur if a financial crisis develops into a debt-deflation and consequently economic crisis, (Mishkin, 1992)

Lenders were willing to lend more even up to almost 100% of the purchase price. However, as Baker (2002) argued, this run-up in home prices was just a housing bubble. He pointed out that there is no obvious explanation for a sudden increase in the relative demand for housing
which could explain the price rise and there is also no obvious explanation for the increase in home purchase prices relative to rental prices. Therefore the only plausible explanation for the

Importance of the Quantity Surveyors for public sector organisations

sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end. (pp.17-18) As Baker predicted, this bubble burst. Asset prices started to fall down. Declines in asset prices made trouble for those who borrowed to buy those assets and as they were struggling to pay their liabilities, they had to sell other assets, causing decline in the price of those assets. As they couldnt repay banks, the resources of banks were dried out, which means there is less credit available which decreased asset prices more, which led to additional contraction of lending, and so on in vicious cycle of decline.(Peston, 2008) thus banks financial intermediation decreased and resulted in a decline in aggregate economic activity and consequently, an economic crisis.

2.2. The impact of the financial crisis on the construction industry

The construction industry, as most of the other industries, was not immune from the current financial crisis. Surveys reveal that new orders reduced by 39% in the third quarter of 2008 in comparison with the average of 2007. Private housing orders fell 62% on the average of the year before and public housing orders declined by 36%. Private housing starts falling down by approximately 43% during 2008 and a further 32% decline is predicated in 2009.(CIOB, 2009). In the UK, the construction industry confronted a workload reduction of 0.7% in 2008 and further decline of 3.1% is anticipated in 2009. (National Statistic, 2008) Table 1 and Chart 1 provides a statistical report of Housing situation in England from 1997-2008. The impact of the prevailing recession on the construction industry can be monitored through the public sector and the private sector which are discussed as follows: Private sector: A sharp decline in private works makes problems for private construction companies. Table 1 show new house building orders declined from 172,290 in 2006-2007 to 155,880 in 20072008 which means approximately a 10% decline.

Importance of the Quantity Surveyors for public sector organisations

Companies adjusted the Tender Price Index forecasts for 2009 and 2010 by minus percents, respectively. A considerable number of construction firms found difficulty to access to capital and a many new projects have been refused new credits. Public sector

Public works have a better condition in comparison with private works. Government decided to spend 3bn of capital on infrastructure. However, risk of delays in governments projects which will lead to increased under-spend, resulted in rationing the budget and postponing the less prioritised projects such as Building Schools for Future Programmes.(CIBO, 2009) Another impact of financial crisis on the construction industry is falling salaries and job cuts. Almost 400,000 jobs in the construction sector are predicted to be lost in next two years. Companies, either public or private, are having to re-structure and down-size to survive therefore the loss of technical resource and expertise is expected. (CIOB, 2009). Quantity Surveyors as the construction based professionals also are facing the threat of being made redundant. Nevertheless, quantity surveyors can play an essential role to help the industry pass through this recession and allow it to grow after the economy recovers. Following sections aim to explain the importance of Quantity Surveyors and generally quantity surveying profession in this dramatic situation.

Importance of the Quantity Surveyors for public sector organisations

Table1. Number of house buildings: permanent dwellings started and completed, by tenure, England,

Start Financial Year 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Private Enterprise 136,280 129,660 132,540 128,600 138,850 139,690 148,770 159,950 167,430 155,240 139,880 Registered Local Social Authorities Landlord 19,630 17,550 15,940 12,840 11,060 10,910 12,350 14,390 17,230 16,850 15,750 260 130 150 210 120 160 280 210 250 200 250 All Dwellings 156,170 147,330 148,630 141,650 150,020 150,760 161,390 174,540 184,910 172,290 155,880 Private Enterprise 127,840 121,190 124,470 116,640 115,700 124,460 130,100 139,130 144,940 145,680 143,590

Completed Registered Social Landlord 21,400 18,890 17,270 16,430 14,100 13,080 13,670 16,660 18,160 21,750 23,090 Local Authorities 320 180 60 180 60 200 190 100 300 250 310 All Dwellings 149,560 140,260 141,800 133,260 129,870 137,740 143,960 155,890 163,400 167,680 166,990

Source: National Statistic (2008) 6

Importance of the Quantity Surveyors for public sector organisations

Chart1. Number of house buildings: permanent dwellings started and completed, England 7

Importance of the Quantity Surveyors for public sector organisations

3.

Quantity surveyors competencies

According to a report published by RICS in 1971, the quantity surveyors roll is to ensure that the resources of the construction industry are utilised to the best advantage of society by providing, inter alia, the financial management for projects and a cost consultancy service to the client and designer during the whole construction process. The rapid development in the profession led the RICS to prepare a new report in 1983 which explored further the work of quantity surveyors as well as their future potential and directions and suggested an even greater expansion of services and in some cases in industries other than construction. In 1991, Quantity Surveyors Division of the RICS commissioned a report, entitled QS 2000-The Future Role of the Chartered Quantity Surveyor and analysed the threats and opportunities which the quantity surveying profession may confront namely, changes in the market, changes in the construction industry, changing client needs and changes in the profession.(Willis et al., 1994). The work of quantity surveyors are summarised as: Preliminary cost advice Cost planning including investment appraisal, life-cycle costing and value analysis Procurement and tendering procedures Contract documentation Evaluation of tenders Cash-flow forecasting, financial reporting and interim payments Final accounting and the settlement of contractual disputes Project management Specialist services The RICS indentifies a range of skill and knowledge that the quantity surveying profession needs to carry on in order to keep its paramount place in the construction industry. The required knowledge includes:

Importance of the Quantity Surveyors for public sector organisations

Construction technology Measurement rules and conventions Financial management Business administration Construction law And the required skills include Management Documentation Analysis Appraisal Quantification Synthesis communication(Willis et al., 1994) The RICS also emphasised on the requirements and competencies for assessment of a quantity surveyor and categorised them into three distinct category namely mandatory competencies, core competencies and optional competencies 1mandatory competencies:

The mandatory competencies are common to all professions involved in the construction industry under the RICS structure and include: Personal &Interpersonal skills Business skills Data, Information and Information Technology Professional Practice Law Measurement Mapping ( Nkado,2000)

Importance of the Quantity Surveyors for public sector organisations

2-

Core competencies:

The primary competencies of a quantity surveyor include: 3Commercial management of construction or Design economics and cost planning Contract practice Construction technology and environmental services Procurement and tendering Project financial control and reporting Quantification and costing of construction works. ( RICS, 2008)

Optional competencies:

There is a need for flexibility in order to respond to new demands and opportunities. Extended services of a Quantity Surveyor are mostly technical competencies which focus on future role of the quantity surveyor. These competencies include: Arbitration & Other Dispute Resolution Procedures Development Appraisal Facilities Management Insolvency Insurance Project Management Property Investment Funding Research Methodologies and Techniques Taxation Allowances and Grants Valuation (Nkado, 2000)

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Importance of the Quantity Surveyors for public sector organisations

3.1. The quantity surveyors in public and private sectors In both public and private sectors the quantity surveyors are the important consultants for employers. Traditionally, the distinctive different between private and public sectors was that in private sector the main emphasis was on profits while in public sector it was on ensuing the accountability of public finance. However, over recent years the aims of both sectors come together which are competing against each other for wok, and their business as well as profits. (Willis et al., 1994)

3.1.1. Private Sector The main concern of quantity surveyor in private sector is finding capital and offices, ensuring a flow of work and avoiding losses. Hence, quantity surveyors have to demonstrate a detailed expertise in terms of funding and economics and the financial consequences on particular type of construction projects. (Willis et al., 1994)

3.1.2. Public Sector The key clients of public sector are mostly government organisations. The public service of the quantity surveyors includes employment in government departments and agencies (Department of the Environment, Department of Transport, Department of education, Department of Health, Property Holdings, Defence Works Services and the Lord Chancellors Department), local authorities and some statutory bodies. Quantity surveyors deal with the control of projects in a wide range size from very large to small minor works, as well as maintenance and repair programmes. The surveyors main responsibility is that of controlling the public money and monitoring the way that it is being spent. (Willis et al., 1994)

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Importance of the Quantity Surveyors for public sector organisations

4.

The key role of quantity surveyors for public sector organisations

In the previous section, a comprehensive description of quantity surveyors competencies in the both private and public sectors has been provided. As it was analysed the most important aspect in the financial crisis is cash flow and credit which are indispensable on the construction industry. It is essential to control and manage these key factors in order to recover the current crisis specially in the public sector because firstly, public sector deals with the public fund and governmental budget, secondly, mostly the public sector projects are the public vital needs such as hospitals, roads and schools; and finally, the public sector projects are often large scale ones and associated with the intensive capital and budget. Therefore the quantity surveyors can play an important role with their knowledge and skills. It is unlikely that a project can be successful without effective reasoned advices and efficient consultancies of a quantity surveyor during the whole lifecycle of the project. The quantity surveyor influences on each stage of the public sector projects with his relevant core and extended competencies. These include the following stages:

Pre-design stage:

At this stage, the client develops the concept, undertake a feasibility study and prepare an outline cost plan. An outline brief is then prepared after studying various options for the project. The brief is then developed which includes the clients requirements such as cost limits, time limits and functionality of the project. (Egbu, 2009) The knowledge and skills of the quantity surveyors that can be useful at this stage are:

Project Evaluation: this competency is comprised development appraisal, investment appraisal, cost benefit analysis and financial aspects of feasibility study. The quantity surveyors have comprehensive knowledge of the various elements of the feasibility 12

Importance of the Quantity Surveyors for public sector organisations

study and development appraisal and the factors that can affect them. Their understanding of techniques used to assess financial viability, enable them to advise the clients on the economics of design, on the use of value management and on how to consider risks associated with the project. Design economics and cost planning: quantity surveyors can give strategic and reasoned advice to the clients on diversity of market factors and trends in construction cost. They have knowledge of the main parameters that affect design economics over the whole life cycle of projects and thus they can assist in the financial control of projects from feasibility to design completion by evaluating the efficiency of the design. They prepare preliminary estimate and cost plans at this stage; and analyse the accuracy of predicted cost. Procurement advice: quantity surveyor is regarded as advisor or experts on selection of procurement methods and the advantages and disadvantages of each to the parties involved. They therefore have a clear knowledge of the main types of procurement used in the public sector and also ancillary processes such as partnering and framework agreements. They can evaluate the appropriateness of various procurement routs and implementing them. ( RICS, 2008)

Design stage:

During this stage, design team develop the brief into drawings and specifications. Client is informed of possible cost changes and can then change items of the design to reduce costs or accept the increased figure. (Egbu, 2009) The following competencies are used during this stage by quantity surveyors:

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Importance of the Quantity Surveyors for public sector organisations

Construction technology and environmental service: understanding and knowledge of different stage of design from inception to completion is one of the quantity surveyors competencies that can be used during the design stage. Quantity surveyors advise on the impact of different design solutions on cost and programme. They appreciate how design solutions vary for different types of buildings; thus can give effective advice on the choice of design solution for projects Contract management: this competency covers the role and responsibility of a surveyor managing the construction contracts. Quantity surveyors have detailed knowledge of the contractual provisions relating to the various standard forms of contracts. They can advise on the most appropriate contractual procedure at the various stages of a contract and then evaluate the appropriateness and implication of proposed contractual amendments. They assess entitlement for extension of time, loss and expenses; finally giving advice to clients of their contractual rights and obligations. ( RICS, 2008)

Value management: employers are now looking for achieving improved value for
money. Values of a project vary from perspective of each parties involved in the project. In the public sector projects, values are not only the cost and commercial aspects. Other factors such as aesthetic aspects, sustainability issues, extendibility and easy-remodelling capability should be taken into account and by considering of the fact that value is related to cost; quantity surveyors therefore are involved in the value management. Quantity Surveyors have the potential to act as the Value engineering coordinator, the key person in the team and also in their traditional role as cost consultant..... Value engineering provides a method of integration in the building process that no other management structure in construction can provide...Value engineering complements Project Management. (Kelly et al., 1998)

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Importance of the Quantity Surveyors for public sector organisations

Construction stage:

At this stage, execution and control of all site work and associated activities are carried out. Site supervisors monitor the project to ensure the project is constructed as per the contract documentation. The clients representative meanwhile is responsible for the management of all aspects of the construction stage, including monitoring the work of the design leader and supervisor. (Egbu, 2009). Presence of quantity surveyors has the significant affect on the project. The following skills and knowledge can lead the project to the best and optimal rout:

Quantification and costing of construction works: this competency includes the measurement, valuation and definition of construction works in order to value and control costs which is another important part of quantity surveyors work. Surveyors carry out the quantifying and pricing construction works at various stages of projects; using their thorough knowledge of the various standard methods of measurement and also have this ability to advise clients on appropriate method of measurement and costing.

Conflict avoidance, management and dispute resolution management: this skill is comprised the procedure and techniques for conflict avoidance, conflict management and dispute resolutions. The quantity surveyor has an in-depth knowledge of how various forms of contract deal with dispute avoidance and their provisions for resolving disputes. They can give advice on law governing conflict avoidance and management and can assist clients by their knowledge of dispute resolution procedure within construction process including: negotiation, mediation and conciliation, adjudication, arbitration, independent expert determination and litigation.(RICS,2008) Commercial management of construction: quantity surveyors have a thoroughly understanding of the financial processes used to achieve profitability and how these 15

Importance of the Quantity Surveyors for public sector organisations

processes integrate with the overall delivery of the project. They are aware of techniques to reconcile the cost against income and therefore manage sub-contractors and suppliers financially. They evaluate and advise on the financial implications and appropriate management actions. Monitoring, analysing, reporting and advising on project cash flow and profitability are the other quantity surveyors competencies that clients can benefit from. Project management:. The quantity surveyor is not only regarded as a building or a civil engineering estimator but he is also can be appointed as project manager, to take control of the project from inception to completion and to organise the work of the design team and the main contractor and subcontractors. (Seeley, 1997). Basically, management of project starts from design stage and continues through construction stage of project. Knowledge of risk management, planning and programming enable a quantity surveyor to be appointed as a project manager. Ability of a quantity surveyor to identify risks associated with the project and his knowledge of the strategies to eliminate or mitigate them are the key competencies for managing a project. ( RICS, 2008)

Post-construction (Use) stage:

At this stage, project is handed over and information for feedback is obtained. Although almost all design and construction parties are not involved in this stage, quantity surveyors still can play a key role during this stage by the following competencies:

Life-cycle cost advice: life cycle cost of a project is defined as the whole life cost of the
project from the very beginning phase through post-construction and use phase including maintenance and service costs. However, the major part of life cycle cost is related to use

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Importance of the Quantity Surveyors for public sector organisations

phase when the project is commissioning and operating. It is wholly dependent on the functionality of that project, for example, life cycle cost of a dwelling house is

completely different from a workshop even though their design and construction cost were the same. As the life cycle cost of a project does not appear before operation and use phase, it does not affect on the design and construction stage therefore usually it is not considered during these phases. However, as mentioned before, the major cost of a project is likely to be related to the post-construction cost and thus has a significant impact on projects; especially in the public sector due to the nature in which provides services to public such as schools, hospitals, health centres and so on. Hence it is essential for public sector projects to consider the maintenance and service and generally life cycle cost of them. Quantity surveyors have the competency to estimate and evaluate the lifecycle/whole life cost of a project. They carry out life cycle cost exercises which take account of value management, value engineering, risk management and sustainability issues.

Finally, quantity surveyors have an important role in improving the effectiveness of managing the public projects by their knowledge of processes associated with project, information and knowledge management. Skills of quantity surveyors in the field of contractual policy, by the application of such techniques as serial tendering, early contractor selection, and statistical measurement of price movement and effective mechanisms of budgetary control, all play a large part in the survival of public sector from the current financial crisis. (RICS, 1973)

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Importance of the Quantity Surveyors for public sector organisations

5. Conclusion
Quantity surveyors have an essential part to play in increasing the efficiency of construction work and reducing confrontation by securing that the most appropriate procurement method is appointed, providing effective cost control procedure and ensuring value for money at all times. They minimise the potential omission by allocation risk and identifying the valueadding activities in the project. Quantity surveyors operate a wide range of competencies outside the traditional quantity surveying activities. The extended skills of quantity surveyors such as project management and value management also help clients to achieve their needs and expectations.(Seeley, 1997) in the current financial crisis which cash flow and credit are paramount factors for clients, an effective project management is essential, thus completion of project on stipulated time and within determined budget is important specially in the public sector which deal with the large scaled projects and intensive capital. Quantity surveyors have this capability to secure success of the projects by their effective technical and financial advices and thus have vital contribution in economic recovery.

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Importance of the Quantity Surveyors for public sector organisations

References:
Baker, D. (2002) The Run-up in Home Prices: Is It Real or Is It Another Bubble?, Challenge, Vol. 45, Issue 6.
Bernanke, B.S (1983) Non-monetary effects of the financial crisis in the propagation of the Great Depression, American Economic Review, Vol. 73, Issue. 3 Bernanke, B.S and Gertler, M. (1990) Financial fragility and economic performance, Quarterly Journal of Economics, Vol. 105, Issue. 1 Calomiris, C.W. and Hubbard, R.G. (1990) Firm Heterogeneity, Internal Finance and Credit Rationing, Economic Journal, Vol. 100, Issue. 399

CIOB (2009) the impact of the global financial crisis on the construction industry, http://www.ciob.org.uk/filegrab/JAN009_POLICY_credit-crunch-brief_v6.pdf?ref=1134, (Accessed on 12/05/09) Davis Langdon & Everest (1991) QS 2000: The Future Role of the Chartered Quantity Surveyor, London: Royal Institution of Chartered Surveyors. Egbu, C.O. (2009), process and project systems module handout, Learning Package 2, The School of Built Environment, University of Salford

Fisher, I. (1933) The debt-deflation theory of Great Depressions,Econometrica,Vol 1.,Issue. 4 International construction intelligence (2009), Faithfull + Gould publication, Vol.21, issue 1. www.fgould.com/media/resources/files/ICI_First_Quarter_2009.pdf (Accessed on 10/05/09) Kelly,J., Bowles, G. and Fernie, S. , Male,S. and Gronqvist, M. (1998), The global development of Value Management : with particular reference to the public sector , mandatory requirements , standards and qualifications, London: Royal Institution of Chartered Surveyors. Mishkin, S. F. (1992) Anatomy of financial crises, Evolutionary Economics, Vol. 2, Issue.2. National Statistic (2008), Housing in England 2006/07: A report based on the 2006/07 Survey of English Housing, carried out by the National Centre for Social Research, London: Department for Communities and Local Government

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Importance of the Quantity Surveyors for public sector organisations

Nkado, R.N. (2000), competencies of professional quantity surveyors in a developing economy, Proc. of 2nd international conference on construction in developing countries: challenges facing the construction industry in developing countries, 15-17 Nov, Gaborone Botswana, http://buildnet.csir.co.za/cdcproc/docs/2nd/nkado_rn.pdf, (Accessed on 15/05/2009) Peston, R. (2008), the new capitalism, BBC report 8 December, bbc.co.uk/robertpeston, www.wtf.org.uk/documents/thenewcapitalism_001.pdf (Accessed on 10/05/09) RICS (1983) The Future Role of the Chartered Quantity Surveyor, London: The Royal Institution of Chartered Surveyors. RICS (1971) The future Role of the quantity Surveyor, London: The Royal Institution of Chartered Surveyors. RICS (2008) Your path way to qualify in Quantity Surveying in Construction, London: The Royal Institution of Chartered Surveyors. Schwartz, A.J. (1986) Real and pseudo-financial crises. In: Capie, F. and Wood, G.E (eds.) Financial Crises and the World Banking System. London: MacMillan Seeley, I.H. (1997) Quantity Surveying Practice, 2nd ed., London: MacMillan Press Ltd
Stiglitz, J.E and Weiss,A. (1987) Credit Rationing in Markets with Imperfect Information, American Economic Review, Vol 77. Issue. 1 Willis, C.J , Ashworth, A. And Willis, J.A (1994), Practice and Procedure for the Quantity Surveyor, 10th ed., Oxford: Blackwell Science

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Bibliography:
Abbott, C., Barrett, P., Ruddock, L. And Sexton, M. (2007), Hidden innovation in the construction and property sectors, RICS Research paper series, Vol.7 Number 20 Ashworth, A. (1989) Life Cycle Costing: Can It Really Work? American Association of Cost Engineering Cartlidge, D. (2002). New Aspects of Quantity Surveying Practice, Oxford: ButterworthHeinemann Colledge, B. (2005), Rational contracting-creating value beyond the project, Lean Construction Journal, Vol. 2. Issue. 1.

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Appendix 1: primary factors causing financial crisis

1- Increases in interest rate: As Stiglitz and Weiss(1987) describes, some lenders cut down the number of loans even borrowers are willing to pay higher interest. This occurs because lenders believe that individuals and firms with high-risk investment projects are those who are willing to pay high rate interest, thus it increases the possibility that the lender is lending to a bad credit risk. If the borrowers cannot be discriminated by the lender in terms of whether their projects are riskier investment projects, they are likely to be denied loans. Hence, even if there is an excess request for loans, a higher interest rate will not be able to balance the market because further increases in the interest rate will reduce the supply of loans and make the demand for loans higher. This credit rationing helps creation of a financial crisis because lenders want to make fewer loans which lead to a significant decline in investment and economic activity in its totality. 2- Stock market declines: The use of collateral is an important way that the borrower can make the lender confident to supply loans because it reduces the lenders losses in the case of default. If a borrower evades the loan, then the lender can take the collateral and sell it to compensate the losses on the loan. Net worth plays the same role to collateral. If a firm has high net worth, then if it defaults on a loan, the lender can take title to the firms net worth and sell it to make up for some of the losses on the loan. Hence, when firms have high net worth, lenders will be more willing to make loans. Calomiris and Hubbard (1990) emphasised that a decline in the stock market leads to a large decline in the market value of firms net worth thus the decline in net worth as a result of a stock market decline makes lenders less willing to lend. Therefore the stock market declines result in a decrease in lending and a decline economic activity. 22

Importance of the Quantity Surveyors for public sector organisations

3-

Increases in uncertainty:

An increase in uncertainty in financial markets makes difficulty for lenders to distinguish a bad credit risk investment from a good one, leading them to a decline in lending and investment 4- Bank panics Financial intermediaries that make private loans such as banks, have an important role in financial markets. Banks by becoming expert in the production of information about firms can discriminate good credit risks from bad ones. Then they attain funds from depositors and lend them to good firms. Because banks are able to lend to good firms, they can revenue on their loans higher than the interest they pay to the depositors so they are able to earn a profit. As Bernanke (1983) described, a financial crisis which resulted from a bank panic reduce the amount of financial intermediation undertaken by banks, and will lead to a decline in investment. The bank panic occurs when depositors, fearing the safety of their deposits, rush to make withdrawal their deposits from the banking system causing a contraction in loans and a multiple contraction in deposits. Banks thus try to protect themselves from deposit outflows by increasing their reserves relative to deposits which produces additional contraction in loans and deposits and precipitate other banks failure. 5unanticipated declines in the aggregate price level:

As debt payments are contractually fixed, unanticipated declines in price level raises the value level of firms liabilities but does not raise the real value of firms assets. The result is that the net worth in real terms declines and as discussed before decreasing the net worth makes lenders less willing to lend and consequently causes a decline in investment and economic activity. (Mishkin, 1992). As pointed out by Bernanke and Gertler (1990), typically a financial crisis begins with an a stock market failure, excessive rise in interest rates, and increasing uncertainty caused by 23

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crash of big financial firms. During these crises, the increase in uncertainty, the rise in interest rates and the crashing stock market, intensify the problems in credit markets which make it less willing for lenders to lend and cause a decrease in lending and investment. Depositors begin to withdraw their money from banks because of deteriorating business conditions and hesitation about their banks health. The resulting of bank panic increases interest rates even higher and decreases the amount of financial contribution by banks which leads to economic contraction. If the economy downturn causes a sharp decrease in prices, the decline in the price level leads to devalue firms net worth. This situation defined by fisher (1933) as debt-deflection period and makes economic activities remain depressed for a long time

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