construction technology and management

construction technology and management

1. Construction Pricing and
Contracting
Chapter 2

2. Cont..
•The construction contract price includes the direct project
cost including field supervision expenses which are often
referred as site overhead costs plus the markup imposed
by contractors for general overhead expenses and profit.

3. 2.1 Tendering Policy and Procedure
Introduction
Factors that need to be considered in construction
pricing
•Work at hand,
•The geographical areas in which the firm will operate,
•Type of client the organization is to favor, ( private, local authority,
community services, )
•Projected risks and uncertainties of the project,
•Form of the bid: (open, short-listed, pre-qualification, etc)

4. 2.1.1Bidding Strategy:
•In a competitive tendering situation, the contracting
firm is constantly facing a tradeoff of submitting a high
price for getting profit and the resulting shortage of
work, with that of a low price for winning the contracts,
but allow little profit margin.
•A bidding strategy may be evolved for determining the
optimum bid, which will be the relationship between
maximum profit and the probability of being the lowest
tenderer.

5. Bid Qualification
Procedure
Competitive Bid Negotiated Bid
Short listed Open Bid
One Stage ProcedureTwo Stage Procedure
Pre-Qualification Post Qualification

6. Tender
•The Tender is the most important single
document submitted by the bidder. It is here
that each bidder confirms that he has read and
understood the requirements of the tender
documents and based on such requirements, it
is here that the bidder states his tender sum
for undertaking and fulfilling all his obligations
under the contract.

7. Cont…..
•Actually the usual tender document consists of
a number of different documents, of which the
following forms the essential elements:
bidding information and contractual information
•Bidding Information:
•Invitation to bid,
•Instruction to bidders,
•Bid form including Bill of Quantities
•Addenda ( Bid amendment)

8. Cont…
•i) Invitation to Bid:
•this is an announcement or a call of bidders to participate in the
bid. It contains a short brief description of the project and forward
information to bidders such that they can eventually reach
a decision on whether to purchase the full bid document and
participate in the bid. The invitation to bid shall contain, as a
minimum:
•The name and address of the Client,
•A brief description of the project ( type, size and location)
including desired time for completion,
•The means and conditions for obtaining the bid documents and
the place from which they may be obtained,
•The place and deadline for the submission of bids,
•The place and time for opening of bids,

9. Cont..
•ii) Instruction to Bidders:
•This is a separate document in the tender to furnish
instruction to bidders on the preparation and
submission of the bids. Although it may repeat some of
the information in the invitation to bid, the instructions
are mostly concerned with the following:
•Instructions about filling out the bid form,
•Bid due date,
•Location to deliver the bid,
•Examination and evaluation of bids
•Method of awarding the contract
•Bid security information,
•Conditions to become non-responsive to the bid

10. Cont..
•iii)Bid Form:
•The bid form is the document upon which the bidder submits its offer
such as financial, technical and legal requirements of the bid. The
form is usually prepared by the designers with blanks left to be filled
out by the bidder. This makes the bids more easily comparable.
Items may include some or all of the following:
•Name of Contractor,
•Unit prices for the bill of quantities,
•Basic price index
•Tender sum both in numbers and in words,
•Technical information such as key staff to be deployed, equipments
to be availed, past experiences, etc
•Legal status of the company : proprietorship, corporation,
partnership,
•Financial status of the company
•Key subcontractors
•Time required for the job by the contractor,
•Signature, title and date.

11. Cont..
•iv)Addenda: After the documents are issued but
before the bids are due, changes often need to be
made. The most common reason is the need to
correct simple mistakes in the bidding documents.

12. Contractual Information
These are documents included in the tender
document to furnish bidders with full and
detailed information of the project for application
after winning the contract.
•i)Agreement Form:
It serves the purpose of presenting a condensation of the contract
elements, stating the work to be done and the price to be
paid and providing suitable places for signature and seal of the
parties. The following provisions are common to most agreement
forms:
•Identification and full address of the signing parties,
•short description of the project and the work,
•Date of commencement and signature,
•Completion time of the project,
•The contract price,

13. ii)Standard or General Conditions of
Contract:
•The purpose of the general conditions is to establish
the legal responsibilities, authority and rights of all
parties involved in the project in normal procedure of
the work, in case of disputes, hazards etc. Although
the owner can devise his own general conditions,
most prefer to use a standard version. This version is
understood by all parties, includes tested language
and can be revised as needed. For example the FIDIC
Conditions of Contract, The Standard Conditions of
Contract by the Ministry of Works and Urban
Development, 1994 etc.

14. Cont..
•iii)Particular or Special Conditions of Contract:
Having similar performance with that of the general
conditions, however more specific and relevant to a
particular project. It is a supplementary and modified
section of the general conditions of contract.
•iv)Technical Specifications & Methods of
Measurement: These are written descriptions
of the quality of the project. They detail
the materials, equipment and workmanship to
be incorporated into the project.

15. Cont..
•v)Drawings: These are intended to describe the
size and dimensional requirements of the project. Many
professionals are involved in developing drawings.
These include the architectural, structural, sanitary,
mechanical, electrical, topographic survey, land profile,
and detailing.
•vi)Appendix to Construction Agreement:
Comprises tabulated and narrative information of the
project such as amount and liquidated damages,
interest rates, completion time, amounts of bond and
insurances, defects liability period, retention, progress
payments, advance payment, etc. Some of this
information might be left blank to be filled by the
contractor or might be readily provided by the
client.

16. 2.1.2 Tendering Procedure
i) Decision to Tender
• Production workload,
• Future commitments,
• Market,
• Capital,
• Associated risk,
• Prestige, reputation
• Estimating workload,
• Time for preparation of
tender,
Procedure for tendering: Ministry of Infrastructures

17. ii) Collection of Information
Some of the factors required include:
•Time scale for tendering with key dates as mentioned in the
invitation to bid,
•Examination of contract documents, with preliminaries attached
with the tender,
•Assessment of client and design team,
•Enquiries to suppliers and sub-contractors with a time scale,
•Site and locality visit,
•Discussion with site management, plant and planning department,
•Evaluation of alternatives
•Preparation of detailed construction method statement and pre-
tender programme, developed to include production outputs, gang
sizes, plant details, etc.

18. iii) Preparation of Estimate
•Having assembled all the information, the next
task of the estimating staff is to build the cost of
the unit rates. This requires the calculation of all-
in rates for labor, plant, materials and extending
these, using the production details from the pre-
tender programme.
•The cost of any on site administration and
services, known as project overheads is also
calculated. These net production costs, together
with a project appraisal report are then submitted
to management for adjudication.

19. iv) The Tender
•The management of the firm would consider the mark-
up required on the estimated production costs, to cover
the firm’s overheads, profit and risk of the tender. These
additional costs included, the tender figure can then be
determined and submitted

20. v) Action with Tender Results
•An analysis of tenders and a comparison of results
should be completed for each project to provide a
basis for future bidding strategy. With a successful
tender, cost information during the progress of the
work and a final reconciliation of estimated and final
account costs should be made.

21. 2.1.3 Firm’s Mark-Up
•In a construction firm the financial turnover will
be mainly derived from carrying out individual
construction projects in competition with other
contractors.
•It is necessary, therefore, that a policy be
established in tendering so that each project
contributes to the firm. This will entail the
setting up of a mark-up target, over the
production costs, for all contracts to be
undertaken.

22. -To determine firm’s mark-up target, it is required establish:
i) Return on Capital Employed (ROCE), which is made to account the
following costs:
      The average weighted cost of capital ( Interest of capital employed)
       

Profit margin (dividends, capital reserves...)
       

Corporate obligations such as taxations and deprecation costs.
       

Contingencies to cover uncertainties ( Risks)
ii) Annual Turnover on contracts. This can be obtained from the firm’s
short-term plan committed or planned for execution in the current
year.
iii) General overhead costs (off-site administration)

23. General overheads
Costs entailed in administering the company and
providing off-site administration
The general overheads vary with individual firms, but
a broad list may include:
•Rent, rates on office ,
•Fees, salaries and wages for directors and office staff,
•Office equipment, stationary, postage, telephones, cars
•Office heating and lighting
•Insurances on office and staff
•Interest on capital borrowed
Express these Costs as a percentage of
previous year’s turnover

24. Example
Assumptions
Capital Employed: Birr 2,000,000
Turnover on contracts for year:Birr 4,000,000
General overheads: Birr 160,000
Return on Capital Employed 17%
Target: Contracts must contribute (Head office Mark-up)
General overheads Birr 160,000
Return ( ROCE) 17% ( 2,000,000 )Birr 340,000
Head office Mark-up = Birr 500,000

Production Costs = 4,000,000 – 500,000 = Birr 3,500,000
Mark-up on contracts = (500,000 / 3,500,000) x 100 = 14.3%

25. 2.2 Contract Provisions for Risk
Allocation
All Pricing arrangements have some common
features in the form of the legal documents
binding the owner and the supplier (s) of the
facility.
Common types of Pricing arrangements are:
1)Competitive Bidding
• Final bid
submitted on
lump sum or unit
price basis
2) Negotiated Contracts
•Reimbursement is
direct project cost plus
the contractor’s fee
All forms of construction pricing arrangements
pose differed level of risk to the parties in the
contract. Hence, it is important to identify the
provisions for risk in contracts

26. Partial list of responsibilities assigned to different parties
in a contract
Force major : "Acts of God" and other external
events such as war, etc
Indemnification: third party liability transfers
Differing site conditions,
Delays and extensions of time,
Liquidated damages,
Occupational safety and health of workers,
Permits, licenses, laws, and regulations,
Equal employment opportunity regulations,
Termination for default by contractor,
Suspension of work,
Warranties and guaranties,
Price variation adjustments,

27. Risks and Incentives on Construction Quality
Most claims and disputes arise most frequently
from lump sum and unit price contracts for both
public and private owners, the following factors
associated with lump sum contracts are particularly
noteworthy:
Unbalanced bids
Change orders subject to negotiated payments
Changes in design or construction technology
Incentives for early completion

28. 2.3 Types of Construction Contracts
In addition to serving as a means of pricing
construction, contracts also structure the allocation
of risk to various parties involved:
1.Lump Sum Contract
All risk assigned to the contractor
2.Unit Price Contract
The risk of inaccurate estimation of uncertain quantities for
some key tasks has been removed from the contractor
Problem: Unbalanced Bid

29. Example
Description Actual
Quantity
Unit prices (Birr)
Contr. A Contr. B
Actual Amount ( Birr)
Contr. A Contr. B
Masonry Works200 m3 250 400 50,000 80,000
Re. Bars 5100 kg 8 6 40,800 30,600
90,800 110,600
50,000 52,500
30,000 40,000 6 85000 kg Re. Bars
20,000 12,500 400 25050 m3 Masonry Works
Tender Amount ( Birr)
Contr. AContr. B
Unit prices (Birr)
Contr. A Contr. B
Estimate
Quantity
Description

30. Cost + Contracts
Cost Plus Fixed Percentage Contract
Purpose: for new approach/technology yet to be
analyzed
 The owner takes all the risks of
cost overruns
4.Cost Plus fixed fee contract
5.Cost plus variable percentage contract

31. 6.Target Estimate Contract
Actual costs measured against target estimates of the
contractor.
7.Guaranteed Maximum Cost Contract
Suitable for turnkey operations

32. Assignment
1. Discuss how pricing policy is adopted by managers and discuss the
major issues considered to adopt a certain pricing policy
2. Identify the pricing arrangements in contracts and discuss what bidding
strategy can be adopted by a firm from a project to maximize wealth.
3. For a strategy to be adopted one needs to know the tendering
procedures and the associated issues.
4. Determining a firm’s mark-up target
5. Identify the clauses in contracts for risk allocation and their effect on
pricing
6. Discuss the major construction contracts and their risk structure to the
contracting parties