ProjectManagementforConstruction

FundamentalConceptsforOwners,Engineers,Architectsand
Builders
1.The_Owners'_Perspective
2.Organizing_For_Project_Management
3.The_Design_And_Construction_Process
4.Labor,_Material,_And_Equipment_Utilization
5.Cost_Estimation
6.Economic_Evaluation_of_Facility_Investments
7.Financing_of_Constructed_Facilities
8.Construction_Pricing_and_Contracting
9.Construction_Planning
10.Fundamental_Scheduling_Procedures
11.Advanced_Scheduling_Techniques
12.Cost_Control,_Monitoring,_and_Accounting
13.Quality_Control_and_Safety_During_Construction
14.Organization_and_Use_of_Project_Information
byChrisHendrickson,DepartmentofCivilandEnvironmentalEngineering,CarnegieMellonUniversity,
Pittsburgh,PAl52l3CopyrightC.Hendrickson1998
FirstEditionoriginallyprintedbyPrenticeHall,ISBN0137312660,1989withcoauthorTungAu.
SecondEditionpreparedforworldwidewebpublicationin2000.
Version2.2preparedSummer,2008.
Preface
Thisbookisprovidedontheworldwidewebasaservicetothecommunityofpractitionersandstudents.
Reproductionforeducationalpurposesispermittedwithappropriatecitation.Ifyoufindthisworkhelpfulor
havesuggestionsforadditionsorcorrections,pleaseemailChrisHendrickson:cth@cmu.edu.Ahardcopy
Instructor'sManualwithproblemsolutionsisavailableforafeeof$10tocoverreproduction,mailingand
handling.SendacheckmadeouttoCarnegieMellonUniversitytoMs.PattyLanger,DepartmentofCivil
andEnvironmentalEngineering,CarnegieMellonUniversity,Pittsburgh,PA15213.
Thisbookdevelopsaspecificviewpointindiscussingtheparticipants,theprocessesandthetechniquesof
projectmanagementforconstruction.Thisviewpointisthatofownerswhodesirecompletionofprojectsina
timely,costeffectivefashion.Someprofoundimplicationsfortheobjectivesandmethodsofproject
managementresultfromthisperspective:
The"lifecycle"ofcostsandbenefitsfrominitialplanningthroughoperationanddisposalofafacility
arerelevanttodecisionmaking.Anownerisconcernedwithaprojectfromthecradletothegrave.
Constructioncostsrepresentonlyoneportionoftheoveralllifecyclecosts.
Optimizingperformanceatonestageoftheprocessmaynotbebeneficialoverallifadditionalcostsor
delaysoccurelsewhere.Forexample,savingmoneyonthedesignprocesswillbeafalseeconomyif
theresultisexcessconstructioncosts.
Fragmentationofprojectmanagementamongdifferentspecialistsmaybenecessary,butgood
communicationandcoordinationamongtheparticipantsisessentialtoaccomplishtheoverallgoalsof
theproject.Newinformationtechnologiescanbeinstrumentalinthisprocess,especiallytheInternet
andspecializedExtranets.
Productivityimprovementsarealwaysofimportanceandvalue.Asaresult,introducingnewmaterials
andautomatedconstructionprocessesisalwaysdesirableaslongastheyarelessexpensiveandare
consistentwithdesiredperformance.

Qualityofworkandperformancearecriticallyimportanttothesuccessofaprojectsinceitisthe
ownerwhowillhavetolivewiththeresults.
Inessence,adoptingtheviewpointoftheownerfocusesattentiononthecosteffectivenessoffacility
constructionratherthancompetitiveprovisionofservicesbythevariousparticipants.
Whilethisbookisdevotedtoaparticularviewpointwithrespecttoprojectmanagementforconstruction,it
isnotsolelyintendedforownersandtheirdirectrepresentatives.Byunderstandingtheentireprocess,all
participantscanrespondmoreeffectivelytotheowner'sneedsintheirownwork,inmarketingtheirservices,
andincommunicatingwithotherparticipants.Inaddition,thespecifictechniquesandtoolsdiscussedinthis
book(suchaseconomicevaluation,scheduling,managementinformationsystems,etc.)canbereadily
appliedtoanyportionoftheprocess.
Asaresultofthefocusontheeffectivemanagementofentireprojects,anumberofnovelorganizational
approachesandtechniquesbecomeofinterest.Firstandforemostistheincentivetoreplaceconfrontation
andadversarialrelationshipswithaspiritofjointendeavor,partnershipandaccomplishment.Forexample,
wediscusstheappropriatemeanstoevaluaterisksandtheappropriateparticipantstoassumetheunavoidable
risksassociatedwithconstructedfacilities.Scheduling,communicationofdata,andqualityassurancehave
particularsignificancefromtheviewpointofanowner,butnotnecessarilyforindividualparticipants.The
useofcomputerbasedtechnologyandautomationalsoprovidesopportunitiesforincreasedproductivityin
theprocess.Presentingsuchmodernmanagementoptionsinaunifiedfashionisamajorobjectiveofthis
book.
Theunifiedviewpointoftheentireprocessofprojectmanagementinthisbookdiffersfromnearlyallother
literatureonthesubject.Mosttextbooksintheareatreatspecialproblems,suchascostestimating,fromthe
viewpointofparticularparticipantssuchasconstructionmanagersorcontractors.Thisliteraturereflectsthe
fragmentationoftheconstructionprocessamongdifferentorganizationsandprofessionals.Evenwithina
singleprofessionsuchascivilengineering,therearequitedistinctgroupsofspecialistsinplanning,design,
management,constructionandothersubspecialties.Fragmentationofinterestandattentionalsoexistsin
nearlyalleducationalprograms.Whilespecialtyknowledgemaybeessentialtoaccomplishparticulartasks,
participantsintheprocessshouldalsounderstandthecontextandroleoftheirspecialtasks.
Thisbookisintendedprimarilyasatextforadvancedundergraduates,beginninggraduatestudentsor
professionalscontinuingtheireducationinengineering,construction,architectureorfacilitiesmanagement.
Examplesanddiscussionarechosentoremindreadersthatprojectmanagementisachallenging,dynamic
andexcitingenterpriseandnotjustarecordofpastpractices.Itshouldalsobeusefultoprofessionalswho
wishanuptodatereferenceonprojectmanagement.
Chapters1to3presentanoverviewoftheconstructionmanagementanddesignprocesswhichshouldbeof
interesttoanyoneengagedinprojectmanagementforconstruction.Oneneednothavedetailedknowledge
aboutindividualtasksortechniquesforthispart.Individualscanreadthesechaptersandunderstandthe
basicphilosophyandprincipleswithoutfurtherelaboration.
Chapters4through14describespecificfunctionsandtechniquesusefulintheprocessofproject
management.Thispartpresentstechniquesandrequirementsduringprojectplanning,includingrisk
assessment,costestimation,forecastingandeconomicevaluation.Itisduringthisplanninganddesignphase
inwhichmajorcostsavingsmaybeobtainedduringtheeventualconstructionandoperationphases.Italso
addressesprogrammingandfinancingissues,suchascontractingandbiddingforservices,financing,
organizingcommunicationandinsuringeffectiveuseofinformation.Itfurtherdiscussestechniquesfor
controloftime,costandqualityduringtheconstructionphase.Beginningcoursesinengineeringeconomics
(includingcashflowanalysisanddiscounting),useofcomputers,probabilityandstatisticswouldbeuseful.
Furthermore,accesstoapersonalcomputerwithspreadsheetorequationsolvingsoftwarewouldbehelpful
forreadersattemptingsomeoftheproblemsinChapters4to14.Numeroussoftwareprogramscouldbeused
forthispurpose,includingbothspreadsheetandequationsolvingprograms.Problemsinsomechapterscould
alsobedoneonanynumberofexistingsoftwarepackagesforinformationmanagementandproject
scheduling.However,theuseofpersonalcomputersinthisfashionisnotrequiredinfollowingthetext
material.Eachinstructormayexercisediscretioninomittingsomeofthematerialinthesechaptersiftheyare
redundantwithotherclassesortooadvancedforstudentsinhisorherownclass.

Itisourhopethatstudentsbeginningtheircareerinprojectmanagementforconstructionwillbepreparedto
adopttheintegratedapproachemphasizedinthisbook.Furthermore,experiencedprofessionalsinvarious
fieldsmaydiscoverinthisbooksomesurprisesthateventheyhavenotanticipated.Highleveldecision
makersinownerorganizationswhoarenotdirectlyinvolvedintheprojectmanagementprocessmayfindthe
basicphilosophyandprinciplesofinterest,especiallyinChapters1through3,asownersmustinvariablypay
forconstructedfacilities,forbetterorworse.Ifthebookcanfulfillevenasmallpartofitspromisesto
influencethefutureofprojectmanagementforconstruction,oureffortswillhavebeenamplyrewarded.
Forversion2.1(Summer2003),anumberofnewexamples,updatesandreferenceshavebeeninserted
throughoutthetext.Forexample,therearenewdiscussionsofleanconstructionandgreenbuildings.
However,thebasicstructureandmethodsremainthesame.Thefundamentalsofprojectmanagementtreated
herearetimeless.
Numerousindividualshelpedwiththepreparationofthefirstandsecondeditionsofthisbook.Inparticular,
wewishtoacknowledgeBurcuAkinci,WilliamJ.Hall,PaulChristiano,StevenFenves,DanielRehak,
DebbieScappatura,andShirleyKnapp.IavorKostov,TommyHendrickson,CurtYeskeandInSooJung
wereinstrumentalindevelopingthewebversionofthisbook.Thisbookalsoreflectsthecontributionsof
numerousstudentsandcolleaguesinindustrywhohavechallengeduswithproblemsandsharedtheirown
ideasandexperienceovermanyyears.Wearegratefultoalloftheseindividuals.
Somematerialinthisbookhasbeentakenfromseveralpapersauthoredbyusandpublishedbythe
AmericanSocietyofCivilEngineers.Materialstakenfromothersourcesareacknowledgedinfootnotes,
tablesorfigures.Wegratefullyacknowledgethepermissionsgiventousbytheseindividuals,publishersand
organizations.
AseriesofphotographsdepictingvariousstagesofconstructionofthePPGbuildinginPittsburgh,PAis
insertedinsequencebetweenchapters.WewishtothankPPGIndustriesforitscooperationinproviding
thesephotographs.
ChrisHendricksonandTungAu

GoUptoTableofContents

GoToChapter2
(OrganizingforProjectManagement)

TheOwners'Perspective
Introduction
TheProjectLifeCycle
MajorTypesofConstruction
SelectionofProfessionalServices
ConstructionContractors
FinancingofConstructedFacilities
LegalandRegulatoryRequirements
TheChangingEnvironmentofthe
ConstructionIndustry
TheRoleofProjectManagers
References
Footnotes

1.TheOwners'Perspective
1.1Introduction
Likethefiveblindmenencounteringdifferentpartsofanelephant,eachofthenumerousparticipantsinthe
processofplanning,designing,financing,constructingandoperatingphysicalfacilitieshasadifferent
perspectiveonprojectmanagementforconstruction.Specializedknowledgecanbeverybeneficial,
particularlyinlargeandcomplicatedprojects,sinceexpertsinvariousspecialtiescanprovidevaluable
services.However,itisadvantageoustounderstandhowthedifferentpartsoftheprocessfittogether.Waste,
excessivecostanddelayscanresultfrompoorcoordinationandcommunicationamongspecialists.Itis
particularlyintheinterestofownerstoinsurethatsuchproblemsdonotoccur.Anditbehoovesall
participantsintheprocesstoheedtheinterestsofownersbecause,intheend,itistheownerswhoprovide
theresourcesandcalltheshots.
Byadoptingtheviewpointoftheowners,wecanfocusourattentiononthecompleteprocessofproject
managementforconstructedfacilitiesratherthanthehistoricalrolesofvariousspecialistssuchasplanners,
architects,engineeringdesigners,constructors,fabricators,materialsuppliers,financialanalystsandothers.
Tobesure,eachspecialtyhasmadeimportantadvancesindevelopingnewtechniquesandtoolsforefficient
implementationofconstructionprojects.However,itisthroughtheunderstandingoftheentireprocessof
projectmanagementthatthesespecialistscanrespondmoreeffectivelytotheowner'sdesiresfortheir
services,inmarketingtheirspecialties,andinimprovingtheproductivityandqualityoftheirwork.
Theintroductionofinnovativeandmoreeffectiveprojectmanagementforconstructionisnotanacademic
exercise.Asreportedbythe"ConstructionIndustryCostEffectivenessProject"oftheBusinessRoundtable:
[1]
Bycommonconsensusandeveryavailablemeasure,theUnitedStatesnolongergetsit's
money'sworthinconstruction,thenation'slargestindustry...Thecreepingerosionof
constructionefficiencyandproductivityisbadnewsfortheentireU.S.economy.Constructionis
aparticularlyseminalindustry.Thepriceofeveryfactory,officebuilding,hotelorpowerplant
thatisbuiltaffectsthepricethatmustbechargedforthegoodsorservicesproducedinitorby
it.Andthateffectgenerallypersistsfordecades...Toomuchoftheindustryremainstetheredto
thepast,partlybyinertiaandpartlybyhistoricdivisions...
Improvementofprojectmanagementnotonlycanaidtheconstructionindustry,butmayalsobetheengine
forthenationalandworldeconomy.However,ifwearetomakemeaningfulimprovements,wemustfirst

understandtheconstructionindustry,itsoperatingenvironmentandtheinstitutionalconstraintsaffectingits
activitiesaswellasthenatureofprojectmanagement.
Backtotop

1.2TheProjectLifeCycle
Theacquisitionofaconstructedfacilityusuallyrepresentsamajorcapitalinvestment,whetheritsowner
happenstobeanindividual,aprivatecorporationorapublicagency.Sincethecommitmentofresourcesfor
suchaninvestmentismotivatedbymarketdemandsorperceivedneeds,thefacilityisexpectedtosatisfy
certainobjectiveswithintheconstraintsspecifiedbytheownerandrelevantregulations.Withtheexception
ofthespeculativehousingmarket,wheretheresidentialunitsmaybesoldasbuiltbytherealestate
developer,mostconstructedfacilitiesarecustommadeinconsultationwiththeowners.Arealestate
developermayberegardedasthesponsorofbuildingprojects,asmuchasagovernmentagencymaybethe
sponsorofapublicprojectandturnsitovertoanothergovernmentunituponitscompletion.Fromthe
viewpointofprojectmanagement,theterms"owner"and"sponsor"aresynonymousbecausebothhavethe
ultimateauthoritytomakeallimportantdecisions.Sinceanownerisessentiallyacquiringafacilityona
promiseinsomeformofagreement,itwillbewiseforanyownertohaveaclearunderstandingofthe
acquisitionprocessinordertomaintainfirmcontrolofthequality,timelinessandcostofthecompleted
facility.
Fromtheperspectiveofanowner,theprojectlifecycleforaconstructedfacilitymaybeillustrated
schematicallyinFigure11.Essentially,aprojectisconceivedtomeetmarketdemandsorneedsinatimely
fashion.Variouspossibilitiesmaybeconsideredintheconceptualplanningstage,andthetechnologicaland
economicfeasibilityofeachalternativewillbeassessedandcomparedinordertoselectthebestpossible
project.Thefinancingschemesfortheproposedalternativesmustalsobeexamined,andtheprojectwillbe
programmedwithrespecttothetimingforitscompletionandforavailablecashflows.Afterthescopeofthe
projectisclearlydefined,detailedengineeringdesignwillprovidetheblueprintforconstruction,andthe
definitivecostestimatewillserveasthebaselineforcostcontrol.Intheprocurementandconstructionstage,
thedeliveryofmaterialsandtheerectionoftheprojectonsitemustbecarefullyplannedandcontrolled.
Aftertheconstructioniscompleted,thereisusuallyabriefperiodofstartuporshakedownofthe
constructedfacilitywhenitisfirstoccupied.Finally,themanagementofthefacilityisturnedovertothe
ownerforfulloccupancyuntilthefacilitylivesoutitsusefullifeandisdesignatedfordemolitionor
conversion.

Figure11:TheProjectLifeCycleofaConstructedFacility

Ofcourse,thestagesofdevelopmentinFigure11maynotbestrictlysequential.Someofthestagesrequire
iteration,andothersmaybecarriedoutinparallelorwithoverlappingtimeframes,dependingonthenature,
sizeandurgencyoftheproject.Furthermore,anownermayhaveinhousecapacitiestohandletheworkin
everystageoftheentireprocess,oritmayseekprofessionaladviceandservicesfortheworkinallstages.
Understandably,mostownerschoosetohandlesomeoftheworkinhouseandtocontractoutside
professionalservicesforothercomponentsoftheworkasneeded.Byexaminingtheprojectlifecyclefrom
anowner'sperspectivewecanfocusontheproperrolesofvariousactivitiesandparticipantsinallstages
regardlessofthecontractualarrangementsfordifferenttypesofwork.
IntheUnitedStates,forexample,theU.S.ArmyCorpsofEngineershasinhousecapabilitiestodealwith
planning,budgeting,design,constructionandoperationofwaterwayandfloodcontrolstructures.Other
publicagencies,suchasstatetransportationdepartments,arealsodeeplyinvolvedinallphasesofa
constructionproject.Intheprivatesector,manylargefirmssuchasDuPont,Exxon,andIBMareadequately

staffedtocarryoutmostactivitiesforplantexpansion.Alltheseowners,bothpublicandprivate,useoutside
agentstoagreaterorlesserdegreewhenitbecomesmoreadvantageoustodoso.
Theprojectlifecyclemaybeviewedasaprocessthroughwhichaprojectisimplementedfromcradleto
grave.Thisprocessisoftenverycomplexhowever,itcanbedecomposedintoseveralstagesasindicatedby
thegeneraloutlineinFigure11.Thesolutionsatvariousstagesarethenintegratedtoobtainthefinal
outcome.Althougheachstagerequiresdifferentexpertise,itusuallyincludesbothtechnicalandmanagerial
activitiesintheknowledgedomainofthespecialist.Theownermaychoosetodecomposetheentireprocess
intomoreorlessstagesbasedonthesizeandnatureoftheproject,andthusobtainthemostefficientresultin
implementation.Veryoften,theownerretainsdirectcontrolofworkintheplanningandprogramming
stages,butincreasinglyoutsideplannersandfinancialexpertsareusedasconsultantsbecauseofthe
complexitiesofprojects.Sinceoperationandmaintenanceofafacilitywillgoonlongafterthecompletion
andacceptanceofaproject,itisusuallytreatedasaseparateproblemexceptintheconsiderationofthelife
cyclecostofafacility.Allstagesfromconceptualplanningandfeasibilitystudiestotheacceptanceofa
facilityforoccupancymaybebroadlylumpedtogetherandreferredtoastheDesign/Constructprocess,
whiletheprocurementandconstructionalonearetraditionallyregardedastheprovinceoftheconstruction
industry.
Ownersmustrecognizethatthereisnosinglebestapproachinorganizingprojectmanagementthroughouta
project'slifecycle.Allorganizationalapproacheshaveadvantagesanddisadvantages,dependingonthe
knowledgeoftheownerinconstructionmanagementaswellasthetype,sizeandlocationoftheproject.Itis
importantfortheownertobeawareoftheapproachwhichismostappropriateandbeneficialforaparticular
project.Inmakingchoices,ownersshouldbeconcernedwiththelifecyclecostsofconstructedfacilities
ratherthansimplytheinitialconstructioncosts.Savingsmallamountsofmoneyduringconstructionmaynot
beworthwhileiftheresultismuchlargeroperatingcostsornotmeetingthefunctionalrequirementsforthe
newfacilitysatisfactorily.Thus,ownersmustbeveryconcernedwiththequalityofthefinishedproductas
wellasthecostofconstructionitself.Sincefacilityoperationandmaintenanceisapartoftheprojectlife
cycle,theowners'expectationtosatisfyinvestmentobjectivesduringtheprojectlifecyclewillrequire
considerationofthecostofoperationandmaintenance.Therefore,thefacility'soperatingmanagement
shouldalsobeconsideredasearlyaspossible,justastheconstructionprocessshouldbekeptinmindatthe
earlystagesofplanningandprogramming.
Backtotop

1.3MajorTypesofConstruction
Sincemostownersaregenerallyinterestedinacquiringonlyaspecifictypeofconstructedfacility,they
shouldbeawareofthecommonindustrialpracticesforthetypeofconstructionpertinenttothem.Likewise,
theconstructionindustryisaconglomerationofquitediversesegmentsandproducts.Someownersmay
procureaconstructedfacilityonlyonceinalongwhileandtendtolookforshorttermadvantages.However,
manyownersrequireperiodicacquisitionofnewfacilitiesand/orrehabilitationofexistingfacilities.Itisto
theiradvantagetokeeptheconstructionindustryhealthyandproductive.Collectively,theownershavemore
powertoinfluencetheconstructionindustrythantheyrealizebecause,bytheirindividualactions,theycan
provideincentivesordisincentivesforinnovation,efficiencyandqualityinconstruction.Itistotheinterest
ofallpartiesthattheownerstakeanactiveinterestintheconstructionandexercisebeneficialinfluenceon
theperformanceoftheindustry.
Inplanningforvarioustypesofconstruction,themethodsofprocuringprofessionalservices,awarding
constructioncontracts,andfinancingtheconstructedfacilitycanbequitedifferent.Forthepurposeof
discussion,thebroadspectrumofconstructedfacilitiesmaybeclassifiedintofourmajorcategories,each
withitsowncharacteristics.

ResidentialHousingConstruction
Residentialhousingconstructionincludessinglefamilyhouses,multifamilydwellings,andhighrise
apartments.Duringthedevelopmentandconstructionofsuchprojects,thedevelopersorsponsorswhoare
familiarwiththeconstructionindustryusuallyserveassurrogateownersandtakecharge,makingnecessary

contractualagreementsfordesignandconstruction,andarrangingthefinancingandsaleofthecompleted
structures.Residentialhousingdesignsareusuallyperformedbyarchitectsandengineers,andthe
constructionexecutedbybuilderswhohiresubcontractorsforthestructural,mechanical,electricalandother
specialtywork.Anexceptiontothispatternisforsinglefamilyhouseswhichmaybedesignedbythe
buildersaswell.
Theresidentialhousingmarketisheavilyaffectedbygeneraleconomicconditions,taxlaws,andthe
monetaryandfiscalpoliciesofthegovernment.Often,aslightincreaseintotaldemandwillcausea
substantialinvestmentinconstruction,sincemanyhousingprojectscanbestartedatdifferentlocationsby
differentindividualsanddevelopersatthesametime.Becauseoftherelativeeaseofentry,atleastatthe
lowerendofthemarket,manynewbuildersareattractedtotheresidentialhousingconstruction.Hence,this
marketishighlycompetitive,withpotentiallyhighrisksaswellashighrewards.

Figure12:ResidentialHousingConstruction(courtesyofCaterpillar,Inc.)

InstitutionalandCommercialBuildingConstruction
Institutionalandcommercialbuildingconstructionencompassesagreatvarietyofprojecttypesandsizes,
suchasschoolsanduniversities,medicalclinicsandhospitals,recreationalfacilitiesandsportsstadiums,
retailchainstoresandlargeshoppingcenters,warehousesandlightmanufacturingplants,andskyscrapers
forofficesandhotels.Theownersofsuchbuildingsmayormaynotbefamiliarwithconstructionindustry
practices,buttheyusuallyareabletoselectcompetentprofessionalconsultantsandarrangethefinancingof
theconstructedfacilitiesthemselves.Specialtyarchitectsandengineersareoftenengagedfordesigninga
specifictypeofbuilding,whilethebuildersorgeneralcontractorsundertakingsuchprojectsmayalsobe
specializedinonlythattypeofbuilding.
Becauseofthehighercostsandgreatersophisticationofinstitutionalandcommercialbuildingsin
comparisonwithresidentialhousing,thismarketsegmentissharedbyfewercompetitors.Sincethe
constructionofsomeofthesebuildingsisalongprocesswhichoncestartedwilltakesometimetoproceed
untilcompletion,thedemandislesssensitivetogeneraleconomicconditionsthanthatforspeculative
housing.Consequently,theownersmayconfrontanoligopolyofgeneralcontractorswhocompeteinthe
samemarket.Inanoligopolysituation,onlyalimitednumberofcompetitorsexist,andafirm'spricefor
servicesmaybebasedinpartonitscompetitivestrategiesinthelocalmarket.

Figure13:ConstructionofthePPGBuildinginPittsburgh,Pennsylvania(courtesyofPPGIndustries,Inc.)

SpecializedIndustrialConstruction
Specializedindustrialconstructionusuallyinvolvesverylargescaleprojectswithahighdegreeof
technologicalcomplexity,suchasoilrefineries,steelmills,chemicalprocessingplantsandcoalfiredor
nuclearpowerplants.Theownersusuallyaredeeplyinvolvedinthedevelopmentofaproject,andpreferto
workwithdesignersbuilderssuchthatthetotaltimeforthecompletionoftheprojectcanbeshortened.They
alsowanttopickateamofdesignersandbuilderswithwhomtheownerhasdevelopedgoodworking
relationsovertheyears.
Althoughtheinitiationofsuchprojectsisalsoaffectedbythestateoftheeconomy,longrangedemand
forecastingisthemostimportantfactorsincesuchprojectsarecapitalintensiveandrequireconsiderable
amountofplanningandconstructiontime.GovernmentalregulationsuchastherulingsoftheEnvironmental
ProtectionAgencyandtheNuclearRegulatoryCommissionintheUnitedStatescanalsoprofoundly
influencedecisionsontheseprojects.

Figure14:ConstructionofaBenzenePlantinLima,Ohio(courtesyofManitowocCompany,Inc.)

InfrastructureandHeavyConstruction
Infrastructureandheavyconstructionincludesprojectssuchashighways,masstransitsystems,tunnels,
bridges,pipelines,drainagesystemsandsewagetreatmentplants.Mostoftheseprojectsarepubliclyowned
andthereforefinancedeitherthroughbondsortaxes.Thiscategoryofconstructionischaracterizedbyahigh
degreeofmechanization,whichhasgraduallyreplacedsomelaborintensiveoperations.
Theengineersandbuildersengagedininfrastructureconstructionareusuallyhighlyspecializedsinceeach
segmentofthemarketrequiresdifferenttypesofskills.However,demandsfordifferentsegmentsof
infrastructureandheavyconstructionmayshiftwithsaturationinsomesegments.Forexample,asthe
availablehighwayconstructionprojectsaredeclining,someheavyconstructioncontractorsquicklymove
theirworkforceandequipmentintothefieldofminingwherejobsareavailable.

Figure15:ConstructionoftheDamePointBridgeinJacksonville,Florida(courtesyofMaryLouMaher)
Backtotop

1.4SelectionofProfessionalServices
Whenanownerdecidestoseekprofessionalservicesforthedesignandconstructionofafacility,heis
confrontedwithabroadvarietyofchoices.Thetypeofservicesselecteddependstoalargedegreeonthe
typeofconstructionandtheexperienceoftheownerindealingwithvariousprofessionalsintheprevious
projectsundertakenbythefirm.Generally,severalcommontypesofprofessionalservicesmaybeengaged
eitherseparatelyorinsomecombinationbytheowners.

FinancialPlanningConsultants
Attheearlystageofstrategicplanningforacapitalproject,anowneroftenseekstheservicesoffinancial
planningconsultantssuchascertifiedpublicaccounting(CPA)firmstoevaluatetheeconomicandfinancial
feasibilityoftheconstructedfacility,particularlywithrespecttovariousprovisionsoffederal,stateandlocal
taxlawswhichmayaffecttheinvestmentdecision.Investmentbanksmayalsobeconsultedonvarious
optionsforfinancingthefacilityinordertoanalyzetheirlongtermeffectsonthefinancialhealthofthe
ownerorganization.

ArchitecturalandEngineeringFirms
Traditionally,theownerengagesanarchitecturalandengineering(A/E)firmorconsortiumastechnical
consultantindevelopingapreliminarydesign.Aftertheengineeringdesignandfinancingarrangementsfor
theprojectarecompleted,theownerwillenterintoaconstructioncontractwithageneralcontractoreither
throughcompetitivebiddingornegotiation.Thegeneralcontractorwillactasaconstructorand/ora
coordinatorofalargenumberofsubcontractorswhoperformvariousspecialtiesforthecompletionofthe
project.TheA/Efirmcompletesthedesignandmayalsoprovideonsitequalityinspectionduring

construction.Thus,theA/Efirmactsastheprimeprofessionalonbehalfoftheownerandsupervisesthe
constructiontoinsuresatisfactoryresults.Thispracticeismostcommoninbuildingconstruction.
Inthepasttwodecades,thistraditionalapproachhasbecomelesspopularforanumberofreasons,
particularlyforlargescaleprojects.TheA/Efirms,whichareengagedbytheownerastheprime
professionalsfordesignandinspection,havebecomemoreisolatedfromtheconstructionprocess.Thishas
occurredbecauseofpressurestoreducefeestoA/Efirms,thethreatoflitigationregardingconstruction
defects,andlackofknowledgeofnewconstructiontechniquesonthepartofarchitectandengineering
professionals.Insteadofpreparingaconstructionplanalongwiththedesign,manyA/Efirmsarenolonger
responsibleforthedetailsofconstructionnordotheyprovideperiodicfieldinspectioninmanycases.Asa
matteroffact,suchfirmswillplaceaprominentdisclaimerofresponsibilitiesonanyshopdrawingsthey
maycheck,andtheywilloftenregardtheirrepresentativesinthefieldasobserversinsteadofinspectors.
Thus,theA/Efirmandthegeneralcontractoronaprojectoftenbecomeantagonistswhoarelookingafter
theirowncompetinginterests.Asaresult,eventheconstructibilityofsomeengineeringdesignsmaybecome
anissueofcontention.Tocarrythisprotectiveattitudetotheextreme,thespecificationspreparedbyanA/E
firmforthegeneralcontractoroftenprotectstheinterestoftheA/Efirmattheexpenseoftheinterestsofthe
ownerandthecontractor.
Inordertoreducethecostofconstruction,someownersintroducevalueengineering,whichseekstoreduce
thecostofconstructionbysolicitingaseconddesignthatmightcostlessthantheoriginaldesignproduced
bytheA/Efirm.Inpractice,theseconddesignissubmittedbythecontractorafterreceivingaconstruction
contractatastipulatedsum,andthesavingincostresultingfromtheredesignissharedbythecontractorand
theowner.Thecontractorisabletoabsorbthecostofredesignfromtheprofitinconstructionortoreduce
theconstructioncostasaresultoftheredesign.IftheownerhadbeenwillingtopayahigherfeetotheA/E
firmortobetterdirectthedesignprocess,theA/Efirmmighthaveproducedanimproveddesignwhich
wouldcostlessinthefirstplace.Regardlessofthemeritofvalueengineering,thispracticehasundermined
theroleoftheA/Efirmastheprimeprofessionalactingonbehalfoftheownertosupervisethecontractor.

Design/ConstructFirms
Acommontrendinindustrialconstruction,particularlyforlargeprojects,istoengagetheservicesofa
design/constructfirm.Byintegratingdesignandconstructionmanagementinasingleorganization,manyof
theconflictsbetweendesignersandconstructorsmightbeavoided.Inparticular,designswillbeclosely
scrutinizedfortheirconstructibility.However,anownerengagingadesign/constructfirmmustinsurethat
thequalityoftheconstructedfacilityisnotsacrificedbythedesiretoreducethetimeorthecostfor
completingtheproject.Also,itisdifficulttomakeuseofcompetitivebiddinginthistypeofdesign/construct
process.Asaresult,ownersmustberelativelysophisticatedinnegotiatingrealisticandcosteffective
constructioncontracts.
Oneofthemostobviousadvantagesoftheintegrateddesign/constructprocessistheuseofphased
constructionforalargeproject.Inthisprocess,theprojectisdividedupintoseveralphases,eachofwhich
canbedesignedandconstructedinastaggeredmanner.Afterthecompletionofthedesignofthefirstphase,
constructioncanbeginwithoutwaitingforthecompletionofthedesignofthesecondphase,etc.Ifproper
coordinationisexercised.thetotalprojectdurationcanbegreatlyreduced.Anotheradvantageistoexploit
thepossibilityofusingtheturnkeyapproachwherebyanownercandelegateallresponsibilitytothe
design/constructfirmwhichwilldelivertotheowneracompletedfacilitythatmeetstheperformance
specificationsatthespecifiedprice.

ProfessionalConstructionManagers
Inrecentyears,anewbreedofconstructionmanagers(CM)offersprofessionalservicesfromtheinception
tothecompletionofaconstructionproject.TheseconstructionmanagersmostlycomefromtheranksofA/E
firmsorgeneralcontractorswhomayormaynotretaindualrolesintheserviceoftheowners.Inanycase,
theownercanrelyontheserviceofasingleprimeprofessionaltomanagetheentireprocessofa
constructionproject.However,liketheA/Efirmsofseveraldecadesago,theconstructionmanagersare
appreciatedbysomeownersbutnotbyothers.Beforelong,someownersfindthattheconstructionmanagers
toomaytrytoprotecttheirowninterestinsteadofthatoftheownerswhenthestakesarehigh.

Itshouldbeobvioustoallinvolvedintheconstructionprocessthatthepartywhichisrequiredtotakehigher
riskdemandslargerrewards.IfanownerwantstoengageanA/Efirmonthebasisoflowfeesinsteadof
establishedqualifications,itoftengetswhatitdeservesoriftheownerwantsthegeneralcontractortobear
thecostofuncertaintiesinconstructionsuchasfoundationconditions,thecontractpricewillbehighereven
ifcompetitivebiddingisusedinreachingacontractualagreement.Withoutmutualrespectandtrust,an
ownercannotexpectthatconstructionmanagerscanproducebetterresultsthanotherprofessionals.Hence,
anownermustunderstanditsownresponsibilityandtheriskitwishestoassigntoitselfandtoother
participantsintheprocess.

OperationandMaintenanceManagers
Althoughmanyownerskeepapermanentstafffortheoperationandmaintenanceofconstructedfacilities,
othersmayprefertocontractsuchtaskstoprofessionalmanagers.Understandably,itiscommontofindin
housestaffforoperationandmaintenanceinspecializedindustrialplantsandinfrastructurefacilities,andthe
useofoutsidemanagersundercontractsfortheoperationandmaintenanceofrentalpropertiessuchas
apartmentsandofficebuildings.However,thereareexceptionstothesecommonpractices.Forexample,
maintenanceofpublicroadwayscanbecontractedtoprivatefirms.Inanycase,managerscanprovidea
spectrumofoperationandmaintenanceservicesforaspecifiedtimeperiodinaccordancetothetermsof
contractualagreements.Thus,theownerscanbesparedtheprovisionofinhouseexpertisetooperateand
maintainthefacilities.

FacilitiesManagement
Asalogicalextensionforobtainingthebestservicesthroughouttheprojectlifecycleofaconstructed
facility,someownersanddevelopersarereceptivetoaddingstrategicplanningatthebeginningandfacility
maintenanceasafollowuptoreducespacerelatedcostsintheirrealestateholdings.Consequently,some
architectural/engineeringfirmsandconstructionmanagementfirmswithcomputerbasedexpertise,together
withinteriordesignfirms,areofferingsuchfrontendandfollowupservicesinadditiontothemore
traditionalservicesindesignandconstruction.ThisspectrumofservicesisdescribedinEngineeringNews
Record(nowENR)asfollows:[2]
Facilitiesmanagementisthedisciplineofplanning,designing,constructingandmanagingspace
ineverytypeofstructurefromofficebuildingstoprocessplants.Itinvolvesdeveloping
corporatefacilitiespolicy,longrangeforecasts,realestate,spaceinventories,projects(through
design,constructionandrenovation),buildingoperationandmaintenanceplansandfurniture
andequipmentinventories.
Acommondenominatorofallfirmsenteringintothesenewservicesisthattheyallhavestrongcomputer
capabilitiesandheavycomputerinvestments.Inadditiontotheuseofcomputersforaidingdesignand
monitoringconstruction,theserviceincludesthecompilationofacomputerrecordofbuildingplansthatcan
beturnedoverattheendofconstructiontothefacilitiesmanagementgroupoftheowner.Acomputerdata
baseoffacilitiesinformationmakesitpossibleforplannersintheowner'sorganizationtoobtainoverview
informationforlongrangespaceforecasts,whilethelinemanagerscanuseasbuiltinformationsuchas
lease/tenantrecords,utilitycosts,etc.fordaytodayoperations.
Backtotop

1.5ConstructionContractors
Builderswhosupervisetheexecutionofconstructionprojectsaretraditionallyreferredtoascontractors,or
moreappropriatelycalledconstructors.Thegeneralcontractorcoordinatesvarioustasksforaprojectwhile
thespecialtycontractorssuchasmechanicalorelectricalcontractorsperformtheworkintheirspecialties.
Materialandequipmentsuppliersoftenactasinstallationcontractorstheyplayasignificantroleina
constructionprojectsincetheconditionsofdeliveryofmaterialsandequipmentaffectthequality,cost,and
timelycompletionoftheproject.Itisessentialtounderstandtheoperationofthesecontractorsinorderto
dealwiththemeffectively.

GeneralContractors
Thefunctionofageneralcontractoristocoordinatealltasksinaconstructionproject.Unlesstheowner
performsthisfunctionorengagesaprofessionalconstructionmanagertodoso,agoodgeneralcontractor
whohasworkedwithateamofsuperintendents,specialtycontractorsorsubcontractorstogetherfora
numberofprojectsinthepastcanbemosteffectiveininspiringloyaltyandcooperation.Thegeneral
contractorisalsoknowledgeableaboutthelaborforceemployedinconstruction.Thelaborforcemayormay
notbeunionizeddependingonthesizeandlocationoftheprojects.Insomeprojects,nomemberofthework
forcebelongstoalaborunioninothercases,bothunionandnonunioncraftsmenworktogetherinwhatis
calledanopenshop,orallcraftsmenmustbeaffiliatedwithlaborunionsinaclosedshop.Sincelaborunions
providehiringhallsstaffedwithskilledjourneymanwhohavegonethroughapprenticeprogramsforthe
projectsaswellasservingascollectivebargainunits,anexperiencedgeneralcontractorwillmakegooduse
ofthebenefitsandavoidthepitfallsindealingwithorganizedlabor.

SpecialtyContractors
Specialtycontractorsincludemechanical,electrical,foundation,excavation,anddemolitioncontractors
amongothers.Theyusuallyserveassubcontractorstothegeneralcontractorofaproject.Insomecases,
legalstatutesmayrequireanownertodealwithvariousspecialtycontractorsdirectly.IntheStateofNew
York,forexample,specialtycontractors,suchasmechanicalandelectricalcontractors,arenotsubjectedto
thesupervisionofthegeneralcontractorofaconstructionprojectandmustbegivenseparateprimecontracts
onpublicworks.Withtheexceptionofsuchspecialcases,anownerwillholdthegeneralcontractor
responsiblefornegotiatingandfulfillingthecontractualagreementswiththesubcontractors.

MaterialandEquipmentSuppliers
Majormaterialsuppliersincludespecialtycontractorsinstructuralsteelfabricationanderection,sheetmetal,
readymixedconcretedelivery,reinforcingsteelbardetailers,roofing,glazingetc.Majorequipmentsuppliers
forindustrialconstructionincludemanufacturersofgenerators,boilersandpipingandotherequipment.
Manysuppliershandleonsiteinstallationtoinsurethattherequirementsandcontractualspecificationsare
met.Asmoreandlargerstructuralunitsareprefabricatedoffsite,thedistributionbetweenspecialty
contractorsandmaterialsuppliersbecomesevenlessobvious.
Backtotop

1.6FinancingofConstructedFacilities
Amajorconstructionprojectrequiresanenormousamountofcapitalthatisoftensuppliedbylenderswho
wanttobeassuredthattheprojectwillofferafairreturnontheinvestment.Thedirectcostsassociatedwith
amajorconstructionprojectmaybebroadlyclassifiedintotwocategories:(1)theconstructionexpensespaid
tothegeneralcontractorforerectingthefacilityonsiteand(2)theexpensesforlandacquisition,legalfees,
architect/engineerfees,constructionmanagementfees,interestonconstructionloansandtheopportunitycost
ofcarryingemptyspaceinthefacilityuntilitisfullyoccupied.Thedirectconstructioncostsinthefirst
categoryrepresentapproximately60to80percentofthetotalcostsinmostconstructionprojects.Sincethe
costsofconstructionareultimatelybornebytheowner,carefulfinancialplanningforthefacilitymustbe
madepriortoconstruction.

ConstructionFinancing
Constructionloanstocontractorsareusuallyprovidedbybanksorsavingsandloanassociationsfor
constructionfinancing.Uponthecompletionofthefacility,constructionloanswillbeterminatedandthe
postconstructionfacilityfinancingwillbearrangedbytheowner.
Constructionloansprovidedfordifferenttypesofconstructionvary.Inthecaseofresidentialhousing,
constructionloansandlongtermmortgagescanbeobtainedfromsavingsandloansassociationsor
commercialbanks.Forinstitutionalandcommercialbuildings,constructionloansareusuallyobtainedfrom

commercialbanks.Sincethevalueofspecializedindustrialbuildingsascollateralforloansislimited,
constructionloansinthisdomainarerare,andconstructionfinancingcanbedonefromthepoolofgeneral
corporatefunds.Forinfrastructureconstructionownedbygovernment,thepropertycannotbeusedas
securityforaprivateloan,buttherearemanypossiblewaystofinancetheconstruction,suchasgeneral
appropriationfromtaxationorspecialbondsissuedfortheproject.
Traditionally,banksserveasconstructionlendersinathreepartyagreementamongthecontractor,theowner
andthebank.Thestipulatedloanwillbepaidtothecontractoronanagreedscheduleupontheverificationof
completionofvariousportionsoftheproject.Generally,apaymentrequesttogetherwithastandardprogress
reportwillbesubmittedeachmonthbythecontractortotheownerwhichinturnsubmitsadrawrequestto
thebank.Providedthattheworktodatehasbeenperformedsatisfactorily,thedisbursementismadeonthat
basisduringtheconstructionperiod.Undersuchcircumstances,thebankhasbeenprimarilyconcernedwith
thecompletionofthefacilityontimeandwithinthebudget.Theeconomiclifeofthefacilityafterits
completionisnotaconcernbecauseofthetransferofrisktotheowneroraninstitutionallender.

FacilityFinancing
Manyprivatecorporationsmaintainapoolofgeneralfundsresultingfromretainedearningsandlongterm
borrowingonthestrengthofcorporateassets,whichcanbeusedforfacilityfinancing.Similarly,forpublic
agencies,thelongtermfundingmaybeobtainedfromthecommitmentofgeneraltaxrevenuesfromthe
federal,stateand/orlocalgovernments.Bothprivatecorporationsandpublicagenciesmayissuespecial
bondsfortheconstructedfacilitieswhichmayobtainlowerinterestratesthanotherformsofborrowing.
Shorttermborrowingmayalsobeusedforbridgingthegapsinlongtermfinancing.Somecorporatebonds
areconvertibletostocksundercircumstancesspecifiedinthebondagreement.Forpublicfacilities,the
assessmentofuserfeestorepaythebondfundsmeritsconsiderationforcertaintypesoffacilitiessuchastoll
roadsandsewagetreatmentplants.[3]Theuseofmortgagesisprimarilyconfinedtorentalpropertiessuchas
apartmentsandofficebuildings.
Becauseofthesuddensurgeofinterestratesinthelate1970's,manyfinancialinstitutionsoffer,inaddition
tothetraditionalfixedratelongtermmortgagecommitments,otherarrangementssuchasacombinationof
debtandapercentageofownershipinexchangeforalongtermmortgageortheuseofadjustablerate
mortgages.Insomecases,theconstructionloanmaybegrantedonanopenendedbasiswithoutalongterm
financingcommitment.Forexample,theplanmightbeissuedfortheconstructionperiodwithanoptionto
extenditforaperiodofuptothreeyearsinordertogivetheownermoretimetoseekalternativelongterm
financingonthecompletedfacility.Thebankwillbedrawnintosituationsinvolvingfinancialriskifit
choosestobealenderwithoutlongtermguarantees.
Forinternationalprojects,thecurrencyusedforfinancingagreementsbecomesimportant.Iffinancial
agreementsarewrittenintermsoflocalcurrencies,thenfluctuationsinthecurrencyexchangeratecan
significantlyaffectthecostandultimatelyprofitofaproject.Insomecases,paymentsmightalsobemadein
particularcommoditiessuchaspetroleumortheoutputfromthefacilityitself.Again,thesearrangements
resultingreateruncertaintyinthefinancingschemebecausethepriceofthesecommoditiesmayvary.
Backtotop

1.7LegalandRegulatoryRequirements
Theownersoffacilitiesnaturallywantlegalprotectionforalltheactivitiesinvolvedintheconstruction.Itis
equallyobviousthattheyshouldseekcompetentlegaladvice.However,therearecertainprinciplesthat
shouldberecognizedbyownersinordertoavoidunnecessarypitfalls.

LegalResponsibilities
Activitiesinconstructionofteninvolverisks,bothphysicalandfinancial.Anownergenerallytriestoshift
theriskstootherpartiestothedegreepossiblewhenenteringintocontractualagreementswiththem.
However,suchactionisnotwithoutcostorrisk.Forexample,acontractorwhoisassignedtherisksmay
eitheraskforahighercontractpricetocompensateforthehigherrisks,orendupinnonperformanceor

bankruptcyasanactofdesperation.Suchconsequencescanbeavoidediftheownerisreasonableinrisk
allocation.Whenrisksareallocatedtodifferentparties,theownermustunderstandtheimplicationsandspell
themoutclearly.Sometimestherearestatutorylimitationsontheallocationofliabilitiesamongvarious
groups,suchasprohibitionagainsttheallocationofnegligenceindesigntothecontractor.Anownermust
realizeitssuperiorpowerinbargainingandhencetheresponsibilitiesassociatedwiththispowerinmaking
contractualagreements.

MitigationofConflicts
Itisimportantfortheownertouselegalcounselorsasadvisorstomitigateconflictsbeforetheyhappen
ratherthantowieldconflictsasweaponsagainstotherparties.Thereareenoughproblemsindesignand
constructionduetouncertaintyratherthanbadintentions.Theownershouldrecognizethemoreenlightened
approachesformitigatingconflicts,suchasusingownercontrolledwrapupinsurancewhichwillprovide
protectionforallpartiesinvolvedintheconstructionprocessforunforeseenrisks,orusingarbitration,
mediationandotherextrajudicialsolutionsfordisputesamongvariousparties.However,thesecompromise
solutionsarenotwithoutpitfallsandshouldbeadoptedonlyonthemeritofindividualcases.

GovernmentRegulation
Toprotectpublicsafetyandwelfare,legislaturesandvariousgovernmentagenciesperiodicallyissue
regulationswhichinfluencetheconstructionprocess,theoperationofconstructedfacilities,andtheir
ultimatedisposal.Forexample,buildingcodespromulgatedbylocalauthoritieshaveprovidedguidelinesfor
designandconstructionpracticesforaverylongtime.Sincethe1970's,manyfederalregulationsthatare
relateddirectlyorindirectlytoconstructionhavebeenestablishedintheUnitedStates.Amongthemare
safetystandardsforworkersissuedbytheOccupationalHealthandSafetyAdministration,environmental
standardsonpollutantsandtoxicwastesissuedbytheEnvironmentalProtectionAgency,anddesignand
operationproceduresfornuclearpowerplantsissuedbytheNuclearRegulatoryCommission.
Ownersmustbeawareoftheimpactsoftheseregulationsonthecostsanddurationsofvarioustypesof
constructionprojectsaswellaspossibilitiesoflitigationduetovariouscontentions.Forexample,owners
acquiringsitesfornewconstructionmaybestrictlyliableforanyhazardouswastesalreadyonthesiteor
removedfromthesiteundertheU.S.ComprehensiveEnvironmentalResponseCompensationandLiability
(CERCL)Actof1980.Forlargescaleprojectsinvolvingnewtechnologies,theconstructioncostsoften
escalatewiththeuncertaintyassociatedwithsuchrestrictions.
Backtotop

1.8TheChangingEnvironmentoftheConstructionIndustry
Theconstructionindustryisaconglomerationofdiversefieldsandparticipantsthathavebeenloosely
lumpedtogetherasasectoroftheeconomy.Theconstructionindustryplaysacentralroleinnational
welfare,includingthedevelopmentofresidentialhousing,officebuildingsandindustrialplants,andthe
restorationofthenation'sinfrastructureandotherpublicfacilities.Theimportanceoftheconstruction
industryliesinthefunctionofitsproductswhichprovidethefoundationforindustrialproduction,andits
impactsonthenationaleconomycannotbemeasuredbythevalueofitsoutputorthenumberofpersons
employedinitsactivitiesalone.
Tobemorespecific,constructionreferstoalltypesofactivitiesusuallyassociatedwiththeerectionand
repairofimmobilefacilities.Contractconstructionconsistsofalargenumberoffirmsthatperform
constructionworkforothers,andisestimatedtobeapproximately85%ofallconstructionactivities.The
remaining15%ofconstructionisperformedbyownersofthefacilities,andisreferredtoasforceaccount
construction.AlthoughthenumberofcontractorsintheUnitedStatesexceedsamillion,over60%ofall
contractorconstructionisperformedbythetop400contractors.ThevalueofnewconstructionintheUnited
States(expressedinconstantdollars)andthevalueofconstructionasapercentageofthegrossnational
productsfrom1950to1985areshowninFigures16and17.Itcanbeseenthatconstructionisasignificant
factorintheGrossNationalProductalthoughitsimportancehasbeendeclininginrecentyears.[4]Nottobe

ignoredisthefactthatasthenation'sconstructedfacilitiesbecomeolder,thetotalexpenditureon
rehabilitationandmaintenancemayincreaserelativetothevalueofnewconstruction.

Figure16:ValueofNewConstructionintheUnitedStates,19751995

Figure17:ConstructionasPercentageofGrossDomesticProductintheUnitedStates,19751995

Ownerswhopaycloseattentiontothepeculiarcharacteristicsoftheconstructionindustryanditschanging
operatingenvironmentwillbeabletotakeadvantageofthefavorableconditionsandtoavoidthepitfalls.
Severalfactorsareparticularlynoteworthybecauseoftheirsignificantimpactsonthequality,costandtime
ofconstruction.

NewTechnologies
Inrecentyears,technologicalinnovationindesign,materialsandconstructionmethodshaveresultedin
significantchangesinconstructioncosts.Computeraidshaveimprovedcapabilitiesforgeneratingquality
designsaswellasreducingthetimerequiredtoproducealternativedesigns.Newmaterialsnotonlyhave

enhancedthequalityofconstructionbutalsohaveshortenedthetimeforshopfabricationandfielderection.
Constructionmethodshavegonethroughvariousstagesofmechanizationandautomation,includingthe
latestdevelopmentofconstructionrobotics.
ThemostdramaticnewtechnologyappliedtoconstructionhasbeentheInternetanditsprivate,corporate
Intranetversions.TheInternetiswidelyusedasameanstofostercollaborationamongprofessionalsona
project,tocommunicateforbidsandresults,andtoprocurenecessarygoodsandservices.Realtimevideo
fromspecificconstructionsitesiswidelyusedtoillustrateconstructionprogresstointerestedparties.The
resulthasbeenmoreeffectivecollaboration,communicationandprocurement.
Theeffectsofmanynewtechnologiesonconstructioncostshavebeenmixedbecauseofthehigh
developmentcostsfornewtechnologies.However,itisunmistakablethatdesignprofessionalsand
constructioncontractorswhohavenotadaptedtochangingtechnologieshavebeenforcedoutofthe
mainstreamofdesignandconstructionactivities.Ultimately,constructionqualityandcostcanbeimproved
withtheadoptionofnewtechnologieswhichareprovedtobeefficientfromboththeviewpointsof
performanceandeconomy.

LaborProductivity
Thetermproductivityisgenerallydefinedasaratiooftheproductionoutputvolumetotheinputvolumeof
resources.Sincebothoutputandinputcanbequantifiedinanumberofways,thereisnosinglemeasureof
productivitythatisuniversallyapplicable,particularlyintheconstructionindustrywheretheproductsare
oftenuniqueandthereisnostandardforspecifyingthelevelsforaggregationofdata.However,sincelabor
constitutesalargepartofthecostofconstruction,laborproductivityintermsofoutputvolume(constant
dollarvalueorfunctionalunits)perpersonhourisausefulmeasure.Laborproductivitymeasuredinthis
waydoesnotnecessarilyindicatetheefficiencyoflaboralonebutrathermeasuresthecombinedeffectsof
labor,equipmentandotherfactorscontributingtotheoutput.
Whileaggregateconstructionindustryproductivityisimportantasameasureofnationaleconomy,owners
aremoreconcernedaboutthelaborproductivityofbasicunitsofworkproducedbyvariouscraftsonsite.
Thus,anownercancomparethelaborperformanceatdifferentgeographiclocations,underdifferentworking
conditions,andfordifferenttypesandsizesofprojects.
Constructioncostsusuallyrunparalleltomaterialpricesandlaborwages.Actually,overtheyears,labor
productivityhasincreasedinsometraditionaltypesofconstructionandthusprovidesalevelingor
compensatingeffectwhenhourlyratesforlaborincreasefasterthanothercostsinconstruction.However,
laborproductivityhasbeenstagnantorevendeclinedinunconventionalorlargescaleprojects.

PublicScrutiny
UnderthepresentlitigiousclimateintheUnitedStates,thepublicisincreasinglyvocalinthescrutinyof
constructionprojectactivities.Sometimesitmayresultinconsiderabledifficultyinsitingnewfacilitiesas
wellasadditionalexpensesduringtheconstructionprocessitself.Ownersmustbepreparedtomanagesuch
crisesbeforetheygetoutofcontrol.
Figure18canservetoindicatepublicattitudestowardsthesitingofnewfacilities.Itrepresentsthe
cumulativepercentageofindividualswhowouldbewillingtoacceptanewindustrialfacilityatvarious
distancesfromtheirhomes.Forexample,overfiftypercentofthepeoplesurveyedwouldacceptatenstory
officebuildingwithinfivemilesoftheirhome,butonlytwentyfivepercentwouldacceptalargefactoryor
coalfiredpowerplantatasimilardistance.Anevenlowerpercentagewouldacceptahazardouswaste
disposalsiteoranuclearpowerplant.Evenatadistanceofonehundredmiles,asignificantfractionofthe
publicwouldbeunwillingtoaccepthazardouswastefacilitiesornuclearpowerplants.

Figure18:PublicAcceptanceTowardsNewFacilities(ReprintedfromEnvironmentalQuality1980,
theEleventhAnnualReportoftheCouncilonEnvironmentalQuality,U.S.GovernmentPrintingOffice,
Washington,DC,December1980.)

Thisobjectiontonewfacilitiesisawidespreadpublicattitude,representingconsiderableskepticismabout
theexternalbenefitsandcostswhichnewfacilitieswillimpose.Itisthispublicattitudewhichislikelyto
makepublicscrutinyandregulationacontinuingconcernfortheconstructionindustry.

InternationalCompetition
Afinaltrendwhichdeservesnoteistheincreasinglevelofinternationalcompetitionintheconstruction
industry.Ownersarelikelytofindnontraditionalfirmsbiddingforconstructionwork,particularlyonlarge
projects.SeparatebidsfromnumerousEuropean,NorthAmerican,andAsianconstructionfirmsarenot
unusual.IntheUnitedStates,overseasfirmsarebecomingincreasinglyvisibleandimportant.Inthis
environmentofheightenedcompetition,goodprojectmanagementandimprovedproductivityaremoreand
moreimportant.
Abiddingcompetitionforamajornewoffshoredrillingplatformillustratesthecompetitiveenvironmentin
construction.AsdescribedintheWallStreetJournal:[5]

Throughmostofthepostwaryears,thenation'sbiggestbuildersofoffshoreoilplatforms
enjoyedanunusuallycozyrelationshipwiththeBigOilCompaniestheyserved.Theirtop
officialsdevelopedpersonalfriendshipswithoilexecutives,entertainedthematopulenthunting
campsandwoncontractstobuildnearlyeverymajoroffshoreoilplatformintheworld....But
thissummer,thegoodoldboynetworkfellapart.Shell[OilCo.]awardedthemaincontractfor
[anew]platformtallerthanChicago'sSearsTower,fourtimesheavierthantheBrooklyn
Bridgetoatinyupstart.
Thewinningbidderarrangedoverseasfabricationoftherig,keptoverheadcostslow,andproposedanovel
assemblyprocedurebywhichconstructionequipmentwasmountedoncompletedsectionsoftheplatformin
ordertospeedthecompletionoftheentirestructure.Theresultwaslowercoststhanthoseestimatedandbid
bytraditionalfirms.
Ofcourse,U.S.firmsincludingA/Efirms,contractorsandconstructionmanagersarealsocompetingin
foreigncountries.Theirsuccessorfailureintheinternationalarenamayalsoaffecttheircapacitiesand
vitalitytoprovideservicesinthedomesticU.S.market.

ContractorFinancedProjects
Increasingly,someownerslooktocontractorsorjointventuresasaresourcetodesign,tobuildandto
financeaconstructedfacility.Forexample,autilitycompanymayseekaconsortiumconsistingofa
design/constructfirmandafinancialinvestmentfirmtoassumetotalliabilityduringconstructionand
therebyeliminatetherisksofcostescalationtoratepayers,stockholdersandthemanagement.Ontheother
hand,alocalsanitationdistrictmayseeksuchaconsortiumtoprovideprivateownershipforaproposednew
sewagetreatmentplant.Intheformercase,theownermaytakeoverthecompletedfacilityandservicethe
debtonconstructionthroughlongtermfinancingarrangementsinthelattercase,theprivateownermay
operatethecompletedfacilityandrecoveritsinvestmentthroughuserfees.Theactivitiesofjointventures
amongdesign,constructionandinvestmentfirmsaresometimesreferredtoasfinancialengineering.
Thistypeofjointventurehasbecomemoreimportantintheinternationalconstructionmarketwhere
aggressivecontractorsoftenwincontractsbyofferingamoreattractivefinancingpackageratherthan
superiortechnology.Withadeepeningshadowofinternationaldebtsinrecentyears,manydeveloping
countriesarenotinapositiontoundertakeanynewprojectwithoutcontractorbackedfinancing.Thus,the
contractorsorjointventuresinoverseasprojectsareforcedintoveryriskypositionsiftheyintendtostayin
thecompetition.

LeanConstruction
"Leanmanufacturing"hadarevolutionaryeffectonmanyindustries,especiallyautomotiveassembly
companies.Characteristicsofthisapproachinclude:
Improvementinqualityandreductionofwasteeverywhere.Ratherthanincreasingcosts,reducing
defectsandwasteprovedtoimprovequalityandreducecosts.
Empoweringworkerstoberesponsibleforsatisfyingcustomerneeds.Inconstruction,forexample,
craftsmanshouldmakesuretheirworksatisfiedthedesignintent.
Continuousimprovementofprocessesinvolvingtheentireworkforce.
Leanconstructionisintendedtospreadthesepracticeswithintheconstructionindustry.Ofcourse,well
managedconstructionprojectsalreadyhavemanyaspectsofleanconstruction.Forexample,justintime
deliveryofmaterialsiscommonplacetoavoidthewasteoflargeinventorystockpiles.Greenbuilding
projectsattempttoreuseorrecycleallconstructionwastes.Butthesystematicattentiontocontinuous
improvementandzeroaccidentsanddefectsisnew.Backtotop

1.9TheRoleofProjectManagers
Intheprojectlifecycle,themostinfluentialfactorsaffectingtheoutcomeoftheprojectoftenresideatthe
earlystages.Atthispoint,decisionsshouldbebasedoncompetenteconomicevaluationwithdue

considerationforadequatefinancing,theprevalentsocialandregulatoryenvironment,andtechnological
considerations.Architectsandengineersmightspecializeinplanning,inconstructionfieldmanagement,or
inoperation,butasprojectmanagers,theymusthavesomefamiliaritywithallsuchaspectsinorderto
understandproperlytheirroleandbeabletomakecompetentdecisions.
Sincethe1970's,manylargescaleprojectshaverunintoseriousproblemsofmanagement,suchascost
overrunsandlongscheduledelays.Actually,themanagementofmegaprojectsorsuperprojectsisnota
practicepeculiartoourtime.WitnesstheconstructionoftranscontinentalrailroadsintheCivilWareraand
theconstructionofthePanamaCanalattheturnofthiscentury.Althoughthemegaprojectsofthisgeneration
mayappearingreaterfrequencyandpresentanewsetofchallenge,theproblemsareorganizationalrather
thantechnical.AsnotedbyHardyCross:[6]
Itiscustomarytothinkofengineeringasapartofatrilogy,purescience,appliedscienceand
engineering.Itneedsemphasisthatthistrilogyisonlyoneofatriadoftrilogiesintowhich
engineeringfits.Thisfirstispurescience,appliedscienceandengineeringthesecondis
economictheory,financeandengineeringandthethirdissocialrelations,industrialrelations
andengineering.Manyengineeringproblemsareascloselyalliedtosocialproblemsastheyare
topurescience.
Asengineersadvanceprofessionally,theyoftenspendasmuchormoretimeonplanning,managementand
othereconomicorsocialproblemsasonthetraditionalengineeringdesignandanalysisproblemswhichform
thecoreofmosteducationalprograms.Itisupontheabilityofengineerstotackleallsuchproblemsthat
theirperformancewillultimatelybejudged.
Thegreateststumblingblocktoeffectivemanagementinconstructionistheinertiaandhistoricdivisions
amongplanners,designersandconstructors.Whiletechnicalcompetenceindesignandinnovationremains
thefoundationofengineeringpractice,thesocial,economicandorganizationalfactorsthatarepervasivein
influencingthesuccessandfailureofconstructionprojectsmustalsobedealtwitheffectivelybydesignand
constructionorganizations.Ofcourse,engineersarenotexpectedtoknoweverydetailofmanagement
techniques,buttheymustbeknowledgeableenoughtoanticipatetheproblemsofmanagementsothatthey
canworkharmoniouslywithprofessionalsinrelatedfieldstoovercometheinertiaandhistoricdivisions.
Paradoxically,engineerswhoarecreativeinengineeringdesignareofteninnovativeinplanningand
managementsincebothtypesofactivitiesinvolveproblemsolving.Infact,theycanreinforceeachotherif
bothareincludedintheeducationprocess,providedthatcreativityandinnovationinsteadofroutinepractice
areemphasized.Aprojectmanagerwhoiswelleducatedinthefundamentalprinciplesofengineeringdesign
andmanagementcanusefullyapplysuchprinciplesonceheorshehasacquiredbasicunderstandingofanew
applicationarea.Aprojectmanagerwhohasbeentrainedbyrotelearningforaspecifictypeofprojectmay
merelygainoneyearofexperiencerepeatedtwentytimesevenifheorshehasbeeninthefieldfortwenty
years.Abroadlyeducatedprojectmanagercanreasonablyhopetobecomealeaderintheprofessiona
narrowlytrainedprojectmanagerisoftenrelegatedtotheroleofhisorherfirstjoblevelpermanently.
Theownershavemuchatstakeinselectingacompetentprojectmanagerandinprovidingherorhimwith
theauthoritytoassumeresponsibilityatvariousstagesoftheprojectregardlessofthetypesofcontractual
agreementsforimplementingtheproject.Ofcourse,theprojectmanagermustalsopossesstheleadership
qualityandtheabilitytohandleeffectivelyintricateinterpersonalrelationshipswithinanorganization.The
ultimatetestoftheeducationandexperienceofaprojectmanagerforconstructionliesinherorhisabilityto
applyfundamentalprinciplestosolvingproblemsinthenewandunfamiliarsituationswhichhavebecome
thehallmarksofthechangingenvironmentintheconstructionindustry.
Backtotop

1.10References
1.Au,T.andC.Hendrickson,"EducationinEngineeringPlanningandManagement,"Proceedingsofthe
ASCEConferenceonCivilEngineeringEducation,Columbus,Ohio,1985.
2.Barrie,D.S.(editor),DirectionsinManagingConstruction,JohnWileyandSons,NewYork,1981.
3.LeanConstructionInstitute,http://www.leanconstruction.org/

4.Bonny,J.B.andJ.P.Frein,HandbookofConstructionManagementandOrganization,2ndEdition,
VanNostrandReinholdCo.,NewYork,1980.
5.Hasagawa,Fumioet.al.,"BuiltbyJapan,"JohnWiley&Sons,1988.
6.Lang,J.E.andD.Q.Mills,TheConstructionIndustry,LexingtonBooks,Lexington,MA,1979.
7.Walker,N.,E.N.WalkerandT.K.Rohdenburg,LegalPitfallsinArchitecture,Engineeringand
BuildingConstruction,2ndEdition,McGrawHillBookCo.,NewYork,1979.
Backtotop

1.11Footnotes
1.TheBusinessRoundtable,MoreConstructionfortheMoney,SummaryReportoftheConstruction
IndustryCostEffectivenessProject,January1983,p.11.Back
2."HotNewMarketLuresAEPlayerstoCuttingEdges,"EngineeringNewsRecord,April4,1985,pp.
3037.Back
3.SeeHendrickson,C.,"FinancingCivilWorkswithUserFees,"CivilEngineering,Vol.53,No.2,
February1983,pp.7172.Back
4.Thegraphisderivedfromdatain"ValueofNewConstructionPutinPlace,19601983",Statistical
AbstractoftheUnitedStates,105thEdition,U.S.DepartmentofCommerce,BureauofCensus,1985,
pp.722723,aswellastheinformationinearliereditions.Back
5.SeePetzinger,ThomasJr.,"Upstart'sWinningBidforOffshorePlatformStunsitsOlderRivals,"Wall
StreetJournal,p.1,c.6,Nov.20,1985.Back
6.SeeH.Cross,EngineersandIvoryTowers,McGrawHillBookCo.,Inc.,NewYork,1952.Back
TableofContents | NextChapter

GoUptoTableof
Contents
GoTo
Chapter1
(The
Owners'
Perspective)

GoTo
Chapter3
(TheDesign
and
Construction
Process)

OrganizingforProject
Management
WhatisProject
Management?
TrendsinModern
Management
StrategicPlanningand
ProjectProgramming
EffectsofProjectRisks
onOrganization
OrganizationofProject
Participants
TraditionalDesigner
ConstructorSequence
Professional
ConstructionManagement
OwnerBuilder
Operation
TurnkeyOperation
Leadershipand
MotivationfortheProject
Team
InterpersonalBehavior
inProjectOrganizations
PerceptionsofOwners
andContractors
References
Footnotes

2.OrganizingforProjectManagement
2.1WhatisProjectManagement?
Themanagementofconstructionprojectsrequiresknowledgeofmodernmanagementaswellasan
understandingofthedesignandconstructionprocess.Constructionprojectshaveaspecificsetofobjectives
andconstraintssuchasarequiredtimeframeforcompletion.Whiletherelevanttechnology,institutional
arrangementsorprocesseswilldiffer,themanagementofsuchprojectshasmuchincommonwiththe
managementofsimilartypesofprojectsinotherspecialtyortechnologydomainssuchasaerospace,
pharmaceuticalandenergydevelopments.
Generally,projectmanagementisdistinguishedfromthegeneralmanagementofcorporationsbythemission
orientednatureofaproject.Aprojectorganizationwillgenerallybeterminatedwhenthemissionis
accomplished.AccordingtotheProjectManagementInstitute,thedisciplineofprojectmanagementcanbe
definedasfollows:[1]

Projectmanagementistheartofdirectingandcoordinatinghumanandmaterialresources
throughoutthelifeofaprojectbyusingmodernmanagementtechniquestoachieve
predeterminedobjectivesofscope,cost,time,qualityandparticipationsatisfaction.
Bycontrast,thegeneralmanagementofbusinessandindustrialcorporationsassumesabroaderoutlookwith
greatercontinuityofoperations.Nevertheless,therearesufficientsimilaritiesaswellasdifferencesbetween
thetwosothatmodernmanagementtechniquesdevelopedforgeneralmanagementmaybeadaptedforproject
management.
Thebasicingredientsforaprojectmanagementframework[2]mayberepresentedschematicallyinFigure2
1.Aworkingknowledgeofgeneralmanagementandfamiliaritywiththespecialknowledgedomainrelatedto
theprojectareindispensable.Supportingdisciplinessuchascomputerscienceanddecisionsciencemayalso
playanimportantrole.Infact,modernmanagementpracticesandvariousspecialknowledgedomainshave
absorbedvarioustechniquesortoolswhichwereonceidentifiedonlywiththesupportingdisciplines.For
example,computerbasedinformationsystemsanddecisionsupportsystemsarenowcommonplacetoolsfor
generalmanagement.Similarly,manyoperationsresearchtechniquessuchaslinearprogrammingandnetwork
analysisarenowwidelyusedinmanyknowledgeorapplicationdomains.Hence,therepresentationinFigure
21reflectsonlythesourcesfromwhichtheprojectmanagementframeworkevolves.

Figure21:BasicIngredientsinProjectManagement
Specifically,projectmanagementinconstructionencompassesasetofobjectiveswhichmaybeaccomplished
byimplementingaseriesofoperationssubjecttoresourceconstraints.Therearepotentialconflictsbetween
thestatedobjectiveswithregardtoscope,cost,timeandquality,andtheconstraintsimposedonhuman
materialandfinancialresources.Theseconflictsshouldberesolvedattheonsetofaprojectbymakingthe
necessarytradeoffsorcreatingnewalternatives.Subsequently,thefunctionsofprojectmanagementfor
constructiongenerallyincludethefollowing:
1.Specificationofprojectobjectivesandplansincludingdelineationofscope,budgeting,scheduling,
settingperformancerequirements,andselectingprojectparticipants.
2.Maximizationofefficientresourceutilizationthroughprocurementoflabor,materialsandequipment
accordingtotheprescribedscheduleandplan.
3.Implementationofvariousoperationsthroughpropercoordinationandcontrolofplanning,design,
estimating,contractingandconstructionintheentireprocess.
4.Developmentofeffectivecommunicationsandmechanismsforresolvingconflictsamongthevarious
participants.
TheProjectManagementInstitutefocusesonninedistinctareasrequiringprojectmanagerknowledgeand
attention:
1.Projectintegrationmanagementtoensurethatthevariousprojectelementsareeffectivelycoordinated.

2.Projectscopemanagementtoensurethatalltheworkrequired(andonlytherequiredwork)isincluded.
3.Projecttimemanagementtoprovideaneffectiveprojectschedule.
4.Projectcostmanagementtoidentifyneededresourcesandmaintainbudgetcontrol.
5.Projectqualitymanagementtoensurefunctionalrequirementsaremet.
6.Projecthumanresourcemanagementtodevelopmentandeffectivelyemployprojectpersonnel.
7.Projectcommunicationsmanagementtoensureeffectiveinternalandexternalcommunications.
8.Projectriskmanagementtoanalyzeandmitigatepotentialrisks.
9.Projectprocurementmanagementtoobtainnecessaryresourcesfromexternalsources.
ThesenineareasformthebasisoftheProjectManagementInstitute'scertificationprogramforproject
managersinanyindustry.Backtotop

2.2TrendsinModernManagement
Inrecentyears,majordevelopmentsinmanagementreflecttheacceptancetovariousdegreesofthefollowing
elements:(1)themanagementprocessapproach,(2)themanagementscienceanddecisionsupportapproach,
(3)thebehavioralscienceapproachforhumanresourcedevelopment,and(4)sustainablecompetitive
advantage.Thesefourapproachescomplementeachotherincurrentpractice,andprovideauseful
groundworkforprojectmanagement.
Themanagementprocessapproachemphasizesthesystematicstudyofmanagementbyidentifying
managementfunctionsinanorganizationandthenexaminingeachindetail.Thereisgeneralagreement
regardingthefunctionsofplanning,organizingandcontrolling.Amajortenetisthatbyanalyzing
managementalongfunctionallines,aframeworkcanbeconstructedintowhichallnewmanagementactivities
canbeplaced.Thus,themanager'sjobisregardedascoordinatingaprocessofinterrelatedfunctions,which
areneithertotallyrandomnorrigidlypredetermined,butaredynamicastheprocessevolves.Anothertenetis
thatmanagementprinciplescanbederivedfromanintellectualanalysisofmanagementfunctions.Bydividing
themanager'sjobintofunctionalcomponents,principlesbaseduponeachfunctioncanbeextracted.Hence,
managementfunctionscanbeorganizedintoahierarchicalstructuredesignedtoimproveoperational
efficiency,suchastheexampleoftheorganizationforamanufacturingcompanyshowninFigure22.The
basicmanagementfunctionsareperformedbyallmanagers,regardlessofenterprise,activityorhierarchical
levels.Finally,thedevelopmentofamanagementphilosophyresultsinhelpingthemanagertoestablish
relationshipsbetweenhumanandmaterialresources.Theoutcomeoffollowinganestablishedphilosophyof
operationhelpsthemanagerwinthesupportofthesubordinatesinachievingorganizationalobjectives.

Figure22:IllustrativeHierarchicalStructureofManagementFunctions
Themanagementscienceanddecisionsupportapproachcontributestothedevelopmentofabodyof
quantitativemethodsdesignedtoaidmanagersinmakingcomplexdecisionsrelatedtooperationsand
production.Indecisionsupportsystems,emphasisisplacedonprovidingmanagerswithrelevantinformation.
Inmanagementscience,agreatdealofattentionisgiventodefiningobjectivesandconstraints,andto
constructingmathematicalanalysismodelsinsolvingcomplexproblemsofinventory,materialsand
productioncontrol,amongothers.Atopicofmajorinterestinmanagementscienceisthemaximizationof
profit,orintheabsenceofaworkablemodelfortheoperationoftheentiresystem,thesuboptimizationofthe
operationsofitscomponents.Theoptimizationorsuboptimizationisoftenachievedbytheuseofoperations
researchtechniques,suchaslinearprogramming,quadraticprogramming,graphtheory,queuingtheoryand
MonteCarlosimulation.Inadditiontotheincreasinguseofcomputersaccompaniedbythedevelopmentof
sophisticatedmathematicalmodelsandinformationsystems,managementscienceanddecisionsupport
systemshaveplayedanimportantrolebylookingmorecarefullyatprobleminputsandrelationshipsandby
promotinggoalformulationandmeasurementofperformance.Artificialintelligencehasalsobeguntobe
appliedtoprovidedecisionsupportsystemsforsolvingillstructuredproblemsinmanagement.
Thebehavioralscienceapproachforhumanresourcedevelopmentisimportantbecausemanagemententails
gettingthingsdonethroughtheactionsofpeople.Aneffectivemanagermustunderstandtheimportanceof
humanfactorssuchasneeds,drives,motivation,leadership,personality,behavior,andworkgroups.Within
thiscontext,someplacemoreemphasisoninterpersonalbehaviorwhichfocusesontheindividualandhis/her
motivationsasasociopsychologicalbeingothersemphasizemoregroupbehaviorinrecognitionofthe
organizedenterpriseasasocialorganism,subjecttoalltheattitudes,habits,pressuresandconflictsofthe
culturalenvironmentofpeople.Themajorcontributionsmadebythebehavioralscientiststothefieldof
managementinclude:(1)theformulationofconceptsandexplanationsaboutindividualandgroupbehaviorin
theorganization,(2)theempiricaltestingoftheseconceptsmethodicallyinmanydifferentexperimentaland
fieldsettings,and(3)theestablishmentofactualmanagerialpoliciesanddecisionsforoperationbasedonthe
conceptualandmethodicalframeworks.
Sustainablecompetitiveadvantagestemsprimarilyfromgoodmanagementstrategy.AsMichaelPorterofthe
HarvardBusinessSchoolargues:
Strategyiscreatingfitamongacompany'sactivities.Thesuccessofastrategydependsondoing
manythingswellnotjustafewandintegratingamongthem.Ifthereisnofitamongactivites,
thereisnodistinctivestrategyandlittlesustainability.

Inthisview,successfulfirmsmustimproveandalignthemanyprocessesunderwaytotheirstrategicvision.
Strategicpositioninginthisfashionrequires:
Creatingauniqueandvaluableposition.
Makingtradeoffscomparedtocompetitors
Creatinga"fit"amongacompany'sactivities.
Projectmanagersshouldbeawareofthestrategicpositionoftheirownorganizationandtheother
organizationsinvolvedintheproject.Theprojectmanagerfacesthedifficulttaskoftryingtoalignthegoals
andstrategiesofthesevariousorganizationstoaccomplishtheprojectgoals.Forexample,theownerofan
industrialprojectmaydefineastrategicgoalasbeingfirsttomarketwithnewproducts.Inthiscase,facilities
developmentmustbeorientedtofasttrack,rapidconstruction.Asanotherexample,acontractingfirmmay
seetheirstrategicadvantageinnewtechnologiesandemphasizeprofitopportunitiesfromvalueengineering
(asdescribedinChapter3).
Backtotop

2.3StrategicPlanningandProjectProgramming
Theprogrammingofcapitalprojectsisshapedbythestrategicplanofanorganization,whichisinfluencedby
marketdemandsandresourcesconstraints.Theprogrammingprocessassociatedwithplanningandfeasibility
studiessetstheprioritiesandtimingforinitiatingvariousprojectstomeettheoverallobjectivesofthe
organizations.However,oncethisdecisionismadetoinitiateaproject,marketpressuremaydictateearlyand
timelycompletionofthefacility.
Amongvarioustypesofconstruction,theinfluenceofmarketpressureonthetimingofinitiatingafacilityis
mostobviousinindustrialconstruction.[3]Demandforanindustrialproductmaybeshortlived,andifa
companydoesnothitthemarketfirst,theremaynotbedemandforitsproductlater.Withintensive
competitionfornationalandinternationalmarkets,thetrendofindustrialconstructionmovestowardshorter
projectlifecycles,particularlyintechnologyintensiveindustries.
Inordertogaintime,someownersarewillingtoforegothoroughplanningandfeasibilitystudysoasto
proceedonaprojectwithinadequatedefinitionoftheprojectscope.Invariably,subsequentchangesinproject
scopewillincreaseconstructioncostshowever,profitsderivedfromearlierfacilityoperationoftenjustifythe
increaseinconstructioncosts.Generally,iftheownercanderivereasonableprofitsfromtheoperationofa
completedfacility,theprojectisconsideredasuccessevenifconstructioncostsfarexceedtheestimatebased
onaninadequatescopedefinition.Thisattitudemaybeattributedinlargeparttotheuncertaintiesinherentin
constructionprojects.Itisdifficulttoarguethatprofitsmightbeevenhigherifconstructioncostscouldbe
reducedwithoutincreasingtheprojectduration.However,someprojects,notablysomenuclearpowerplants,
areclearlyunsuccessfulandabandonedbeforecompletion,andtheirdemisemustbeattributedatleastinpart
toinadequateplanningandpoorfeasibilitystudies.
Theownerorfacilitysponsorholdsthekeytoinfluencetheconstructioncostsofaprojectbecauseany
decisionmadeatthebeginningstageofaprojectlifecyclehasfargreaterinfluencethanthosemadeatlater
stages,asshownschematicallyinFigure23.Moreover,thedesignandconstructiondecisionswillinfluence
thecontinuingoperatingcostsand,inmanycases,therevenuesoverthefacilitylifetime.Therefore,anowner
shouldobtaintheexpertiseofprofessionalstoprovideadequateplanningandfeasibilitystudies.Manyowners
donotmaintainaninhouseengineeringandconstructionmanagementcapability,andtheyshouldconsider
theestablishmentofanongoingrelationshipwithoutsideconsultantsinordertorespondquicklytorequests.
Evenamongthoseownerswhomaintainengineeringandconstructiondivisions,manytreatthesedivisionsas
reimbursable,independentorganizations.Suchanarrangementshouldnotdiscouragetheirlegitimateuseas
falseeconomiesinreimbursablecostsfromsuchdivisionscanindeedbeverycostlytotheoverall
organization.

Figure23:AbilitytoInfluenceConstructionCostOverTime
Finally,theinitiationandexecutionofcapitalprojectsplacesdemandsontheresourcesoftheownerandthe
professionalsandcontractorstobeengagedbytheowner.Forverylargeprojects,itmaybidupthepriceof
engineeringservicesaswellasthecostsofmaterialsandequipmentandthecontractpricesofalltypes.
Consequently,suchfactorsshouldbetakenintoconsiderationindeterminingthetimingofaproject.
Example21:Settingprioritiesforprojects
Adepartmentstoreplannedtoexpanditsoperationbyacquiring20acresoflandinthesoutheast
ofametropolitanareawhichconsistsofwellestablishedsuburbsformiddleincomefamilies.An
architectural/engineering(A/E)firmwasengagedtodesignashoppingcenteronthe20acreplot
withthedepartmentstoreasitsflagshipplusalargenumberofstorefrontsfortenants.Oneyear
later,thedepartmentstoreownerpurchased2,000acresoffarmlandinthenorthwestoutskirtsof
thesamemetropolitanareaanddesignated20acresofthislandforashoppingcenter.TheA/E
firmwasagainengagedtodesignashoppingcenteratthisnewlocation.
TheA/Efirmwaskeptcompletelyinthedarkwhiletheassemblageofthe2,000acresoflandin
thenorthwestquietlytookplace.Whentheplansandspecificationsforthesoutheastshopping
centerwerecompleted,theownerinformedtheA/Efirmthatitwouldnotproceedwiththe
constructionofthesoutheastshoppingcenterforthetimebeing.Instead,theownerurgedtheA/E
firmtoproduceanewsetofsimilarplansandspecificationsforthenorthwestshoppingcenteras
soonaspossible,evenatthesacrificeofcostsavingmeasures.Whentheplansandspecifications
forthenorthwestshoppingcenterwereready,theownerimmediatelyauthorizeditsconstruction.
However,ittookanotherthreeyearsbeforethesoutheastshoppingcenterwasfinallybuilt.
Thereasonbehindthechangeofplanwasthattheownerdiscoveredtheavailabilityofthefarm
landinthenorthwestwhichcouldbedevelopedintoresidentialrealestatepropertiesforupper
middleincomefamilies.Theimmediateconstructionofthenorthwestshoppingcenterwould
makethelanddevelopmentparcelsmoreattractivetohomebuyers.Thus,theownerwasableto
recoupenoughcashflowinthreeyearstoconstructthesoutheastshoppingcenterinadditionto
financingtheconstructionofthenortheastshoppingcenter,aswellasthelanddevelopmentinits
vicinity.

Whiletheownerdidnotwanttheconstructioncostofthenorthwestshoppingcentertorunwild,
itapparentlywassatisfiedwiththecostestimatebasedonthedetailedplansofthesoutheast
shoppingcenter.Thus,theownerhadageneralideaofwhattheconstructioncostofthenorthwest
shoppingcenterwouldbe,anddidnotwishtowaitforamorerefinedcostestimateuntilthe
detailedplansforthatcenterwereready.Totheowner,thetimelinessofcompletingthe
constructionofthenorthwestshoppingcenterwasfarmoreimportantthanreducingthe
constructioncostinfulfillingitsinvestmentobjectives.
Example22:ResourceConstraintsforMegaProjects
Amajorproblemwithmegaprojectsistheseverestrainplacedontheenvironment,particularly
ontheresourcesintheimmediateareaofaconstructionproject."Mega"or"macro"projects
involveconstructionofverylargefacilitiessuchastheAlaskapipelineconstructedinthe1970's
orthePanamaCanalconstructedinthe1900's.Thelimitationsinsomeorallofthebasic
elementsrequiredforthesuccessfulcompletionofamegaprojectinclude:
engineeringdesignprofessionalstoprovidesufficientmanpowertocompletethedesign
withinareasonabletimelimit.
constructionsupervisorswithcapacityandexperiencetodirectlargeprojects.
thenumberofconstructionworkerswithproperskillstodothework.
themarkettosupplymaterialsinsufficientquantitiesandofrequiredqualityontime.
theabilityofthelocalinfrastructuretosupportthelargenumberofworkersoveran
extendedperiodoftime,includinghousing,transportationandotherservices.
Tocompoundtheproblem,megaprojectsareoftenconstructedinremoteenvironmentsaway
frommajorpopulationcentersandsubjecttosevereclimateconditions.Consequently,special
featuresofeachmegaprojectmustbeevaluatedcarefully.
Backtotop

2.4EffectsofProjectRisksonOrganization
Theuncertaintyinundertakingaconstructionprojectcomesfrommanysourcesandofteninvolvesmany
participantsintheproject.Sinceeachparticipanttriestominimizeitsownrisk,theconflictsamongvarious
participantscanbedetrimentaltotheproject.Onlytheownerhasthepowertomoderatesuchconflictsasit
aloneholdsthekeytoriskassignmentthroughpropercontractualrelationswithotherparticipants.Failureto
recognizethisresponsibilitybytheowneroftenleadstoundesirableresults.Inrecentyears,theconceptof
"risksharing/riskassignment"contractshasgainedacceptancebythefederalgovernment.[4]Sincethistype
ofcontractacknowledgestheresponsibilitiesoftheowners,thecontractpricesareexpectedtobelowerthan
thoseinwhichallrisksareassignedtocontractors.
Inapproachingtheproblemofuncertainty,itisimportanttorecognizethatincentivesmustbeprovidedifany
oftheparticipantsisexpectedtotakeagreaterrisk.Thewillingnessofaparticipanttoacceptrisksoften
reflectstheprofessionalcompetenceofthatparticipantaswellasitspropensitytorisk.However,society's
perceptionofthepotentialliabilitiesoftheparticipantcanaffecttheattitudeofrisktakingforallparticipants.
Whenaclaimismadeagainstoneoftheparticipants,itisdifficultforthepublictoknowwhetherafraudhas
beencommitted,orsimplythatanaccidenthasoccurred.
Risksinconstructionprojectsmaybeclassifiedinanumberofways.[5]Oneformofclassificationisas
follows:
1.Socioeconomicfactors
Environmentalprotection
Publicsafetyregulation
Economicinstability
Exchangeratefluctuation
2.Organizationalrelationships
Contractualrelations

Attitudesofparticipants
Communication
3.Technologicalproblems
Designassumptions
Siteconditions
Constructionprocedures
Constructionoccupationalsafety
Theenvironmentalprotectionmovementhascontributedtotheuncertaintyforconstructionbecauseofthe
inabilitytoknowwhatwillberequiredandhowlongitwilltaketoobtainapprovalfromtheregulatory
agencies.Therequirementsofcontinuedreevaluationofproblemsandthelackofdefinitivecriteriawhichare
practicalhavealsoresultedinaddedcosts.Publicsafetyregulationshavesimilareffects,whichhavebeen
mostnoticeableintheenergyfieldinvolvingnuclearpowerplantsandcoalmining.Thesituationhascreated
constantlyshiftingguidelinesforengineers,constructorsandownersasprojectsmovethroughthestagesof
planningtoconstruction.Thesemovingtargetsaddasignificantnewdimensionofuncertaintywhichcan
makeitvirtuallyimpossibletoscheduleandcompleteworkatbudgetedcost.Economicconditionsofthepast
decadehavefurtherreinforcedtheclimateofuncertaintywithhighinflationandinterestrates.The
deregulationoffinancialinstitutionshasalsogeneratedunanticipatedproblemsrelatedtothefinancingof
construction.
Uncertaintystemmingfromregulatoryagencies,environmentalissuesandfinancialaspectsofconstruction
shouldbeatleastmitigatedorideallyeliminated.Ownersarekeenlyinterestedinachievingsomeformof
breakthroughthatwilllowerthecostsofprojectsandmitigateoreliminatelengthydelays.Such
breakthroughsareseldomplanned.Generally,theyhappenwhentherightconditionsexist,suchaswhen
innovationispermittedorwhenabasisforincentiveorrewardexists.However,thereisalongwaytogo
beforeatruepartnershipofallpartiesinvolvedcanbeforged.
Duringperiodsofeconomicexpansion,majorcapitalexpendituresaremadebyindustriesandbidupthecost
ofconstruction.Inordertocontrolcosts,someownersattempttousefixedpricecontractssothattherisksof
unforeseencontingenciesrelatedtoanoverheatedeconomyarepassedontocontractors.However,contractors
willraisetheirpricestocompensatefortheadditionalrisks.
Therisksrelatedtoorganizationalrelationshipsmayappeartobeunnecessarybutarequitereal.Strained
relationshipsmaydevelopbetweenvariousorganizationsinvolvedinthedesign/constructprocess.When
problemsoccur,discussionsoftencenteronresponsibilitiesratherthanprojectneedsatatimewhenthefocus
shouldbeonsolvingtheproblems.Cooperationandcommunicationbetweenthepartiesarediscouragedfor
fearoftheeffectsofimpendinglitigation.Thisbarriertocommunicationresultsfromtheillconceivednotion
thatuncertaintiesresultingfromtechnologicalproblemscanbeeliminatedbyappropriatecontractterms.The
netresulthasbeenanincreaseinthecostsofconstructedfacilities.
Therisksrelatedtotechnologicalproblemsarefamiliartothedesign/constructprofessionswhichhavesome
degreeofcontroloverthiscategory.However,becauseofrapidadvancesinnewtechnologieswhichpresent
newproblemstodesignersandconstructors,technologicalriskhasbecomegreaterinmanyinstances.Certain
designassumptionswhichhaveservedtheprofessionswellinthepastmaybecomeobsoleteindealingwith
newtypesoffacilitieswhichmayhavegreatercomplexityorscaleorboth.Siteconditions,particularly
subsurfaceconditionswhichalwayspresentsomedegreeofuncertainty,cancreateanevengreaterdegreeof
uncertaintyforfacilitieswithheretoforeunknowncharacteristicsduringoperation.Becauseconstruction
proceduresmaynothavebeenfullyanticipated,thedesignmayhavetobemodifiedafterconstructionhas
begun.Anexampleoffacilitieswhichhaveencounteredsuchuncertaintyisthenuclearpowerplant,andmany
owners,designersandcontractorshavesufferedforundertakingsuchprojects.
Ifeachoftheproblemscitedabovecancauseuncertainty,thecombinationofsuchproblemsisoftenregarded
byallpartiesasbeingoutofcontrolandinherentlyrisky.Thus,theissueofliabilityhastakenonmajor
proportionsandhasinfluencedthepracticesofengineersandconstructors,whointurnhaveinfluencedthe
actionsoftheowners.
Manyownershavebeguntounderstandtheproblemsofrisksandareseekingtoaddresssomeofthese
problems.Forexample,someownersareturningtothoseorganizationsthatoffercompletecapabilitiesin
planning,design,andconstruction,andtendtoavoidbreakingtheprojectintomajorcomponentstobe

undertakenindividuallybyspecialtyparticipants.Propercoordinationthroughouttheprojectdurationand
goodorganizationalcommunicationcanavoiddelaysandcostsresultingfromfragmentationofservices,even
thoughthecomponentsfromvariousservicesareeventuallyintegrated.
Attitudesofcooperationcanbereadilyappliedtotheprivatesector,butonlyinspecialcircumstancescanthey
beappliedtothepublicsector.Theabilitytodealwithcomplexissuesisoftenprecludedinthecompetitive
biddingwhichisusuallyrequiredinthepublicsector.Thesituationbecomesmoredifficultwiththe
proliferationofregulatoryrequirementsandresultingdelaysindesignandconstructionwhileawaiting
approvalsfromgovernmentofficialswhodonotparticipateintherisksoftheproject.
Backtotop

2.5OrganizationofProjectParticipants
Thetopmanagementoftheownersetstheoverallpolicyandselectstheappropriateorganizationtotake
chargeofaproposedproject.Itspolicywilldictatehowtheprojectlifecycleisdividedamongorganizations
andwhichprofessionalsshouldbeengaged.Decisionsbythetopmanagementoftheownerwillalsoinfluence
theorganizationtobeadoptedforprojectmanagement.Ingeneral,therearemanywaystodecomposea
projectintostages.Themosttypicalwaysare:
Sequentialprocessingwherebytheprojectisdividedintoseparatestagesandeachstageiscarriedout
successivelyinsequence.
Parallelprocessingwherebytheprojectisdividedintoindependentpartssuchthatallstagesarecarried
outsimultaneously.
Staggeredprocessingwherebythestagesmaybeoverlapping,suchastheuseofphaseddesign
constructproceduresforfasttrackoperation.
Itshouldbepointedoutthatsomedecompositionsmayworkoutbetterthanothers,dependingonthe
circumstances.Inanycase,theprevalenceofdecompositionmakesthesubsequentintegrationparticularly
important.Thecriticalissuesinvolvedinorganizationforprojectmanagementare:
Howmanyorganizationsareinvolved?
Whataretherelationshipsamongtheorganizations?
Whenarethevariousorganizationsbroughtintotheproject?
Therearetwobasicapproachestoorganizeforprojectimplementation,eventhoughmanyvariationsmay
existasaresultofdifferentcontractualrelationshipsadoptedbytheownerandbuilder.Thesebasic
approachesaredividedalongthefollowinglines:
1.Separationoforganizations.Numerousorganizationsserveasconsultantsorcontractorstotheowner,
withdifferentorganizationshandlingdesignandconstructionfunctions.Typicalexampleswhich
involvedifferentdegreesofseparationare:
Traditionalsequenceofdesignandconstruction
Professionalconstructionmanagement
2.Integrationoforganizations.Asingleorjointventureconsistingofanumberoforganizationswitha
singlecommandundertakesbothdesignandconstructionfunctions.Twoextremesmaybecitedas
examples:
Ownerbuilderoperationinwhichallworkwillbehandledinhousebyforceaccount.
Turnkeyoperationinwhichallworkiscontractedtoavendorwhichisresponsiblefordelivering
thecompletedproject
Sinceconstructionprojectsmaybemanagedbyaspectrumofparticipantsinavarietyofcombinations,the
organizationforthemanagementofsuchprojectsmayvaryfromcasetocase.Ononeextreme,eachproject
maybestaffedbyexistingpersonnelinthefunctionaldivisionsoftheorganizationonanadhocbasisas
showninFigure24untiltheprojectiscompleted.Thisarrangementisreferredtoasthematrixorganization
aseachprojectmanagermustnegotiateallresourcesfortheprojectfromtheexistingorganizational
framework.Ontheotherhand,theorganizationmayconsistofasmallcentralfunctionalstaffforthe
exclusivepurposeofsupportingvariousprojects,eachofwhichhasitsfunctionaldivisionsasshowninFigure

25.Thisdecentralizedsetupisreferredtoastheprojectorientedorganizationaseachprojectmanagerhas
autonomyinmanagingtheproject.Therearemanyvariationsofmanagementstylebetweenthesetwo
extremes,dependingontheobjectivesoftheorganizationandthenatureoftheconstructionproject.For
example,alargechemicalcompanywithinhousestaffforplanning,designandconstructionoffacilitiesfor
newproductlineswillnaturallyadoptthematrixorganization.Ontheotherhand,aconstructioncompany
whoseexistencedependsentirelyonthemanagementofcertaintypesofconstructionprojectsmayfindthe
projectorientedorganizationparticularlyattractive.Whileorganizationsmaydiffer,thesamebasicprinciples
ofmanagementstructureareapplicabletomostsituations.

Figure24:AMatrixOrganization

Figure25:AProjectOrientedOrganization
Toillustratevarioustypesoforganizationsforprojectmanagement,weshallconsidertwoexamples,thefirst
onerepresentinganownerorganizationwhilethesecondonerepresentingtheorganizationofaconstruction
managementconsultantunderthedirectsupervisionoftheowner.
Example23:MatrixOrganizationofanEngineeringDivision

TheEngineeringDivisionofanElectricPowerandLightCompanyhasfunctionaldepartmentsas
showninFigure26.Whensmallscaleprojectssuchastheadditionofatransmissiontowerora
substationareauthorized,amatrixorganizationisusedtocarryoutsuchprojects.Forexample,
inthedesignofatransmissiontower,theprofessionalskillofastructuralengineerismost
important.Consequently,theleaderoftheprojectteamwillbeselectedfromtheStructural
EngineeringDepartmentwhiletheremainingteammembersareselectedfromalldepartmentsas
dictatedbythemanpowerrequirements.Ontheotherhand,inthedesignofanewsubstation,the
professionalskillofanelectricalengineerismostimportant.Hence,theleaderoftheprojectteam
willbeselectedfromtheElectricalEngineeringDepartment.

Figure26:TheMatrixOrganizationinanEngineeringDivision
Example24:ExampleofConstructionManagementConsultantOrganization
WhenthesameElectricPowerandLightCompanyinthepreviousexampledecidedtobuilda
newnuclearpowerplant,itengagedaconstructionmanagementconsultanttotakechargeofthe
designandconstructioncompletely.However,thecompanyalsoassignedaprojectteamto
coordinatewiththeconstructionmanagementconsultantasshowninFigure27.

Figure27:CoordinationbetweenOwnerandConsultant
Sincethecompanyeventuallywilloperatethepowerplantuponitscompletion,itishighly
importantforitsstafftomonitorthedesignandconstructionoftheplant.Suchcoordination
allowstheownernotonlytoassurethequalityofconstructionbutalsotobefamiliarwiththe
designtofacilitatefutureoperationandmaintenance.Notetheclosedirectrelationshipsof
variousdepartmentsoftheownerandtheconsultant.Sincetheprojectwilllastformanyyears
beforeitscompletion,thestaffmembersassignedtotheprojectteamarenotexpectedtorejoin
theEngineeringDepartmentbutwillprobablybeinvolvedinthefutureoperationofthenew
plant.Thus,theprojectteamcanactindependentlytowarditsdesignatedmission.
Backtotop

2.6TraditionalDesignerConstructorSequence
Forordinaryprojectsofmoderatesizeandcomplexity,theowneroftenemploysadesigner(an
architectural/engineeringfirm)whichpreparesthedetailedplansandspecificationsfortheconstructor(a
generalcontractor).Thedesigneralsoactsonbehalfoftheownertooverseetheprojectimplementation
duringconstruction.Thegeneralcontractorisresponsiblefortheconstructionitselfeventhoughtheworkmay
actuallybeundertakenbyanumberofspecialtysubcontractors.
Theownerusuallynegotiatesthefeeforservicewiththearchitectural/engineering(A/E)firm.Inadditionto
theresponsibilitiesofdesigningthefacility,theA/Efirmalsoexercisestosomedegreesupervisionofthe
constructionasstipulatedbytheowner.Traditionally,theA/Efirmregardsitselfasdesignprofessionals
representingtheownerwhoshouldnotcommunicatewithpotentialcontractorstoavoidcollusionorconflict
ofinterest.FieldinspectorsworkingforanA/Efirmusuallyfollowthroughtheimplementationofaproject
afterthedesigniscompletedandseldomhaveextensiveinputinthedesignitself.Becauseofthelitigation
climateinthelasttwodecades,mostA/Efirmsonlyprovideobserversratherthaninspectorsinthefield.Even
theshopdrawingsoffabricationorconstructionschemessubmittedbythecontractorsforapprovalare
reviewedwithadisclaimerofresponsibilitybytheA/Efirms.

Theownermayselectageneralconstructoreitherthroughcompetitivebiddingorthroughnegotiation.Public
agenciesarerequiredtousethecompetitivebiddingmode,whileprivateorganizationsmaychooseeither
modeofoperation.Inusingcompetitivebidding,theownerisforcedtousethedesignerconstructorsequence
sincedetailedplansandspecificationsmustbereadybeforeinvitingbidderstosubmittheirbids.Iftheowner
choosestouseanegotiatedcontract,itisfreetousephasedconstructionifitsodesires.
Thegeneralcontractormaychoosetoperformallorpartoftheconstructionwork,oractonlyasamanagerby
subcontractingalltheconstructiontosubcontractors.Thegeneralcontractormayalsoselectthesubcontractors
throughcompetitivebiddingornegotiatedcontracts.Thegeneralcontractormayaskanumberof
subcontractorstoquotepricesforthesubcontractsbeforesubmittingitsbidtotheowner.However,the
subcontractorsoftencannotforcethewinninggeneralcontractortousethemontheproject.Thissituation
mayleadtopracticesknownasbidshoppingandbidpeddling.Bidshoppingreferstothesituationwhenthe
generalcontractorapproachessubcontractorsotherthanthosewhosequotedpriceswereusedinthewinning
contractinordertoseeklowerpricedsubcontracts.Bidpeddlingreferstotheactionsofsubcontractorswho
offerlowerpricedsubcontractstothewinninggeneralsubcontractorsinordertodislodgethesubcontractors
whooriginallyquotedpricestothegeneralcontractorpriortoitsbidsubmittal.Inbothcases,thequalityof
constructionmaybesacrificed,andsomestatestatutesforbidthesepracticesforpublicprojects.
Althoughthedesignerconstructorsequenceisstillwidelyusedbecauseofthepublicperceptionoffairnessin
competitivebidding,manyprivateownersrecognizethedisadvantagesofusingthisapproachwhenthe
projectislargeandcomplexandwhenmarketpressuresrequireashorterprojectdurationthanthatwhichcan
beaccomplishedbyusingthistraditionalmethod.
Backtotop

2.7ProfessionalConstructionManagement
Professionalconstructionmanagementreferstoaprojectmanagementteamconsistingofaprofessional
constructionmanagerandotherparticipantswhowillcarryoutthetasksofprojectplanning,designand
constructioninanintegratedmanner.Contractualrelationshipsamongmembersoftheteamareintendedto
minimizeadversarialrelationshipsandcontributetogreaterresponsewithinthemanagementgroup.A
professionalconstructionmanagerisafirmspecializedinthepracticeofprofessionalconstruction
managementwhichincludes:
WorkwithownerandtheA/Efirmsfromthebeginningandmakerecommendationsondesign
improvements,constructiontechnology,schedulesandconstructioneconomy.
Proposedesignandconstructionalternativesifappropriate,andanalyzetheeffectsofthealternativeson
theprojectcostandschedule.
Monitorsubsequentdevelopmentoftheprojectinorderthatthesetargetsarenotexceededwithoutthe
knowledgeoftheowner.
Coordinateprocurementofmaterialandequipmentandtheworkofallconstructioncontractors,and
monthlypaymentstocontractors,changes,claimsandinspectionforconformingdesignrequirements.
Performotherprojectrelatedservicesasrequiredbyowners.
Professionalconstructionmanagementisusuallyusedwhenaprojectisverylargeorcomplex.The
organizationalfeaturesthatarecharacteristicsofmegaprojectscanbesummarizedasfollows:[6]
Theoverallorganizationalapproachfortheprojectwillchangeastheprojectadvances.The
"functional"organizationmaychangetoa"matrix"whichmaychangetoa"project"organization(not
necessarilyinthisorder).
Withintheoverallorganization,therewillprobablybefunctional,project,andmatrixsuborganizations
allatthesametime.Thisfeaturegreatlycomplicatesthetheoryandthepracticeofmanagement,yetis
essentialforoverallcosteffectiveness.
Successfulgiant,complexorganizationsusuallyhaveastrongmatrixtypesuborganizationatthelevel
wherebasiccostandschedulecontrolresponsibilityisassigned.Thissuborganizationisreferredtoasa
"costcenter"orasa"project"andisheadedbyaprojectmanager.Thecostcentermatrixmayhave
participantsassignedfrommanydifferentfunctionalgroups.Inturn,thesefunctionalgroupsmayhave
technicalreportingresponsibilitiestoseveraldifferentandhighertiersintheorganization.Thekeytoa

costeffectiveeffortisthedevelopmentofthisprojectsuborganizationintoasingleteamunderthe
leadershipofastrongprojectmanager.
Theextenttowhichdecisionmakingwillbecentralizedordecentralizediscrucialtotheorganization
ofthemegaproject.
Consequently,itisimportanttorecognizethechangingnatureoftheorganizationalstructureasaprojectis
carriedoutinvariousstages.
Example25:ManagingoftheAlaskaPipelineProject
TheAlaskaPipelineProjectwasthelargest,mostexpensiveprivateconstructionprojectinthe
1970's,whichencompassed800miles,thousandsofemployees,and10billiondollars.
Attheplanningstage,theowner(aconsortium)employedaConstructionManagement
Contractor(CMC)todirectthepipelineportion,butretainedcentralizeddecisionmakingto
assuresingledirectionandtointegratetheeffortoftheCMCwiththepumpstationsandthe
terminalsperformedbyanothercontractor.TheCMCalsocentralizeditsdecisionmakingin
directingover400subcontractorsandthousandsofvendors.Becausetherewere19different
constructioncampsandhundredsofdifferentconstructionsites,thiscentralizationcauseddelays
indecisionmaking.
Ataboutthe15%pointofphysicalcompletion,theownerdecidedtoreorganizethedecision
makingprocessandchangetheroleoftheCMC.Theneworganizationwasacombinationof
ownerandCMCpersonnelassignedwithinanintegratedorganization.Theobjectivewasto
developasingleprojectteamresponsibleforcontrollingallsubcontractors.Insteadofhavingnine
tiersoforganizationfromtheGeneralManageroftheCMCtothesubcontractors,thenew
organizationhadonlyfourtiersfromtheSeniorProjectManageroftheownertosubcontractors.
Besidesunifieddirectionandcoordination,thisreductionintiersoforganizationgreatly
improvedcommunicationsandtheabilitytomakeandimplementdecisions.Thenew
organizationalsoalloweddecentralizationofdecisionmakingbytreatingfivesectionsofthe
pipelineatdifferentgeographiclocationsasseparateprojects,withasectionmanagerresponsible
forallfunctionsofthesectionasaprofitcenter.
Atabout98%pointofphysicalcompletion,allremainingactivitiesweretobeconsolidatedto
identifysinglebottomlineresponsibility,toreduceduplicationinmanagementstaff,andtounify
coordinationofremainingwork.Thus,theprojectwasfirsthandledbyseparateorganizationsbut
laterwasrunbyanintegratedorganizationwithdecentralizedprofitcenters.Finally,the
organizationineffectbecamesmallandwasreadytobephasedoutofoperation.
Example26:ManagingtheChannelTunnelConstructionfromBritaintoFrance
TheundergroundrailroadtunnelfromBritaintoFranceiscommonlycalledtheChannelTunnel
orChunnel.Itwasbuiltbytunnelingfromeachside.Startingin1987,thetunnelshada
breakthoughin1990.
Managementturmoildoggedtheprojectfromthestart.In1989,sevenoftheeighttoppeoplein
theconstructionorganizationleft.Therewasabuiltinconflictbetweenthecontractorsand
governmentoverseers:"Thefundamentalthingwrongisthattheconstractorsownlessthan6%of
Eurotunnel.Theirinterestistobuildandselltheprojectataprofit.(Eurotunnel's)interestisforit
tooperateeconomically,safelyandreliablyforthenext50years."(AlastairMorton,Eurotunnel
CEO,quotedinENR,12/10/90,p.56).
Backtotop

2.8OwnerBuilderOperation
Inthisapproachanownermusthaveasteadyflowofongoingprojectsinordertomaintainalargeworkforce
forinhouseoperation.However,theownermaychoosetosubcontractasubstantialportionoftheprojectto

outsideconsultantsandcontractorsforbothdesignandconstruction,eventhoughitretainscentralized
decisionmakingtointegratealleffortsinprojectimplementation.
Example27:U.S.ArmyCorpsofEngineersOrganization
TheDistrictEngineer'sOfficeoftheU.S.ArmyCorpsofEngineersmaybeviewedasatypical
exampleofanownerbuilderapproachasshowninFigure28.

Figure28:OrganizationofaDistrictofCorpsofEngineers
IntheDistrictEngineer'sOfficeoftheU.S.CorpsofEngineers,thereusuallyexistan
EngineeringDivisionandanOperationsDivision,and,inalargedistrict,aConstructionDivision.
Undereachdivision,thereareseveralbranches.Sincetheauthorizationofaprojectisusually
initiatedbytheU.S.Congress,theplanninganddesignfunctionsareseparatedinorderto
facilitateoperations.Sincetheauthorizationofthefeasibilitystudyofaprojectmayprecedethe
authorizationofthedesignbymanyyears,eachstagecanbestbehandledbyadifferentbranchin
theEngineeringDivision.Ifconstructionisultimatelyauthorized,theworkmaybehandledby
theConstructionDivisionorbyoutsidecontractors.TheOperationsDivisionhandlesthe
operationoflocksandotherfacilitieswhichrequireroutineattentionandmaintenance.
Whenaprojectisauthorized,aprojectmanagerisselectedfromthemostappropriatebranchto
headtheproject,togetherwithagroupofstaffdrawnfromvariousbranchestoformtheproject
team.Whentheprojectiscompleted,allmembersoftheteamincludingtheprojectmanagerwill
returntotheirregularpostsinvariousbranchesanddivisionsuntilthenextprojectassignment.
Thus,amatrixorganizationisusedinmanagingeachproject.
Backtotop

2.9TurnkeyOperation
Someownerswishtodelegateallresponsibilitiesofdesignandconstructiontooutsideconsultantsina
turnkeyprojectarrangement.Acontractoragreestoprovidethecompletedfacilityonthebasisofperformance
specificationssetforthbytheowner.Thecontractormayevenassumetheresponsibilityofoperatingthe
projectiftheownersodesires.Inorderforaturnkeyoperationtosucceed,theownermustbeabletoprovide
asetofunambiguousperformancespecificationstothecontractorandmusthavecompleteconfidenceinthe
capabilityofthecontractortocarryoutthemission.
Thisapproachisthedirectoppositeoftheownerbuilderapproachinwhichtheownerwishestoretainthe
maximumamountofcontrolforthedesignconstructionprocess.
Example28:AnExampleofaTurnkeyOrganization

A150Mwpowerplantwasproposedin1985bytheTexasNewMexicoPowerCompanyofFort
Worth,Texas,whichwouldmakeuseoftheturnkeyoperation.[7]UponapprovalbytheTexas
UtilityCommission,aconsortiumconsistingofH.B.ZachryCo.,WestinghouseElectricCo.,and
CombustionEngineering,Inc.woulddesign,buildandfinancethepowerplantforcompletionin
1990foranestimatedconstructioncostof$200millionin1990dollars.Theconsortiumwould
assumetotalliabilityduringconstruction,includingdebtservicecosts,andtherebyeliminatethe
risksofcostescalationtoratepayers,stockholdersandtheutilitycompanymanagement.
Backtotop

2.10LeadershipandMotivationfortheProjectTeam
Theprojectmanager,inthebroadestsenseoftheterm,isthemostimportantpersonforthesuccessorfailure
ofaproject.Theprojectmanagerisresponsibleforplanning,organizingandcontrollingtheproject.Inturn,
theprojectmanagerreceivesauthorityfromthemanagementoftheorganizationtomobilizethenecessary
resourcestocompleteaproject.
Theprojectmanagermustbeabletoexertinterpersonalinfluenceinordertoleadtheprojectteam.The
projectmanageroftengainsthesupportofhis/herteamthroughacombinationofthefollowing:
Formalauthorityresultingfromanofficialcapacitywhichisempoweredtoissueorders.
Rewardand/orpenaltypowerresultingfromhis/hercapacitytodispensedirectlyorindirectlyvalued
organizationrewardsorpenalties.
Expertpowerwhentheprojectmanagerisperceivedaspossessingspecialknowledgeorexpertisefor
thejob.
Attractivepowerbecausetheprojectmanagerhasapersonalityorothercharacteristicstoconvince
others.
Inamatrixorganization,themembersofthefunctionaldepartmentsmaybeaccustomedtoasinglereporting
lineinahierarchicalstructure,buttheprojectmanagercoordinatestheactivitiesoftheteammembersdrawn
fromfunctionaldepartments.Thefunctionalstructurewithinthematrixorganizationisresponsiblefor
priorities,coordination,administrationandfinaldecisionspertainingtoprojectimplementation.Thus,there
arepotentialconflictsbetweenfunctionaldivisionsandprojectteams.Theprojectmanagermustbegiventhe
responsibilityandauthoritytoresolvevariousconflictssuchthattheestablishedprojectpolicyandquality
standardswillnotbejeopardized.Whencontendingissuesofamorefundamentalnaturearedeveloped,they
mustbebroughttotheattentionofahighlevelinthemanagementandberesolvedexpeditiously.
Ingeneral,theprojectmanager'sauthoritymustbeclearlydocumentedaswellasdefined,particularlyina
matrixorganizationwherethefunctionaldivisionmanagersoftenretaincertainauthorityoverthepersonnel
temporarilyassignedtoaproject.Thefollowingprinciplesshouldbeobserved:
Theinterfacebetweentheprojectmanagerandthefunctionaldivisionmanagersshouldbekeptas
simpleaspossible.
Theprojectmanagermustgaincontroloverthoseelementsoftheprojectwhichmayoverlapwith
functionaldivisionmanagers.
Theprojectmanagershouldencourageproblemsolvingratherthanroleplayingofteammembersdrawn
fromvariousfunctionaldivisions.
Backtootp

2.11InterpersonalBehaviorinProjectOrganizations
Whileasuccessfulprojectmanagermustbeagoodleader,othermembersoftheprojectteammustalsolearn
toworktogether,whethertheyareassembledfromdifferentdivisionsofthesameorganizationorevenfrom
differentorganizations.Someproblemsofinteractionmayariseinitiallywhentheteammembersare
unfamiliarwiththeirownrolesintheprojectteam,particularlyforalargeandcomplexproject.These
problemsmustberesolvedquicklyinordertodevelopaneffective,functioningteam.

Manyofthemajorissuesinconstructionprojectsrequireeffectiveinterventionsbyindividuals,groupsand
organizations.Thefundamentalchallengeistoenhancecommunicationamongindividuals,groupsand
organizationssothatobstaclesinthewayofimprovinginterpersonalrelationsmayberemoved.Some
behaviorscienceconceptsarehelpfulinovercomingcommunicationdifficultiesthatblockcooperationand
coordination.Inverylargeprojects,professionalbehaviorscientistsmaybenecessaryindiagnosingthe
problemsandadvisingthepersonnelworkingontheproject.Thepoweroftheorganizationshouldbeused
judiciouslyinresolvingconflicts.
Themajorsymptomsofinterpersonalbehaviorproblemscanbedetectedbyexperiencedobservers,andthey
areoftenthesourcesofseriouscommunicationdifficultiesamongparticipantsinaproject.Forexample,
membersofaprojectteammayavoideachotherandwithdrawfromactiveinteractionsaboutdifferencesthat
needtobedealtwith.Theymayattempttocriticizeandblameotherindividualsorgroupswhenthingsgo
wrong.Theymayresentsuggestionsforimprovement,andbecomedefensivetominimizeculpabilityrather
thantaketheinitiativetomaximizeachievements.Alltheseactionsaredetrimentaltotheprojectorganization.
Whilethesesymptomscanoccurtoindividualsatanyorganization,theyarecompoundediftheprojectteam
consistsofindividualswhoareputtogetherfromdifferentorganizations.Invariably,differentorganizations
havedifferentculturesormodesofoperation.Individualsfromdifferentgroupsmaynothaveacommon
loyaltyandmayprefertoexpandtheirenergyinthedirectionsmostadvantageoustothemselvesinsteadofthe
projectteam.Therefore,nooneshouldtakeitforgrantedthataprojectteamwillworktogetherharmoniously
justbecauseitsmembersareplacedphysicallytogetherinonelocation.Onthecontrary,itmustbeassumed
thatgoodcommunicationcanbeachievedonlythroughthedeliberateeffortofthetopmanagementofeach
organizationcontributingtothejointventure.
Backtotop

2.12PerceptionsofOwnersandContractors
Althoughownersandcontractorsmayhavedifferentperceptionsonprojectmanagementforconstruction,
theyhaveacommoninterestincreatinganenvironmentleadingtosuccessfulprojectsinwhichperformance
quality,completiontimeandfinalcostsarewithinprescribedlimitsandtolerances.Itisinterestingthereforeto
notetheopinionsofsomeleadingcontractorsandownerswhowereinterviewedin1984.[8]
Fromtheresponsesofsixcontractors,thekeyfactorscitedforsuccessfulprojectsare:
welldefinedscope
extensiveearlyplanning
goodleadership,managementandfirstlinesupervision
positiveclientrelationshipwithclientinvolvement
properprojectteamchemistry
quickresponsetochanges
engineeringmanagersconcernedwiththetotalproject,notjusttheengineeringelements.
Conversely,thekeyfactorscitedforunsuccessfulprojectsare:
illdefinedscope
poormanagement
poorplanning
breakdownincommunicationbetweenengineeringandconstruction
unrealisticscope,schedulesandbudgets
manychangesatvariousstagesofprogress
lackofgoodprojectcontrol
Theresponsesofeightownersindicatedthattheydidnotalwaysunderstandtheconcernsofthecontractors
althoughtheygenerallyagreedwithsomeofthekeyfactorsforsuccessfulandunsuccessfulprojectscitedby
thecontractors.Thesignificantfindingsoftheinterviewswithownersaresummarizedasfollows:
Allownershavethesameperceptionoftheirownrole,buttheydiffersignificantlyinassumingthatrole
inpractice.

Theownersalsodifferdramaticallyintheamountofearlyplanningandinprovidinginformationinbid
packages.
Thereisatrendtowardbreakingaprojectintoseveralsmallerprojectsastheprojectsbecomelargerand
morecomplex.
Mostownersrecognizetheimportanceofschedule,buttheyadoptdifferentrequirementsincontrolling
theschedule.
Allagreethatpeoplearethekeytoprojectsuccess.
Fromtheresultsoftheseinterviews,itisobviousthatownersmustbemoreawareandinvolvedintheprocess
inordertogeneratefavorableconditionsforsuccessfulprojects.Designprofessionalsandconstruction
contractorsmustprovidebettercommunicationwitheachotherandwiththeownerinprojectimplementation.
Backtotop

2.13References
1.Barrie,DonaldS.andBoydC.Paulson,Jr.,ProfessionalConstructionManagement,McGrawHill
BookCompany,2ndEd.,1984.
2.Halpin,DanielW.andRonaldW.Woodhead,ConstructionManagement,JohnWileyandSons,1980.
3.Hodgetts,R.M.,Management:Theory,ProcessandPractice,W.B.SaundersCo.,Philadelphia,PA,
1979.
4.Kerzner,H.ProjectManagement:ASystemsApproachtoPlanning,SchedulingandControlling.2nd.
Ed.,VanNostrandReinhold,NewYork,1984.
5.Levitt,R.E.,R.D.LogcherandN.H.Quaddumi,"ImpactofOwnerEngineerRiskSharingonDesign
Conservatism,"ASCEJournalofProfessionalIssuesinEngineering,Vol.110,1984,pp.157167.
6.Moolin,F.P.,Jr.,andF.A.McCoy:"ManagingtheAlaskaPipelineProject,"CivilEngineering,
November1981,pp.5154.
7.Murray,L.,E.Gallardo,S.AggarwalandR.Waywitka,"MarketingConstructionManagement
Services,"ASCEJournalofConstructionDivision,Vol.107,1981,pp.665677.
8.ProjectManagementInstitute,AGuidetotheProjectManagementBodyofKnowledge,Newtown
Square,Pennsylvania,2000.
Backtotop

2.14Footnotes
1.SeeR.M.Wideman,"ThePMBOKReportPMIBodyofKnowledgeStandard,"ProjectManagement
Journal,Vol.17,No.3,Augustl986,pp.l524.Back
2.SeeL.C.Stuckenbruck,"ProjectManagementFramework,"ProjectManagementJournal,Vol.17,No.
3,August1986,pp.2530.Back
3.See,forexample,O'Connor,J.T.,andVickory,C.G.,ControlofConstructionProjectScope,AReportto
theConstructionIndustryInstitute,TheUniversityofTexasatAustin,December1985.Back
4.See,forexample,FederalForm23AandEPA'sAppendixC2clauses.Back
5.SeeE.D'Appolonia,"CopingwithUncertaintyinGeotechnicalEngineeringandConstruction,"Special
Proceedingsofthe9thInternationalConferenceonSoilMechanicsandFoundationEngineering,
Tokyo,Japan,Vol.4,1979,pp.118.Back
6.ThesefeaturesandthefollowingexamplearedescribedinF.P.Moolin,Jr.andF.A.McCoy,"Managing
theAlaskaPipelineProject,"CivilEngineering,November1981,pp.5154.Back
7."PrivateMoneyFinancesTexasUtility'sPowerPlant"EngineeringNewsRecord:July25,1985,p.13.
Back
8.SeeJ.E.DiekmannandK.B.Thrush,ProjectControlinDesignEngineering,AReporttothe
ConstructionIndustryInstitute,TheUniversityofTexasatAustin,Texas,May1986.Back

PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoTo
Chapter2
(Organizing
ForProject
Management)

GoTo
Chapter4
(Labor,
Material,And
Equipment
Utilization.)

TheDesignand
ConstructionProcess
DesignandConstruction
asanIntegratedSystem
Innovationand
TechnologicalFeasibility
InnovationandEconomic
Feasibility
DesignMethodology
FunctionalDesign
PhysicalStructures
GeotechnicalEngineering
Investigation
ConstructionSite
Environment
ValueEngineering
ConstructionPlanning
Industrialized
ConstructionandPre
fabrication
ComputerAided
Engineering
PreProjectPlanning
References
Footnotes

3.TheDesignandConstructionProcess
3.1DesignandConstructionasanIntegratedSystem
Intheplanningoffacilities,itisimportanttorecognizethecloserelationshipbetweendesignandconstruction.
Theseprocessescanbestbeviewedasanintegratedsystem.Broadlyspeaking,designisaprocessofcreatingthe
descriptionofanewfacility,usuallyrepresentedbydetailedplansandspecificationsconstructionplanningisa
processofidentifyingactivitiesandresourcesrequiredtomakethedesignaphysicalreality.Hence,construction
istheimplementationofadesignenvisionedbyarchitectsandengineers.Inbothdesignandconstruction,
numerousoperationaltasksmustbeperformedwithavarietyofprecedenceandotherrelationshipsamongthe
differenttasks.
Severalcharacteristicsareuniquetotheplanningofconstructedfacilitiesandshouldbekeptinmindevenatthe
veryearlystageoftheprojectlifecycle.Theseincludethefollowing:
Nearlyeveryfacilityiscustomdesignedandconstructed,andoftenrequiresalongtimetocomplete.
Boththedesignandconstructionofafacilitymustsatisfytheconditionspeculiartoaspecificsite.
Becauseeachprojectissitespecific,itsexecutionisinfluencedbynatural,socialandotherlocational
conditionssuchasweather,laborsupply,localbuildingcodes,etc.
Sincetheservicelifeofafacilityislong,theanticipationoffuturerequirementsisinherentlydifficult.
Becauseoftechnologicalcomplexityandmarketdemands,changesofdesignplansduringconstructionare
notuncommon.

Inanintegratedsystem,theplanningforbothdesignandconstructioncanproceedalmostsimultaneously,
examiningvariousalternativeswhicharedesirablefrombothviewpointsandthuseliminatingthenecessityof
extensiverevisionsundertheguiseofvalueengineering.Furthermore,thereviewofdesignswithregardtotheir
constructibilitycanbecarriedoutastheprojectprogressesfromplanningtodesign.Forexample,ifthesequence
ofassemblyofastructureandthecriticalloadingsonthepartiallyassembledstructureduringconstructionare
carefullyconsideredasapartoftheoverallstructuraldesign,theimpactsofthedesignonconstructionfalsework
andonassemblydetailscanbeanticipated.However,ifthedesignprofessionalsareexpectedtoassumesuch
responsibilities,theymustberewardedforsharingtherisksaswellasforundertakingtheseadditionaltasks.
Similarly,whenconstructioncontractorsareexpectedtotakeovertheresponsibilitiesofengineers,suchas
devisingaveryelaborateschemetoerectanunconventionalstructure,theytoomustberewardedaccordingly.As
longastheownerdoesnotassumetheresponsibilityforresolvingthisriskrewarddilemma,theconceptofatruly
integratedsystemfordesignandconstructioncannotberealized.
ItisinterestingtonotethatEuropeanownersaregenerallymoreopentonewtechnologiesandtoshareriskswith
designersandcontractors.Inparticular,theyaremorewillingtoacceptresponsibilitiesfortheunforeseen
subsurfaceconditionsingeotechnicalengineering.Consequently,thedesignersandcontractorsarealsomore
willingtointroducenewtechniquesinordertoreducethetimeandcostofconstruction.InEuropeanpractice,
ownerstypicallypresentcontractorswithaconceptualdesign,andcontractorspreparedetaileddesigns,whichare
checkedbytheowner'sengineers.Thosedetaileddesignsmaybealternatedesigns,andspecialtycontractorsmay
alsopreparedetailedalternatedesigns.
Example31:ResponsibilityforShopDrawings
Thewillingnesstoassumeresponsibilitiesdoesnotcomeeasilyfromanypartyinthecurrentlitigious
climateoftheconstructionindustryintheUnitedStates.Ontheotherhand,ifowner,architect,
engineer,contractorandothergroupsthatrepresentpartsoftheindustrydonotjointlyfixthe
responsibilitiesofvarioustaskstoappropriateparties,thestandardsofpracticewilleventuallybeset
bycourtdecisions.Inanattempttoprovideaguidetotheentirespectrumofparticipantsina
constructionproject,theAmericanSocietyofCivilEngineersissuedaManualofProfessional
PracticeentitledQualityintheConstructedProjectin1990.Thismanualisintendedtohelpbringa
turnaroundofthefragmentationofactivitiesinthedesignandconstructionprocess.
Shopdrawingsrepresenttheassemblydetailsforerectingastructurewhichshouldreflecttheintent
andrationaleoftheoriginalstructuraldesign.Theyarepreparedbytheconstructioncontractorand
reviewedbythedesignprofessional.However,sincetheresponsibilityforpreparingshopdrawings
wastraditionallyassignedtoconstructioncontractors,designprofessionalstooktheviewthatthe
reviewprocesswasadvisoryandassumednoresponsibilityfortheiraccuracy.Thisjustificationwas
ruledunacceptablebyacourtinconnectionwiththewalkwayfailureattheHyattHotelinKansas
Cityin1985.InpreparingtheASCEManualofProfessionalPracticeforQualityintheConstructed
Project,theresponsibilitiesforpreparationofshopdrawingsprovedtobethemostdifficultto
develop.[1]Thereasonforthissituationisnotdifficulttofathomsincetheresponsibilitiesforthe
taskarediffused,andallpartiesmustagreetothenewresponsibilitiesassignedtoeachinthe
recommendedriskrewardrelationsshowninTable31.
Traditionally,theownerisnotinvolvedinthepreparationandreviewofshopdrawings,andperhaps
isevenunawareofanypotentialproblems.Intherecommendedpractice,theownerisrequiredtotake
responsibilityforprovidingadequatetimeandfunding,includingapprovalofscheduling,inorderto
allowthedesignprofessionalsandconstructioncontractorstoperformsatisfactorily.
Table31RecommendedResponsibilityforShopDrawings
ResponsibleParty
Task
Design Construction
Owner
Professional Contractor
Provideadequatetimeandfundingforshopdrawingpreparationandreview Prime

Arrangeforstructuraldesign
Prime

Providestructuraldesign

Prime

Establishoverallresponsibilityforconnectiondesign

Prime

Accomplishconnectiondesign(bydesignprofessional)

Prime

Alternatively,provideloadingrequirementandotherinformationnecessary

forshopdrawingpreparation
Alternatively,accomplishsomeorallofconnectiondesign(byconstuctor
withalicensedP.E.)
Specifyshopdrawingrequirementsandprocedures
Approveproperscheduling
Provideshopdrawingandsubmitthedrawingonschedule
Maketimelyreviewsandapprovals
Provideerectionprocedures,constructionbracing,shoring,means,methods
andtechniquesofconstruction,andconstructionsafety

Prime

Prime

Review
Prime

Prime Assisting
Assisting

Prime

Prime

Prime

Example32:ModelMetroProjectinMilan,Italy[2]
UnderItalianlaw,unforeseensubsurfaceconditionsaretheowner'sresponsibility,notthecontractor's.
ThisisastrikingdifferencefromU.S.constructionpracticewherechangedconditionsclausesand
claimsandtheadequacyofprebidsiteinvestigationsarepointsofcontention.Ineffect,theItalianlaw
meansthattheownerassumesthoserisks.Butunderthesamelaw,acontractormayelecttoassume
therisksinordertolowerthebidpriceandtherebybeatthecompetition.
AccordingtotheTechnicalDirectorofRodio,theMilanbasedcontractorwhichisheavilyinvolvedin
thegroutingjobfortunnelingintheModelMetroprojectinMilan,Italy,therearetwotypical
contractualarrangementsforspecializedsubcontractorfirmssuchastheirs.Oneistoworkonaunit
pricebasiswithnoresponsibilityforthedesign.Theotheriswhathecallsthe"nominated
subcontractor"orturnkeymethod:prequalifiedsubcontractorsoffertheirowndesignsandguarantee
theprice,quality,quantities,and,iftheywish,therisksofunforeseenconditions.
AtthebeginningoftheMilanmetroproject,theRodiocontractratiowas50/50unitpriceandturnkey.
Thefirmconvincedthemetroownersthattheywouldsavemoneywiththeturnkeyapproach,andthe
ratiobecame80%turnkey.What'smore,intheworkpackageswhereRodioworkedwithother
groutingspecialists,thosesubcontractorspaidRodioafeetoassumeallrisksforunforeseen
conditions.
Underthesecircumstances,itwascriticalthatthefirmshouldknowthesubsurfaceconditionsas
preciselyaspossible,whichwasamajorreasonwhythefirmdevelopedacomputerizedelectronic
sensingprogramtopredictstratigraphyandthuscontrolgroutmixes,pressuresand,mostimportant,
quantities.

3.2InnovationandTechnologicalFeasibility
Theplanningforaconstructionprojectbeginswiththegenerationofconceptsforafacilitywhichwillmeet
marketdemandsandownerneeds.Innovativeconceptsindesignarehighlyvaluednotfortheirownsakebutfor
theircontributionstoreducingcostsandtotheimprovementofaesthetics,comfortorconvenienceasembodiedin
awelldesignedfacility.However,theconstructoraswellasthedesignprofessionalsmusthaveanappreciation
andfullunderstandingofthetechnologicalcomplexitiesoftenassociatedwithinnovativedesignsinorderto
provideasafeandsoundfacility.Sincetheseconceptsareoftenpreliminaryortentative,screeningstudiesare
carriedouttodeterminetheoveralltechnologicalviabilityandeconomicattractivenesswithoutpursuingthese
conceptsingreatdetail.Becauseoftheambiguityoftheobjectivesandtheuncertaintyofexternalevents,
screeningstudiescallforuninhibitedinnovationincreatingnewconceptsandjudiciousjudgmentinselectingthe
appropriateonesforfurtherconsideration.
Oneofthemostimportantaspectsofdesigninnovationisthenecessityofcommunicationinthe
design/constructionpartnership.Inthecaseofbridgedesign,itcanbeillustratedbythefollowingquotationfrom
LinandGerwickconcerningbridgeconstruction:[3]
ThegreatpioneeringsteelbridgesoftheUnitedStateswerebuiltbyanopenorcovertalliance
betweendesignersandconstructors.Theturnkeyapproachofdesignerconstructorhasdevelopedand
builtourchemicalplants,refineries,steelplants,andnuclearpowerplants.Itistimetoask,seriously,
whetherwemaynothaveadoptedarestrictiveapproachbydivorcingengineeringandconstructionin
thefieldofbridgeconstruction.

Ifacontractorengineer,bysomestrokeofgenius,weretopresenttodesignengineerstodaya
wonderfulnewschemeforlongspanprestressedconcretebridgesthatmadethemfarcheaper,he
wouldhavetomaketheseideasavailabletoallotherconstructors,evenlimitingorwateringthem
downsoasto"getagroupoftrulycompetitivebidders."Theengineerwouldhavetomakesurethat
hefoundothercontractorstobidagainsttheingeniousinnovator.
Ifanengineershould,byasimilarstrokeofgenius,hitonsuchauniqueandbrilliantscheme,he
wouldhavetoworry,wonderingifthelowbidderwouldbeonewhohadanyconceptofwhathewas
tryingtoaccomplishorwasinanywayqualifiedforhighclasstechnicalwork.
Innovativedesignconceptsmustbetestedfortechnologicalfeasibility.Threelevelsoftechnologyareofspecial
concern:technologicalrequirementsforoperationorproduction,designresourcesandconstructiontechnology.
Thefirstreferstothenewtechnologiesthatmaybeintroducedinafacilitywhichisusedforacertaintypeof
productionsuchaschemicalprocessingornuclearpowergeneration.Thesecondreferstothedesigncapabilities
thatareavailabletothedesigners,suchasnewcomputationalmethodsornewmaterials.Thethirdreferstonew
technologieswhichcanbeadoptedtoconstructthefacility,suchasnewequipmentornewconstructionmethods.
Anewfacilitymayinvolvecomplexnewtechnologyforoperationinhostileenvironmentssuchassevereclimate
orrestrictedaccessibility.Largeprojectswithunprecedenteddemandsforresourcessuchaslaborsupply,material
andinfrastructuremayalsocallforcarefultechnologicalfeasibilitystudies.Majorelementsinafeasibilitystudy
onproductiontechnologyshouldinclude,butarenotlimitedto,thefollowing:
Projecttypeascharacterizedbythetechnologyrequired,suchassyntheticfuels,petrochemicals,nuclear
powerplants,etc.
Projectsizeindollars,designengineer'shours,constructionlaborhours,etc.
Design,includingsourcesofanyspecialtechnologywhichrequirelicensingagreements.
Projectlocationwhichmayposeproblemsinenvironmentalprotection,laborproductivityandspecialrisks.
Anexampleofinnovativedesignforoperationandproductionistheuseofentropyconceptsforthedesignof
integratedchemicalprocesses.Simplecalculationscanbeusedtoindicatetheminimumenergyrequirementsand
theleastnumberofheatexchangeunitstoachievedesiredobjectives.Theresultisanewincentiveandcriterion
fordesignerstoachievemoreeffectivedesigns.Numerousapplicationsofthenewmethodologyhasshownits
efficacyinreducingbothenergycostsandconstructionexpenditures.[4]Thisisacaseinwhichinnovativedesign
isnotamatteroftradingoffoperatingandcapitalcosts,butbetterdesignscansimultaneouslyachieve
improvementsinbothobjectives.
Thechoiceofconstructiontechnologyandmethodinvolvesbothstrategicandtacticaldecisionsaboutappropriate
technologiesandthebestsequencingofoperations.Forexample,theextenttowhichprefabricatedfacility
componentswillbeusedrepresentsastrategicconstructiondecision.Inturn,prefabricationofcomponentsmight
beaccomplishedoffsiteinexistingmanufacturingfacilitiesoratemporary,onsitefabricationplantmightbe
used.Anotherexampleofastrategicdecisioniswhethertoinstallmechanicalequipmentinplaceearlyinthe
constructionprocessoratanintermediatestage.Strategicdecisionsofthissortshouldbeintegratedwiththe
processoffacilitydesigninmanycases.Atthetacticallevel,detaileddecisionsabouthowtoaccomplish
particulartasksarerequired,andsuchdecisionscanoftenbemadeinthefield.
Constructionplanningshouldbeamajorconcerninthedevelopmentoffacilitydesigns,inthepreparationofcost
estimates,andinformingbidsbycontractors.Unfortunately,planningfortheconstructionofafacilityisoften
treatedasanafterthoughtbydesignprofessionals.Thiscontrastswithmanufacturingpracticesinwhichthe
assemblyofdevicesisamajorconcernindesign.Designtoinsureeaseofassemblyorconstructionshouldbea
majorconcernofengineersandarchitects.AstheBusinessRoundtablenoted,"Alltoooftenchancestocut
scheduletimeandcostsarelostbecauseconstructionoperatesasaproductionprocessseparatedbyachasmfrom
financialplanning,scheduling,andengineeringorarchitecturaldesign.Toomanyengineers,separatedfromfield
experience,arenotuptodateabouthowtobuildwhattheydesign,orhowtodesignsostructuresandequipment
canbeerectedmostefficiently."[5]
Example33:Innovativeuseofstructuralframesforbuildings[6]
Thestructuraldesignofskyscrapersoffersanexampleofinnovationinovercomingthebarrierofhigh
costsfortallbuildingsbymakinguseofnewdesigncapabilities.Arevolutionaryconceptin
skyscraperdesignwasintroducedinthe1960'sbyFazlurKhanwhoarguedthat,forabuildingofa

givenheight,thereisanappropriatestructuralsystemwhichwouldproducethemostefficientuseof
thematerial.
Before1965,mostskyscrapersweresteelrigidframes.However,FazlurKhanbelievedthatitwas
uneconomicaltoconstructallofficebuildingsofrigidframes,andproposedanarrayofappropriate
structuralsystemsforsteelbuildingsofspecifiedheightsasshowninFigure31.Bychoosingan
appropriatestructuralsystem,anengineercanusestructuralmaterialsmoreefficiently.Forexample,
the60storyChaseManhattanBuildinginNewYorkusedabout60poundspersquarefootofsteelin
itsrigidframestructure,whilethe100storyJohnHancockCenterinChicagousedonly30pounds
persquarefootforatrustedtubesystem.AtthetimetheChaseManhattanBuildingwasconstructed,
nobracingwasusedtostiffenthecoreofarigidframebuildingbecausedesignengineersdidnothave
thecomputingtoolstodothecomplexmathematicalanalysisassociatedwithcorebracing.

Figure31:ProposedStructuralSystemfirSteelBuildings
(ReprintedwithpermissionfromCivilEngineering,May1983)

3.3InnovationandEconomicFeasibility
Innovationisoftenregardedastheenginewhichcanintroduceconstructioneconomiesandadvancelabor
productivity.Thisisobviouslytrueforcertaintypesofinnovationsinindustrialproductiontechnologies,design
capabilities,andconstructionequipmentandmethods.However,therearealsolimitationsduetotheeconomic
infeasibilityofsuchinnovations,particularlyinthesegmentsofconstructionindustrywhicharemorefragmented
andpermiteaseofentry,asintheconstructionofresidentialhousing.
Marketdemandandfirmsizeplayanimportantroleinthisregard.Ifabuilderistoconstructalargernumberof
similarunitsofbuildings,thecostperunitmaybereduced.Thisrelationshipbetweenthemarketdemandandthe
totalcostofproductionmaybeillustratedschematicallyasinFigure32.AninitialthresholdorfixedcostFis
incurredtoallowanyproduction.Beyondthisthresholdcost,totalcostincreasesfasterthantheunitsofoutputbut
atadecreasingrate.Ateachpointonthistotalcostcurve,theaveragecostisrepresentedbytheslopeofaline
fromtheorigintothepointonthecurve.AtapointH,theaveragecostperunitisataminimum.BeyondHtothe
right,thetotalcostagainincreasesfasterthantheunitsofoutputandatanincreasingrate.Whentherateof
changeoftheaveragecostslopeisdecreasingorconstantasbetween0andHonthecurve,therangebetween0
andHissaidtobeincreasingreturntoscalewhentherateofchangeoftheaveragecostslopeisincreasingas
beyondHtotheright,theregionissaidtobedecreasingreturntoscale.Thus,iffewerthanhunitsare
constructed,theunitpricewillbehigherthanthatofexactlyhunits.Ontheotherhand,theunitpricewillincrease
againifmorethanhunitsareconstructed.

Figure32:MarketDemandandTotalCostRelationship
Nowhereistheeffectofmarketdemandandtotalcostmoreevidentthaninresidentialhousing.[7]Thehousing
segmentinthelastfewdecadesacceptedmanyinnovativetechnicalimprovementsinbuildingmaterialswhich
werepromotedbymaterialsuppliers.Sincematerialsuppliersprovideproductstoalargenumberofhomebuilders
andothers,theyareinabetterpositiontoexploitproductioneconomiesofscaleandtosupportnewproduct
development.However,homebuildersthemselveshavenotbeenassuccessfulinmakingthemostfundamental
formofinnovationwhichencompasseschangesinthetechnologicalprocessofhomebuildingbyshiftingthe
mixtureoflaborandmaterialinputs,suchassubstitutinglargescaleoffsiteprefabricationforonsiteassembly.
Thereareseveralmajorbarrierstoinnovationinthetechnologicalprocessofhomebuilding,includingdemand
instability,industrialfragmentation,andbuildingcodes.Sincemarketdemandfornewhomesfollows
demographictrendsandothersocioeconomicconditions,thevariationinhomebuildinghasbeenanythingbut
regular.Theprofitabilityofthehomebuildingindustryhascloselymatchedaggregateoutputlevels.Sinceentry
andexistfromtheindustryarerelativelyeasy,itisnotuncommonduringperiodsofslackdemandtofindbuilders
leavingthemarketorsuspendingtheiroperationsuntilbettertimes.Theinconsistentlevelsofretainedearnings
overaperiodofyears,evenamongthemoreestablishedbuilders,arelikelytodiscouragesupportforresearchand
developmenteffortswhicharerequiredtonurtureinnovation.Furthermore,becausethehomebuildingindustryis
fragmentedwithavastmajorityofhomebuildersactiveonlyinlocalregions,thetypicalhomebuilderfindsit
excessivelyexpensivetoexperimentwithnewdesigns.Thepotentialcostsofafailureorevenamoderately
successfulinnovationwouldoutweightheexpectedbenefitsofallbutthemostsuccessfulinnovations.Variationin
localbuildingcodeshasalsocausedinefficienciesalthoughrepeatedattemptshavebeenmadetostandardize
buildingcodes.
Inadditiontothescaleeconomiesvisiblewithinasectoroftheconstructionmarket,therearealsopossibilitiesfor
scaleeconomiesinindividualfacility.Forexample,therelationshipbetweenthesizeofabuilding(expressedin
squarefeet)andtheinputlabor(expressedinlaborhourspersquarefoot)variesfordifferenttypesandsizesof
buildings.AsshowninFigure33,theserelationshipsforseveraltypesofbuildingsexhibitdifferent
characteristics.[8]Thelaborhourspersquarefootdeclineasthesizeoffacilityincreasesforhouses,public
housingandpublicbuildings.However,thelaborhourspersquarefootalmostremainsconstantforallsizesof
schoolbuildingsandincreasesasthesizeofahospitalfacilityincreases.

Figure33:IllustrativeRelationshipsbetweenBuildingSizeandInputLaborbyTypesofBuilding
(ReprintedwithpermissionfromP.J.Cassimatis,EconomicsoftheConstructionIndustry,
TheNationalIndustryConferenceBoard,SEB,No.111,1969,p.53)
Example34:Useofnewmaterials[9]
Inrecentyears,analmostentirelynewsetofmaterialsisemergingforconstruction,largelyfromthe
aerospaceandelectronicsindustries.Thesematerialsweredevelopedfromnewknowledgeaboutthe
structureandpropertiesofmaterialsaswellasnewtechniquesforalteringexistingmaterials.
Additivestotraditionalmaterialssuchasconcreteandsteelareparticularlyprominent.Forexample,it
hasbeenknownforsometimethatpolymerswouldincreaseconcretestrength,waterresistanceand
abilitytoinsulatewhentheyareaddedtothecement.However,theirusehasbeenlimitedbytheir
costssincetheyhavehadtoreplaceasmuchas10percentofthecementtobeeffective.However,
Swedishresearchershavehelpedreducecostsbyusingpolymermicrospheres8millionthsofaninch
across,whichoccupylessthan1percentofthecement.Concretesmadewiththesemicrospheresmeet
eventhestrictstandardsforoffshorestructuresintheNorthSea.Researchonmicroadditiveswill
probablyproduceusefulconcretesforrepairingroadandbridgesaswell.
Example35:GreenBuildings[10]
TheLeadershipinEnergyandEnvironmentalDesign(LEED)GreenBuildingRatingSystemis
intendedtopromotevoluntaryimprovementsindesignandconstructionpractices.Intherating
system,buildingsreceivepointsforavarietyofaspects,includingreducedenergyuse,greateruseof
daylightratherthanartificiallights,recyclingconstructionwaste,rainfallrunoffreduction,availability
ofpublictransitaccess,etc.Ifabuildingaccumulatesasufficientnumberofpoints,itmaybecertified
bytheGreenBuildingAllianceasa"greenbuilding."Whilesomeoftheseaspectsmayincrease
constructioncosts,manyreduceoperatingcostsormakebuildingsmoreattractive.Greenbuilding
approachesarespreadingtoindustrialplantsandothertypesofconstruction.

3.4DesignMethodology

Whiletheconceptualdesignprocessmaybeformalorinformal,itcanbecharacterizedbyaseriesofactions:
formulation,analysis,search,decision,specification,andmodification.However,attheearlystageinthe
developmentofanewproject,theseactionsarehighlyinteractiveasillustratedinFigure34.[11]Manyiterations
ofredesignareexpectedtorefinethefunctionalrequirements,designconceptsandfinancialconstraints,even
thoughtheanalytictoolsappliedtothesolutionoftheproblematthisstagemaybeverycrude.

Figure34:ConceptualDesignProcess
(AdaptedwithpermissionfromR.W.JensenandC.C.Tonies,SoftwareEngineering,
PrenticeHall,EnglewoodCliffs,NJ,1979,p.22)
Theseriesofactionstakenintheconceptualdesignprocessmaybedescribedasfollows:
Formulationreferstothedefinitionordescriptionofadesignprobleminbroadtermsthroughthesynthesis
ofideasdescribingalternativefacilities.
Analysisrefinestheproblemdefinitionordescriptionbyseparatingimportantfromperipheralinformation
andbypullingtogethertheessentialdetail.Interpretationandpredictionareusuallyrequiredaspartofthe
analysis.
Searchinvolvesgatheringasetofpotentialsolutionsforperformingthespecifiedfunctionsandsatisfying
theuserrequirements.
Decisionmeansthateachofthepotentialsolutionsisevaluatedandcomparedtothealternativesuntilthe
bestsolutionisobtained.
Specificationistodescribethechosensolutioninaformwhichcontainsenoughdetailforimplementation.
Modificationreferstothechangeinthesolutionorredesignifthesolutionisfoundtobewantingorifnew
informationisdiscoveredintheprocessofdesign.
Astheprojectmovesfromconceptualplanningtodetaileddesign,thedesignprocessbecomesmoreformal.In
general,theactionsofformulation,analysis,search,decision,specificationandmodificationstillhold,butthey
representspecificstepswithlessrandominteractionsindetaileddesign.Thedesignmethodologythusformalized
canbeappliedtoavarietyofdesignproblems.Forexample,theanalogyoftheschematicdiagramsofthe
structuraldesignprocessandofthecomputerprogramdevelopmentprocessisshowninFigure35[12].

Figure35:AnAnalogyBetweenStructuralDesignandComputerProgramDevelopmentProcess
(ReprintedwithpermissionfromE.H.GaylordandC.N.Gaylord,eds.,StructuralEngineeringHandbook,
2ndEd.,McGrawHillBookCompany,NewYork,1979.)
Thebasicapproachtodesignreliesondecompositionandintegration.Sincedesignproblemsarelargeand
complex,theyhavetobedecomposedtoyieldsubproblemsthataresmallenoughtosolve.Therearenumerous
alternativewaystodecomposedesignproblems,suchasdecompositionbyfunctionsofthefacility,byspatial
locationsofitsparts,orbylinksofvariousfunctionsorparts.Solutionstosubproblemsmustbeintegratedintoan
overallsolution.Theintegrationoftencreatesconceptualconflictswhichmustbeidentifiedandcorrected.A
hierarchicalstructurewithanappropriatenumberoflevelsmaybeusedforthedecompositionofadesignproblem
tosubproblems.Forexample,inthestructuraldesignofamultistorybuilding,thebuildingmaybedecomposed

intofloors,andeachfloormayinturnbedecomposedintoseparateareas.Thus,ahierarchyrepresentingthelevels
ofbuilding,floorandareaisformed.
Differentdesignstylesmaybeused.Theadoptionofaparticularstyleoftendependsonfactorssuchastime
pressureoravailabledesigntools,aswellasthenatureofthedesignproblem.Examplesofdifferentstylesare:
Topdowndesign.Beginwithabehaviordescriptionofthefacilityandworktowardsdescriptionsofits
componentsandtheirinterconnections.
Bottomupdesign.Beginwithasetofcomponents,andseeiftheycanbearrangedtomeetthebehavior
descriptionofthefacility.
Thedesignofanewfacilityoftenbeginswiththesearchofthefilesforadesignthatcomesascloseaspossibleto
theoneneeded.Thedesignprocessisguidedbyaccumulatedexperienceandintuitionintheformofheuristic
rulestofindacceptablesolutions.Asmoreexperienceisgainedforthisparticulartypeoffacility,itoftenbecomes
evidentthatpartsofthedesignproblemareamenabletorigorousdefinitionandalgorithmicsolution.Evenformal
optimizationmethodsmaybeappliedtosomepartsoftheproblem.

3.5FunctionalDesign
Theobjectiveoffunctionaldesignforaproposedfacilityistotreatthefacilityasacomplexsystemofinterrelated
spaceswhichareorganizedsystematicallyaccordingtothefunctionstobeperformedinthesespacesinorderto
serveacollectionofneeds.Thearrangementofphysicalspacescanbeviewedasaniterativedesignprocessto
findasuitablefloorplantofacilitatethemovementofpeopleandgoodsassociatedwiththeoperationsintended.
Adesigneroftenreliesonaheuristicapproach,i.e.,applyingselectedrulesorstrategiesservingtostimulatethe
investigationinsearchforasolution.Theheuristicapproachusedinarrangingspatiallayoutsforfacilitiesisbased
generallyonthefollowingconsiderations:
1.identificationofthegoalsandconstraintsforspecifiedtasks,
2.determinationofthecurrentstateofeachtaskintheiterativedesignprocess,
3.evaluationofthedifferencesbetweenthecurrentstateandthegoals,
4.meansofdirectingtheeffortsofsearchtowardsthegoalsonthebasisofpastexperience.
Hence,theprocedureforseekingthegoalscanberecyclediterativelyinordertomaketradeoffsandthusimprove
thesolutionofspatiallayouts.
Consider,forexample,anintegratedfunctionaldesignforaproposedhospital.[13]Sincetheresponsibilitiesfor
satisfyingvariousneedsinahospitalaredividedamongdifferentgroupsofpersonnelwithinthehospital
administrativestructure,ahierarchyoffunctionscorrespondingtodifferentlevelsofresponsibilitiesisproposedin
thesystematicorganizationofhospitalfunctions.Inthismodel,thefunctionsofahospitalsystemaredecomposed
intoahierarchyofseverallevels:
1.Hospitalconglomerateofallhospitalservicesresultingfromtoppolicydecisions,
2.Divisionbroadlyrelatedactivitiesassignedtothesamegeneralareabyadministrativedecisions,
3.Departmentcombinationofservicesdeliveredbyaserviceortreatmentgroup,
4.Suitespecificstyleofcommonservicesortreatmentsperformedinthesamesuiteofrooms,
5.Roomallactivitiesthatcanbecarriedoutinthesameinternalenvironmentsurroundedbyphysical
barriers,
6.Zoneseveralcloselyrelatedactivitiesthatareundertakenbyindividuals,
7.Objectasingleactivityassociatedwithanindividual.
Intheintegratedfunctionaldesignofhospitals,theconnectionbetweenphysicalspacesandfunctionsismost
easilymadeatthelowestlevelofthehierarchy,andthenextendedupwardtothenexthigherlevel.Forexample,a
bedisaphysicalobjectimmediatelyrelatedtotheactivityofapatient.Asetoffurnitureconsistingofabed,a
nighttableandanarmchairarrangedcomfortablyinazoneindicatesthesphereofprivateactivitiesforapatientin
aroomwithmultipleoccupancy.Thus,thespatialrepresentationofahospitalcanbeorganizedinstagesstarting
fromthelowestlevelandmovingtothetop.Ineachstepoftheorganizationprocess,anelement(spaceor
function)underconsiderationcanberelateddirectlytotheelementsatthelevelsaboveit,tothoseatthelevels
belowit,andtothosewithinthesamelevel.

Sincetheprimaryfactorrelatingspacesisthemovementofpeopleandsupplies,theobjectiveofarrangingspaces
istheminimizationofmovementwithinthehospital.Ontheotherhand,theinternalenvironmentalfactorssuchas
atmosphericconditions(pressure,temperature,relativehumidity,odorandparticlepollution),sound,lightandfire
protectionproduceconstrainingeffectsonthearrangementofspacessincecertainspacescannotbeplaced
adjacenttootherspacesbecauseofdifferentrequirementsinenvironmentalconditions.Theconsiderationof
logisticsisimportantatalllevelsofthehospitalsystem.Forexample,thetravelpatternsbetweenobjectsinazone
orthosebetweenzonesinaroomarefrequentlyequallyimportantfordevisinganeffectivedesign.Ontheother
hand,theadjacencydesirabilitymatrixbaseduponenvironmentalconditionswillnotbeimportantfororganization
offunctionalelementsbelowtheroomlevelsincearoomisthelowestlevelthatcanprovideaphysicalbarrierto
containdesirableenvironmentalconditions.Hence,theorganizationoffunctionsforanewhospitalcanbecarried
outthroughaninteractiveprocess,startingfromthefunctionalelementsatthelowestlevelthatisregardedas
stablebythedesigner,andmovingstepbystepuptothetoplevelofthehierarchy.Duetothestrongcorrelation
betweenfunctionsandthephysicalspacesinwhichtheyareperformed,thearrangementofphysicalspacesfor
accommodatingthefunctionswillalsofollowthesameiterativeprocess.Onceasatisfactoryspatialarrangement
isachieved,thehospitaldesigniscompletedbytheselectionofsuitablebuildingcomponentswhichcomplement
thespatialarrangement.
Example36:Topdowndesignstyle
Inthefunctionaldesignofahospital,thedesignermaybeginwitha"referencemodel",i.e.thespatial
layoutsofexistinghospitalsofsimilarsizeandservicerequirements.Onthebasisofpastexperience,
spacesareallocatedtovariousdivisionsasshownschematicallyinFigure36.Thespaceineach
divisionisthendividedfurtherforvariousdepartmentsinthedivision,andallthewaydowntheline
ofthehierarchy.Ineverystepalongtheway,thepertinentinformationoftheelementsimmediately
belowthelevelunderconsiderationwillbeassessedinordertoprovideinputformakingnecessary
adjustmentsatthecurrentlevelifnecessary.Themajordrawbackofthetopdowndesignstyleisthat
theconnectionbetweenphysicalspacesandfunctionsatlowerlevelscannotbeeasilyanticipated.
Consequently,thenewdesignisessentiallybasedontheintuitionandexperienceofthedesigner
ratherthananobjectiveanalysisofthefunctionsandspaceneedsofthefacility.Itsgreatestattraction
isitssimplicitywhichkeepsthetimeandcostofdesignrelativelylow.

Figure36:AModelforTopDownDesignofaHospital
Example37:Bottomupdesignstyle
Amultipurposeexaminationsuiteinahospitalisusedasanillustrationofbottomupdesignstyle.In
Figure37,themostbasicelements(furniture)arefirstorganizedintozoneswhichmakeuptheroom.
Thusthesizeoftheroomisdeterminedbyspatiallayoutrequiredtoperformthedesiredservices.
Finally,thesuiteisdefinedbytheroomswhicharepartsofthemultipurposeexaminationsuite.

Figure37:AModelforBottomupdesignofanExaminationSuite

3.6PhysicalStructures
Thestructuraldesignofcomplexengineeringsystemsgenerallyinvolvesbothsynthesisandanalysis.Synthesisis
aninductiveprocesswhileanalysisisadeductiveprocess.Theactivitiesinsynthesisareoftendescribedasanart
ratherthanascience,andareregardedmoreakintocreativitythantoknowledge.Theconceptionofanew
structuralsystemisbyandlargeamatterofsubjectivedecisionsincethereisnoestablishedprocedurefor
generatinginnovativeandhighlysuccessfulalternatives.Theinitialselectionofaworkablesystemfromnumerous
possiblealternativesreliesheavilyonthejudiciousjudgmentofthedesigner.Onceastructuralsystemisselected,
itmustbesubjectedtovigorousanalysistoinsurethatitcansustainthedemandsinitsenvironment.Inaddition,
compatibilityofthestructuralsystemwithmechanicalequipmentandpipingmustbeassured.
Fortraditionaltypesofstructuressuchasofficebuildings,therearestandardsystemsderivedfromthepast
experienceofmanydesigners.However,inmanysituations,specialsystemsmustbedevelopedtomeetthe
specifiedrequirements.Thechoiceofmaterialsforastructuredependsnotonlyonthesuitabilityofmaterialsand
theirinfluenceontheformofthestructure.Forexample,inthedesignofanairplanehangar,asteelskeletonframe
maybeselectedbecauseasimilarframeinreinforcedconcretewilllimitthespanofthestructureowingtoits
unfavorableratioorresistancetoweight.However,ifathinshelledroofisadopted,reinforcedconcretemayprove
tobemoresuitablethansteel.Thus,theinterplayofthestructuralformsandmaterialsaffectstheselectionofa
structuralsystem,whichinturnmayinfluencethemethodofconstructionincludingtheuseoffalsework.
Example38:Steelframesupportingaturboblower[14]
Thedesignofastructuralframesupportingaturboblowersupplyingpressurizedairtoablastfurnace
inasteelmillcanbeusedtoillustratethestructuraldesignprocess.AsshowninFigure38,the
turboblowerconsistsofaturbineandablowerlinkedtoanairinletstack.Sincethevibrationofthe
turboblowerisamajorconcerntoitsoperation,apreliminaryinvestigationcallsforasupporting
framewhichisseparatedfromthestructuralframeofthebuilding.Ananalysisofthevibration
characteristicsoftheturboblowerindicatesthatthelowestmodeofvibrationconsistsofindependent
vibrationoftheturbineshaftandtheblowershaft,withhighermodesforthecoupledturboblower
systemwhenbothshaftsvibrateeitherinphaseoroutofphase.Consequently,asteelframewith
separateunitsfortheblowersideandtheturbinesideisselected.Thecolumnsofthesteelframeare
mountedonpilefoundationandalljointsofthesteelframeareweldedtoreducethevibrationlevels.
Sincethestructuralsteelframealsosupportsacondenser,anairinletandexhaust,andasteaminlet
andexhaustinadditiontotheturboblower,astaticanalysisismadetosizeitsmemberstosupportall

appliedloads.Then,adynamicanalysisisconductedtodeterminethevibrationcharacteristicsofthe
systemincorporatingthestructuralsteelframeandtheturboblower.Whenthelimitingconditionsfor
staticloadsandnaturalfrequenciesofvibrationaremet,thedesignisacceptedassatisfactory.

Figure38:SteelFrameSupportingaTurboBlower
Example39:Multiplehierarchydescriptionsofprojects
Intheprevioussection,ahierarchyoffunctionalspaceswassuggestedfordescribingafacility.This
descriptionisappropriateforfunctionaldesignofspacesandprocesseswithinabuilding,butmaybe
inadequateasaviewofthefacility'sstructuralsystems.Ahierarchysuitableforthispurposemight
divideelementsintostructuralfunctionssuchasslabs,walls,frames,footings,pilesormats.Lower
levelsofthehierarchywoulddescribeindividualdesignelements.Forexample,frameswouldbe
madeupofcolumn,beamanddiagonalgroupswhich,inturn,arecomposedofindividualstructural
elements.Theseindividualstructuralelementscomprisethelimitsonfunctionalspacessuchasrooms
inadifferenthierarchicalperspective.Designerstypicallywillinitiateaviewappropriatefortheir
ownconcerns,andthesedifferenthierarchicalviewsmustbesynthesizedtoinsureconsistencyand
adequacyoftheoveralldesign.

3.7GeotechnicalEngineeringInvestigation
Sinceconstructionissitespecific,itisveryimportanttoinvestigatethesubsurfaceconditionswhichoften
influencethedesignofafacilityaswellasitsfoundation.Theuncertaintyinthedesignisparticularlyacutein
geotechnicalengineeringsothattheassignmentofrisksinthisareashouldbeamajorconcern.Sincethedegreeof
uncertaintyinaprojectisperceiveddifferentlybydifferentpartiesinvolvedinaproject,theassignmentof
unquantifiablerisksarisingfromnumerousunknownstotheowner,engineerandcontractorisinherentlydifficult.

Itisnowonderthatcourtsorarbitratorsareoftenaskedtodistributeequitablyarisktopartieswhodonotperceive
thesamerisksanddonotwanttoassumeadisproportionateshareofsuchrisks.
Example310:Designofatiebackretainingwall[15]
Thisexampledescribestheuseofatiebackretainingwallbuiltinthe1960'swhensuchconstruction
wasuncommonandposedaconsiderablerisk.Theengineerdesigningitandtheownerwereawareof
theriskbecauseofpotentiallyextremefinanciallossesfrombothremedialandlitigationcostsinthe
eventthattheretainingwallfailedandpermittedafailureoftheslope.Butthebenefitswere
perceivedasbeingworththeriskbenefitstotheownerintermsofbothlowercostandshorter
schedule,andbenefitstotheengineerintermsofprofessionalsatisfactioninmeetingtheowner's
needsandsolvingwhatappearedtobeaninsurmountabletechnicalproblem.
Thetiebackretainingwallwasdesignedtopermitacutinahillsidetoprovideadditionalspacefor
theexpansionofasteelmakingfacility.Figure39showsacrosssectionoftheoriginalhillside
locatedinanurbanarea.Numerousresidentialdwellingswerelocatedontopofthehillwhichwould
havebeenprohibitivelycostlyorperhapsimpossibletoremovetopermitregradingofthehillsideto
pushbackthetoeoftheslope.Theonlyrealisticwayofaccomplishingthedesiredgoalwasto
attempttoremovethetoeoftheexistingslopeanduseatiebackretainingwalltostabilizetheslope
asshowninFigure310.

Figure39:TypicalCrossSectionofHillsideAdjoiningSite

Figure310:SchematicSectionofAnchoredSteelSheetPileRetainingWall

Acommitmentwasmadebyboththeownerandtheengineertoaccomplishwhatwasacommon
goal.Theengineermadeacommitmenttodesignandconstructthewallinamannerwhichpermitted
arealtimeevaluationofproblemsandtheabilitytotakemitigatingmeasuresthroughoutthe
constructionofthewall.Theownermadeacommitmenttogivetheengineerboththeprofessional
latitudeandresourcesrequiredtoperformhiswork.Adesignconstructcontractwasnegotiated
wherebythedesigncouldbemodifiedasactualconditionswereencounteredduringconstruction.But
evenwithalloftheplanning,investigationanddesignefforts,therestillremainedasizableriskof
failure.
Thewallwassuccessfullybuiltnotaccordingtoapredevisedplanwhichwentsmoothly,andnot
withoutnumerousproblemstoberesolvedasunexpectedgroundwaterandgeologicalconditionswere
encountered.Estimatedcostswereexceededaseachunexpectedconditionwasaddressed.Butthere
werenoconstructiondelaysandtheirattendantcostsasdisputesoverchangedconditionsandcontract
termswerereconciled.Therewerenocostsforlegalfeesarisingfromlitigationnorincreasedinterest
costsasconstructionstoppedwhiledisputeswerelitigated.Theownerpaidmorethanwasestimated,
butnotmorethanwasnecessaryandnotasmuchasifhehadtoacquirethepropertyatthetopofthe
hilltoregradetheslope.Inaddition,theownerwasabletoattainthedesiredfacilityexpansioninfar
lesstimethanbyanyothermethod.
Asaresultofthesuccessofthisexperienceandothers,theuseoftiebackretainingwallshasbecome
aroutinepractice.

3.8ConstructionSiteEnvironment
Whilethegeneralinformationabouttheconstructionsiteisusuallyavailableattheplanningstageofaproject,itis
importantforthedesignprofessionalsandconstructionmanageraswellasthecontractortovisitthesite.Each
groupwillbebenefitedbyfirsthandknowledgeacquiredinthefield.
Fordesignprofessionals,anexaminationofthetopographymayfocustheirattentiontothelayoutofafacilityon
thesiteformaximumuseofspaceincompliancewithvariousregulatoryrestrictions.Inthecaseofindustrial
plants,theproductionorprocessingdesignandoperationoftendictatethesitelayout.Apoorlayoutcancause

constructionproblemssuchasinadequatespaceforstaging,limitedaccessformaterialsandpersonnel,and
restrictionsontheuseofcertainconstructionmethods.Thus,designandconstructioninputsareimportantinthe
layoutofafacility.
Theconstructionmanagerandthecontractormustvisitthesitetogainsomeinsightinpreparingorevaluatingthe
bidpackagefortheproject.Theycanverifyaccessroadsandwater,electricalandotherserviceutilitiesinthe
immediatevicinity,withtheviewoffindingsuitablelocationsforerectingtemporaryfacilitiesandthefieldoffice.
Theycanalsoobserveanyinterferencesofexistingfacilitieswithconstructionanddevelopaplanforsitesecurity
duringconstruction.
Inexaminingsiteconditions,particularattentionmustbepaidtoenvironmentalfactorssuchasdrainage,
groundwaterandthepossibilityoffloods.Ofparticularconcernisthepossiblepresenceofhazardouswaste
materialsfromprevioususes.Cleaninguporcontrollinghazardouswastescanbeextremelyexpensive.
Example311:GroundwaterPollutionfromaLandfill[16]
Thepresenceofwastedepositsonapotentialconstructionsitecanhavesubstantialimpactsonthe
surroundingarea.UnderexistingenvironmentalregulationsintheUnitedStates,theresponsibilityfor
cleaninguporotherwisecontrollingwastesgenerallyresideswiththeownerofafacilityin
conjunctionwithanyoutstandinginsurancecoverage.
AtypicalexampleofawasteproblemisillustratedinFigure311.Inthisfigure,asmallpushover
burningdumpwaslocatedinadepressiononaslope.Thelandfillconsistedofgeneralrefuseandwas
coveredbyaverysandymaterial.Theinevitableinfiltrationofwaterfromthesurfaceorfromthe
groundwaterintothelandfillwillresultinverticalorhorizontalpercolationofleachableionsand
organiccontamination.Thisleachatewouldbeodorousandpotentiallyhazardousinwater.The
pollutantwouldshowupasseepagedownhill,aspollutioninsurfacestreams,oraspollutionentering
theregionalgroundwater.

Figure311:CrossSectionIllustrationofaLandfill

Beforenewconstructioncouldproceed,thislandfillsitewouldhavetobecontrolledorremoved.Typicalcontrol
methodsmightinvolve:

Surfacewatercontrolmeasures,suchascontourgradingorsurfacesealing.
Passivegroundwatercontroltechniquessuchasundergroundbarriersbetweenthegroundwaterandthe
landfill.
Plumemanagementproceduressuchaspumpingwaterfromsurroundingwells.
Chemicalimmobilizationtechniquessuchasapplyingsurfacesealsorchemicalinjections.
Excavationandreburialofthelandfillrequiringtheavailabilityofanengineeredandenvironmentallysound
landfill.
Theexcavationandreburialofevenasmalllandfillsitecanbeveryexpensive.Forexample,theestimated
reburialcostforalandfilllikethatshowninFigure311wasinexcessof$4millionin1978.

3.9ValueEngineering
Valueengineeringmaybebroadlydefinedasanorganizedapproachinidentifyingunnecessarycostsindesignand
constructionandinsolicitingorproposingalternativedesignorconstructiontechnologytoreducecostswithout
sacrificingqualityorperformancerequirements.Itusuallyinvolvesthestepsofgatheringpertinentinformation,
searchingforcreativeideas,evaluatingthepromisingalternatives,andproposingamorecosteffectivealternative.
Thisapproachisusuallyappliedatthebeginningoftheconstructionphaseoftheprojectlifecycle.
Theuseofvalueengineeringinthepublicsectorofconstructionhasbeenfosteredbylegislationandgovernment
regulation,buttheapproachhasnotbeenwidelyadoptedintheprivatesectorofconstruction.Oneexplanation
maylieinthedifferenceinpracticeofengineeringdesignservicesinthepublicandprivatesectors.Inthepublic
sector,thefeefordesignservicesistightlymonitoredagainstthe"marketprice,"ormayevenbebasedonthe
lowestbidforservice.Suchapracticeinsettingprofessionalfeesencouragesthedesignprofessionalstoadopt
knownandtrieddesignsandconstructiontechnologieswithoutgivingmuchthoughttoalternativesthatare
innovativebutrisky.Contractorsarewillingtoexaminesuchalternativeswhenofferedincentivesforsharingthe
savingsbyowners.Intheprivatesector,theownerhasthefreedomtooffersuchincentivestodesignprofessionals
aswellasthecontractorswithoutbeingconcernedabouttheappearanceoffavoritisminengagingprofessional
services.
Anothersourceofcostsavingsfromvalueengineeringistheabilityofcontractorstotakeadvantageofproprietary
orunusualtechniquesandknowledgespecifictothecontractor'sfirm.Forexample,acontractormayhavemuch
moreexperiencewithaparticularmethodoftunnelingthatisnotspecifiedintheoriginaldesignand,becauseof
thisexperience,thealternativemethodmaybelessexpensive.Inadvanceofabiddingcompetition,adesign
professionaldoesnotknowwhichcontractorwillundertaketheconstructionofafacility.Onceaparticular
contractorischosen,thenmodificationstotheconstructiontechnologyordesignmaytakeadvantageofpeculiar
advantagesofthecontractor'sorganization.
Asafinalsourceofsavingsinvalueengineering,thecontractormayoffergenuinenewdesignorconstruction
insightswhichhaveescapedtheattentionofthedesignprofessionalevenifthelatterisnotrestrainedbythefee
structuretoexploremorealternatives.Iftheexpertiseofthecontractorcanbeutilized,ofcourse,thebesttimeto
employitisduringtheplanninganddesignphaseoftheprojectlifecycle.Thatiswhyprofessionalconstruction
managementorintegrateddesign/constructionareoftenpreferredbyprivateowners.

3.10ConstructionPlanning
Thedevelopmentofaconstructionplanisverymuchanalogoustothedevelopmentofagoodfacilitydesign.The
plannermustweighthecostsandreliabilityofdifferentoptionswhileatthesametimeinsuringtechnical
feasibility.Constructionplanningismoredifficultinsomewayssincethebuildingprocessisdynamicasthesite
andthephysicalfacilitychangeovertimeasconstructionproceeds.Ontheotherhand,constructionoperations
tendtobefairlystandardfromoneprojecttoanother,whereasstructuralorfoundationdetailsmightdiffer
considerablyfromonefacilitytoanother.
Formingagoodconstructionplanisanexceptionallychallengingproblem.Therearenumerouspossibleplans
availableforanygivenproject.Whilepastexperienceisagoodguidetoconstructionplanning,eachprojectis
likelytohavespecialproblemsoropportunitiesthatmayrequireconsiderableingenuityandcreativityto
overcomeorexploit.Unfortunately,itisquitedifficulttoprovidedirectguidanceconcerninggeneralprocedures
orstrategiestoformgoodplansinallcircumstances.Therearesomerecommendationsorissuesthatcanbe
addressedtodescribethecharacteristicsofgoodplans,butthisdoesnotnecessarilytellaplannerhowtodiscover
agoodplan.However,asinthedesignprocess,strategiesofdecompositioninwhichplanningisdividedinto

subproblemsandhierarchicalplanninginwhichgeneralactivitiesarerepeatablysubdividedintomorespecific
taskscanbereadilyadoptedinmanycases.
Fromthestandpointofconstructioncontractorsortheconstructiondivisionsoflargefirms,theplanningprocess
forconstructionprojectsconsistsofthreestagesthattakeplacebetweenthemomentinwhichaplannerstartsthe
planfortheconstructionofafacilitytothemomentinwhichtheevaluationofthefinaloutputoftheconstruction
processisfinished.
Theestimatestageinvolvesthedevelopmentofacostanddurationestimatefortheconstructionofafacilityas
partoftheproposalofacontractortoanowner.Itisthestageinwhichassumptionsofresourcecommitmenttothe
necessaryactivitiestobuildthefacilityaremadebyaplanner.Acarefulandthoroughanalysisofdifferent
conditionsimposedbytheconstructionprojectdesignandbysitecharacteristicsaretakenintoconsiderationto
determinethebestestimate.Thesuccessofacontractordependsuponthisestimate,notonlytoobtainajobbut
alsotoconstructthefacilitywiththehighestprofit.Theplannerhastolookforthetimecostcombinationthatwill
allowthecontractortobesuccessfulinhiscommitment.Theresultofahighestimatewouldbetolosethejob,and
theresultofalowestimatecouldbetowinthejob,buttolosemoneyintheconstructionprocess.Whenchanges
aredone,theyshouldimprovetheestimate,takingintoaccountnotonlypresenteffects,butalsofutureoutcomes
ofsucceedingactivities.Itisveryseldomthecaseinwhichtheoutputoftheconstructionprocessexactlyechoes
theestimateofferedtotheowner.
Inthemonitoringandcontrolstageoftheconstructionprocess,theconstructionmanagerhastokeepconstant
trackofbothactivities'durationsandongoingcosts.Itismisleadingtothinkthatiftheconstructionofthefacility
isonscheduleoraheadofschedule,thecostwillalsobeontheestimateorbelowtheestimate,especiallyif
severalchangesaremade.Constantevaluationisnecessaryuntiltheconstructionofthefacilityiscomplete.When
workisfinishedintheconstructionprocess,andinformationaboutitisprovidedtotheplanner,thethirdstageof
theplanningprocesscanbegin.
Theevaluationstageistheoneinwhichresultsoftheconstructionprocessarematchedagainsttheestimate.A
plannerdealswiththisuncertaintyduringtheestimatestage.Onlywhentheoutcomeoftheconstructionprocessis
knownishe/sheabletoevaluatethevalidityoftheestimate.Itisinthislaststageoftheplanningprocessthathe
orshedeterminesiftheassumptionswerecorrect.Iftheywerenotorifnewconstraintsemerge,he/sheshould
introducecorrespondingadjustmentsinfutureplanning.

3.11IndustrializedConstructionandPrefabrication
Anotherapproachtoconstructioninnovationistoapplytheprinciplesandorganizationalsolutionsadoptedfor
manufacturing.Industrializedconstructionandprefabricationwouldinvolvetransferringasignificantportionof
constructionoperationsfromtheconstructionsitetomoreorlessremotesiteswhereindividualcomponentsof
buildingsandstructuresareproduced.Elementsoffacilitiescouldbeprefabricatedofftheerectionsiteand
assembledbycranesandotherliftingmachinery.
Thereareawidevarietyanddegreesofintroducinggreaterindustrializationtotheconstructionprocess.Many
componentsofconstructedfacilitieshavealwaysbeenmanufactured,suchasairconditioningunits.Lumber,
pipingandotherindividualcomponentsaremanufacturedtostandardsizes.Eventemporaryitemssuchasforms
forconcretecanbeassembledoffsiteandtransportedforuse.Reinforcingbarsforconcretecanalsobeprecut
andshapedtothedesiredconfigurationinamanufacturingplantorinanautomatedplantlocatedproximatetoa
constructionsite.
Amajorprobleminextendingtheuseofprefabricatedunitsisthelackofstandardizationforsystemsand
buildingregulations.[17]Whiledesignershavelongadoptedstandardsizesforindividualcomponentsindesigns,
theadoptionofstandardizedsubassembliesisrarer.Withoutstandardization,theachievementofalargemarket
andscaleeconomiesofproductioninmanufacturingmaybeimpossible.Aninnovativeandmorethorough
industrializationoftheentirebuildingprocessmaybeaprimarysourceofconstructioncostsavingsinthefuture.
Example312:Planningofprefabrication
Whenmightprefabricatedcomponentsbeusedinpreferencetocomponentsassembledona
constructionsite?Astraightforwardansweristouseprefabricatedcomponentswhenevertheircost,
includingtransportation,islessthanthecostofassemblyonsite.Asanexample,formsforconcrete
panelsmightbetransportedtoaconstructionsitewithreinforcingbarsalreadybuiltin,necessary

coatingsappliedtotheforms,andevenspecialfeaturessuchaselectricalconduitalreadyinstalledin
theform.Insomecases,itmightbelessexpensivetoprefabricateandtransporttheentireconcrete
paneltoamanufacturingsite.Incontrast,traditionalconstructionpracticewouldbetoassembleall
thedifferentfeaturesofthepanelonsite.Therelevantcostsofthesealternativescouldbeassessed
duringconstructionplanningtodeterminethelowestcostalternative.
Inadditiontotheconsiderationofdirectcosts,aconstructionplannershouldalsoconsidersomeother
aspectsofthistechnologychoice.First,theplannermustinsurethatprefabricatedcomponentswill
satisfytherelevantbuildingcodesandregulations.Second,therelativequalityoftraditionalversus
prefabricatedcomponentsasexperiencedinthefinalfacilityshouldbeconsidered.Finally,the
availabilityofcomponentsattherequiredtimeduringtheconstructionprocessshouldalsobe
considered.
Example313:Impactsofbuildingcodes[18]
Buildingcodesoriginatedasapartofthebuildingregulatoryprocessforthesafetyandgeneral
welfareofthepublic.Thesourceofallauthoritytoenactbuildingcodesisbasedonthepolicepower
ofthestatewhichmaybedelegatedbythestatelegislaturetolocalgovernmentunits.Consequently,
about8,000localitieshavingtheirownbuildingcodes,eitherbyfollowinganationalmodelcodeor
developingalocalcode.Thelackofuniformityofbuildingcodesmaybeattributedtoavarietyof
reasons:
Neighboringmunicipalitiesmayadoptdifferentnationalmodelsasthebasisforlocal
regulation.
Periodicrevisionsofnationalcodesmaynotbeadoptedbylocalauthoritiesbeforethelapseof
severalyears.
Municipalitiesmayexplicitlydeclinetoadoptspecificprovisionsofnationalmodelcodesor
mayusetheirownvariantsofkeyprovisions.
Localauthoritiesmaydifferininterpretationofthesamelanguageinnationalmodelcodes.
Thelackofuniformityinbuildingcodeshasseriousimpactondesignandconstructionaswellasthe
regulatoryprocessforbuildings.Amongthesignificantfactorsare:
Delayinthediffusionofnewbuildinginnovationswhichmaytakealongtimetofindtheir
waystobeincorporatedinbuildingcodes.
Discouragementtonewproductionorganizations,suchasindustrializedconstructionand
prefabrication.
Duplicationofadministrativecostofpublicagenciesandcompliancecostincurredbyprivate
firms.

3.12ComputerAidedEngineering
Inthepasttwentyyears,thecomputerhasbecomeanessentialtoolinengineering,design,andaccounting.The
innovativedesignsofcomplicatedfacilitiescitedintheprevioussectionswouldbeimpossiblewithouttheaidof
computerbasedanalysistools.Byusinggeneralpurposeanalysisprogramstotestalternativedesignsofcomplex
structuressuchaspetrochemicalplants,engineersareabletogreatlyimproveinitialdesigns.Generalpurpose
accountingsystemsarealsoavailableandadoptedinorganizationstoperformroutinebookkeepingandfinancial
accountingchores.Theseapplicationsexploitthecapabilityforcomputerstoperformnumericalcalculationsina
preprogrammedfashionrapidly,inexpensivelyandaccurately.
Despitetheseadvances,thecomputerisoftenusedasonlyanincidentaltoolinthedesign,constructionand
projectmanagementprocesses.However,newcapabilities,systemsandapplicationprogramsarerapidlybeing
adopted.Thesearemotivatedinpartbytheremarkableimprovementincomputerhardwarecapability,the
introductionoftheInternet,andanextraordinarydeclineincost.Newconceptsincomputerdesignandin
softwarearealsocontributing.Forexample,theintroductionofpersonalcomputersusingmicrocircuitryhas
encouragedtheadoptionofinteractiveprogramsbecauseofthelowcostandconsiderablecapabilityofthe
computerhardware.Personalcomputersavailableforathousanddollarsin1995haveessentiallythesame
capabilityasexpensivemainframecomputersystemsoffifteenyearsearlier.

Computergraphicsprovideanotherpertinentexampleofapotentiallyrevolutionarymechanismfordesignand
communication.Graphicalrepresentationsofboththephysicalandworkactivitiesonprojectshavebeenessential
toolsintheconstructionindustryfordecades.However,manualdraftingofblueprints,plansandotherdiagramsis
laboriousandexpensive.Standalone,computeraideddraftingequipmenthasprovedtobelessexpensiveand
fullycapableofproducingtherequiringdrawings.Moresignificantly,thegeometricinformationrequiredfor
producingdesireddrawingsmightalsobeusedasadatabaseforcomputeraideddesignandcomputerintegrated
construction.Componentsoffacilitiescanberepresentedasthreedimensionalcomputerbasedsolidmodelsfor
thispurpose.Geometricinformationformsonlyonecomponentofintegrateddesigndatabasesinwhichthe
computercanassureconsistency,completenessandcompliancewithrelevantspecificationsandconstraints.
Severalapproachestointegratedcomputeraidedengineeringenvironmentsofthistypehavealreadybeen
attempted.[19]
Computersarealsobeingappliedmoreandmoreextensivelytononanalyticalandnonnumericaltasks.For
example,computerbasedspecificationwritingassistantsareusedtorapidlyassemblesetsofstandard
specificationsortoinsertspecialclausesinthedocumentationoffacilitydesigns.Asanotherexample,
computerizedtransferofinformationprovidesameanstoavoidlaboriousanderrorpronetranscriptionofproject
information.Whilemostofthetraditionalapplicationsandresearchincomputeraidshaveemphasizednumerical
calculations,theuseofcomputerswillrapidlyshifttowardsthemoreprevalentanddifficultproblemsofplanning,
communication,designandmanagement.
Knowledgebasedsystemsrepresentaprominentexampleofnewsoftwareapproachesapplicabletoproject
management.Thesesystemsoriginallyemergedfromresearchinartificialintelligenceinwhichhumancognitive
processesweremodeled.Inlimitedproblemdomainssuchasequipmentconfigurationorprocesscontrol,
knowledgebasedsystemshavebeendemonstratedtoapproachorsurpasstheperformanceofhumanexperts.The
programsaremarkedbyaseparationbetweenthereasoningor"inference"engineprogramandtherepresentation
ofdomainspecificknowledge.Asaresult,systemdevelopersneednotspecifycompleteproblemsolving
strategies(oralgorithms)forparticularproblems.Thischaracteristicofknowledgebasedsystemsmakethem
particularlyusefulintheillstructureddomainsofdesignandprojectmanagement.Chapter15willdiscuss
knowledgebasedsystemsingreaterdetail.
Computerprogramassistantswillsoonbecomeubiquitousinvirtuallyallprojectmanagementorganizations.The
challengeformanagersistousethenewtoolsinaneffectivefashion.Computerintensiveworkenvironments
shouldbestructuredtoaidandtoamplifythecapabilitiesofmanagersratherthantodivertattentionfromreal
problemssuchasworkermotivation.

3.13PreProjectPlanning
Evenbeforedesignandconstructionprocessesbegin,thereisastageof"preprojectplanning"thatcanbecritical
forprojectsuccess.Inthisprocess,theprojectscopeisestablished.Sinceconstructionanddesignprofessionals
areoftennotinvolvedinthisprojectscopestage,theterminologyofdescribingthisasa"preproject"processhas
arisen.Fromtheowner'sperspective,definingtheprojectscopeisjustanotherphaseintheprocessofacquiringa
constructedfacility.
Thedefinitionofaprojectscopetypicallyinvolvesdevelopingprojectalternativesataconceptuallevel,analyzing
projectrisksandeconomicpayoff,developingafinancialplan,makingadecisiontoproceed(ornot),and
decidingupontheprojectorganizationandcontrolplan.Thenextfewchapterswillexaminethesedifferent
problemsatsomelength.
Thedangerofpoorprojectdefinitioncomesfromescalatingcosts(asnewitemsareadded)or,intheextreme,
projectfailure.Agooddefinitionofscopeallowsallthepartiesintheprojecttounderstandwhatisneededandto
worktowardsmeetingthoseneeds.
Example314:TheProjectDefinitionRatingIndex(PDRI)forBuildingProjectsTheConstructionIndustry
Institutehasdevelopedratingindexesfordifferenttypesofprojectstoassesstheadequacyofprojectscope
definitions.[20]Theseareintendedtoreflectbestpracticesinthebuildingindustryandprovidesachecklistfor
recommendedactivitiesandmilestonestodefineaprojectscope.Theratingindexisaweightedsumofscores
receivedforavarietyofitemsonthescopedefinitionchecklist.Eachiteminthechecklistisratedas"not
applicable"(0),"completedefinition"(1),"minordeficiencies"(2),"somedeficiencies"(3),"majordeficiencies"
(4)or"incompleteorpoordefinition"(5).Lowerscoresinthesecategoriesarepreferable.Someitemsinthe
checklistinclude:

BusinessStrategyforbuildinguse,justification,plan,economicanalysis,facilityrequirements,
expansion/alterationconsideration,siteselectionissuesandprojectobjectives.
OwnerPhilosophywithregardtoreliability,maintenance,operationanddesign.
ProjectRequirementsforvalueengineering,design,existingfacility,scopeofworkreview,scheduleand
budget.
SiteInformationincludingapplicableregulatoryreportingandpermitsrequirements.
BuildingProgrammingincludingroombyroomdefinitionsforuse,finishes,interiorrequirementsandhvac
(heating,ventilatingandairconditioning).
DesignParametersincludingallcomponentsandaconstructabilityanalysis.
Equipmentincludinginventory,locationsandutilityrequirements.

3.14References
1.Au,T.andP.Christiano,StructuralAnalysis,PrenticeHall,Inc.,EnglewoodCliffs,NJ,1987.
2.BuildingResearchAdvisoryBoard,ExploratoryStudyonResponsibility,LiabilityandAccountabilityfor
RisksinConstruction,NationalAcademyofSciences,Washington,D.C.,1978.
3.Drucker,P.F.,InnovationandEntrepreneurship:PracticeandPrinciples,HarperandRow,NewYork,1985.
4.Gaylord,E.,andC.Gaylord(Editors),StructuralEngineeringHandbook,McGrawHillBookCo.,New
York,1979.
5.Levitt,R.E.,R.D.LogcherandN.H.Quaddumi,"ImpactofOwnerEngineerRiskSharingonDesign
Conservatism,"ASCEJournalofProfessionalIssuesinEngineering,Vol.110,1984,pp.157167.
6.Simon,H.A.,TheScienceoftheArtificial,SecondEdition,MITPress,Cambridge,MA,1981.
7.Tatum,C.B.,"InnovationontheConstructionProject:AProcessView,"ProjectManagementJournal,Vol.
18,No.5,1987,pp.5767.
8.PreProjectPlanningResearchTeam,PreProjectPlanningHandbookConstructionIndustryInstitute,
Publication392,April1995.

3.15Footnotes
1.See"ASCEUnveilsQualityManual",ENR,November5,1987,p.14)Back
2.SeeV.Fairweather,"Milan'sModelMetro",CivilEngineering,December1987,pp.4043.Back
3.SeeT.Y.LinandB.G.Gerwick,Jr."DesignofLongSpanConcreteBridgeswithSpecialReferencesto
Prestressing,Precasting,StructuralBehaviorandEconomics,"ACIPublicationSP23,FirstInternational
Symposium,1969,pp.693704Back
4.SeeLinnhoff,B.,D.W.Townsend,D.Boland,G.F.Hewitt,B.E.A.Thomas,A.R.Guy,andR.H.Marsland,
UserGuideonProcessIntegrationfortheEfficientUseofEnergy,InstitutionofChemicalEngineers,
Rugby,Warks.,England,1982.Back
5."MoreConstructionfortheMoney,"SummaryReportoftheConstructionIndustryCostEffectiveness
Project,TheBusinessRoundtable,NewYork,1983,pg.30.Back
6.See"TheQuietRevolutioninSkyscraperDesign,"CivilEngineering,May1983,pp.5459.Back
7.SeeJ.Landis,"WhyHomebuildersDon'tInnovate,"BuiltEnvironment,Vol.8,No.1,1982,pp.4653.Back
8.SeeP.J.Cassimates,EconomicsoftheConstructionIndustry,NationalIndustryConferenceBoard(SBENo.
111),1969.Back
9.SeeF.Moavenzadeh,"Construction'sHighTechnologyRevolution,"TechnologyReview,October,1985,pp.
3239.Back
10.FormoreinformationonGreenBuildingsseetheLEEDwebsite:
http://www.usgbc.org/LEED/LEED_main.aspBack
11.SeeR.W.JensenandC.C.Tonies(Editors),SoftwareEngineering,PrenticeHall,Inc.,EnglewoodCliffs,
NJ,1979,p.22.Back
12.SeeS.J.Fenves,"ComputerApplications,"inStructuralEngineeringHandbook,(Gaylord,E.andC.
Gaylord,Editors),McGrawHillBookCo.,NewYork,NY,1979.Back
13.SeeT.Au,E.W.PartiandA.K.C.Wong,"ComputerApplicationsforHealthCareFacilityDesign,"
ComputersinBiologyandMedicine,Vol.1,No.4,1971,pp.299316.Back
14.TheauthorsareindebtedtoE.D'Appoloniaforsuggestingthisexample.Back
15.SeeE.D'Appolonia,R.AlpersteinandD.J.D'Appolonia,"BehaviorofColluvialSlope",ASCEJournalof
SoilMechanicsandFoundationsDivision,Vol.93,No.SM4,1967,pp.447473.Back
16.ThematerialinthisexampleisadaptedfromA.L.Tolman,A.P.Ballestero,W.W.Beck,G.H.Emrich,
"GuidanceManualforMinimizingPollutionfromWasteDisposalSites,"ReporttotheMunicipal

EnvironmentalResearchLaboratory,U.S.EnvironmentalProtectionAgency,EPA600/278142,August
1978.Back
17.Fordiscussionsofindustrializedbuilding,seeBender,Richard,ACrackintheRearViewMirrorAViewof
IndustrializedBuilding,VonNostrandReinholdCo.,1983NuttPowell,Thomas,E.,ManufacturedHomes:
MakingSenseofaHousingOpportunity,AuburnHouse,1982orWarzawski,A.,M.Avraham,andD.
Carmel,"UtilizationofPrecastConcreteElementsinBuilding,"ASCEJournalofConstructionEngineering
andManagement,Vol.110,No.CO4,1984,pp.476485.Back
18.SeeC.G.FieldandS.R.Rivkin,TheBuildingCodeBurden,LexingtonBooks,D.C.HeathandCo.,
Lexington,MA,1975.Back
19.SeeRehak,DanielR.andL.A.Lopez,ComputerAidedEngineeringProblemsandProspects,Dept.ofCivil
Engineering,UniversityofIllinois,1981.Back
20.SeePDRIforBuildingProjectsResearchTeam,PDRI:ProjectDefinitionRatingIndexforBuilding
Projects,ConstructionIndustryInstitute,Resource1552,July1999.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter3
GoToChapter5
(TheDesignandConstructionProcess) (CostEstimation)
Labor,MaterialandEquipmentUtilization
HistoricalPerspective
LaborProductivity
FactorsAffectingJobSiteProductivity
LaborRelationsinConstruction
ProblemsinCollectiveBargaining
MaterialsManagement
MaterialProcurementandDelivery
InventoryControl
TradeoffsofCostsinMaterialsManagement.
ConstructionEquipment
ChoiceofEquipmentandStandardProductionRates
ConstructionProcesses
QueuesandResourceBottlenecks
References
Problems
Footnotes

4.Labor,MaterialandEquipmentUtilization
4.1HistoricalPerspective
Goodprojectmanagementinconstructionmustvigorouslypursuetheefficientutilizationoflabor,materialandequipment.Improvement
oflaborproductivityshouldbeamajorandcontinualconcernofthosewhoareresponsibleforcostcontrolofconstructedfacilities.
Materialhandling,whichincludesprocurement,inventory,shopfabricationandfieldservicing,requiresspecialattentionforcost
reduction.Theuseofnewequipmentandinnovativemethodshasmadepossiblewholesalechangesinconstructiontechnologiesinrecent
decades.Organizationswhichdonotrecognizetheimpactofvariousinnovationsandhavenotadaptedtochangingenvironmentshave
justifiablybeenforcedoutofthemainstreamofconstructionactivities.
Observingthetrendsinconstructiontechnologypresentsaverymixedandambiguouspicture.Ontheonehand,manyofthetechniques
andmaterialsusedforconstructionareessentiallyunchangedsincetheintroductionofmechanizationintheearlypartofthetwentieth
century.Forexample,ahistoryofthePanamaCanalconstructionfrom1904to1914arguesthat:
[T]heworkcouldnothavedoneanyfasterormoreefficientlyinourday,despitealltechnologicalandmechanicaladvancesin
thetimesince,thereasonbeingthatnopresentsystemcouldpossiblycarrythespoilawayanyfasterormoreefficientlythan
thesystememployed.Nomotortruckswereusedinthediggingofthecanaleverythingranonrails.Andbecauseofthemud
andrain,noothermethodwouldhaveworkedhalfsowell.[1]
Incontrasttothisviewofonelargeproject,onemayalsopointtothecontinualchangeandimprovementsoccurringintraditional
materialsandtechniques.Bricklayingprovidesagoodexampleofsuchchanges:
Bricklaying...issaidnottohavechangedinthousandsofyearsperhapsintheliteralplacingofbrickonbrickithasnot.But
masonrytechnologyhaschangedagreatdeal.Motorizedwheelbarrowsandmortarmixers,sophisticatedscaffoldingsystems,
andforklifttrucksnowassistthebricklayer.Newepoxymortarsgivestrongeradhesionbetweenbricks.Mortaradditivesand
coldweatherprotectioneliminatewintershutdowns.[2]
Addtothislistofexistinginnovationsthepossibilityofroboticbricklayingautomatedprototypesformasonryconstructionalreadyexist.
Technicalchangeiscertainlyoccurringinconstruction,althoughitmayoccurataslowerratethaninothersectorsoftheeconomy.
TheUnitedStatesconstructionindustryoftenpointstofactorswhichcannotbecontrolledbytheindustryasamajorexplanatoryfactorin
costincreasesandlackoftechnicalinnovation.Theseincludetheimpositionofrestrictionsforprotectionoftheenvironmentandhistorical
districts,requirementsforcommunityparticipationinmajorconstructionprojects,laborlawswhichallowunionstrikestobecomea
sourceofdisruption,regulatorypoliciesincludingbuildingcodesandzoningordinances,andtaxlawswhichinhibitconstructionabroad.
However,theconstructionindustryshouldbearalargeshareofblamefornotrealizingearlierthatthetechnologicaledgeheldbythelarge
U.S.constructionfirmshaserodedinfaceofstiffforeigncompetition.Manypastpractices,whichweretoleratedwhenU.S.contractors
hadatechnologicallead,mustnowbechangedinthefaceofstiffcompetition.Otherwise,theU.S.constructionindustrywillcontinueto
finditselfintrouble.
Withastrongtechnologicalbase,thereisnoreasonwhytheconstructionindustrycannotcatchupandreassertitselftomeetcompetition
whereveritmaybe.Individualdesignand/orconstructionfirmsmustexplorenewwaystoimproveproductivityforthefuture.Ofcourse,
operationalplanningforconstructionprojectsisstillimportant,butsuchtacticalplanninghaslimitationsandmaysoonreachthepointof
diminishingreturnbecausemuchthatcanbewrungoutoftheexistingpracticeshavealreadybeentried.Whatisneededthemostis
strategicplanningtousherinarevolutionwhichcanimproveproductivitybyanorderofmagnitudeormore.Strategicplanningshould
lookatopportunitiesandaskwhethertherearepotentialoptionsalongwhichnewgoalsmaybesoughtonthebasisofexistingresources.
Noonecanbecertainaboutthesuccessofvariousdevelopmentoptionsforthedesignprofessionsandtheconstructionindustry.However,
withtheavailabilityoftoday'shightechnology,someoptionshavegoodpotentialofsuccessbecauseofthesocialandeconomicnecessity
whichwilleventuallypushbarriersaside.Ultimately,decisionsforaction,notplans,willdictatefutureoutcomes.

Backtotop

4.2LaborProductivity
Productivityinconstructionisoftenbroadlydefinedasoutputperlaborhour.Sincelaborconstitutesalargepartoftheconstructioncost
andthequantityoflaborhoursinperformingataskinconstructionismoresusceptibletotheinfluenceofmanagementthanarematerials
orcapital,thisproductivitymeasureisoftenreferredtoaslaborproductivity.However,itisimportanttonotethatlaborproductivityisa
measureoftheoveralleffectivenessofanoperatingsysteminutilizinglabor,equipmentandcapitaltoconvertlaboreffortsintouseful
output,andisnotameasureofthecapabilitiesoflaboralone.Forexample,byinvestinginapieceofnewequipmenttoperformcertain
tasksinconstruction,outputmaybeincreasedforthesamenumberoflaborhours,thusresultinginhigherlaborproductivity.
Constructionoutputmaybeexpressedintermsoffunctionalunitsorconstantdollars.Intheformercase,laborproductivityisassociated
withunitsofproductperlaborhour,suchascubicyardsofconcreteplacedperhourormilesofhighwaypavedperhour.Inthelattercase,
laborproductivityisidentifiedwithvalueofconstruction(inconstantdollars)perlaborhour.Thevalueofconstructioninthisregardisnot
measuredbythebenefitofconstructedfacilities,butbyconstructioncost.Laborproductivitymeasuredinthiswayrequiresconsiderable
careininterpretation.Forexample,wageratesinconstructionhavebeendecliningintheUSduringtheperiod1970to1990,andsince
wagesareanimportantcomponentinconstructioncosts,thevalueofconstructionputinplaceperhourofworkwilldeclineasaresult,
suggestinglowerproductivity.

ProductivityattheJobSite
Contractorsandownersareoftenconcernedwiththelaboractivityatjobsites.Forthispurpose,itisconvenienttoexpresslabor
productivityasfunctionalunitsperlaborhourforeachtypeofconstructiontask.However,evenforsuchspecificpurposes,differentlevels
ofmeasuremaybeused.Forexample,cubicyardsofconcreteplacedperhourisalowerlevelofmeasurethanmilesofhighwaypaved
perhour.Lowerlevelmeasuresaremoreusefulformonitoringindividualactivities,whilehigherlevelmeasuresmaybemoreconvenient
fordevelopingindustrywidestandardsofperformance.
Whileeachcontractororownerisfreetouseitsownsystemtomeasurelaborproductivityatasite,itisagoodpracticetosetupasystem
whichcanbeusedtotrackproductivitytrendsovertimeandinvariedlocations.Considerableeffortsarerequiredtocollectinformation
regionallyornationallyoveranumberofyearstoproducesuchresults.Theproductivityindicescompiledfromstatisticaldatashould
includeparameterssuchastheperformanceofmajorcrafts,effectsofprojectsize,typeandlocation,andothermajorprojectinfluences.
Inordertodevelopindustrywidestandardsofperformance,theremustbeageneralagreementonthemeasurestobeusefulforcompiling
data.Then,thejobsiteproductivitydatacollectedbyvariouscontractorsandownerscanbecorrelatedandanalyzedtodevelopcertain
measuresforeachofthemajorsegmentoftheconstructionindustry.Thus,acontractororownercancompareitsperformancewiththatof
theindustryaverage.

ProductivityintheConstructionIndustry
Becauseofthediversityoftheconstructionindustry,asingleindexfortheentireindustryisneithermeaningfulnorreliable.Productivity
indicesmaybedevelopedformajorsegmentsoftheconstructionindustrynationwideifreliablestatisticaldatacanbeobtainedfor
separateindustrialsegments.Forthisgeneraltypeofproductivitymeasure,itismoreconvenienttoexpresslaborproductivityasconstant
dollarsperlaborhourssincedollarvaluesaremoreeasilyaggregatedfromalargeamountofdatacollectedfromdifferentsources.Theuse
ofconstantdollarsallowsmeaningfulapproximationsofthechangesinconstructionoutputfromoneyeartoanotherwhenpricedeflators
areappliedtocurrentdollarstoobtainthecorrespondingvaluesinconstantdollars.However,sincemostconstructionpricedeflatorsare
obtainedfromacombinationofpriceindicesformaterialandlaborinputs,theyreflectonlythechangeofpricelevelsanddonotcapture
anysavingsarisingfromimprovedlaborproductivity.Suchdeflatorstendtooverstateincreasesinconstructioncostsoveralongperiodof
time,andconsequentlyunderstatethephysicalvolumeorvalueofconstructionworkinyearssubsequenttothebaseyearfortheindices.
Backtotop

4.3FactorsAffectingJobSiteProductivity
Jobsiteproductivityisinfluencedbymanyfactorswhichcanbecharacterizedeitheraslaborcharacteristics,projectworkconditionsoras
nonproductiveactivities.Thelaborcharacteristicsinclude:
age,skillandexperienceofworkforce
leadershipandmotivationofworkforce
Theprojectworkconditionsincludeamongotherfactors:
Jobsizeandcomplexity.
Jobsiteaccessibility.
Laboravailability.
Equipmentutilization.
Contractualagreements.
Localclimate.
Localculturalcharacteristics,particularlyinforeignoperations.
Thenonproductiveactivitiesassociatedwithaprojectmayormaynotbepaidbytheowner,buttheyneverthelesstakeuppotentiallabor
resourceswhichcanotherwisebedirectedtotheproject.Thenonproductiveactivitiesincludeamongotherfactors:

Indirectlaborrequiredtomaintaintheprogressoftheproject
Reworkforcorrectingunsatisfactorywork
Temporaryworkstoppageduetoinclementweatherormaterialshortage
Timeoffforunionactivities
Absenteetime,includinglatestartandearlyquits
Nonworkingholidays
Strikes
Eachcategoryoffactorsaffectstheproductivelaboravailabletoaprojectaswellastheonsitelaborefficiency.

LaborCharacteristics
Performanceanalysisisacommontoolforassessingworkerqualityandcontribution.Factorsthatmightbeevaluatedinclude:
QualityofWorkcaliberofworkproducedoraccomplished.
QuantityofWorkvolumeofacceptablework
JobKnowledgedemonstratedknowledgeofrequirements,methods,techniquesandskillsinvolvedindoingthejobandinapplying
thesetoincreaseproductivity.
RelatedWorkKnowledgeknowledgeofeffectsofworkuponotherareasandknowledgeofrelatedareaswhichhaveinfluenceon
assignedwork.
Judgmentsoundnessofconclusions,decisionsandactions.
Initiativeabilitytotakeeffectiveactionwithoutbeingtold.
ResourceUtilizationabilitytodelineateprojectneedsandlocate,planandeffectivelyuseallresourcesavailable.
Dependabilityreliabilityinassumingandcarryingoutcommitmentsandobligations.
AnalyticalAbilityeffectivenessinthinkingthroughaproblemandreachingsoundconclusions.
CommunicativeAbilityeffectivenessinusingorgalandwrittencommunicationsandinkeepingsubordinates,associates,superiors
andothersadequatelyinformed.
InterpersonalSkillseffectivenessinrelatinginanappropriateandproductivemannertoothers.
AbilitytoWorkUnderPressureabilitytomeettightdeadlinesandadapttochanges.
SecuritySensitivityabilitytohandleconfidentialinformationappropriatelyandtoexercisecareinsafeguardingsensitive
information.
SafetyConsciousnesshasknowledgeofgoodsafetypracticesanddemonstratesawarenessofownpersonalsafetyandthesafetyof
others.
ProfitandCostSensitivityabilitytoseekout,generateandimplementprofitmakingideas.
PlanningEffectivenessabilitytoanticipateneeds,forecastconditions,setgoalsandstandards,planandscheduleworkand
measureresults.
Leadershipabilitytodevelopinothersthewillingenssanddesiretoworktowardscommonobjectives.
Delegatingeffectivenessindelegatingworkappropriately.
DevelopmentPeopleabilitytoselect,trainandappraisepersonnel,setstandardsofperformance,andprovidemotivationtogrow
intheircapacity.<li>Diversity(EqualEmploymentOpportunity)abilitytobesenstivetotheneedsofminorities,femalesand
otherprotectedgroupsandtodemonstrateaffirmativeactioninrespondingtotheseneeds.
Thesedifferentfactorscouldeachbeassessedonathreepointscale:(1)recognizedstrength,(2)meetsexpectations,(3)areaneeding
improvement.Examplesofworkperformanceintheseareasmightalsobeprovided.

ProjectWorkConditions
Jobsitelaborproductivitycanbeestimatedeitherforeachcraft(carpenter,bricklayer,etc.)oreachtypeofconstruction(residential
housing,processingplant,etc.)underaspecificsetofworkconditions.Abaselaborproductivitymaybedefinedforasetofwork
conditionsspecifiedbytheownerorcontractorwhowishestoobserveandmeasurethelaborperformanceoveraperiodoftimeunder
suchconditions.Alaborproductivityindexmaythenbedefinedastheratioofthejobsitelaborproductivityunderadifferentsetofwork
conditionstothebaselaborproductivity,andisameasureoftherelativelaborefficiencyofaprojectunderthisnewsetofwork
conditions.
Theeffectsofvariousfactorsrelatedtoworkconditionsonanewprojectcanbeestimatedinadvance,somemoreaccuratelythanothers.
Forexample,forverylargeconstructionprojects,thelaborproductivityindextendstodecreaseastheprojectsizeand/orcomplexity
increasebecauseoflogisticproblemsandthe"learning"thattheworkforcemustundergobeforeadjustingtothenewenvironment.Job
siteaccessibilityoftenmayreducethelaborproductivityindexiftheworkersmustperformtheirjobsinroundaboutways,suchas
avoidingtrafficinrepavingthehighwaysurfaceormaintainingtheoperationofaplantduringrenovation.Laboravailabilityinthelocal
marketisanotherfactor.Shortageoflocallaborwillforcethecontractortobringinnonlocallabororscheduleovertimeworkorboth.In
eithercase,thelaborefficiencywillbereducedinadditiontoincurringadditionalexpenses.Thedegreeofequipmentutilizationand
mechanizationofaconstructionprojectclearlywillhavedirectbearingonjobsitelaborproductivity.Thecontractualagreementsplayan
importantroleintheutilizationofunionornonunionlabor,theuseofsubcontractorsandthedegreeoffieldsupervision,allofwhichwill
impactjobsitelaborproductivity.Sinceonsiteconstructionessentiallyinvolvesoutdooractivities,thelocalclimatewillinfluencethe
efficiencyofworkersdirectly.Inforeignoperations,theculturalcharacteristicsofthehostcountryshouldbeobservedinassessingthe
laborefficiency.

NonProductiveActivities
Thenonproductiveactivitiesassociatedwithaprojectshouldalsobeexaminedinordertoexaminetheproductivelaboryield,whichis
definedastheratioofdirectlaborhoursdevotedtothecompletionofaprojecttothepotentiallaborhours.Thedirectlaborhoursare
estimatedonthebasisofthebestpossibleconditionsatajobsitebyexcludingallfactorswhichmayreducetheproductivelaboryield.For

example,intherepavingofhighwaysurface,theflagmenrequiredtodiverttrafficrepresentindirectlaborwhichdoesnotcontributetothe
laborefficiencyofthepavingcrewifthehighwayisclosedtothetraffic.Similarly,forlargeprojectsinremoteareas,indirectlabormay
beusedtoprovidehousingandinfrastructurefortheworkershiredtosupplythedirectlaborforaproject.Thelaborhoursspentonrework
tocorrectunsatisfactoryoriginalworkrepresentextratimetakenawayfrompotentiallaborhours.Thelaborhoursrelatedtosuch
activitiesmustbedeductedfromthepotentiallaborhoursinordertoobtaintheactualproductivelaboryield.
Example41:Effectsofjobsizeonproductivity
Acontractorhasestablishedthatunderasetof"standard"workconditionsforbuildingconstruction,ajobrequiring500,000
laborhoursisconsideredstandardindeterminingthebaselaborproductivity.Allotherfactorsbeingthesame,thelabor
productivityindexwillincreaseto1.1or110%forajobrequiringonly400,000laborhours.Assumingthatalinearrelation
existsfortherangebetweenjobsrequiring300,000to700,000laborhoursasshowninFigure41,determinethelabor
productivityindexforanewjobrequiring650,000laborhoursunderotherwisethesamesetofworkconditions.

Figure41:IllustrativeRelationshipbetweenProductivityIndexandJobSize
ThelaborproductivityindexIforthenewjobcanbeobtainedbylinearinterpolationoftheavailabledataasfollows:

Thisimpliesthatlaboris15%lessproductiveonthelargejobthanonthestandardproject.
Example42:Productivelaboryield[3]
Intheconstructionofanoffshoreoildrillingplatform,thepotentiallaborhourswerefoundtobeL=7.5millionhours.Of
thistotal,thenonproductiveactivitiesexpressedinthousandlaborhourswereasfollows:
A=417forholidaysandstrikes
B=1,415forabsentees(i.e.vacation,sicktime,etc.)
C=1,141fortemporarystoppage(i.e.weather,waiting,unionactivities,etc.)
D=1,431forindirectlabor(i.e.buildingtemporaryfacilities,cleaningupthesite,reworktocorrecterrors,etc.)
Determinetheproductivelaboryieldaftertheabovefactorsaretakenintoconsideration.
Thepercentagesoftimeallocatedtovariousnonproductiveactivities,A,B,CandDare:

ThetotalpercentageoftimeXforallnonproductiveactivitiesis:

Theproductivelaboryield,Y,whenthegivenfactorsforA,B,CandDareconsidered,isasfollows:

Asaresult,only41%ofthebudgetedlabortimewasdevoteddirectlytoworkonthefacility.
Example43:Utilizationofonsiteworker'stime
Anexampleillustratingtheeffectsofindirectlaborrequirementswhichlimitproductivelaborbyatypicalcraftsmanonthe
jobsitewasgivenbyR.Tuckerwiththefollowingpercentagesoftimeallocation:[4]
Productivetime
Unproductivetime
Administrativedelays
Inefficientworkmethods
Laborjurisdictionsandotherworkrestrictions
Personaltime

40%
20%
20%
15%
5%

Inthisestimate,asmuchtimeisspentonproductiveworkasondelaysduetomanagementandinefficienciesdueto
antiquatedworkmethods.
Backtotop

4.4LaborRelationsinConstruction
Themarketdemandinconstructionfluctuatesgreatly,oftenwithinshortperiodsandwithunevendistributionsamonggeographical
regions.Evenwhenthevolumeofconstructionisrelativelysteady,sometypesofworkmaydeclineinimportancewhileothertypesgain.
Underanunstableeconomicenvironment,employersintheconstructionindustryplacegreatvalueonflexibilityinhiringandlayingoff
workersastheirvolumesofworkwaxandwane.Ontheotherhand,constructionworkerssensetheirinsecurityundersuchcircumstances
andattempttolimittheimpactsofchangingeconomicconditionsthroughlabororganizations.
Therearemanycraftsintheconstructionlaborforces,butmostcontractorshirefromonlyafewofthesecraftstosatisfytheirspecialized
needs.Becauseofthepeculiarcharacteristicsofemploymentconditions,employersandworkersareplacedinamoreintimaterelationship
thaninmanyotherindustries.Laborandmanagementarrangementsintheconstructionindustryincludebothunionizedandnonunionized
operationswhichcompeteforfuturedominance.Dramaticshiftsinunionizationcanoccur.Forexample,thefractionoftradeunion
membersintheconstructionindustrydeclinedfrom42%in1992to26%in2000inAustralia,a40%declinein8years.

UnionizedConstruction
Thecraftunionsworkwithconstructioncontractorsusingunionizedlaborthroughvariousmarketinstitutionssuchasjurisdictionrules,
apprenticeshipprograms,andthereferralsystem.Craftunionswithspecificjurisdictionrulesfordifferenttradessetuniformhourlywage
ratesforjourneymenandofferformalapprenticeshiptrainingtoprovidecommonandequivalentskillforeachtrade.Contractors,through
thecontractors'associations,enterintolegallybindingcollectivebargainingagreementswithoneormoreofthecraftunionsinthe
constructiontrades.Thesystemwhichbindbothpartiestoacollectivebargainingagreementisreferredtoasthe"unionshop".These
agreementsobligateacontractortoobservetheworkjurisdictionsofvariousunionsandtohireemployeesthroughaunionoperated
referralsystemcommonlyknownasthehiringhall.
Thereferralsystemsoperatedbyunionorganizationsarerequiredtoobserveseveralconditions:
1.Allqualifiedworkersreportedtothereferralsystemmustbemadeavailabletothecontractorwithoutdiscriminationonthebasisof
unionmembershiporotherrelationshiptotheunion.The"closedshop"whichlimitsreferraltounionmembersonlyisnowillegal.
2.Thecontractorreservestherighttohireorrefusetohireanyworkerreferredbytheuniononthebasisofhisorherqualifications.
3.Thereferralplanmustbepostedinpublic,includinganyprioritiesofreferralsorrequiredqualifications.
Whiletheseprinciplesmustprevail,referralsystemsoperatedbylabororganizationsdifferwidelyintheconstructionindustry.
Contractorsandcraftunionsmustnegotiatenotonlywageratesandworkingconditions,butalsohiringandapprenticetrainingpractices.
Thepurposeoftradejurisdictionistoencourageconsiderableinvestmentinapprenticetrainingonthepartoftheunionsothatthe
contractorwillbeprotectedbyhavingonlyqualifiedworkersperformthejobeventhoughsuchworkersarenotpermanentlyattachedto
thecontractorandthusmayhavenosenseofsecurityorloyalty.Thereferralsystemisoftenarapidanddependablesourceofworkers,
particularlyforacontractorwhomovesintoanewgeographicallocationorstartsanewprojectwhichhashighfluctuationsindemandfor
labor.Byandlarge,thereferralsystemhasfunctionedsmoothlyinprovidingqualifiedworkerstocontractors,eventhoughsomeother
aspectsofunionoperationsarenotaswellacceptedbycontractors.

NonUnionizedConstruction
Inrecentyears,nonunioncontractorshaveenteredandprosperedinanindustrywhichhasalongtraditionofunionization.Nonunion
operationsinconstructionarereferredtoas"openshops."However,intheabsenceofcollectivebargainingagreements,manycontractors
operateunderpoliciesadoptedbynonunioncontractors'associations.Thispracticeisreferredtoas"meritshop",whichfollows
substantiallythesamepoliciesandproceduresascollectivebargainingalthoughunderthecontrolofanonunioncontractors'association

withoutunionparticipation.Othercontractorsmaychoosetobetotally"unorganized"bynotfollowingeitherunionshopormeritshop
practices.
Theoperationsofthemeritshoparenationalinscope,exceptforthelocalorstateapprenticeshipandtrainingplans.Thecomprehensive
plansofthecontractors'associationapplytoallemployeesandcraftsofacontractorregardlessoftheirtrades.Undersuchoperations,
workershavefullrightstomovethroughthenationamongmembercontractorsoftheassociation.Thus,thenonunionsegmentofthe
industryisorganizedbycontractors'associationsintoanintegralpartoftheconstructionindustry.However,sincemeritshopworkersare
employeddirectlybytheconstructionfirms,theyhaveagreaterloyaltytothefirm,andrecognizethattheirowninterestwillbeaffected
bythefinancialhealthofthefirm.
PlayingasignificantroleintheearlygrowthandcontinuedexpansionofmeritshopconstructionistheAssociatedBuildersand
Contractorsassociation.By1987,ithadamembershipofnearly20,000contractorsandanetworkof75chaptersthroughthenation.
AmongthemeritshopcontractorsarelargeconstructionfirmssuchasFluorDaniel,BlountInternational,andBrown&Root
Construction.Theadvantagesofmeritshopsasclaimedbyitsadvocatesare:
theabilitytomanagetheirownworkforce
flexibilityinmakingtimelymanagementdecisions
theemphasisonmakingmaximumusageoflocallaborforce
theemphasisonencouragingindividualworkadvancementthroughcontinueddevelopmentofskills
thesharedinterestthatmanagementandworkershaveinseeinganindividualfirmprosper.
Byshoulderingthetrainingresponsibilityforproducingskillworkers,themeritshopcontractorshavedeflectedthemostserious
complaintsofusersandlaborthatusedtoberaisedagainsttheopenshop.Ontheotherhand,theuseofmixedcrewsofskilledworkersat
ajobsitebymeritshopcontractorsenablesthemtoremoveamajorsourceofinefficienciescausedbytheexclusivejurisdictionpracticed
intheunionshop,namelytheideathatonlymembersofaparticularunionshouldbepermittedtoperformanygiventaskinconstruction.
Asaresult,meritshopcontractorsareabletoexertabeneficialinfluenceonproductivityandcosteffectivenessofconstructionprojects.
Theunorganizedformofopenshopisfoundprimarilyinhousingconstructionwherealargepercentageofworkersarecharacterizedas
unskilledhelpers.Theskilledworkersinvariouscraftsaredevelopedgraduallythroughinformalapprenticeshipswhileservingashelpers.
Thisformofopenshopisnotexpectedtoexpandbeyondthetypeofconstructionprojectsinwhichhighlyspecializedskillsarenot
required.
Backtotop

4.5ProblemsinCollectiveBargaining
IntheorganizedbuildingtradesinNorthAmericanconstruction,theprimaryunitistheinternationalunion,whichisanassociationof
localunionsintheUnitedStatesandCanada.Althoughonlytheinternationalunionshavethepowertoissueorremovechartersandto
organizeorcombinelocalunions,eachlocalunionhasconsiderabledegreesofautonomyintheconductofitsaffairs,includingthe
negotiationofcollectivebargainingagreements.Thebusinessagentofalocalunionisanelectedofficialwhoisthemostimportantperson
inhandlingthedaytodayoperationsonbehalfoftheunion.Thecontractors'associationsrepresentingtheemployersvarywidelyin
compositionandstructure,particularlyindifferentgeographicalregions.Ingeneral,localcontractors'associationsareconsiderablyless
wellorganizedthantheunionwithwhichtheydeal,buttheytrytostrengthenthemselvesthroughaffiliationwithstateandnational
organizations.Typically,collectivebargainingagreementsinconstructionarenegotiatedbetweenalocalunioninasinglecraftandthe
employersofthatcraftasrepresentedbyacontractors'association,buttherearemanyexceptionstothispattern.Forexample,acontractor
mayremainoutsidetheassociationandnegotiateindependentlyoftheunion,butitusuallycannotobtainabetteragreementthanthe
association.
Becauseofthegreatvarietyofbargainingstructuresinwhichtheunionandcontractors'organizationmaychoosetostagenegotiations,
therearemanyproblemsarisingfromjurisdictionaldisputesandothercauses.Giventhetraditionalrivalriesamongvariouscraftsandthe
ineffectiveorganizationofsomeofcontractors'associations,coupledwiththelackofadequatemechanismsforsettlingdisputes,some
possiblesolutionstotheseproblemsdeserveseriousattention:[5]

RegionalBargaining
Currently,thegeographicalareainacollectivebargainingagreementdoesnotnecessarilycoincidewiththeterritoryoftheunionand
contractors'associationsinthenegotiations.Thereareoverlappingofjurisdictionsaswellasterritories,whichmaycreatesuccessionsof
contractterminationdatesfordifferentcrafts.Mostcollectivebargainingagreementsarenegotiatedlocally,butregionalagreementswith
morecomprehensivecoverageembracinganumberofstateshavebeenestablished.Theroleofnationalunionnegotiatorsandcontractors'
representativesinlocalcollectivebargainingislimited.Thenationalagreementbetweeninternationalunionsandanationalcontractor
normallybindsthecontractors'associationanditsbargainingunit.Consequently,themostpromisingreformliesinthebroadeningofthe
geographicregionofanagreementinasingletradewithoutoverlappingterritoriesorjurisdictions.

MulticraftBargaining
Thetreatmentofinterrelationshipsamongvariouscrafttradesinconstructionpresentsoneofthemostcomplexissuesinthecollective
bargainingprocess.Pastexperienceonprojectagreementshasdealtwithsuchissuessuccessfullyinthatcollectivebargainingagreements
aresignedbyagroupofcrafttradeunionsandacontractorforthedurationofaproject.Projectagreementsmayreferenceother
agreementsonparticularpoints,suchaswageratesandfringebenefits,butmaysettheirownworkingconditionsandproceduresfor
settlingdisputesincludingacommitmentofnostrikeandnolockout.Thistypeofagreementmayserveasastartingpointformulticraft
bargainingonaregional,nonprojectbasis.

ImprovementofBargainingPerformance
Althoughbothsidesofthebargainingtablearetosomedegreeresponsibleforthesuccessorfailureofnegotiation,contractorshaveoften
beenresponsibleforthepoorperformanceofcollectivebargaininginconstructioninrecentyearsbecauselocalcontractors'associations
aregenerallylesswellorganizedandlessprofessionallystaffedthantheunionswithwhichtheydeal.Legislationprovidingfor
contractors'associationaccreditationasanexclusivebargainingagenthasnowbeenprovidedinseveralprovincesinCanada.Itprovidesa
governmentboardthatcouldholdhearingsandestablishanappropriatebargainingunitbygeographicregionorsectoroftheindustry,ona
singletradeormultitradebasis.
Backtotop

4.6MaterialsManagement
Materialsmanagementisanimportantelementinprojectplanningandcontrol.Materialsrepresentamajorexpenseinconstruction,so
minimizingprocurementorpurchasecostspresentsimportantopportunitiesforreducingcosts.Poormaterialsmanagementcanalsoresult
inlargeandavoidablecostsduringconstruction.First,ifmaterialsarepurchasedearly,capitalmaybetiedupandinterestchargesincurred
ontheexcessinventoryofmaterials.Evenworse,materialsmaydeteriorateduringstorageorbestolenunlessspecialcareistaken.For
example,electricalequipmentoftenmustbestoredinwaterprooflocations.Second,delaysandextraexpensesmaybeincurredif
materialsrequiredforparticularactivitiesarenotavailable.Accordingly,insuringatimelyflowofmaterialisanimportantconcernof
projectmanagers.
Materialsmanagementisnotjustaconcernduringthemonitoringstageinwhichconstructionistakingplace.Decisionsaboutmaterial
procurementmayalsoberequiredduringtheinitialplanningandschedulingstages.Forexample,activitiescanbeinsertedintheproject
scheduletorepresentpurchasingofmajoritemssuchaselevatorsforbuildings.Theavailabilityofmaterialsmaygreatlyinfluencethe
scheduleinprojectswithafasttrackorverytighttimeschedule:sufficienttimeforobtainingthenecessarymaterialsmustbeallowed.In
somecase,moreexpensivesuppliersorshippersmaybeemployedtosavetime.
Materialsmanagementisalsoaproblemattheorganizationlevelifcentralpurchasingandinventorycontrolisusedforstandarditems.In
thiscase,thevariousprojectsundertakenbytheorganizationwouldpresentrequeststothecentralpurchasinggroup.Inturn,thisgroup
wouldmaintaininventoriesofstandarditemstoreducethedelayinprovidingmaterialortoobtainlowercostsduetobulkpurchasing.
Thisorganizationalmaterialsmanagementproblemisanalogoustoinventorycontrolinanyorganizationfacingcontinuingdemandfor
particularitems.
Materialsorderingproblemslendthemselvesparticularlywelltocomputerbasedsystemstoinsuretheconsistencyandcompletenessof
thepurchasingprocess.Inthemanufacturingrealm,theuseofautomatedmaterialsrequirementsplanningsystemsiscommon.Inthese
systems,themasterproductionschedule,inventoryrecordsandproductcomponentlistsaremergedtodeterminewhatitemsmustbe
ordered,whentheyshouldbeordered,andhowmuchofeachitemshouldbeorderedineachtimeperiod.Theheartofthesecalculationsis
simplearithmetic:theprojecteddemandforeachmaterialitemineachperiodissubtractedfromtheavailableinventory.Whenthe
inventorybecomestoolow,aneworderisrecommended.Foritemsthatarenonstandardornotkeptininventory,thecalculationiseven
simplersincenoinventorymustbeconsidered.Withamaterialsrequirementsystem,muchofthedetailedrecordkeepingisautomatedand
projectmanagersarealertedtopurchasingrequirements.
Example44:Examplesofbenefitsformaterialsmanagementsystems.[6]
Fromastudyoftwentyheavyconstructionsites,thefollowingbenefitsfromtheintroductionofmaterialsmanagement
systemswerenoted:
Inoneproject,a6%reductionincraftlaborcostsoccurredduetotheimprovedavailabilityofmaterialsasneededon
site.Onotherprojects,an8%savingsduetoreduceddelayformaterialswasestimated.
Acomparisonoftwoprojectswithandwithoutamaterialsmanagementsystemrevealedachangeinproductivityfrom
1.92manhoursperunitwithoutasystemto1.14manhoursperunitwithanewsystem.Again,muchofthisdifference
canbeattributedtothetimelyavailabilityofmaterials.
Warehousecostswerefoundtodecrease50%ononeprojectwiththeintroductionofimprovedinventorymanagement,
representingasavingsof$92,000.Interestchargesforinventoryalsodeclined,withoneprojectreportingacashflow
savingsof$85,000fromimprovedmaterialsmanagement.
Againstthesevariousbenefits,thecostsofacquiringandmaintainingamaterialsmanagementsystemhastobecompared.
However,managementstudiessuggestthatinvestmentinsuchsystemscanbequitebeneficial.
Backtotop

4.7MaterialProcurementandDelivery
Themainsourcesofinformationforfeedbackandcontrolofmaterialprocurementarerequisitions,bidsandquotations,purchaseorders
andsubcontracts,shippingandreceivingdocuments,andinvoices.Forprojectsinvolvingthelargescaleuseofcriticalresources,the
ownermayinitiatetheprocurementprocedureevenbeforetheselectionofaconstructorinordertoavoidshortagesanddelays.Under
ordinarycircumstances,theconstructorwillhandletheprocurementtoshopformaterialswiththebestprice/performancecharacteristics
specifiedbythedesigner.Someoverlappingandrehandlingintheprocurementprocessisunavoidable,butitshouldbeminimizedto
insuretimelydeliveryofthematerialsingoodcondition.
Thematerialsfordeliverytoandfromaconstructionsitemaybebroadlyclassifiedas:(1)bulkmaterials,(2)standardofftheshelf
materials,and(3)fabricatedmembersorunits.Theprocessofdelivery,includingtransportation,fieldstorageandinstallationwillbe

differentfortheseclassesofmaterials.Theequipmentneededtohandleandhaultheseclassesofmaterialswillalsobedifferent.
Bulkmaterialsrefertomaterialsintheirnaturalorsemiprocessedstate,suchasearthworktobeexcavated,wetconcretemix,etc.which
areusuallyencounteredinlargequantitiesinconstruction.Somebulkmaterialssuchasearthworkorgravelsmaybemeasuredinbank
(solidinsitu)volume.Obviously,thequantitiesofmaterialsfordeliverymaybesubstantiallydifferentwhenexpressedindifferent
measuresofvolume,dependingonthecharacteristicsofsuchmaterials.
Standardpipingandvalvesaretypicalexamplesofstandardofftheshelfmaterialswhichareusedextensivelyinthechemicalprocessing
industry.Sincestandardofftheshelfmaterialscaneasilybestockpiled,thedeliveryprocessisrelativelysimple.
Fabricatedmemberssuchassteelbeamsandcolumnsforbuildingsarepreprocessedinashoptosimplifythefielderectionprocedures.
Weldedorboltedconnectionsareattachedpartiallytothememberswhicharecuttoprecisedimensionsforadequatefit.Similarly,steel
tanksandpressurevesselsareoftenpartlyorfullyfabricatedbeforeshippingtothefield.Ingeneral,iftheworkcanbedoneintheshop
whereworkingconditionscanbetterbecontrolled,itisadvisabletodoso,providedthatthefabricatedmembersorunitscanbeshippedto
theconstructionsiteinasatisfactorymanneratareasonablecost.
Asafurthersteptosimplifyfieldassembly,anentirewallpanelincludingplumbingandwiringorevenanentireroommaybe
prefabricatedandshippedtothesite.Whilethefieldlaborisgreatlyreducedinsuchcases,"materials"fordeliveryareinfact
manufacturedproductswithvalueaddedbyanothertypeoflabor.Withmodernmeansoftransportingconstructionmaterialsand
fabricatedunits,thepercentagesofcostsondirectlaborandmaterialsforaprojectmaychangeifmoreprefabricatedunitsareintroduced
intheconstructionprocess.
Intheconstructionindustry,materialsusedbyaspecificcraftaregenerallyhandledbycraftsmen,notbygenerallabor.Thus,electricians
handleelectricalmaterials,pipefittershandlepipematerials,etc.Thismultiplehandlingdivertsscarceskilledcraftsmenandcontractor
supervisionintoactivitieswhichdonotdirectlycontributetoconstruction.Sincecontractorsarenotnormallyinthefreightbusiness,they
donotperformthetasksoffreightdeliveryefficiently.Allthesefactorstendtoexacerbatetheproblemsoffreightdeliveryforverylarge
projects.
Example45:FreightdeliveryfortheAlaskaPipelineProject[7]
ThefreightdeliverysystemfortheAlaskapipelineprojectwassetuptohandle600,000tonsofmaterialsandsupplies.This
tonnagedidnotincludethepipeswhichcomprisedanother500,000tonsandwereshippedthroughadifferentroutingsystem.
ThecomplexityofthisdeliverysystemisillustratedinFigure42.Therectangularboxesdenotegeographicallocations.The
pointsoforiginrepresentplantsandfactoriesthroughouttheUSandelsewhere.Someofthematerialswenttoaprimary
stagingpointinSeattleandsomewentdirectlytoAlaska.Therewerefiveportsofentry:Valdez,Anchorage,Whittier,Seward
andPrudhoeBay.TherewasasecondarystagingareainFairbanksandthepipelineitselfwasdividedintosixsections.
BeyondtheYukonRiver,therewasnothingavailablebutadirtroadforhauling.Theamountsoffreightinthousandsoftons
shippedtoandfromvariouslocationsareindicatedbythenumbersnearthenetworkbranches(witharrowsshowingthe
directionsofmaterialflows)andthemodesoftransportationarenotedabovethebranches.Ineachofthelocations,the
contractorhadsupervisionandconstructionlabortoidentifymaterials,unloadfromtransport,determinewherethematerial
wasgoing,repackageifrequiredtosplitshipments,andthenreloadmaterialonoutgoingtransport.

Figure42:FreightDeliveryfortheAlaskaPipelineProject

Example46:Processplantequipmentprocurement[8]
Theprocurementanddeliveryofbulkmaterialsitemssuchaspipingelectricalandstructuralelementsinvolvesaseriesof
activitiesifsuchitemsarenotstandardand/orinstock.Thetimesrequiredforvariousactivitiesintheprocurementofsuch
itemsmightbeestimatedtobeasfollows:
Activities
Requisitionreadybydesigner
Ownerapproval
Inquiryissuedtovendors
Vendorquotationsreceived
Completebidevaluationbydesigner
Ownerapproval
Placepurchaseorder
Receivepreliminaryshopdrawings
Receivefinaldesigndrawings
Fabricationanddelivery

Duration
(days)
0
5
3
15
7
5
5
10
10
60200

Cumulative
Duration
0
5
8
23
30
35
40
50
60
120260

Asaresult,thistypeofequipmentprocurementwilltypicallyrequirefourtoninemonths.Slippageorcontractioninthis
standardscheduleisalsopossible,basedonsuchfactorsastheextenttowhichafabricatorisbusy.
Backtotop

4.8InventoryControl
Oncegoodsarepurchased,theyrepresentaninventoryusedduringtheconstructionprocess.Thegeneralobjectiveofinventorycontrolis
tominimizethetotalcostofkeepingtheinventorywhilemakingtradeoffsamongthemajorcategoriesofcosts:(1)purchasecosts,(2)
ordercost,(3)holdingcosts,and(4)unavailablecost.Thesecostcategoriesareinterrelatedsincereducingcostinonecategorymay
increasecostinothers.Thecostsinallcategoriesgenerallyaresubjecttoconsiderableuncertainty.

PurchaseCosts

Thepurchasecostofanitemistheunitpurchasepricefromanexternalsourceincludingtransportationandfreightcosts.Forconstruction
materials,itiscommontoreceivediscountsforbulkpurchases,sotheunitpurchasecostdeclinesasquantityincreases.Thesereductions
mayreflectmanufacturers'marketingpolicies,economiesofscaleinthematerialproduction,orscaleeconomiesintransportation.There
arealsoadvantagesinhavinghomogeneousmaterials.Forexample,abulkordertoinsurethesamecolororsizeofitemssuchasbricks
maybedesirable.Accordingly,itisusuallydesirabletomakealimitednumberoflargepurchasesformaterials.Insomecases,
organizationsmayconsolidatesmallordersfromanumberofdifferentprojectstocapturesuchbulkdiscountsthisisabasicsavingtobe
derivedfromacentralpurchasingoffice.
Thecostofmaterialsisbasedonpricesobtainedthrougheffectivebargaining.Unitpricesofmaterialsdependonbargainingleverage,
quantitiesanddeliverytime.Organizationswithpotentialforlongtermpurchasevolumecancommandbetterbargainingleverage.While
ordersinlargequantitiesmayresultinlowerunitprices,theymayalsoincreaseholdingcostsandthuscauseproblemsincashflow.
Requirementsofshortdeliverytimecanalsoadverselyaffectunitprices.Furthermore,designcharacteristicswhichincludeitemsofodd
sizesorshapesshouldbeavoided.Sincesuchitemsnormallyarenotavailableinthestandardstockpile,purchasingthemcauseshigher
prices.
Thetransportationcostsareaffectedbyshipmentsizesandotherfactors.Shipmentbythefullloadofacarrieroftenreducespricesand
assuresquickerdelivery,asthecarriercantravelfromtheorigintothedestinationofthefullloadwithouthavingtostopfordelivering
partofthecargoatotherstations.Avoidingtransshipmentisanotherconsiderationinreducingshippingcost.Whilethereductionin
shippingcostsisamajorobjective,therequirementsofdelicatehandlingofsomeitemsmayfavoramoreexpensivemodeof
transportationtoavoidbreakageandreplacementcosts.

OrderCost
Theordercostreflectstheadministrativeexpenseofissuingapurchaseordertoanoutsidesupplier.Ordercostsincludeexpensesof
makingrequisitions,analyzingalternativevendors,writingpurchaseorders,receivingmaterials,inspectingmaterials,checkingonorders,
andmaintainingrecordsoftheentireprocess.Ordercostsareusuallyonlyasmallportionoftotalcostsformaterialmanagementin
constructionprojects,althoughorderingmayrequiresubstantialtime.

HoldingCosts
Theholdingcostsorcarryingcostsareprimarilytheresultofcapitalcosts,handling,storage,obsolescence,shrinkageanddeterioration.
Capitalcostresultsfromtheopportunitycostorfinancialexpenseofcapitaltiedupininventory.Oncepaymentforgoodsismade,
borrowingcostsareincurredorcapitalmustbedivertedfromotherproductiveuses.Consequently,acapitalcarryingcostisincurredequal
tothevalueoftheinventoryduringaperiodmultipliedbytheinterestrateobtainableorpaidduringthatperiod.Notethatcapitalcosts
onlyaccumulatewhenpaymentformaterialsactuallyoccursmanyorganizationsattempttodelaypaymentsaslongaspossibleto
minimizesuchcosts.Handlingandstoragerepresentthemovementandprotectionchargesincurredformaterials.Storagecostsalso
includethedisruptioncausedtootherprojectactivitiesbylargeinventoriesofmaterialsthatgetintheway.Obsolescenceistheriskthatan
itemwilllosevaluebecauseofchangesinspecifications.Shrinkageisthedecreaseininventoryovertimeduetotheftorloss.
Deteriorationreflectsachangeinmaterialqualityduetoageorenvironmentaldegradation.Manyoftheseholdingcostcomponentsare
difficulttopredictinadvanceaprojectmanagerknowsonlythatthereissomechancethatspecificcategoriesofcostwilloccur.In
additiontothesemajorcategoriesofcost,theremaybeancillarycostsofadditionalinsurance,taxes(manystatestreatinventoriesas
taxableproperty),oradditionalfirehazards.Asageneralrule,holdingcostswilltypicallyrepresent20to40%oftheaverageinventory
valueoverthecourseofayearthusiftheaveragematerialinventoryonaprojectis$1millionoverayear,theholdingcostmightbe
expectedtobe$200,000to$400,000.

UnavailabilityCost
Theunavailabilitycostisincurredwhenadesiredmaterialisnotavailableatthedesiredtime.Inmanufacturingindustries,thiscostis
oftencalledthestockoutordepletioncost.Shortagesmaydelaywork,therebywastinglaborresourcesordelayingthecompletionofthe
entireproject.Again,itmaybedifficulttoforecastinadvanceexactlywhenanitemmayberequiredorwhenanshipmentwillbe
received.Whiletheprojectschedulegivesoneestimate,deviationsfromtheschedulemayoccurduringconstruction.Moreover,thecost
associatedwithashortagemayalsobedifficulttoassessifthematerialusedforoneactivityisnotavailable,itmaybepossibletoassign
workerstootheractivitiesand,dependinguponwhichactivitiesarecritical,theprojectmaynotbedelayed.
Backtotop

4.9TradeoffsofCostsinMaterialsManagement.
Toillustratethetypeoftradeoffsencounteredinmaterialsmanagement,supposethataparticularitemistobeorderedforaproject.The
amountoftimerequiredforprocessingtheorderandshippingtheitemisuncertain.Consequently,theprojectmanagermustdecidehow
muchleadtimetoprovideinorderingtheitem.Orderingearlyandtherebyprovidingalongleadtimewillincreasethechancethatthe
itemisavailablewhenneeded,butitincreasesthecostsofinventoryandthechanceofspoilageonsite.
LetTbethetimeforthedeliveryofaparticularitem,Rbethetimerequiredforprocesstheorder,andSbetheshippingtime.Then,the
minimumamountoftimeforthedeliveryoftheitemisT=R+S.Ingeneral,bothRandSarerandomvariableshenceTisalsoarandom
variable.Forthesakeofsimplicity,weshallconsideronlythecaseofinstantprocessingforanorder,i.e.R=0.Then,thedeliverytimeT
equalstheshippingtimeS.
SinceTisarandomvariable,thechancethatanitemwillbedeliveredondaytisrepresentedbytheprobabilityp(t).Then,theprobability
thattheitemwillbedeliveredonorbeforetdayisgivenby:

4.1

Ifaandbarethelowerandupperboundsofpossibledeliverydates,theexpecteddeliverytimeisthengivenby:

4.2

TheleadtimeLfororderinganitemisthetimeperiodaheadofthedeliverytime,andwilldependonthetradeoffbetweenholdingcosts
andunavailabilitycosts.Aprojectmanagermaywanttoavoidtheunavailablecostbyrequiringdeliveryonthescheduleddateofuse,or
maybetolowertheholdingcostbyadoptingamoreflexibleleadtimebasedontheexpecteddeliverytime.Forexample,themanager
maymakethetradeoffbyspecifyingtheleadtimetobeDdaysmorethantheexpecteddeliverytime,i.e.,
4.3
whereDmayvaryfrom0tothenumberofadditionaldaysrequiredtoproducecertaindeliveryonthedesireddate.
Inamorerealisticsituation,theprojectmanagerwouldalsocontendwiththeuncertaintyofexactlywhentheitemmightberequired.Even
iftheitemisscheduledforuseonaparticulardate,theworkprogressmightvarysothatthedesireddatewoulddiffer.Inmanycases,
greaterthanexpectedworkprogressmayresultinnosavingsbecausematerialsforfutureactivitiesareunavailable.
Example47::Leadtimefororderingwithnoprocessingtime.
Table41summarizestheprobabilityofdifferentdeliverytimesforanitem.Inthistable,thefirstcolumnliststhepossible
shippingtimes(rangingfrom10to16days),thesecondcolumnliststheprobabilityorchancethatthisshippingtimewill
occurandthethirdcolumnsummarizesthechancethattheitemarrivesonorbeforeaparticulardate.Thistablecanbeused
toindicatethechancethattheitemwillarriveonadesireddatefordifferentleadtimes.Forexample,iftheorderisplaced12
daysinadvanceofthedesireddate(sotheleadtimeis12days),thenthereisa15%chancethattheitemwillarriveexactlyon
thedesireddayanda35%chancethattheitemwillarriveonorbeforethedesireddate.Notethatthisimpliesthatthereisa1
0.35=0.65or65%chancethattheitemwillnotarrivebythedesireddatewithaleadtimeof12days.Giventheinformation
inTable41,whenshouldtheitemorderbeplaced?
Table41DeliveryDateonOrdersandProbabilityofDeliveryfor
anExample
Delivery
Date
t

Probabilityof
deliveryondatet
p(t)

Cummulativeprobability
ofdeliverybydayt
Pr{T t}

10
11
12
13
14
15
16

0.10
0.10
0.15
0.20
0.30
0.10
0.05

0.10
0.20
0.35
0.55
0.85
0.95
1.00

Supposethatthescheduleddateofusefortheitemisin16days.Tobecompletelycertaintohavedeliverybythedesiredday,
theordershouldbeplaced16daysinadvance.However,theexpecteddeliverydatewitha16dayleadtimewouldbe:

=(10)(0.1)+(11)(0.1)+(12)(0.15)+(13)(0.20)+(14)(0.30)+(15)(0.10)+(16)(0.05)=13.0
Thus,theactualdeliverydatemaybe1613=3daysearly,andthisearlydeliverymightinvolvesignificantholdingcosts.A
projectmanagermightthendecidetoprovidealeadtimesothattheexpecteddeliverydatewasequaltothedesiredassembly
dateaslongastheavailabilityoftheitemwasnotcritical.Alternatively,theprojectmanagermightnegotiateamorecertain
deliverydatefromthesupplier.
Backtotop

4.10ConstructionEquipment
Theselectionoftheappropriatetypeandsizeofconstructionequipmentoftenaffectstherequiredamountoftimeandeffortandthusthe
jobsiteproductivityofaproject.Itisthereforeimportantforsitemanagersandconstructionplannerstobefamiliarwiththecharacteristics
ofthemajortypesofequipmentmostcommonlyusedinconstruction.[9]

ExcavationandLoading
Onefamilyofconstructionmachinesusedforexcavationisbroadlyclassifiedasacraneshovelasindicatedbythevarietyofmachinesin
Figure43.Thecraneshovelconsistsofthreemajorcomponents:
acarrierormountingwhichprovidesmobilityandstabilityforthemachine.
arevolvingdeckorturntablewhichcontainsthepowerandcontrolunits.
afrontendattachmentwhichservesthespecialfunctionsinanoperation.
ThetypeofmountingforallmachinesinFigure43isreferredtoascrawlermounting,whichisparticularlysuitableforcrawlingover
relativelyruggedsurfacesatajobsite.Othertypesofmountingincludetruckmountingandwheelmountingwhichprovidegreater
mobilitybetweenjobsites,butrequirebettersurfacesfortheiroperation.Therevolvingdeckincludesacabtohousethepersonoperating
themountingand/ortherevolvingdeck.ThetypesoffrontendattachmentsinFigure43mightincludeacranewithhook,claimshell,
dragline,backhoe,shovelandpiledriver.

Figure43TypicalMachinesintheCraneShovelFamily
Atractorconsistsofacrawlermountingandanonrevolvingcab.Whenanearthmovingbladeisattachedtothefrontendofatractor,the
assemblyiscalledabulldozer.Whenabucketisattachedtoitsfrontend,theassemblyisknownasaloaderorbucketloader.Thereare
differenttypesofloadersdesignedtohandlemostefficientlymaterialsofdifferentweightsandmoisturecontents.
Scrapersaremultipleunitsoftractortruckandbladebucketassemblieswithvariouscombinationstofacilitatetheloadingandhaulingof
earthwork.Majortypesofscrapersincludesingleenginetwoaxleorthreeaxlescrapers,twinengineallwheeldrivescrapers,elevating
scrapers,andpushpullscrapers.Eachtypehasdifferentcharacteristicsofrollingresistance,maneuverabilitystability,andspeedin
operation.

CompactionandGrading
Thefunctionofcompactionequipmentistoproducehigherdensityinsoilmechanically.Thebasicforcesusedincompactionarestatic
weight,kneading,impactandvibration.Thedegreeofcompactionthatmaybeachieveddependsonthepropertiesofsoil,itsmoisture
content,thethicknessofthesoillayerforcompactionandthemethodofcompaction.Somemajortypesofcompactionequipmentare
showninFigure44,whichincludesrollerswithdifferentoperatingcharacteristics.
Thefunctionofgradingequipmentistobringtheearthworktothedesiredshapeandelevation.Majortypesofgradingequipmentinclude
motorgradersandgradetrimmers.Theformerisanallpurposemachineforgradingandsurfacefinishing,whilethelatterisusedfor
heavyconstructionbecauseofitshigheroperatingspeed.

Figure44SomeMajorTypesofCompactionEquipment

DrillingandBlasting
Rockexcavationisanaudacioustaskrequiringspecialequipmentandmethods.Thedegreeofdifficultydependsonphysical
characteristicsoftherocktypetobeexcavated,suchasgrainsize,planesofweakness,weathering,brittlenessandhardness.Thetaskof
rockexcavationincludesloosening,loading,haulingandcompacting.Thelooseningoperationisspecializedforrockexcavationandis
performedbydrilling,blastingorripping.
Majortypesofdrillingequipmentarepercussiondrills,rotarydrills,androtarypercussiondrills.Apercussiondrillpenetratesandcuts
rockbyimpactwhileitrotateswithoutcuttingontheupstroke.Commontypesofpercussiondrillsincludeajackhammerwhichishand
heldandotherswhicharemountedonafixedframeoronawagonorcrawlformobility.Arotarydrillcutsbyturningabitagainstthe
rocksurface.Arotarypercussiondrillcombinesthetwocuttingmovementstoprovideafasterpenetrationinrock.

Blastingrequirestheuseofexplosives,themostcommonofwhichisdynamite.Generally,electricblastingcapsareconnectedinacircuit
withinsulatedwires.Powersourcesmaybepowerlinesorblastingmachinesdesignedforfiringelectriccapcircuits.Alsoavailableare
nonelectricalblastingsystemswhichcombinetheprecisetimingandflexibilityofelectricblastingandthesafetyofnonelectrical
detonation.
Tractormountedrippersarecapableofpenetratingandpryingloosemostrocktypes.Thebladeorripperisconnectedtoanadjustable
shankwhichcontrolstheangleatthetipofthebladeasitisraisedorlowered.Automatedrippercontrolmaybeinstalledtocontrol
rippingdepthandtipangle.
Inrocktunneling,specialtunnelmachinesequippedwithmultiplecutterheadsandcapableofexcavatingfulldiameterofthetunnelare
nowavailable.Theirusehasincreasinglyreplacedthetraditionalmethodsofdrillingandblasting.

LiftingandErecting
Derricksarecommonlyusedtoliftequipmentofmaterialsinindustrialorbuildingconstruction.Aderrickconsistsofaverticalmastand
aninclinedboomsproutingfromthefootofthemast.Themastisheldinpositionbyguysorstifflegsconnectedtoabasewhileatopping
liftlinksthetopofthemastandthetopoftheinclinedboom.Ahookintheroadlinehangingfromthetopoftheinclinedboomisusedto
liftloads.Guyderricksmayeasilybemovedfromonefloortothenextinabuildingunderconstructionwhilestifflegderricksmaybe
mountedontracksformovementwithinaworkarea.
Towercranesareusedtoliftloadstogreatheightsandtofacilitatetheerectionofsteelbuildingframes.Horizonboomtypetowercranes
aremostcommoninhighrisebuildingconstruction.Inclinedboomtypetowercranesarealsousedforerectingsteelstructures.

MixingandPaving
Basictypesofequipmentforpavingincludemachinesfordispensingconcreteandbituminousmaterialsforpavementsurfaces.Concrete
mixersmayalsobeusedtomixportlandcement,sand,gravelandwaterinbatchesforothertypesofconstructionotherthanpaving.
Atruckmixerreferstoaconcretemixermountedonatruckwhichiscapableoftransportingreadymixedconcretefromacentralbatch
planttoconstructionsites.Apavingmixerisaselfpropelledconcretemixerequippedwithaboomandabuckettoplaceconcreteatany
desiredpointwithinaroadway.Itcanbeusedasastationarymixerorusedtosupplyslipformpaversthatarecapableofspreading,
consolidatingandfinishingaconcreteslabwithouttheuseofforms.
Abituminousdistributorisatruckmountedplantforgeneratingliquidbituminousmaterialsandapplyingthemtoroadsurfacesthrougha
spraybarconnectedtotheendofthetruck.Bituminousmaterialsincludebothasphaltandtarwhichhavesimilarpropertiesexceptthattar
isnotsolubleinpetroleumproducts.Whileasphaltismostfrequentlyusedforroadsurfacing,tarisusedwhenthepavementislikelytobe
heavilyexposedtopetroleumspills.

ConstructionToolsandOtherEquipment
Aircompressorsandpumpsarewidelyusedasthepowersourcesforconstructiontoolsandequipment.Commonpneumaticconstruction
toolsincludedrills,hammers,grinders,saws,wrenches,stapleguns,sandblastingguns,andconcretevibrators.Pumpsareusedtosupply
waterortodewateratconstructionsitesandtoprovidewaterjetsforsometypesofconstruction.

AutomationofEquipment
Theintroductionofnewmechanizedequipmentinconstructionhashadaprofoundeffectonthecostandproductivityofconstructionas
wellasthemethodsusedforconstructionitself.Anexcitingexampleofinnovationinthisregardistheintroductionofcomputer
microprocessorsontoolsandequipment.Asaresult,theperformanceandactivityofequipmentcanbecontinuallymonitoredandadjusted
forimprovement.Inmanycases,automationofatleastpartoftheconstructionprocessispossibleanddesirable.Forexample,wrenches
thatautomaticallymonitortheelongationofboltsandtheappliedtorquecanbeprogrammedtoachievethebestbolttightness.Ongrading
projects,lasercontrolledscraperscanproducedesiredcutsfasterandmorepreciselythanwhollymanualmethods.[10]Possibilitiesfor
automationandroboticsinconstructionareexploredmorefullyinChapter16.
Example48:TunnelingEquipment[11]
Inthemid1980's,someJapanesefirmsweresuccessfulinobtainingconstructioncontractsfortunnelingintheUnitedStates
byusingnewequipmentandmethods.Forexample,theJapanesefirmofOhbayashiwonthesewercontractinSanFrancisco
becauseofitsadvancedtunnelingtechnology.Whenatunnelisdugthroughsoftearth,asinSanFrancisco,itmustbe
maintainedatafewatmospheresofpressuretokeepitfromcavingin.Workersmustspendseveralhoursinapressure
chamberbeforeenteringthetunnelandseveralmoreindecompressionafterwards.Theycanstayinsideforonlythreeorfour
hours,alwaysatconsiderableriskfromcaveinsandasphyxiation.OhbayashiusedthenewJapanese"earthpressurebalance"
method,whicheliminatestheseproblems.Whirlingbladesadvanceslowly,cuttingthetunnel.Thelooseearthtemporarily
remainsbehindtobalancethepressureofthecompactearthonallsides.Meanwhile,prefabricatedconcretesegmentsare
insertedandjoinedwithwaterproofsealstolinethetunnel.Thenthelooseearthisconveyedaway.Thisnewtunneling
methodenabledOhbayashitobid$5millionbelowtheengineer'sestimateforaSanFranciscosewer.Thefirmcompletedthe
tunnelthreemonthsaheadofschedule.Ineffect,aninnovationinvolvingnewtechnologyandmethodledtoconsiderablecost
andtimesavings.
Backtotop

4.11ChoiceofEquipmentandStandardProductionRates

Typically,constructionequipmentisusedtoperformessentiallyrepetitiveoperations,andcanbebroadlyclassifiedaccordingtotwobasic
functions:(1)operatorssuchascranes,graders,etc.whichstaywithintheconfinesoftheconstructionsite,and(2)haulerssuchasdump
trucks,readymixedconcretetruck,etc.whichtransportmaterialstoandfromthesite.Inbothcases,thecycleofapieceofequipmentisa
sequenceoftaskswhichisrepeatedtoproduceaunitofoutput.Forexample,thesequenceoftasksforacranemightbetofitandinstalla
wallpanel(orapackageofeightwallpanels)onthesideofabuildingsimilarly,thesequenceoftasksofareadymixedconcretetruck
mightbetoload,haulandunloadtwocubicyards(oronetruckload)offreshconcrete.
Inordertoincreasejobsiteproductivity,itisbeneficialtoselectequipmentwithpropercharacteristicsandasizemostsuitableforthe
workconditionsataconstructionsite.Inexcavationforbuildingconstruction,forexamples,factorsthatcouldaffecttheselectionof
excavatorsinclude:
1.Sizeofthejob:Largervolumesofexcavationwillrequirelargerexcavators,orsmallerexcavatorsingreaternumber.
2.Activitytimeconstraints:Shortageoftimeforexcavationmayforcecontractorstoincreasethesizeornumbersofequipmentfor
activitiesrelatedtoexcavation.
3.Availabilityofequipment:Productivityofexcavationactivitieswilldiminishiftheequipmentusedtoperformthemisavailable
butnotthemostadequate.
4.Costoftransportationofequipment:Thiscostdependsonthesizeofthejob,thedistanceoftransportation,andthemeansof
transportation.
5.Typeofexcavation:Principaltypesofexcavationinbuildingprojectsarecutand/orfill,excavationmassive,andexcavationforthe
elementsoffoundation.Themostadequateequipmenttoperformoneoftheseactivitiesisnotthemostadequatetoperformthe
others.
6.Soilcharacteristics:Thetypeandconditionofthesoilisimportantwhenchoosingthemostadequateequipmentsinceeachpiece
ofequipmenthasdifferentoutputsfordifferentsoils.Moreover,oneexcavationpitcouldhavedifferentsoilsatdifferentstratums.
7.Geometriccharacteristicsofelementstobeexcavated:Functionalcharacteristicsofdifferenttypesofequipmentmakessuch
considerationsnecessary.
8.Spaceconstraints:Theperformanceofequipmentisinfluencedbythespatiallimitationsforthemovementofexcavators.
9.Characteristicsofhaulunits:Thesizeofanexcavatorwilldependonthehaulunitsifthereisaconstraintonthesizeand/or
numberoftheseunits.
10.Locationofdumpingareas:Thedistancebetweentheconstructionsiteanddumpingareascouldberelevantnotonlyforselecting
thetypeandnumberofhaulers,butalsothetypeofexcavators.
11.Weatherandtemperature:Rain,snowandseveretemperatureconditionsaffectthejobsiteproductivityoflaborandequipment.
Bycomparingvarioustypesofmachinesforexcavation,forexample,powershovelsaregenerallyfoundtobethemostsuitablefor
excavatingfromalevelsurfaceandforattackinganexistingdiggingsurfaceoronecreatedbythepowershovelfurthermore,theyhave
thecapabilityofplacingtheexcavatedmaterialdirectlyontothehaulers.Anotheralternativeistousebulldozersforexcavation.
Thechoiceofthetypeandsizeofhaulersisbasedontheconsiderationthatthenumberofhaulersselectedmustbecapableofdisposingof
theexcavatedmaterialsexpeditiously.Factorswhichaffectthisselectioninclude:
1.Outputofexcavators:Thesizeandcharacteristicsoftheexcavatorsselectedwilldeterminetheoutputvolumeexcavatedperday.
2.Distancetodumpsite:Sometimespartoftheexcavatedmaterialsmaybepiledupinacorneratthejobsiteforuseasbackfill.
3.Probableaveragespeed:Theaveragespeedofthehaulerstoandfromthedumpingsitewilldeterminethecycletimeforeach
haulingtrip.
4.Volumeofexcavatedmaterials:Thevolumeofexcavatedmaterialsincludingtheparttobepiledupshouldbehauledawayas
soonaspossible.
5.Spatialandweightconstraints:Thesizeandweightofthehaulersmustbefeasibleatthejobsiteandovertheroutefromthe
constructionsitetothedumpingarea.
Dumptrucksareusuallyusedashaulersforexcavatedmaterialsastheycanmovefreelywithrelativelyhighspeedsoncitystreetsaswell
asonhighways.
ThecyclecapacityCofapieceofequipmentisdefinedasthenumberofoutputunitspercycleofoperationunderstandardwork
conditions.Thecapacityisafunctionoftheoutputunitsusedinthemeasurementaswellasthesizeoftheequipmentandthematerialto
beprocessed.ThecycletimeTreferstounitsoftimepercycleofoperation.ThestandardproductionrateRofapieceofconstruction
equipmentisdefinedasthenumberofoutputunitsperunittime.Hence:
4.4
or
4.5
ThedailystandardproductionratePeofanexcavatorcanbeobtainedbymultiplyingitsstandardproductionrateRebythenumberof
operatinghoursHeperday.Thus:
4.6
whereCeandTearecyclecapacity(inunitsofvolume)andcycletime(inhours)oftheexcavatorrespectively.

Indeterminingthedailystandardproductionrateofahauler,itisnecessarytodeterminefirstthecycletimefromthedistanceDtoadump
siteandtheaveragespeedSofthehauler.LetTtbethetraveltimefortheroundtriptothedumpsite,TobetheloadingtimeandTdbethe
dumpingtime.Thenthetraveltimefortheroundtripisgivenby:
4.7
TheloadingtimeisrelatedtothecycletimeoftheexcavatorTeandtherelativecapacitiesChandCeofthehaulerandtheexcavator
respectively.Intheoptimumorstandardcase:
4.8
ForagivendumpingtimeTd,thecycletimeThofthehaulerisgivenby:
4.9
ThedailystandardproductionratePhofahaulercanbeobtainedbymultiplyingitsstandardproductionrateRhbythenumberof
operatinghoursHhperday.Hence:
4.10
Thisexpressionassumesthathaulersbeginloadingassoonastheyreturnfromthedumpsite.
Thenumberofhaulersrequiredisalsoofinterest.LetwdenotetheswellfactorofthesoilsuchthatwPedenotesthedailyvolumeofloose
excavatedmaterialsresultingfromtheexcavationvolumePe.Thentheapproximatenumberofhaulersrequiredtodisposeofthe
excavatedmaterialsisgivenby:
4.11
Whilethestandardproductionrateofapieceofequipmentisbasedon"standard"oridealconditions,equipmentproductivitiesatjobsites
areinfluencedbyactualworkconditionsandavarietyofinefficienciesandworkstoppages.Asoneexample,variousfactoradjustments
canbeusedtoaccountinaapproximatefashionforactualsiteconditions.Iftheconditionsthatlowerthestandardproductionrateare
denotedbynfactorsF1,F2,...,Fn,eachofwhichissmallerthan1,thentheactualequipmentproductivityR'atthejobsitecanberelated
tothestandardproductionrateRasfollows:
4.12
Ontheotherhand,thecycletimeT'atthejobsitewillbeincreasedbythesefactors,reflectingactualworkconditions.Ifonlythese
factorsareinvolved,T'isrelatedtothestandardcycletimeTas:
4.13
Eachofthesevariousadjustmentfactorsmustbedeterminedfromexperienceorobservationofjobsites.Forexample,abulkcomposition
factorisderivedforbulkexcavationinbuildingconstructionbecausethestandardproductionrateforgeneralbulkexcavationisreduced
whenanexcavatorisusedtocreatearamptoreachthebottomofthebulkandtoopenupaspaceinthebulktoaccommodatethehauler.
Inadditiontotheproblemofestimatingthevariousfactors,F1,F2,...,Fn,itmayalsobeimportanttoaccountforinteractionsamongthe
factorsandtheexactinfluenceofparticularsitecharacteristics.
Example49:Dailystandardproductionrateofapowershovel[12]
Apowershovelwithadipperofonecubicyardcapacityhasastandardoperatingcycletimeof30seconds.Findthedaily
standardproductionrateoftheshovel.
ForCe=1cu.yd.,Te=30sec.andHe=8hours,thedailystandardproductionrateisfoundfromEq.(4.6)asfollows:

Inpractice,ofcourse,thisstandardratewouldbemodifiedtoreflectvariousproductioninefficiencies,asdescribedin
Example411.
Example410:Dailystandardproductionrateofadumptruck
Adumptruckwithacapacityof6cubicyardsisusedtodisposeofexcavatedmaterialsatadumpsite4milesaway.The
averagespeedofthedumptruckis30mphandthedumpingtimeis30seconds.Findthedailystandardproductionrateofthe
truck.IfafleetofdumptrucksofthiscapacityisusedtodisposeoftheexcavatedmaterialsinExample49for8hoursper
day,determinethenumberoftrucksneededdaily,assumingaswellfactorof1.1forthesoil.
ThedailystandardproductionrateofadumptruckcanbeobtainedbyusingEquations(4.7)through(4.10):

Hence,thedailyhaulerproductivityis:

Finally,fromEquation(4.12),thenumberoftrucksrequiredis:

implyingthat8trucksshouldbeused.
Example411:Jobsiteproductivityofapowershovel
Apowershovelwithadipperofonecubicyardcapacity(inExample49)hasastandardproductionrateof960cubicyards
foran8hourday.Determinethejobsiteproductivityandtheactualcycletimeofthisshovelundertheworkconditionsatthe
sitethataffectsitsproductivityasshownbelow:
WorkConditionsattheSite

Bulkcomposition
Soilpropertiesandwatercontent
Equipmentidletimeforworkerbreaks
Managementefficiency

Factors
0.954
0.983
0.8
0.7

UsingEquation(4.11),thejobsiteproductivityofthepowershovelperdayisgivenby:

Theactualcycletimecanbedeterminedasfollows:

NotingEquation(4.6),theactualcycletimecanalsobeobtainedfromtherelationT'e=(CeHe)/P'e.Thus:

Example412:Jobsiteproductivityofadumptruck
Adumptruckwithacapacityof6cubicyards(inExample410)isusedtodisposeofexcavatedmaterials.Thedistancefrom
thedumpsiteis4milesandtheaveragespeedofthedumptruckis30mph.Thejobsiteproductivityofthepowershovelper
day(inExample411)is504cubicyards,whichwillbemodifiedbyaswellfactorof1.1.Theonlyfactorsaffectingthejob
siteproductivityofthedumptruckinadditiontothoseaffectingthepowershovelare0.80forequipmentidletimeand0.70
formanagementefficiency.Determinethejobsiteproductivityofthedumptruck.Ifafleetofsuchtrucksisusedtohaulthe
excavatedmaterial,findthenumberoftrucksneededdaily.
TheactualcycletimeT'hofthedumptruckcanbeobtainedbysummingtheactualtimesfortraveling,loadinganddumping:

Hence,theactualcycletimeis:

ThejobsiteproductivityP'hofthedumptruckperdayis:

Thenumberoftrucksneededdailyis:

so8trucksarerequired.
Backtotop

4.12ConstructionProcesses
Theprevioussectionsdescribedtheprimaryinputsoflabor,materialandequipmenttotheconstructionprocess.Atvaryinglevelsof
detail,aprojectmanagermustinsurethattheseinputsareeffectivelycoordinatedtoachieveanefficientconstructionprocess.This
coordinationinvolvesbothstrategicdecisionsandtacticalmanagementinthefield.Forexample,strategicdecisionsaboutappropriate
technologiesorsitelayoutareoftenmadeduringtheprocessofconstructionplanning.Duringthecourseofconstruction,foremenandsite
managerswillmakedecisionsaboutworktobeundertakenatparticulartimesofthedaybasedupontheavailabilityofthenecessary
resourcesoflabor,materialsandequipment.Withoutcoordinationamongthesenecessaryinputs,theconstructionprocesswillbe
inefficientorstopaltogether.
Example413:Steelerection
Erectionofstructuralsteelforbuildings,bridgesorotherfacilitiesisanexampleofaconstructionprocessrequiring
considerablecoordination.Fabricatedsteelpiecesmustarriveonsiteinthecorrectorderandquantityfortheplannedeffort
duringaday.Crewsofsteelworkersmustbeavailabletofitpiecestogether,boltjoints,andperformanynecessarywelding.
Cranesandcraneoperatorsmayberequiredtoliftfabricatedcomponentsintoplaceotheractivitiesonajobsitemayalsobe

competingforuseofparticularcranes.Weldingequipment,wrenchesandotherhandtoolsmustbereadilyavailable.Finally,
ancillarymaterialssuchasboltsofthecorrectsizemustbeprovided.
Incoordinatingaprocesssuchassteelerection,itiscommontoassigndifferenttaskstospecificcrews.Forexample,one
crewmayplacemembersinplaceandinsertafewboltsinjointsinaspecificarea.Afollowingcrewwouldbeassignedto
finishbolting,andathirdcrewmightperformnecessaryweldsorattachmentofbracketsforitemssuchascurtainwalls.
Withtherequiredcoordinationamongtheseresources,itiseasytoseehowpoormanagementorotherproblemscanresultin
considerableinefficiency.Forexample,ifashipmentoffabricatedsteelisimproperlyprepared,thecrewsandequipmenton
sitemayhavetowaitfornewdeliveries.
Example414:Constructionprocesssimulationmodels
Computerbasedsimulationofconstructionoperationscanbeausefulalthoughlaborioustoolinanalyzingtheefficiencyof
particularprocessesortechnologies.Thesetoolstendtobeeitherorientedtowardmodelingresourceprocessesortowards
representationofspatialconstraintsandresourcemovements.Laterchapterswilldescribesimulationinmoredetail,buta
smallexampleofaconstructionoperationmodelcanbedescribedhere.[13]Theprocessinvolvedplacingconcretewithin
existingformworkforthecolumnsofanewstructure.Acraneandbucketcombinationwithonecubicyardcapacityanda
flexible"elephanttrunk"wasassumedforplacement.Concretewasdeliveredintruckswithacapacityofeightcubicyards.
Becauseofsiteconstraints,onlyonetruckcouldbemovedintothedeliverypositionatatime.Constructionworkersand
electricimmersiontypeconcretevibratorswerealsoassumedfortheprocess.
ThesimulationmodelofthisprocessisillustratedinFigure45.Node2signalstheavailabilityofaconcretetruckarriving
fromthebatchplant.AswithothercircularnodesinFigure45,theavailabilityofatruckmayresultinaresourcewaitingor
queueingforuse.Ifatruck(node2)andthecrane(node3)arebothavailable,thenthecranecanloadandhoistabucketof
concrete(node4).Aswithotherrectangularnodesinthemodel,thisoperationwillrequireanappreciableperiodoftime.On
thecompletionoftheloadandhoistoperations,thebucket(node5)isavailableforconcreteplacement.Placementis
accomplishedbyhavingaworkerguidethebucket'selephanttrunkbetweentheconcreteformsandhavingasecondworker
operatethebucketreleaselever.Athirdlaboreroperatesavibratorintheconcretewhilethebucket(node8)movesbackto
receiveanewload.Oncetheconcreteplacementiscomplete,thecrewbecomesavailabletoplaceanewbucketload(node7).
Aftertwobucketsareplaced,thenthecolumniscomplete(node9)andtheequipmentandcrewcanmovetothenextcolumn
(node10).Afterthemovementtothenewcolumniscomplete,placementinthenewcolumncanbegin(node11).Finally,
afteratruckisemptied(nodes12and13),thetruckdepartsandanewtruckcanenterthedeliverystall(node14)ifoneis
waiting.

Figure45:IllustrationofaConcretePlacingSimulationModel
Applicationofthesimulationmodelconsistsoftracingthroughthetimerequiredforthesevariousoperations.Eventsarealso
simulatedsuchasthearrivaltimesofconcretetrucks.Ifrandomelementsareintroduced,numeroussimulationsarerequired
toestimatetheactualproductivityandresourcerequirementsoftheprocess.Forexample,onesimulationofthisprocessusing
fourconcretetrucksfoundthatatruckwaswaiting83%ofthetimewithanaveragewaitatthesiteof14minutes.Thistype
ofsimulationcanbeusedtoestimatethevariousproductivityadjustmentfactorsdescribedintheprevioussection.
Backtotop

4.13QueuesandResourceBottlenecks
Aprojectmanagerneedstoinsurethatresourcesrequiredforand/orsharedbynumerousactivitiesareadequate.Problemsinthisareacan
beindicatedinpartbytheexistenceofqueuesofresourcedemandsduringconstructionoperations.Aqueuecanbeawaitinglinefor
service.Onecanimagineaqueueasanorderlylineofcustomerswaitingforastationaryserversuchasaticketseller.However,the
demandsforservicemightnotbesoneatlyarranged.Forexample,wecanspeakofthequeueofweldsonabuildingsitewaitingfor
inspection.Inthiscase,demandsdonotcometotheserver,butarovinginspectortravelsamongthewaitingservicepoints.Waitingfor
resourcessuchasaparticularpieceofequipmentoraparticularindividualisanendemicproblemonconstructionsites.Ifworkersspend
appreciableportionsoftimewaitingforparticulartools,materialsoraninspector,costsincreaseandproductivitydeclines.Insuring
adequateresourcestoserveexpecteddemandsisanimportantproblemduringconstructionplanningandfieldmanagement.
Ingeneral,thereisatradeoffbetweenwaitingtimesandutilizationofresources.Utilizationistheproportionoftimeaparticularresource
isinproductiveuse.Higheramountsofresourceutilizationwillbebeneficialaslongasitdoesnotimposeunduecostsontheentire
operation.Forexample,aweldinginspectormighthaveonehundredpercentutilization,butworkersthroughoutthejobsitemightbe
wastinginordinatetimewaitingforinspections.Providingadditionalinspectorsmaybecosteffective,eveniftheyarenotutilizedatall
times.

Afewconceptualmodelsofqueueingsystemsmaybehelpfultoconstructionplannersinconsideringthelevelofadequateresourcesto
provide.First,weshallconsiderthecaseoftimevaryingdemandsandaserverwithaconstantservicerate.Thismightbethesituationfor
anelevatorinwhichlargedemandsfortransportationoccurduringthemorningoratashiftchange.Second,weshallconsiderthesituation
ofrandomlyarrivingdemandsforserviceandconstantservicerates.Finally,weshallconsiderbrieflytheproblemsinvolvingmultiple
servingstations.

SingleServerwithDeterministicArrivalsandServices
Supposethatthecumulativenumberofdemandsforserviceor"customers"atanytimetisknownandequaltothevalueofthefunction
A(t).These"customers"mightbecraneloads,weldinspections,oranyotherdefinedgroupofitemstobeserviced.Supposefurtherthata
singleserverisavailabletohandlethesedemands,suchasasinglecraneorasingleinspector.Forthismodelofqueueing,weassumethat
theservercanhandlecustomersatsomeconstant,maximumratedenotedasx"customers"perunitoftime.Thisisamaximumratesince
theservermaybeidleforperiodsoftimeifnocustomersarewaiting.Thissystemisdeterministicinthesensethatboththearrival
functionandtheserviceprocessareassumedtohavenorandomorunknowncomponent.

Figure46:CumulativeArrivalsandDeparturesinaDeterministicQueue

Acumulativearrivalfunctionofcustomers,A(t),isshowninFigure46inwhichtheverticalaxisrepresentsthecumulativenumberof
customers,whilethehorizontalaxisrepresentsthepassageoftime.Thearrivalofindividualcustomerstothequeuewouldactually
representaunitstepinthearrivalfunctionA(t),butthesesmallstepsareapproximatedbyacontinuouscurveinthefigure.Therateof
arrivalsforaunittimeinterval tfromt1totisgivenby:
4.14
Whileanhouroraminuteisanaturalchoiceasaunittimeinterval,othertimeperiodsmayalsobeusedaslongasthepassageoftimeis
expressedasmultiplesofsuchtimeperiods.Forinstance,ifhalfanhourisusedasunittimeintervalforaprocessinvolvingtenhours,
thenthearrivalsshouldberepresentedby20stepsofhalfhoureach.Hence,theunittimeintervalbetweent1andtis t=t(t1)=1,
andtheslopeofthecumulativearrivalfunctionintheintervalisgivenby:
4.15
ThecumulativenumberofcustomersservedovertimeisrepresentedbythecumulativedeparturefunctionD(t).Whilethemaximum
servicerateisxperunittime,theactualservicerateforaunittimeinterval tfromt1totis:
4.16
Theslopeofthecumulativedeparturefunctionis:
4.17
Anytimethattherateofarrivalstothequeueexceedsthemaximumservicerate,thenaqueuebeginstoformandthecumulative
departureswilloccuratthemaximumservicerate.Thecumulativedeparturesfromthequeuewillproceedatthemaximumservicerateof
x"customers"perunitoftime,sothattheslopeofD(t)isxduringthisperiod.ThecumulativedeparturefunctionD(t)canbereadily
constructedgraphicallybyrunningarulerwithaslopeofxalongthecumulativearrivalfunctionA(t).AssoonasthefunctionA(t)climbs
abovetheruler,aqueuebeginstoform.Themaximumserviceratewillcontinueuntilthequeuedisappears,whichisrepresentedbythe
convergenceofthecumulativearrivalanddeparturefunctionsA(t)andD(t).

Withthecumulativearrivalsandcumulativedeparturefunctionsrepresentedgraphically,avarietyofserviceindicatorscanbereadily
obtainedasshowninFigure46.LetA'(t)andD'(t)denotethederivativesofA(t)andD(t)withrespecttot,respectively.For0 t tiin
whichA'(t) x,thereisnoqueue.Att=ti,whenA'(t)>D'(t),aqueueisformed.ThenD'(t)=xintheintervalti t tk.AsA'(t)
continuestoincreasewithincreasingt,thequeuebecomeslongersincetheservicerateD'(t)=xcannotcatchupwiththearrivals.
However,whenagainA'(t) D'(t)astincreases,thequeuebecomesshorteruntilitreaches0att=tk.Atanygiventimet,thequeue
lengthis
4.18
Forexample,supposeaqueuebeginstoformattimetiandisdispersedbytimetk.Themaximumnumberofcustomerswaitingorqueue
lengthisrepresentedbythemaximumdifferencebetweenthecumulativearrivalandcumulativedeparturefunctionsbetweentiandtk,i.e.
themaximumvalueofQ(t).Thetotalwaitingtimeforserviceisindicatedbythetotalareabetweenthecumulativearrivalandcumulative
departurefunctions.
Generally,thearrivalrates At=1,2,...,nperiodsofaprocessaswellasthemaximumserviceratexareknown.Thenthecumulative
arrivalfunctionandthecumulativedeparturefunctioncanbeconstructedsystematicallytogetherwithotherpertinentquantitiesasfollows:
1.StartingwiththeinitialconditionsD(t1)=0andQ(t1)=0att=1,findtheactualservicerateatt=1:
4.19
2.StartingwithA(t1)=0att=1,findthecumulativearrivalfunctionfort=2,3,...,naccordingly:
4.20
3.Computethequeuelengthfort=1,2,...,n.
4.21
4.Compute Dtfort=2,3,...,nafterQ(t1)isfoundfirstforeacht:
4.22
5.IfA'(t)>x,findthecumulativedeparturefunctioninthetimeperiodbetweentiwhereaqueueisformedandtkwherethequeue
dissipates:
4.23
6.Computethewaitingtime wforthearrivalswhicharewaitingforserviceininterval t:
4.24
7.ComputethetotalwaitingtimeWoverthetimeperiodbetweentiandtk.

4.25

8.Computetheaveragewaitingtimewforarrivalswhicharewaitingforserviceintheprocess.
4.26
Thissimple,deterministicmodelhasanumberofimplicationsforoperationsplanning.First,anincreaseinthemaximumserviceratewill
resultinreductionsinwaitingtimeandthemaximumqueuelength.Suchincreasesmightbeobtainedbyspeedinguptheserviceratesuch
asintroducingshorterinspectionproceduresorinstallingfastercranesonasite.Second,alteringthepatternofcumulativearrivalscan
resultinchangesintotalwaitingtimeandinthemaximumqueuelength.Inparticular,ifthemaximumarrivalrateneverexceedsthe
maximumservicerate,noqueuewillform,orifthearrivalratealwaysexceedsthemaximumservicerate,thebottleneckcannotbe
dispersed.BothcasesareshowninFigure47.

Figure47:CasesofNoQueueandPermanentBottleneck

Apracticalmeanstoalterthearrivalfunctionandobtainthesebenefitsistoinaugurateareservationsystemforcustomers.Evenwithout
drawingagraphsuchasFigure46,goodoperationsplannersshouldconsidertheeffectsofdifferentoperationorserviceratesontheflow
ofwork.Clearly,servicerateslessthantheexpectedarrivalrateofworkwillresultinresourcebottlenecksonajob.

SingleServerwithRandomArrivalsandConstantServiceRate
Supposethatarrivalsof"customers"toaqueuearenotdeterministicorknownasinFigure46.Inparticular,supposethat"customers"
suchasjointsarecompletedorcraneloadsarriveatrandomintervals.Whataretheimplicationsforthesmoothflowofwork?
Unfortunately,bottlenecksandqueuesmayariseinthissituationevenifthemaximumservicerateislargerthantheaverageorexpected
arrivalrateofcustomers.Thisoccursbecauserandomarrivalswilloftenbunchtogether,therebytemporarilyexceedingthecapacityofthe
system.Whiletheaveragearrivalratemaynotchangeovertime,temporaryresourceshortagescanoccurinthiscircumstance.
Letwbetheaveragewaitingtime,abetheaveragearrivalrateofcustomers,andxbethedeterministicconstantservicerate(incustomers
perunitoftime).Then,theexpectedaveragetimeforacustomerinthissituationisgivenby:[14]

4.27

Iftheaverageutilizationrateoftheserviceisdefinedastheratiooftheaveragearrivalrateandtheconstantservicerate,i.e.,
4.28
Then,Eq.(4.27)becomes:
4.29
Inthisequation,theratiouofarrivalratetoservicerateisveryimportant:iftheaveragearrivalrateapproachestheservicerate,the
waitingtimecanbeverylong.Ifa x,thenthequeueexpandsindefinitely.Resourcebottleneckswilloccurwithrandomarrivalsunlessa
measureofextraservicecapacityisavailabletoaccommodatesuddenbunchesinthearrivalstream.Figure48illustratesthewaitingtime
resultingfromdifferentcombinationsofarrivalratesandservicetimes.

Figure48:IllustrativeWaitingTimesforDifferentAverageArrivalRatesandServiceTimes

MultipleServers
Bothofthesimplemodelsofserviceperformancedescribedabovearelimitedtosingleservers.Inoperationsplanning,itiscommonlythe
casethatnumerousoperatorsareavailableandnumerousstagesofoperationsexist.Inthesecircumstances,aplannertypicallyattemptsto
matchtheserviceratesoccurringatdifferentstagesintheprocess.Forexample,constructionofahighrisebuildinginvolvesaseriesof
operationsoneachfloor,includingerectionofstructuralelements,pouringorassemblingafloor,constructionofwalls,installationof
HVAC(Heating,ventilatingandairconditioning)equipment,installationofplumbingandelectricwiring,etc.Asmoothconstruction
processwouldhaveeachofthesevariousactivitiesoccurringatdifferentfloorsatthesametimewithoutlargetimegapsbetweenactivities
onanyparticularfloor.Thus,floorswouldbeinstalledsoonaftererectionofstructuralelements,wallswouldfollowsubsequently,andso
on.Fromthestandpointofaqueueingsystem,theplanningproblemistoinsurethattheproductivityorservicerateperfloorofthese
differentactivitiesareapproximatelyequal,sothatonecrewisnotcontinuallywaitingonthecompletionofaprecedingactivityor
interferingwithafollowingactivity.Intherealmofmanufacturingsystems,creatingthisbalanceamongoperationsiscalledassemblyline
balancing.

Figure49:ArrivalsandServicesofCraneLoadswithaCraneBreakdown

Example415:Effectofacranebreakdown
Supposethatloadsforacranearearrivingatasteadyrateofoneeverytenminutes.Thecranehasthecapacitytohandleone
loadeveryfiveminutes.Supposefurtherthatthecranebreaksdownforninetyminutes.Howmanyloadsaredelayed,whatis
thetotaldelay,andhowlongwillberequiredbeforethecranecancatchupwiththebacklogofloads?

ThecumulativearrivalandservicefunctionsaregraphedinFigure49.Startingwiththebreakdownattimezero,nineloads
arriveduringtheninetyminuterepairtime.FromFigure49,anadditionalnineloadsarrivebeforetheentirequeueisserved.
Algebraically,therequiredtimeforservice,t,canbecalculatedbynotedthatthenumberofarrivalsmustequalthenumberof
loadsserved.Thus:

Aqueueisformedatt=0becauseofthebreakdown,butitdissipatesatA(t)=D2(t).Let

fromwhichweobtaint=180min.Hence

ThetotalwaitingtimeWcanbecalculatedastheareabetweenthecumulativearrivalandservicefunctionsinFigure49.
Algebraically,thisisconvenientlycalculatedasthedifferenceintheareasoftwotriangles:

sotheaveragedelayperloadisw=810/18=45minutes.
Example416:Waitingtimewithrandomarrivals
Supposethatmaterialloadstobeinspectedarriverandomlybutwithanaverageof5arrivalsperhour.Eachloadrequiresten
minutesforaninspection,soaninspectorcanhandlesixloadsperhour.Inspectionsmustbecompletedbeforethematerial
canbeunloadedfromatruck.Thecostperhourofholdingamaterialloadinwaitingis$30,representingthecostofadriver
andatruck.Inthisexample,thearrivalrate,a,equals5arrivalsperhourandtheservicerate,x,equals6materialloadsper
hour.Then,theaveragewaitingtimeofanymaterialloadforu=5/6is:

Ataresourcecostof$30.00perhour,thiswaitingwouldrepresentacostof(30)(0.4)(5)=$60.00perhourontheproject.
Incontrast,ifthepossibleservicerateisx=10materialloadsperhour,thentheexpectedwaitingtimeofanymaterialload
foru=5/10=0.5is:

whichhasonlyacostof(30)(0.05)(5)=$7.50perhour.
Example417:Delayofliftloadsonabuildingsite
Supposethatasinglecraneisavailableonabuildingsiteandthateachliftrequiresthreeminutesincludingthetimefor
attachingloads.Supposefurtherthatthecumulativearrivalsofliftloadsatdifferenttimeperiodsareasfollows:
6:007:00A.M.
7:008:00A.M.
8:0011:00A.M.

4perhour
15perhour
25perhour

12:004:00P.M.
4:006:00P.M.
6:00P.M.6:00A.M.

8perhour
4perhour
0perhour

11:0012:00A.M.

5perhour

Usingtheaboveinformationofarrivalandservicerates
1.Findthecumulativearrivalsandcumulativenumberofloadsservedasafunctionoftime,beginningwith6:00AM.
2.Estimatethemaximumqueuelengthofloadswaitingforservice.Whattimedoesthemaximumqueueoccur?
3.Estimatethetotalwaitingtimeforloads.
4.Graphthecumulativearrivalanddeparturefunctions.
Themaximumserviceratex=60min/3minperlift=20liftsperminute.Thedetailedcomputationcanbecarriedoutinthe
Table42,andthegraphofA(t)andD(t)isgiveninFigure410.

Table42Computationofqueuelengthandwaitingtime

Period

Arrival
rate

Cumulative
arrivals
A(T)

Queue

Departure
rate

67:00
78:00
89:00
910:00
1011:00
1112:00
121:00
12:00
23:00
34:00
45:00
56:00
67:00
78:00

4
15
25
25
25
5
8
8
8
8
4
4
0
0

4
19
44
69
94
99
107
115
123
131
135
139
139
139

0
0
5
10
15
0
0
0
0
0
0
0
0
0

4
15
20
20
20
20
8
8
8
8
4
4
0
0

Cumulative
departures
D(T)
4
19
39
59
79
99
107
115
123
131
135
139
139
139
Totalwaitingtime=30
Maximumqueue=15

Waiting
time
0
0
5
10
15
0
0
0
0
0
0
0
0
0

Figure410:DelayofLiftLoadsonaBuildingSite

Backtotop

4.14References
1.Bourdon,C.C.,andR.W.Levitt,UnionandOpenShopConstruction,LexingtonBooks,D.C.HeathandCo.,Lexington,MA,1980.
2.CaterpillarPerformanceHandbook,18@+(th)Edition,Caterpillar,Inc.,Peoria,IL,1987.
3.Cordell,R.H.,"ConstructionProductivityManagement,"CostEngineering,Vol.28,No.2,February1986,pp.1423.
4.Lange,J.E.,andD.Q.Mills,TheConstructionIndustry,LexingtonBooks,D.C.HeathandCo.,Lexington,MA,1979.

5.Nunnally,S.W.,ConstructionMethodsandManagement,PrenticeHall,EnglewooodCliffs,NJ,2ndEd.,1987.
6.Peurifoy,R.L.,ConstructionPlanning,EquipmentandMethods,2ndEdition,McGrawHill,NewYork,1970.
7.Tersine,R.J.,PrinciplesofInventoryandMaterialsManagement,NorthHolland,NewYork,1982.
Backtotop

4.15Problems
1.UsingtherelationshipbetweentheproductivityindexandjobsizeinExample41,determinethelaborproductivityforanewjob
requiring350,000laborhoursunderotherwisethesamesetofworkconditions.
2.Thepotentiallaborhoursavailableforalargeenergycomplexwerefoundtobe5.4millionhours.Thenonproductiveactivities
expressedinthousandsoflaborhourswere:
1.360forholidaysandstrikes
2.1,152forabsentees
3.785fortemporarystoppage
4.1,084forindirectlabor
Determinetheproductivelaboryieldaftertheabovefactorsaretakenintoconsideration.
3.Laborproductivityatjobsiteisknowntodecreasewithovertimework.Letxbethepercentageofovertimeovernormalworkweek.
Ifxisexpressedindecimals,theproductivityindexIasafunctionofthepercentageofovertimeisfoundtobe:

FindthevalueoftheindexIforx=0,0.1,0.2,0.3,0.4and0.5andplottherelationshipinagraph.
4.Laborproductivityforacomplexprojectisknowntoincreasegraduallyinthefirst500,000laborhoursbecauseofthelearning
effects.Letxbethenumberof100,000laborhours.ThelaborproductivityindexIisfoundtobeafunctionofxasfollows:

FindthevalueoftheindexIforx=0,1,2,3,4and5andplottherelationshipinagraph.
5.Theprobabilitiesfordifferentdeliverytimesofanitemaregiveninthetablebelow.Findtheexpecteddeliverydateoftheitem.
Alsofindtheleadtimerequiredtoprovideanexpecteddeliverydateonedaylessthanthedesireddeliverydate.

p(t)

Pr{T t}

12
13
14
15
16
17

0.05
0.10
0.25
0.35
0.15
0.10

0.05
0.15
0.40
0.75
0.90
1.00

6.Apowershovelwithadipperoftwocubicyardcapacityhasastandardoperatingcycletimeof80seconds.Theexcavatedmaterial
whichhasaswellfactorof1.05willbedisposedbyadumptruckwithan8cubicyardcapacityatadumpsite6milesaway.The
averagespeedofthedumptruckis30mphandthedumpingtimeis40seconds.Findthedailystandardproductionratesofthe
powershovelandthedumptruckifbothareoperated8hoursperday.Determinealsothenumberoftrucksneededdailytodispose
oftheexcavatedmaterial.
7.ThepowershovelinProblemP6hasadailystandardproductionrateof720cubicyards.Determinethejobsiteproductivityandthe
actualcycletimeofthisshovelundertheworkconditionsatthesitethataffecttheproductivityasshownbelow:
Workconditionsatsite

Factors

Bulkcomposition
Soilpropertiesandwatercontent
Equipmentidletimeforbreaks
Managementinefficiency

0.972
0.960
0.750
0.750

8.BasedontheinformationgivenforProblemsP46andP47,findthejobsiteproductivityofadumptruck,assumingthattheonly
factorsaffectingworkconditionsare0.85forequipmentidletimeand0.80formanagementefficiency.Alsofindthenumberof
dumptrucksrequired.
9.APowershovelwithadipperof1.5cubicyardcapacityhasastandardoperatingcycletimeof60seconds.Theexcavatedmaterial
whichhasaswellfactorof1.08willbedisposedbyadumptruckwitha7.5cubicyardcapacityatadumpsite5milesaway.The
averagespeedofadumptruckis25mphandthedumpingtimeis75seconds.Boththepowershovelandthedumptruckare
operated8hoursperday.
1.Findthedailystandardproductionrateofthepowershovel.
2.Findthedailystandardproductionrateofthedumptruckandnumberoftrucksrequired.
3.IftheworkconditionsatthesitethataffecttheproductivityoftheshovelcanberepresentedbyfourfactorsF1=0.940,F2=
0.952,F3=0.850andF4=0.750,determinethejobsiteproductivityandtheactualcycletime.
4.IftheworkconditionsatthesiteaffecttheproductivityofthedumptruckcanberepresentedbythreefactorsF1=0.952,F2=
0.700andF3=0.750,determinethejobsiteproductivityofthedumptruck,andthenumberofdumptrucksrequired.
10.Supposethatasinglepieceofequipmentisavailableonasitefortestingjoints.Further,supposethateachjointhastobetestedand
certifiedbeforeworkcanproceed.Jointsarecompletedandreadyfortestingatrandomintervalsduringashift.Eachtestrequiresan
averageoftenminutes.Whatistheaverageutilizationofthetestingequipmentandtheaveragewaitofacompletedjointfortesting
ifthenumberofjointscompletedis(a)fiveperhouror(b)threeperhour.
11.Supposethatthesteelplatestobeinspectedarearrivingsteadilyatarateofoneeverytwelveminutes.Eachinspectionrequires
sixteenminutes,buttwoinspectorsareavailablesotheinspectionservicerateisoneeveryeightminutes.Supposeoneinspector
takesabreakforsixtyminutes.Whatistheresultingdelayinthearrivingpieces?Whatistheaveragedelayamongthepiecesthat
havetowait?
12.Supposethatthreemachinesareavailableinafabricationshipfortestingweldedjointsofstructuralmemberssothatthetesting
servicerateofthethreemachinesisoneinevery20minutes.However,oneofthethreemachinesisshutdownfor90minuteswhen
theweldedjointstobetestedarriveatarateofoneinevery25minutes.Whatisthetotaldelayforthetestingserviceofthearriving
joints?Whatistheaveragedelay?Sketchthecumulativearrivalsandservicesversustime.
13.SolveExample417ifeachliftrequires5minutesinsteadof3minutes.
14.SolveExample417ifeachliftrequires6minutesinsteadof3minutes
15.Supposethatupto12customerscanbeservedperhourinanautomatedinspectionprocess.Whatisthetotalwaitingtimeand
maximumqueuewitharrivalratesforbothcases(a)and(b)below:

67:00am
78:00
89:00
910:00am
1011:00am
1112:00am
121:00pm
12:00pm
23:00pm
34:00pm
45:00pm
After5pm
Totalnumberofarrivals

(a)

(b)

0
25
25
25
25
10
8
0
0
0
0
0
118

0
10
10
15
15
10
15
15
10
10
10
0
120

16.ForthelistoflaborcharacteristicqualitiesinSection4.3(beginningwithQualityofWorkandendingwithDiversity),rateyourown
jobperformanceonthethreepointscalegiven.
Backtotop

4.16Footnotes
1.McCullough,David,ThePathBetweentheSeas,SimonandSchuster,1977,pg.531.(Back)
2.Rosefielde,StevenandDanielQuinnMills,"IsConstructionTechnologicallyStagnant?",inLange,JulianE.andDanielQuinnMills,
TheConstructionIndustry,LexingtonBooks,1979,pg.83.(Back)
3.Thisexamplewasadaptedwithpermissionfromanunpublishedpaper"ManagingMegaProjects"presentedbyG.R.Desnoyersatthe
ProjectManagementSymposiumsponsoredbytheExxonResearchandEngineeringCompany,FlorhamPark,NJ,November12,1980.
(Back)
4.SeeR.L.Tucker,"PerfectionoftheBuggyWhip,"TheConstructionAdvancementAddress,ASCE,Boston,MA,Oct.29,1986.(Back)

5.Formoredetaileddiscussion,seeD.G.Mills:"LaborRelationsandCollectiveBargaining"(Chapter4)inTheConstructionIndustry(by
J.E.LangandD.Q.Mills),LexingtonBooks,D.C.HeathandCo.,Lexington,MA,1979.(Back)
6.ThisexamplewasadaptedfromStukhart,G.andBell,L.C."CostsandBenefitsofMaterialsManagementSystems,",ASCEJournalof
ConstructionEngineeringandManagement,Vol.113,No.2,June1987,pp.222234.(Back)
7.TheinformationforthisexamplewasprovidedbyExxonPipelineCompany,Houston,Texas,withpermissionfromtheAlyeska
PipelineServiceCo.,Anchorage,Alaska.(Back)
8.ThisexamplewasadaptedfromA.E.Kerridge,"HowtoDevelopaProjectSchedule,"inA.E.KerridgeandC.H.Vervalin(eds.),
EngineeringandConstructionProjectManagement,GulfPublishingCompany,Houston,1986.(Back)
9.Forfurtherdetailsonequipmentcharacteristics,see,forexample,S.W.Nunnally,ConstructionMethodsandManagement,Second
Edition,PrenticeHall,1986(Back)
10.SeePaulson,C.,"AutomationandRoboticsforConstruction,"ASCEJournalofConstructionEngineeringandManagement,Vol.111,
No.CO3,1985,pp.190207.(Back)
11.ThisexampleisadaptedfromFredMoavenzadeh,"Construction'sHighTechnologyRevolution,"TechnologyReview,October,1985,
pg.32.(Back)
12.ThisandthefollowingexamplesinthissectionhavebeenadaptedfromE.BaraccoMillerandC.T.Hendrickson,Planningfor
Construction,TechnicalReportNo.R87162,DepartmentofCivilEngineering,CarnegieMellonUniversity,Pittsburgh,PA1987.(Back)
13.ThismodelusedtheINSIGHTsimulationlanguageandwasdescribedinB.C.Paulson,W.T.Chan,andC.C.Koo,"Construction
OperationsSimulationbyMicrocomputer,"ASCEJournalofConstructionEngineeringandManagement,Vol.113,No.CO2,June1987,
pp.302314.(Back)
14.Intheliteratureofqueueingtheory,thisformularepresentsanM/D/1queue,meaningthatthearrivalprocessisMarkovianorrandom,
theservicetimeisfixed,onlyoneserverexists,andthesystemisin"steadystate,"implyingthattheservicetimeandaveragearrivalrate
areconstant.Alteringtheseassumptionswouldrequirechangesinthewaitingtimeformulaforexample,ifservicetimeswerealso
random,thewaitingtimeformulawouldnothavethe2showninthedenominatorofEq.(4.27).Formoredetailsonqueueingsystems,see
Newell,G.F.ApplicationsofQueueingTheory,ChapmanandHall,London,1982.(Back)
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter4
(Labor,Materialand
EquipmentUtilization)

GoToChapter6
(EconomicEvaluationof
FacilityInvestments)

CostEstimation
CostsAssociatedwithConstructedFacilities
ApproachestoCostEstimation
TypeofConstructionCostEstimates
EffectsofScaleonConstructionCost
UnitCostMethodofEstimation
MethodsforAllocationofJointCosts
HistoricalCostData
CostIndices
ApplicationsofCostIndicestoEstimating
EstimateBasedonEngineer'sListofQuantities
AllocationofConstructionCostsOverTime
ComputerAidedCostEstimation
EstimationofOperatingCosts
References
Problems
Footnotes

5.CostEstimation
5.1CostsAssociatedwithConstructedFacilities
Thecostsofaconstructedfacilitytotheownerincludeboththeinitialcapitalcostandthesubsequentoperationand
maintenancecosts.Eachofthesemajorcostcategoriesconsistsofanumberofcostcomponents.
Thecapitalcostforaconstructionprojectincludestheexpensesrelatedtotheinitalestablishmentofthefacility:
Landacquisition,includingassembly,holdingandimprovement
Planningandfeasibilitystudies
Architecturalandengineeringdesign
Construction,includingmaterials,equipmentandlabor
Fieldsupervisionofconstruction
Constructionfinancing
Insuranceandtaxesduringconstruction
Owner'sgeneralofficeoverhead
Equipmentandfurnishingsnotincludedinconstruction
Inspectionandtesting
Theoperationandmaintenancecostinsubsequentyearsovertheprojectlifecycleincludesthefollowingexpenses:
Landrent,ifapplicable
Operatingstaff
Laborandmaterialformaintenanceandrepairs
Periodicrenovations
Insuranceandtaxes
Financingcosts
Utilities
Owner'sotherexpenses
Themagnitudeofeachofthesecostcomponentsdependsonthenature,sizeandlocationoftheprojectaswellasthe
managementorganization,amongmanyconsiderations.Theownerisinterestedinachievingthelowestpossibleoverall
projectcostthatisconsistentwithitsinvestmentobjectives.
Itisimportantfordesignprofessionalsandconstructionmanagerstorealizethatwhiletheconstructioncostmaybethesingle
largestcomponentofthecapitalcost,othercostcomponentsarenotinsignificant.Forexample,landacquisitioncostsarea
majorexpenditureforbuildingconstructioninhighdensityurbanareas,andconstructionfinancingcostscanreachthesame
orderofmagnitudeastheconstructioncostinlargeprojectssuchastheconstructionofnuclearpowerplants.

Fromtheowner'sperspective,itisequallyimportanttoestimatethecorrespondingoperationandmaintenancecostofeach
alternativeforaproposedfacilityinordertoanalyzethelifecyclecosts.Thelargeexpendituresneededforfacility
maintenance,especiallyforpubliclyownedinfrastructure,areremindersoftheneglectinthepasttoconsiderfullythe
implicationsofoperationandmaintenancecostinthedesignstage.
Inmostconstructionbudgets,thereisanallowanceforcontingenciesorunexpectedcostsoccuringduringconstruction.This
contingencyamountmaybeincludedwithineachcostitemorbeincludedinasinglecategoryofconstructioncontingency.
Theamountofcontingencyisbasedonhistoricalexperienceandtheexpecteddifficultyofaparticularconstructionproject.
Forexample,oneconstructionfirmmakesestimatesoftheexpectedcostinfivedifferentareas:
Designdevelopmentchanges,
Scheduleadjustments,
Generaladministrationchanges(suchaswagerates),
Differingsiteconditionsforthoseexpected,and
Thirdpartyrequirementsimposedduringconstruction,suchasnewpermits.
Contingentamountsnotspentforconstructioncanbereleasedneartheendofconstructiontotheownerortoaddadditional
projectelements.
Inthischapter,weshallfocusontheestimationofconstructioncost,withonlyoccasionalreferencetoothercostcomponents.
InChapter6,weshalldealwiththeeconomicevaluationofaconstructedfacilityonthebasisofboththecapitalcostandthe
operationandmaintenancecostinthelifecycleofthefacility.Itisatthisstagethattradeoffsbetweenoperatingandcapital
costscanbeanalyzed.
Example51:Energyprojectresourcedemands[1]
Theresourcesdemandsforthreetypesofmajorenergyprojectsinvestigatedduringtheenergycrisisinthe1970's
areshowninTable51.Theseprojectsare:(1)anoilshaleprojectwithacapacityof50,000barrelsofoilproduct
perday(2)acoalgasificationprojectthatmakesgaswithaheatingvalueof320billionsofBritishthermalunits
perday,orequivalenttoabout50,000barrelsofoilproductperdayand(3)atarsandprojectwithacapacityof
150,000barrelsofoilproductperday.
Foreachproject,thecostinbillionsofdollars,theengineeringmanpowerrequirementforbasicdesignin
thousandsofhours,theengineeringmanpowerrequirementfordetailedengineeringinmillionsofhours,the
skilledlaborrequirementforconstructioninmillionsofhoursandthematerialrequirementinbillionsofdollars
areshowninTable51.Tobuildseveralprojectsofsuchanorderofmagnitudeconcurrentlycoulddriveupthe
costsandstraintheavailabilityofallresourcesrequiredtocompletetheprojects.Consequently,costestimation
oftenrepresentsanexerciseinprofessionaljudgmentinsteadofmerelycompilingabillofquantitiesand
collectingcostdatatoreachatotalestimatemechanically.
TABLE51ResourceRequirementsofSomeMajorEnergyProjects

Cost
($billion)
Basicdesign
(Thousandsofhours)
Detailedengineering
(Millionsofhours)
Construction
(Millionsofhours)
Materials
($billion)

Oilshale
(50,000barrels/day)

Coalgasification
(320billionsBTU/day)

TarSands
(150,000barrels/day)

2.5

8to10

80

200

100

3to4

4to5

6to8

20

30

40

2.5

Source:ExxonResearchandEngineeringCompany,FlorhamPark,NJ
Backtotop

5.2ApproachestoCostEstimation
Costestimatingisoneofthemostimportantstepsinprojectmanagement.Acostestimateestablishesthebaselineofthe
projectcostatdifferentstagesofdevelopmentoftheproject.Acostestimateatagivenstageofprojectdevelopment
representsapredictionprovidedbythecostengineerorestimatoronthebasisofavailabledata.AccordingtotheAmerican

AssociationofCostEngineers,costengineeringisdefinedasthatareaofengineeringpracticewhereengineeringjudgment
andexperienceareutilizedintheapplicationofscientificprinciplesandtechniquestotheproblemofcostestimation,cost
controlandprofitability.
Virtuallyallcostestimationisperformedaccordingtooneorsomecombinationofthefollowingbasicapproaches:
Productionfunction.Inmicroeconomics,therelationshipbetweentheoutputofaprocessandthenecessaryresourcesis
referredtoastheproductionfunction.Inconstruction,theproductionfunctionmaybeexpressedbytherelationshipbetween
thevolumeofconstructionandafactorofproductionsuchaslabororcapital.Aproductionfunctionrelatestheamountor
volumeofoutputtothevariousinputsoflabor,materialandequipment.Forexample,theamountofoutputQmaybederived
asafunctionofvariousinputfactorsx1,x2,...,xnbymeansofmathematicaland/orstatisticalmethods.Thus,foraspecified
levelofoutput,wemayattempttofindasetofvaluesfortheinputfactorssoastominimizetheproductioncost.The
relationshipbetweenthesizeofabuildingproject(expressedinsquarefeet)totheinputlabor(expressedinlaborhoursper
squarefoot)isanexampleofaproductionfunctionforconstruction.SeveralsuchproductionfunctionsareshowninFigure3
3ofChapter3.
Empiricalcostinference.Empiricalestimationofcostfunctionsrequiresstatisticaltechniqueswhichrelatethecostof
constructingoroperatingafacilitytoafewimportantcharacteristicsorattributesofthesystem.Theroleofstatistical
inferenceistoestimatethebestparametervaluesorconstantsinanassumedcostfunction.Usually,thisisaccomplishedby
meansofregressionanalysistechniques.
Unitcostsforbillofquantities.Aunitcostisassignedtoeachofthefacilitycomponentsortasksasrepresentedbythebill
ofquantities.Thetotalcostisthesummationoftheproductsofthequantitiesmultipliedbythecorrespondingunitcosts.The
unitcostmethodisstraightforwardinprinciplebutquitelaboriousinapplication.Theinitialstepistobreakdownor
disaggregateaprocessintoanumberoftasks.Collectively,thesetasksmustbecompletedfortheconstructionofafacility.
Oncethesetasksaredefinedandquantitiesrepresentingthesetasksareassessed,aunitcostisassignedtoeachandthenthe
totalcostisdeterminedbysummingthecostsincurredineachtask.Thelevelofdetailindecomposingintotaskswillvary
considerablyfromoneestimatetoanother.
Allocationofjointcosts.Allocationsofcostfromexistingaccountsmaybeusedtodevelopacostfunctionofanoperation.
Thebasicideainthismethodisthateachexpenditureitemcanbeassignedtoparticularcharacteristicsoftheoperation.
Ideally,theallocationofjointcostsshouldbecausallyrelatedtothecategoryofbasiccostsinanallocationprocess.Inmany
instances,however,acausalrelationshipbetweentheallocationfactorandthecostitemcannotbeidentifiedormaynotexist.
Forexample,inconstructionprojects,theaccountsforbasiccostsmaybeclassifiedaccordingto(1)labor,(2)material,(3)
constructionequipment,(4)constructionsupervision,and(5)generalofficeoverhead.Thesebasiccostsmaythenbeallocated
proportionallytovarioustaskswhicharesubdivisionsofaproject.
Backtotop

5.3TypesofConstructionCostEstimates
Constructioncostconstitutesonlyafraction,thoughasubstantialfraction,ofthetotalprojectcost.However,itisthepartof
thecostunderthecontroloftheconstructionprojectmanager.Therequiredlevelsofaccuracyofconstructioncostestimates
varyatdifferentstagesofprojectdevelopment,rangingfromballparkfiguresintheearlystagetofairlyreliablefiguresfor
budgetcontrolpriortoconstruction.Sincedesigndecisionsmadeatthebeginningstageofaprojectlifecyclearemore
tentativethanthosemadeatalaterstage,thecostestimatesmadeattheearlierstageareexpectedtobelessaccurate.
Generally,theaccuracyofacostestimatewillreflecttheinformationavailableatthetimeofestimation.
Constructioncostestimatesmaybeviewedfromdifferentperspectivesbecauseofdifferentinstitutionalrequirements.Inspite
ofthemanytypesofcostestimatesusedatdifferentstagesofaproject,costestimatescanbestbeclassifiedintothreemajor
categoriesaccordingtotheirfunctions.Aconstructioncostestimateservesoneofthethreebasicfunctions:design,bidand
control.Forestablishingthefinancingofaproject,eitheradesignestimateorabidestimateisused.
1.DesignEstimates.Fortheowneroritsdesignateddesignprofessionals,thetypesofcostestimatesencounteredrun
parallelwiththeplanninganddesignasfollows:
Screeningestimates(ororderofmagnitudeestimates)
Preliminaryestimates(orconceptualestimates)
Detailedestimates(ordefinitiveestimates)
Engineer'sestimatesbasedonplansandspecifications
Foreachofthesedifferentestimates,theamountofdesigninformationavailabletypicallyincreases.
2.BidEstimates.Forthecontractor,abidestimatesubmittedtotheownereitherforcompetitivebiddingornegotiation
consistsofdirectconstructioncostincludingfieldsupervision,plusamarkuptocovergeneraloverheadandprofits.
Thedirectcostofconstructionforbidestimatesisusuallyderivedfromacombinationofthefollowingapproaches.
Subcontractorquotations
Quantitytakeoffs
Constructionprocedures.

3.3.ControlEstimates.Formonitoringtheprojectduringconstruction,acontrolestimateisderivedfromavailable
informationtoestablish:
Budgetestimateforfinancing
Budgetedcostaftercontractingbutpriortoconstruction
Estimatedcosttocompletionduringtheprogressofconstruction.

DesignEstimates
Intheplanninganddesignstagesofaproject,variousdesignestimatesreflecttheprogressofthedesign.Attheveryearly
stage,thescreeningestimateororderofmagnitudeestimateisusuallymadebeforethefacilityisdesigned,andmusttherefore
relyonthecostdataofsimilarfacilitiesbuiltinthepast.Apreliminaryestimateorconceptualestimateisbasedonthe
conceptualdesignofthefacilityatthestatewhenthebasictechnologiesforthedesignareknown.Thedetailedestimateor
definitiveestimateismadewhenthescopeofworkisclearlydefinedandthedetaileddesignisinprogresssothatthe
essentialfeaturesofthefacilityareidentifiable.Theengineer'sestimateisbasedonthecompletedplansandspecifications
whentheyarereadyfortheownertosolicitbidsfromconstructioncontractors.Inpreparingtheseestimates,thedesign
professionalwillincludeexpectedamountsforcontractors'overheadandprofits.
Thecostsassociatedwithafacilitymaybedecomposedintoahierarchyoflevelsthatareappropriateforthepurposeofcost
estimation.Thelevelofdetailindecomposingthefacilityintotasksdependsonthetypeofcostestimatetobeprepared.For
conceptualestimates,forexample,thelevelofdetailindefiningtasksisquitecoarsefordetailedestimates,thelevelofdetail
canbequitefine.
Asanexample,considerthecostestimatesforaproposedbridgeacrossariver.Ascreeningestimateismadeforeachofthe
potentialalternatives,suchasatiedarchbridgeoracantilevertrussbridge.Asthebridgetypeisselected,e.g.thetechnology
ischosentobeatiedarchbridgeinsteadofsomenewbridgeform,apreliminaryestimateismadeonthebasisofthelayout
oftheselectedbridgeformonthebasisofthepreliminaryorconceptualdesign.Whenthedetaileddesignhasprogressedtoa
pointwhentheessentialdetailsareknown,adetailedestimateismadeonthebasisofthewelldefinedscopeoftheproject.
Whenthedetailedplansandspecificationsarecompleted,anengineer'sestimatecanbemadeonthebasisofitemsand
quantitiesofwork.

BidEstimates
Thecontractor'sbidestimatesoftenreflectthedesireofthecontractortosecurethejobaswellastheestimatingtoolsatits
disposal.Somecontractorshavewellestablishedcostestimatingprocedureswhileothersdonot.Sinceonlythelowestbidder
willbethewinnerofthecontractinmostbiddingcontests,anyeffortdevotedtocostestimatingisalosstothecontractorwho
isnotasuccessfulbidder.Consequently,thecontractormayputintheleastamountofpossibleeffortformakingacost
estimateifitbelievesthatitschanceofsuccessisnothigh.
Ifageneralcontractorintendstousesubcontractorsintheconstructionofafacility,itmaysolicitpricequotationsforvarious
taskstobesubcontractedtospecialtysubcontractors.Thus,thegeneralsubcontractorwillshifttheburdenofcostestimating
tosubcontractors.Ifallorpartoftheconstructionistobeundertakenbythegeneralcontractor,abidestimatemaybe
preparedonthebasisofthequantitytakeoffsfromtheplansprovidedbytheowneroronthebasisoftheconstruction
proceduresdevisedbythecontractorforimplementingtheproject.Forexample,thecostofafootingofacertaintypeand
sizemaybefoundincommercialpublicationsoncostdatawhichcanbeusedtofacilitatecostestimatesfromquantity
takeoffs.However,thecontractormaywanttoassesstheactualcostofconstructionbyconsideringtheactualconstruction
procedurestobeusedandtheassociatedcostsiftheprojectisdeemedtobedifferentfromtypicaldesigns.Hence,itemssuch
aslabor,materialandequipmentneededtoperformvarioustasksmaybeusedasparametersforthecostestimates.

ControlEstimates
Boththeownerandthecontractormustadoptsomebaselineforcostcontrolduringtheconstruction.Fortheowner,abudget
estimatemustbeadoptedearlyenoughforplanninglongtermfinancingofthefacility.Consequently,thedetailedestimateis
oftenusedasthebudgetestimatesinceitissufficientdefinitivetoreflecttheprojectscopeandisavailablelongbeforethe
engineer'sestimate.Astheworkprogresses,thebudgetedcostmustberevisedperiodicallytoreflecttheestimatedcostto
completion.Arevisedestimatedcostisnecessaryeitherbecauseofchangeordersinitiatedbytheownerorduetounexpected
costoverrunsorsavings.
Forthecontractor,thebidestimateisusuallyregardedasthebudgetestimate,whichwillbeusedforcontrolpurposesaswell
asforplanningconstructionfinancing.Thebudgetedcostshouldalsobeupdatedperiodicallytoreflecttheestimatedcostto
completionaswellastoinsureadequatecashflowsforthecompletionoftheproject.
Example52:Screeningestimateofagroutingsealbeneathalandfill[2]
Oneofthemethodsofisolatingalandfillfromgroundwateristocreateabowlshapedbottomsealbeneaththe
siteasshowninFigure50.Thesealisconstructedbypumpingorpressureinjectinggroutundertheexisting
landfill.Holesareboredatregularintervalsthroughoutthelandfillforthispurposeandthegrouttubesare

extendedfromthesurfacetothebottomofthelandfill.Alayerofsoilataminimumof5ft.thickisleftbetween
thegroutedmaterialandthelandfillcontentstoallowforirregularitiesinthebottomofthelandfill.Thegrout
linercanbebetween4and6feetthick.AtypicalmaterialwouldbePortlandcementgroutpumpedunder
pressurethroughtubestofillvoidsinthesoil.Thisgroutwouldthenhardenintoapermanent,impermeableliner.

Figure51:GroutBottomSealLinerataLandfill
Theworkitemsinthisprojectinclude(1)drillingexploratoryboreholesat50ftintervalsforgrouttubes,and(2)
pumpinggroutintothevoidsofasoillayerbetween4and6ftthick.Thequantitiesforthesetwoitemsare
estimatedonthebasisofthelandfillarea:
8acres=(8)(43,560ft2/acre)=348,480ft2
(Asanapproximation,use360,000ft2toaccountforthebowlshape)
Thenumberofboreholesina50ftby50ftgridpatterncovering360,000ft2isgivenby:

Theaveragedepthoftheboreholesisestimatedtobe20ft.Hence,thetotalamountofdrillingis(144)(20)=
2,880ft.
Thevolumeofthesoillayerforgroutingisestimatedtobe:
fora4ftlayer,volume=(4ft)(360,000ft2)=1,440,000ft3
fora6ftlayer,volume=(6ft)(360,000ft2)=2,160,000ft3
Itisestimatedfromsoilteststhatthevoidsinthesoillayerarebetween20%and30%ofthetotalvolume.Thus,
fora4ftsoillayer:
groutingin20%voids=(20%)(1,440,000)=288,000ft3
groutingin30%voids=(30%)(1,440,000)=432,000ft3
andfora6ftsoillayer:
groutingin20%voids=(20%)(2,160,000)=432,000ft3
groutingin30%voids=(30%)(2,160,000)=648,000ft3

Theunitcostfordrillingexploratoryboreholesisestimatedtobebetween$3and$10perfoot(in1978dollars)
includingallexpenses.Thus,thetotalcostofboringwillbebetween(2,880)(3)=$8,640and(2,880)(10)=
$28,800.TheunitcostofPortlandcementgroutpumpedintoplaceisbetween$4and$10percubicfoot
includingoverheadandprofit.Inadditiontothevariationintheunitcost,thetotalcostofthebottomsealwill
dependuponthethicknessofthesoillayergroutedandtheproportionofvoidsinthesoil.Thatis:
fora4ftlayerwith20%voids,groutingcost=$1,152,000to$2,880,000
fora4ftlayerwith30%voids,groutingcost=$1,728,000to$4,320,000
fora6ftlayerwith20%voids,groutingcost=$1,728,000to$4,320,000
fora6ftlayerwith30%voids,groutingcost=$2,592,000to$6,480,000
Thetotalcostofdrillingboreholesissosmallincomparisonwiththecostofgroutingthattheformercanbe
omittedinthescreeningestimate.Furthermore,therangeofunitcostvariesgreatlywithsoilcharacteristics,and
theengineermustexercisejudgmentinnarrowingtherangeofthetotalcost.Alternatively,additionalsoiltests
canbeusedtobetterestimatetheunitcostofpumpinggroutandtheproportionofvoidsinthesoil.Supposethat,
inadditiontoignoringthecostofboreholes,anaveragevalueofa5ftsoillayerwith25%voidsisusedtogether
withaunitcostof$7percubicfootofPortlandcementgrouting.Inthiscase,thetotalprojectcostisestimated
tobe:
(5ft)(360,000ft2)(25%)($7/ft3)=$3,150,000
Animportantpointtonoteisthatthisscreeningestimateisbasedtoalargedegreeonengineeringjudgmentof
thesoilcharacteristics,andtherangeoftheactualcostmayvaryfrom$1,152,000to$6,480,000eventhough
theprobabilitiesofhavingactualcostsattheextremesarenotveryhigh.
Example53:Exampleofengineer'sestimateandcontractors'bids[3]
Theengineer'sestimateforaprojectinvolving14milesofInterstate70roadwayinUtahwas$20,950,859.Bids
weresubmittedonMarch10,1987,forcompletingtheprojectwithin320workingdays.Thethreelowbidders
were:

1.Ball,Ball&Brosame,Inc.,DanvilleCA
2.NationalProjects,Inc.,Phoenix,AR
3.KiewitWesternCo.,Murray,Utah

$14,129,798
$15,381,789
$18,146,714

Itwasastoundingthatthewinningbidwas32%belowtheengineer'sestimate.Eventhethirdlowestbidderwas
13%belowtheengineer'sestimateforthisproject.Thedisparityinpricingcanbeattributedeithertothevery
conservativeestimateoftheengineerintheUtahDepartmentofTransportationortoareacontractorswhoare
hungrierthanusualtowinjobs.
Theunitpricesfordifferentitemsofworksubmittedforthisprojectby(1)Ball,Ball&Brosame,Inc.and(2)
NationalProjects,Inc.areshowninTable52.Thesimilarityoftheirunitpricesforsomeitemsandthedisparity
inotherssubmittedbythetwocontractorscanbenoted.

TABLE52:UnitPricesinTwoContractors'BidsforRoadwayConstruction
Items

Unit

Quantity

Unitprice

Mobilization
Removal,berm

ls
lf

1
8,020

1
115,000
1.00

2
569,554
1.50

Finishsubgrade
Surfaceditches
Excavationstructures
Basecourse,untreated,3/4''
Leanconcrete,4''thick

sy
lf
cy
ton
sy

1,207,500
525
7,000
362,200
820,310

0.50
2.00
3.00
4.50
3.10

0.30
1.00
5.00
5.00
3.00

PCC,pavement,10''thick
Concrete,ciAA(AE)
Smallstructure
Barrier,precast

sy
ls
cy
lf

76,010
1
50
7,920

10.90
200,000
500
15.00

12.00
190,000
475
16.00

Flatwork,4''thick
10''thick
Slopeprotection
Metal,endsection,15''
18''
Post,rightofway,modification

sy
sy
sy
ea
ea
lf

7,410
4,241
2,104
39
3
4,700

10.00
20.00
25.00
100
150
3.00

8.00
27.00
30.00
125
200
2.50

Salvageandrelaypipe
Looseriprap
Bracedposts
Delineators,typeI
typeII

lf
cy
ea
lb
ea

1,680
32
54
1,330
140

5.00
40.00
100
12.00
15.00

12.00
30.00
110
12.00
12.00

Constructivesignsfixed
Barricades,typeIII
Warninglights
Pavementmarking,epoxymaterial
Black

sf
lf
day

gal

52,600
29,500
6,300

0.10
0.20
0.10

0.40
0.20
0.50

475

90.00

100

Yellow
White
Plowable,onewaywhite
Topsoil,contractorfurnished
Seedling,methodA

gal
gal
ea
cy
acr

740
985
342
260
103

90.00
90.00
50.00
10.00
150

80.00
70.00
20.00
6.00
200

Excelsiorblanket
Corrugated,metalpipe,18''
Polyethylenepipe,12''
Catchbasingrateandframe
Equalopportunitytraining

sy
lf
lf
ea
hr

500
580
2,250
35
18,000

2.00
20.00
15.00
350
0.80

2.00
18.00
13.00
280
0.80

Granularbackfillborrow
Drillcaisson,2'x6''
Flagging
Prestressedconcretemember
typeIV,141'x4''
132'x4''

cy
lf
hr

ea
ea

274
722
20,000

10.00
100
8.25

16.00
80.00
12.50

7
6

12,000
11,000

16.00
14.00

Reinforcedsteel
Epoxycoated
Structuralsteel
Sign,covering
typeC2woodpost

lb
lb
ls
sf
sf

6,300
122,241
1
16
98

0.60
0.55
5,000
10.00
15.00

0.50
0.50
1,600
4.00
17.00

24''
30''
48''
Auxiliary
Steelpost,48''x60''

ea
ea
ea
sf
ea

3
2
11
61
11

100
100
200
15.00
500

400
160
300
12.00
700

type3,woodpost
24''
30''
36''
42''x60''

sf
ea
ea
ea
ea

669
23
1
12
8

15.00
100
100
150
150

19.00
125
150
180
220

48''
Auxiliary
Steelpost

ea
sf
sf

7
135
1,610

200
15.00
40.00

270
13.00
35.00

12''x36''
Foundation,concrete
Barricade,48''x42''
Woodpost,roadclosed

ea
ea
ea
lf

28
60
40
100

100
300
100
30.00

150
650
100
36.00

Backtotop

5.4EffectsofScaleonConstructionCost
Screeningcostestimatesareoftenbasedonasinglevariablerepresentingthecapacityorsomephysicalmeasureofthedesign
suchasfloorareainbuildings,lengthofhighways,volumeofstoragebinsandproductionvolumesofprocessingplants.
Costsdonotalwaysvarylinearlywithrespecttodifferentfacilitysizes.Typically,scaleeconomiesordiseconomiesexist.If
theaveragecostperunitofcapacityisdeclining,thenscaleeconomiesexist.Conversely,scalediseconomiesexistifaverage
costsincreasewithgreatersize.Empiricaldataaresoughttoestablishtheeconomiesofscaleforvarioustypesoffacility,if
theyexist,inordertotakeadvantageoflowercostsperunitofcapacity.
Letxbeavariablerepresentingthefacilitycapacity,andybetheresultingconstructioncost.Then,alinearcostrelationship
canbeexpressedintheform:
(5.1)
whereaandbarepositiveconstantstobedeterminedonthebasisofhistoricaldata.NotethatinEquation(5.1),afixedcost
ofy=aatx=0isimpliedasshowninFigure52.Ingeneral,thisrelationshipisapplicableonlyinacertainrangeofthe
variablex,suchasbetweenx=candx=d.Ifthevaluesofycorrespondingtox=candx=dareknown,thenthecostofa
facilitycorrespondingtoanyxwithinthespecifiedrangemaybeobtainedbylinearinterpolation.Forexample,the
constructioncostofaschoolbuildingcanbeestimatedonthebasisofalinearrelationshipbetweencostandfloorareaifthe
unitcostpersquarefootoffloorareaisknownforschoolbuildingswithincertainlimitsofsize.

Figure52:LinearCostRelationshipwithEconomiesofScale
Anonlinearcostrelationshipbetweenthefacilitycapacityxandconstructioncostycanoftenberepresentedintheform:

(5.2)
whereaandbarepositiveconstantstobedeterminedonthebasisofhistoricaldata.For0<b<1,Equation(5.2)represents
thecaseofincreasingreturnstoscale,andforbgt1,therelationshipbecomesthecaseofdecreasingreturnstoscale,as
showninFigure53.Takingthelogarithmofbothsidesthisequation,alinearrelationshipcanbeobtainedasfollows:

Figure53:NonlinearCostRelationshipwithincreasingorDecreasingEconomiesofScale

(5.3)
AlthoughnofixedcostisimpliedinEq.(5.2),theequationisusuallyapplicableonlyforacertainrangeofx.Thesame
limitationappliestoEq.(5.3).Anonlinearcostrelationshipoftenusedinestimatingthecostofanewindustrialprocessing
plantfromtheknowncostofanexistingfacilityofadifferentsizeisknownastheexponentialrule.Letynbetheknowncost
ofanexistingfacilitywithcapacityQn,andybetheestimatedcostofthenewfacilitywhichhasacapacityQ.Then,fromthe
empiricaldata,itcanbeassumedthat:
(5.4)
wheremusuallyvariesfrom0.5to0.9,dependingonaspecifictypeoffacility.Avalueofm=0.6isoftenusedforchemical
processingplants.TheexponentialrulecanbereducedtoalinearrelationshipifthelogarithmofEquation(5.4)isused:
(5.5)
or
(5.6)
Theexponentialrulecanbeappliedtoestimatethetotalcostofacompletefacilityorthecostofsomeparticularcomponent
ofafacility.
Example54:Determinationofmfortheexponentialrule

Figure54:LogLogScaleGraphofExponentialRuleExample

Theempiricalcostdatafromanumberofsewagetreatmentplantsareplottedonaloglogscaleforln(Q/Qn)and
ln(y/yn)andalinearrelationshipbetweentheselogarithmicratiosisshowninFigure54.For(Q/Qn)=1or
ln(Q/Qn)=0,ln(y/yn)=0andforQ/Qn=2orln(Q/Qn)=0.301,ln(y/yn)=0.1765.Sincemistheslopeofthe
lineinthefigure,itcanbedeterminedfromthegeometricrelationasfollows:

Forln(y/yn)=0.1765,y/yn=1.5,whilethecorrespondingvalueofQ/Qnis2.Inwords,form=0.585,thecostof
aplantincreasesonly1.5timeswhenthecapacityisdoubled.
Example55:Costexponentsforwaterandwastewatertreatmentplants[4]
Themagnitudeofthecostexponentmintheexponentialruleprovidesasimplemeasureoftheeconomyofscale
associatedwithbuildingextracapacityforfuturegrowthandsystemreliabilityforthepresentinthedesignof
treatmentplants.Whenmissmall,thereisconsiderableincentivetoprovideextracapacitysincescaleeconomies
existasillustratedinFigure53.Whenmiscloseto1,thecostisdirectlyproportionaltothedesigncapacity.The
valueofmtendstoincreaseasthenumberofduplicateunitsinasystemincreases.Thevaluesofmforseveral
typesoftreatmentplantswithdifferentplantcomponentsderivedfromstatisticalcorrelationofactual
constructioncostsareshowninTable53.
TABLE53EstimatedValuesofCostExponentsforWaterTreatmentPlants
Treatmentplant
type
1.Watertreatment
2.Wastetreatment
Primarywithdigestion(small)
Primarywithdigestion(large)
Tricklingfilter
Activatedsludge
Stabilizationponds

Exponent
m

Capacityrange
(millionsofgallonsperday)

0.67

1100

0.55
0.75
0.60
0.77
0.57

0.110
0.7100
0.120
0.1100
0.1100

Source:DataarecollectedfromvarioussourcesbyP.M.Berthouex.Seethereferencesinhisarticlefortheprimarysources.
Example56:SomeHistoricalCostDatafortheExponentialRule
TheexponentialruleasrepresentedbyEquation(5.4)canbeexpressedinadifferentformas:

where

IfmandKareknownforagiventypeoffacility,thenthecostyforaproposednewfacilityofspecifiedcapacity
Qcanbereadilycomputed.
TABLE54CostFactorsofProcessingUnitsforTreatmentPlants
Processing
unit
1.Liquidprocessing
Oilseparation
Hydroclonedegritter
Primarysedimentation
Furialclarifier
Sludgeaerationbasin
Ticklingfilter
Aeratedlagoonbasin
Equalization
Neutralization

Unitof
capacity

mgd
mgd
ft2
ft2
mil.gal.
ft2
mil.gal.
mil.gal.
mgd

KValue
(1968$)

m
value

58,000
3,820
399

0.84
0.35
0.60

700
170,000
21,000

0.57
0.50
0.71

46,000
72,000
60,000

0.67
0.52
0.70

2.Sludgehandling
Digestion

ft3

67,500

0.59

Vacuumfilter

ft2
lbdry
solids/hr

9,360

0.84

318

0.81

Centrifuge

Source:DataarecollectedfromvarioussourcesbyP.M.Berthouex.Seethereferencesinhisarticlefortheprimarysources.
TheestimatedvaluesofKandmforvariouswaterandsewagetreatmentplantcomponentsareshowninTable54.TheK
valuesarebasedon1968dollars.TherangeofdatafromwhichtheKandmvaluesarederivedintheprimarysourcesshould
beobservedinordertousetheminmakingcostestimates.
Asanexample,takeK=$399andm=0.60foraprimarysedimentationcomponentinTable54.Foraproposednewplant
withtheprimarysedimentationprocesshavingacapacityof15,000sq.ft.,theestimatedcost(in1968dollars)is:
y=($399)(15,000)0.60=$128,000.
Backtotop

5.5UnitCostMethodofEstimation
Ifthedesigntechnologyforafacilityhasbeenspecified,theprojectcanbedecomposedintoelementsatvariouslevelsof
detailforthepurposeofcostestimation.Theunitcostforeachelementinthebillofquantitiesmustbeassessedinorderto
computethetotalconstructioncost.Thisconceptisapplicabletobothdesignestimatesandbidestimates,althoughdifferent
elementsmaybeselectedinthedecomposition.
Fordesignestimates,theunitcostmethodiscommonlyusedwhentheprojectisdecomposedintoelementsatvariouslevels
ofahierarchyasfollows:
1.PreliminaryEstimates.Theprojectisdecomposedintomajorstructuralsystemsorproductionequipmentitems,e.g.
theentirefloorofabuildingoracoolingsystemforaprocessingplant.
2.DetailedEstimates.Theprojectisdecomposedintocomponentsofvariousmajorsystems,i.e.,asinglefloorpanelfor
abuildingoraheatexchangerforacoolingsystem.

3.Engineer'sEstimates.Theprojectisdecomposedintodetaileditemsofvariouscomponentsaswarrantedbythe
availablecostdata.Examplesofdetaileditemsareslabsandbeamsinafloorpanel,orthepipingandconnectionsfora
heatexchanger.
Forbidestimates,theunitcostmethodcanalsobeappliedeventhoughthecontractormaychoosetodecomposetheproject
intodifferentlevelsinahierarchyasfollows:
1.SubcontractorQuotations.Thedecompositionofaprojectintosubcontractoritemsforquotationinvolvesaminimum
amountofworkforthegeneralcontractor.However,theaccuracyoftheresultingestimatedependsonthereliabilityof
thesubcontractorssincethegeneralcontractorselectsoneamongseveralcontractorquotationssubmittedforeachitem
ofsubcontractedwork.
2.QuantityTakeoffs.Thedecompositionofaprojectintoitemsofquantitiesthataremeasured(ortakenoff)fromthe
engineer'splanwillresultinaproceduresimilartothatadoptedforadetailedestimateoranengineer'sestimatebythe
designprofessional.Thelevelsofdetailmayvaryaccordingtothedesireofthegeneralcontractorandtheavailability
ofcostdata.
3.ConstructionProcedures.Iftheconstructionprocedureofaproposedprojectisusedasthebasisofacostestimate,
theprojectmaybedecomposedintoitemssuchaslabor,materialandequipmentneededtoperformvarioustasksinthe
projects.

SimpleUnitCostFormula
Supposethataprojectisdecomposedintonelementsforcostestimation.LetQibethequantityoftheithelementanduibe
thecorrespondingunitcost.Then,thetotalcostoftheprojectisgivenby:
(5.7)
wherenisthenumberofunits.Basedoncharacteristicsoftheconstructionsite,thetechnologyemployed,orthemanagement
oftheconstructionprocess,theestimatedunitcost,uiforeachelementmaybeadjusted.

FactoredEstimateFormula
Aspecialapplicationoftheunitcostmethodisthe"factoredestimate"commonlyusedinprocessindustries.Usually,an
industrialprocessrequiresseveralmajorequipmentcomponentssuchasfurnaces,towersdrumsandpumpinachemical
processingplant,plusancillaryitemssuchaspiping,valvesandelectricalelements.Thetotalcostofaprojectisdominated
bythecostsofpurchasingandinstallingthemajorequipmentcomponentsandtheirancillaryitems.LetCibethepurchase
costofamajorequipmentcomponentiandfibeafactoraccountingforthecostofancillaryitemsneededfortheinstallation
ofthisequipmentcomponenti.Then,thetotalcostofaprojectisestimatedby:
(5.8)
wherenisthenumberofmajorequipmentcomponentsincludedintheproject.Thefactoredmethodisessentiallybasedon
theprincipleofcomputingthecostofancillaryitemssuchaspipingandvalvesasafractionoramultipleofthecostsofthe
majorequipmentitems.ThevalueofCimaybeobtainedbyapplyingtheexponentialrulesotheuseofEquation(5.8)may
involveacombinationofcostestimationmethods.

FormulaBasedonLabor,MaterialandEquipment
Considerthesimplecaseforwhichcostsoflabor,materialandequipmentareassignedtoalltasks.Supposethataprojectis
decomposedintontasks.LetQibethequantityofworkfortaski,Mibetheunitmaterialcostoftaski,Eibetheunit
equipmentratefortaski,LibetheunitsoflaborrequiredperunitofQi,andWibethewagerateassociatedwithLi.Inthis
case,thetotalcostyis:
(5.9)
NotethatWiLiyieldsthelaborcostperunitofQi,orthelaborunitcostoftaski.Consequently,theunitsforalltermsin
Equation(5.9)areconsistent.
Example57:Decompositionofabuildingfoundationintodesignandconstructionelements.

Theconceptofdecompositionisillustratedbytheexampleofestimatingthecostsofabuildingfoundation
excludingexcavationasshowninTable55inwhichthedecomposeddesignelementsareshownonhorizontal
linesandthedecomposedcontractelementsareshowninverticalcolumns.Foradesignestimate,the
decompositionoftheprojectintofootings,foundationwallsandelevatorpitispreferredsincethedesignercan
easilykeeptrackofthesedesignelementshowever,forabidestimate,thedecompositionoftheprojectinto
formwork,reinforcingbarsandconcretemaybepreferredsincethecontractorcangetquotationsofsuchcontract
itemsmoreconvenientlyfromspecialtysubcontractors.
TABLE55IllustrativeDecompositionofBuildingFoundationCosts
Contractelements

Design
elements
Footings
Foundationwalls
Elevatorpit
Totalcost

Formwork

Rebars

Concrete

Totalcost

$5,000
15,000
9,000
$29,000

$10,000
18,000
15,000
$43,000

$13,000
28,000
16,000
$57,000

$28,000
61,000
40,000
$129,000

Example58:Costestimateusinglabor,materialandequipmentrates.
ForthegivenquantitiesofworkQifortheconcretefoundationofabuildingandthelabor,materialand
equipmentratesinTable56,thecostestimateiscomputedonthebasisofEquation(5.9).Theresultistabulated
inthelastcolumnofthesametable.
TABLE56IllustrativeCostEstimateUsingLabor,MaterialandEquipmentRates

Description

Quantity
Qi

Material
unitcost
Mi

Equipment
unitcost
Ei

Wage
rate
Wi

Labor
input
Li

Labor
unitcost
WiLi

Direct
cost
Yi

Formwork
Rebars

12,000ft2
4,000lb

$0.4/ft2
0.2/lb

$0.8/ft2
0.3/lb

$15/hr
15/hr

0.2hr/ft2
0.04hr/lb

$3.0/ft2
0.6/lb

$50,400
4,440

Concrete
Total

500yd3

5.0/yd3

50/yd3

15/hr

0.8hr/yd3

12.0/yd3

33,500
$88,300

Backtotop

5.6MethodsforAllocationofJointCosts
Theprincipleofallocatingjointcoststovariouselementsinaprojectisoftenusedincostestimating.Becauseofthe
difficultyinestablishingcasualrelationshipbetweeneachelementanditsassociatedcost,thejointcostsareoftenproratedin
proportiontothebasiccostsforvariouselements.
Onecommonapplicationisfoundintheallocationoffieldsupervisioncostamongthebasiccostsofvariouselementsbased
onlabor,materialandequipmentcosts,andtheallocationofthegeneraloverheadcosttovariouselementsaccordingtothe
basicandfieldsupervisioncost.Supposethataprojectisdecomposedintontasks.Letybethetotalbasiccostfortheproject
andyibethetotalbasiccostfortaski.IfFisthetotalfieldsupervisioncostandFiistheprorationofthatcosttotaski,thena
typicalproportionalallocationis:
(5.10)
Similarly,letzbethetotaldirectfieldcostwhichincludesthetotalbasiccostandthefieldsupervisioncostoftheproject,and
zibethedirectfieldcostfortaski.IfGisthegeneralofficeoverheadforprorationtoalltasks,andGiisthesharefortaski,
then
(5.11)

Finally,letwbethegrandtotalcostoftheprojectwhichincludesthedirectfieldcostandthegeneralofficeoverheadcost
chargedtotheprojectandwibethatattributabletaski.Then,
(5.12)
and
(5.13)

Example59:Proratedcostsforfieldsupervisionandofficeoverhead
Ifthefieldsupervisioncostis$13,245fortheprojectinTable56(Example58)withatotaldirectcostof
$88,300,findtheproratedfieldsupervisioncostsforvariouselementsoftheproject.Furthermore,ifthegeneral
officeoverheadchargedtotheprojectis4%ofthedirectfieldcostwhichisthesumofbasiccostsandfield
supervisioncost,findtheproratedgeneralofficeoverheadcostsforvariouselementsoftheproject.
Fortheproject,y=$88,300andF=$13,245.Hence:
z=13,245+88,300=$101,545
G=(0.04)(101,545)=$4,062
w=101,545+4,062=$105,607
TheresultsoftheprorationofcoststovariouselementsareshowninTable57.
TABLE57ProrationofFieldSupervisionandOfficeOverheadCosts

Description

Formwork
Rebars
Concrete
Total

Basiccost
yi

Allocated
fieldsupervisioncost
Fi

Total
fieldcost
zi

Allocated
overheadcost
Gi

Totalcost
Li

$50,400
4,400
33,500
$88,300

$7,560
660
5,025
$13,245

$57,960
5,060
38,525
$101,545

$2,319
202
1,541
$4,062

$60,279
5,262
40,066
$105,607

Example510:Astandardcostreportforallocatingoverhead
Therelianceonlaborexpensesasameansofallocatingoverheadburdensintypicalmanagementaccounting
systemscanbeillustratedbytheexampleofaparticularproduct'sstandardcostsheet.[5]Table58isanactual
product'sstandardcostsheetofacompanyfollowingtheprocedureofusingoverheadburdenratesassessedper
directlaborhour.Thematerialandlaborcostsformanufacturingatypeofvalvewereestimatedfromengineering
studiesandfromcurrentmaterialandlaborprices.TheseamountsaresummarizedinColumns2and3ofTable
58.TheoverheadcostsshowninColumn4ofTable58wereobtainedbyallocatingtheexpensesofseveral
departmentstothevariousproductsmanufacturedinthesedepartmentsinproportiontothelaborcost.Asshown
inthelastlineofthetable,thematerialcostrepresents29%ofthetotalcost,whilelaborcostsare11%ofthe
totalcost.Theallocatedoverheadcostconstitutes60%ofthetotalcost.Eventhoughmaterialcostsexceedlabor
costs,onlythelaborcostsareusedinallocatingoverhead.Althoughthistypeofallocationmethodiscommonin
industry,thearbitraryallocationofjointcostsintroducesunintendedcrosssubsidiesamongproductsandmay
produceadverseconsequencesonsalesandprofits.Forexample,aparticulartypeofpartmayincurfewoverhead
expensesinpractice,butthisphenomenonwouldnotbereflectedinthestandardcostreport.
TABLE58StandardCostReportforaTypeofValve
(1)Materialcost
Purchasedpart
Operation
Drill,face,tap(2)

(2)Laborcost

(3)Overheadcost

$1.1980

(4)Totalcost
$1.1980

$0.0438

$0.2404

$0.2842

Degrease
Removeburs
Totalcost,thisitem
Othersubassemblies
Totalcost,subassemblies
Assembleandtest
Packwithoutpaper
Totalcost,thisitem
Costcomponent,%

1.1980
0.3523
1.5233

$1.5233
29%

0.0031
0.0577
0.1046
0.2994
0.4040
0.1469
0.0234
$0.5743
11%

0.0337
0.3241
0.5982
1.8519
2.4501
0.4987
0.1349
$3.0837
60%

0.0368
0.3818
1.9008
2.4766
4.3773
0.6456
0.1583
$5.1813
100%

Source:H.T.JohnsonandR.S.Kaplan,Relevancelost:TheRiseandFallofManagementAccounting,Harvard
BusinessSchoolPress,Boston.Reprintedwithpermission.
Backtotop

5.7HistoricalCostData
Preparingcostestimatesnormallyrequirestheuseofhistoricaldataonconstructioncosts.Historicalcostdatawillbeuseful
forcostestimationonlyiftheyarecollectedandorganizedinawaythatiscompatiblewithfutureapplications.Organizations
whichareengagedincostestimationcontinuallyshouldkeepafilefortheirownuse.Theinformationmustbeupdatedwith
respecttochangesthatwillinevitablyoccur.Theformatofcostdata,suchasunitcostsforvariousitems,shouldbeorganized
accordingtothecurrentstandardofusageintheorganization.
Constructioncostdataarepublishedinvariousformsbyanumberoforganizations.Thesepublicationsareusefulas
referencesforcomparison.Basically,thefollowingtypesofinformationareavailable:
Catalogsofvendors'dataonimportantfeaturesandspecificationsrelatingtotheirproductsforwhichcostquotations
areeitherpublishedorcanbeobtained.Amajorsourceofvendors'informationforbuildingproductsisSweets'Catalog
publishedbyMcGrawHillInformationSystemsCompany.
Periodicalscontainingconstructioncostdataandindices.OnesourceofsuchinformationisENR,theMcGrawHill
ConstructionWeekly,whichcontainsextensivecostdataincludingquarterlycostreports.CostEngineering,ajournalof
theAmericanSocietyofCostEngineers,alsopublishesusefulcostdataperiodically.
Commercialcostreferencemanualsforestimatingguides.AnexampleistheBuildingConstructionCostData
publishedannuallybyR.S.MeansCompany,Inc.,whichcontainsunitpricesonbuildingconstructionitems.Dodge
ManualforBuildingConstruction,publishedbyMcGrawHill,providessimilarinformation.
Digestsofactualprojectcosts.TheDodgeDigestofBuildingCostsandSpecificationsprovidesdescriptionsofdesign
featuresandcostsofactualprojectsbybuildingtype.Onceaweek,ENRpublishesthebidpricesofaprojectchosen
fromalltypesofconstructionprojects.
Historicalcostdatamustbeusedcautiously.Changesinrelativepricesmayhavesubstantialimpactsonconstructioncosts
whichhaveincreasedinrelativeprice.Unfortunately,systematicchangesoveralongperiodoftimeforsuchfactorsare
difficulttopredict.Errorsinanalysisalsoservetointroduceuncertaintyintocostestimates.Itisdifficult,ofcourse,toforesee
alltheproblemswhichmayoccurinconstructionandoperationoffacilities.Thereissomeevidencethatestimatesof
constructionandoperatingcostshavetendedtopersistentlyunderstatetheactualcosts.Thisisduetotheeffectsofgreater
thananticipatedincreasesincosts,changesindesignduringtheconstructionprocess,oroveroptimism.
Sincethefuturepricesofconstructedfacilitiesareinfluencedbymanyuncertainfactors,itisimportanttorecognizethatthis
riskmustbebornetosomedegreebyallpartiesinvolved,i.e.,theowner,thedesignprofessionals,theconstruction
contractors,andthefinancinginstitution.Itistothebestinterestofallpartiesthattherisksharingschemeimplicitinthe
design/constructprocessadoptedbytheownerisfullyunderstoodbyall.Wheninflationadjustmentprovisionshavevery
differentriskimplicationstovariousparties,thepricelevelchangeswillalsobetreateddifferentlyforvarioussituations.
Backtotop

5.8CostIndices
Sincehistoricalcostdataareoftenusedinmakingcostestimates,itisimportanttonotethepricelevelchangesovertime.
Trendsinpricechangescanalsoserveasabasisforforecastingfuturecosts.Theinputpriceindicesoflaborand/ormaterial
reflectthepricelevelchangesofsuchinputcomponentsofconstructiontheoutputpriceindices,whereavailable,reflectthe
pricelevelchangesofthecompletedfacilities,thustosomedegreealsomeasuringtheproductivityofconstruction.
Apriceindexisaweightedaggregatemeasureofconstantquantitiesofgoodsandservicesselectedforthepackage.Theprice
indexatasubsequentyearrepresentsaproportionatechangeinthesameweightedaggregatemeasurebecauseofchangesin

prices.Letltbethepriceindexinyeart,andlt+1bethepriceindexinthefollowingyeart+1.Then,thepercentchangein
priceindexforyeart+1is:
(5.14)
or
(5.15)
Ifthepriceindexatthebaseyeart=0issetatavalueof100,thenthepriceindicesl1,l2...lnforthesubsequentyearst=1,2...n
canbecomputedsuccessivelyfromchangesinthetotalpricechargedforthepackageofgoodsmeasuredintheindex.
ThebestknownindicatorsofgeneralpricechangesaretheGrossDomesticProduct(GDP)deflatorscompiledperiodicallyby
theU.S.DepartmentofCommerce,andtheconsumerpriceindex(CPI)compiledperiodicallybytheU.S.Departmentof
Labor.Theyarewidelyusedasbroadgaugesofthechangesinproductioncostsandinconsumerpricesforessentialgoods
andservices.Specialpriceindicesrelatedtoconstructionarealsocollectedbyindustrysourcessincesomeinputfactorsfor
constructionandtheoutputsfromconstructionmaydisproportionatelyoutpaceorfallbehindthegeneralpriceindices.
ExamplesofspecialpriceindicesforconstructioninputfactorsarethewholesaleBuildingMaterialPriceandBuildingTrades
UnionWages,bothcompiledbytheU.S.DepartmentofLabor.Inaddition,theconstructioncostindexandthebuildingcost
indexarereportedperiodicallyintheEngineeringNewsRecord(ENR).BothENRcostindicesmeasuretheeffectsofwage
rateandmaterialpricetrends,buttheyarenotadjustedforproductivity,efficiency,competitiveconditions,ortechnology
changes.Consequently,alltheseindicesmeasureonlythepricechangesofrespectiveconstructioninputfactorsas
representedbyconstantquantitiesofmaterialand/orlabor.Ontheotherhand,thepriceindicesofvarioustypesofcompleted
facilitiesreflectthepricechangesofconstructionoutputincludingallpertinentfactorsintheconstructionprocess.The
buildingconstructionoutputindicescompiledbyTurnerConstructionCompanyandHandyWhitmanUtilitiesarecompiled
intheU.S.StatisticalAbstractspublishedeachyear.
Figure57andTable59showavarietyofUnitedStatesindices,includingtheGrossDomesticProduct(GDP)pricedeflator,
theENRbuildingindex,andtheTurnerConstructionCompanyBuildingCostIndexfrom1996to2007,using2000asthe
baseyearwithanindexof100.
TABLE59SummaryofInputandOutputPriceIndices,19962007
Year
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
TurnerConstructionBuildings 84.9 88.2 92.3 95.8 100.0 103.0 104.0 104.4 110.1 120.5 133.3 143.5
ENRBuildings

90.5 95.0 95.8 97.6 100.0 101.0 102.4 104.4 112.6 118.8 123.5 126.7

GDPDeflator

94.0 95.6 96.8 98.0 100.0 102.3 104.2 105.9 107.2 108.6 110.2 112.0
Note:Index=100inbaseyearof2000.

Figure57TrendsforUSpriceindices.

Figure58Priceandcostindicesforconstruction.
SinceconstructioncostsvaryindifferentregionsoftheUnitedStatesandinallpartsoftheworld,locationalindicesshowing
theconstructioncostataspecificlocationrelativetothenationaltrendareusefulforcostestimation.ENRpublishes
periodicallytheindicesoflocalconstructioncostsatthemajorcitiesindifferentregionsoftheUnitedStatesaspercentages
oflocaltonationalcosts.
Whentheinflationrateisrelativelysmall,i.e.,lessthan10%,itisconvenienttoselectasinglepriceindextomeasurethe
inflationaryconditionsinconstructionandthustodealonlywithasinglesetofpricechangeratesinforecasting.Letjtbethe
pricechangerateinyeart+1overthepriceinyeart.Ifthebaseyearisdenotedasyear0(t=0),thenthepricechangeratesat
years1,2,...tarej1,j2,...jt,respectively.LetAtbethecostinyeartexpressedinbaseyeardollarsandAt'bethecostinyeart
expressedinthencurrentdollars.Then:
(5.16)
Conversely
(5.17)
Ifthepricesofcertainkeyitemsaffectingtheestimatesoffuturebenefitsandcostsareexpectedtoescalatefasterthanthe
generalpricelevels,itmaybecomenecessarytoconsiderthedifferentialpricechangesoverandabovethegeneralinflation
rate.Forexample,duringtheperiodbetween1973through1979,itwascustomarytoassumethatfuelcostswouldescalate
fasterthanthegeneralpricelevels.Withhindsightin1983,theassumptionforestimatingcostsovermanyyearswouldhave
beendifferent.Becauseoftheuncertaintyinthefuture,theuseofdifferentialinflationratesforspecialitemsshouldbe
judicious.
Futureforecastsofcostswillbeuncertain:theactualexpensesmaybemuchlowerormuchhigherthanthoseforecasted.This
uncertaintyarisesfromtechnologicalchanges,changesinrelativeprices,inaccurateforecastsofunderlyingsocioeconomic
conditions,analyticalerrors,andotherfactors.Forthepurposeofforecasting,itisoftensufficienttoprojectthetrendof
futurepricesbyusingaconstantratejforpricechangesineachyearoveraperiodoftyears,then
(5.18)
and
(5.19)
Estimationofthefuturerateincreasejisnotatallstraightforward.Asimpleexpedientistoassumethatfutureinflationwill
continueattherateofthepreviousperiod:
(5.20)
Alongertermperspectivemightusetheaverageincreaseoverahorizonofnpastperiods:

(5.21)

Moresophisticatedforecastingmodelstopredictfuturecostincreasesincludecorrectionsforitemssuchaseconomiccycles
andtechnologychanges.
Example512:Changesinhighwayandbuildingcosts
Figure59showsthechangeofstandardhighwaycostsfrom1992to2002,andTable510showsthechangeof
residentialbuildingcostsfrom1970to1990.Ineachcase,therateofcostincreasewassubstantiallyabovethe
rateofinflationinthedecadeofthe1970s..Indeed,therealcostincreasebetween1970and1980wasinexcess
ofthreepercentperyearinbothcases.However,thesedataalsoshowsomecauseforoptimism.Forthecaseof
thestandardhighway,realcostdecreasestookplaceintheperiodfroml970tol990.Unfortunately,comparable
indicesofoutputsarenotbeingcompiledonanationwidebasisforothertypesofconstruction.

Figure59ProducerPricesofHighwayandStreetConstruction(ProducerPriceIndex:HighwaysandStreetsmonthlydata).
TABLE510ComparisonofResidentialBuildingCosts,19701990

year

Standard
residencecost
(1972=100)

Pricedeflator
(1972=100)

Standardresidence
realcost
(1972=100)

Percentage
change
peryear

1970
1980
1990

77
203
287

92
179
247

74
99
116

+3.4%
+1.7%

Source:StatisticalAbstractoftheUnitedStates.GNPdeflatorisusedforthepricedeflatorindex.
Backtotop

5.9ApplicationsofCostIndicestoEstimating
Inthescreeningestimateofanewfacility,asingleparameterisoftenusedtodescribeacostfunction.Forexample,thecost
ofapowerplantisafunctionofelectricitygeneratingcapacityexpressedinmegawatts,orthecostofasewagetreatment
plantasafunctionofwasteflowexpressedinmilliongallonsperday.

Thegeneralconditionsfortheapplicationofthesingleparametercostfunctionforscreeningestimatesare:
1.Excludespeciallocalconditionsinhistoricaldata
2.Determinenewfacilitycostonbasisofspecifiedsizeorcapacity(usingthemethodsdescribedinSections5.3to5.6)
3.Adjustforinflationindex
4.Adjustforlocalindexofconstructioncosts
5.Adjustfordifferentregulatoryconstraints
6.Adjustforlocalfactorsforthenewfacility
Someoftheseadjustmentsmaybedoneusingcompiledindices,whereasothersmayrequirefieldinvestigationand
considerableprofessionaljudgmenttoreflectdifferencesbetweenagivenprojectandstandardprojectsperformedinthepast.
Example513:Screeningestimateforarefinery
Thetotalconstructioncostofarefinerywithaproductioncapacityof200,000bbl/dayinGary,Indiana,
completedin2001was$100million.Itisproposedthatasimilarrefinerywithaproductioncapacityof300,000
bbl/daybebuiltinLosAngeles,California,forcompletionin2003.Fortheadditionalinformationgivenbelow,
makeanorderofmagnitudeestimateofthecostoftheproposedplant.
1.InthetotalconstructioncostfortheGary,Indiana,plant,therewasanitemof$5millionforsite
preparationwhichisnottypicalforotherplants.
2.Thevariationofsizesoftherefineriescanbeapproximatedbytheexponentialrule,Equation(5.4),withm
=0.6.
3.Theinflationrateisexpectedtobe8%peryearfrom1999to2003.
4.Thelocationindexwas0.92forGary,Indianaand1.14forLosAngelesin1999.Theseindicesaredeemed
tobeappropriateforadjustingthecostsbetweenthesetwocities.
5.NewairpollutionequipmentfortheLAplantcosts$7millionin2003dollars(notrequiredintheGary
plant).
6.Thecontingencycostduetoinclementweatherdelaywillbereducedbytheamountof1%oftotal
constructioncostbecauseofthefavorableclimateinLA(comparedtoGary).
Onthebasisoftheaboveconditions,theestimateforthenewprojectmaybeobtainedasfollows:
1.TypicalcostexcludingspecialitematGary,INis
$100million$5million=$95million
2.Adjustmentforcapacitybasedontheexponentiallawyields
($95)(300,000/200,000)0.6=(95)(1.5)0.6=$121.2million
3.Adjustmentforinflationleadstothecostin2003dollarsas
($121.2)(1.08)4=$164.6million
4.Adjustmentforlocationindexgives
($164.6)(1.14/0.92)=$204.6million
5.AdjustmentfornewpollutionequipmentattheLAplantgives
$204.6+$7=$211.6million
6.Reductionincontingencycostyields
($211.6)(10.01)=$209.5million
Sincethereisnoadjustmentforthecostofconstructionfinancing,theorderofmagnitudeestimateforthenew
projectis$209.5million.
Example514:Conceptualestimateforachemicalprocessingplant
Inmakingapreliminaryestimateofachemicalprocessingplant,severalmajortypesofequipmentarethemost
significantparametersinaffectingtheinstallationcost.Thecostofpipingandotherancillaryitemsforeachtype
ofequipmentcanoftenbeexpressedasapercentageofthattypeofequipmentforagivencapacity.Thestandard
costsforthemajorequipmenttypesfortwoplantswithdifferentdailyproductioncapacitiesareasshownin
Table511.Ithasbeenestablishedthattheinstallationcostofallequipmentforaplantwithdailyproduction
capacitybetween100,000bbland400,000bblcanbestbeestimatedbyusinglinearinterpolationofthestandard

data.
TABLE511CostDataforEquipmentandAncillaryItems
Costofancillaryitems
Equipment EquipmentCost($1000) as%ofequipmentcost($1000)
type
100,000bbl 400,000bbl 100,000bbl
400,000bbl
Furnace
Tower

3,000
2,000

10,000
6,000

40%
45%

30%
35%

Drum

1,500

5,000

50%

40%

Pump,etc.

1,000

4,000

60%

50%

Anewchemicalprocessingplantwithadailyproductioncapacityof200,000bblistobeconstructedin
Memphis,TNinfouryears.Determinethetotalpreliminarycostestimateoftheplantincludingthebuildingand
theequipmentonthefollowingbasis:
1.TheinstallationcostforequipmentwasbasedonlinearinterpolationfromTable511,andadjustedfor
inflationfortheinterveningfouryears.Weexpectinflationinthefouryearstobesimilartotheperiod
19901994andwewillusetheGNPDeflatorindex.
2.Thelocationindexforequipmentinstallationis0.95forMemphis,TN,incomparisonwiththestandard
cost.
3.Anadditionalcostof$500,000wasrequiredforthelocalconditionsinMemphis,TN.
Thesolutionofthisproblemcanbecarriedoutaccordingtothestepsasoutlinedintheproblemstatement:
1.Thecostsoftheequipmentandancillaryitemsforaplantwithacapacityof200,000bblcanbeestimated
bylinearinterpolationofthedatainTable511andtheresultsareshowninTable512.

TABLE512ResultsofLinearInterpolationforanEstimationExample
Equipment
EquipmentCost
Percentagefor
type
(in$1,000)
ancillaryitems
Furnace
Tower

$3,000+(1/3)($10,000$3,000)=$5,333 40%(1/3)(40%30%)=37%
$2,000+(1/3)($6,000$2,000)=$3,333 45%(1/3)(45%35%)=42%

Drum
$1,500+(1/3)($5,000$1,500)=$2,667 50%(1/3)(50%40%)=47%
Pumps,etc. $1,000+(1/3)($4,000$1,000)=$2,000 60%(1/3)(60%50%)=57%
Hence,thetotalprojectcostinthousandsofcurrentdollarsisgivenbyEquation(5.8)as:
($5,333)(1.37)+($3,333)(1.42)+($2,667)(1.47)+($2,000)(1.57)=
=$2,307+$4,733+$3,920+$3,140=$19,000
2.ThecorrespondingcostinthousandsoffouryearinthefuturedollarsusingEquation(5.16)andTable59
is:
($19,100)(105/94)=$21,335
3.Thetotalcostoftheprojectafteradjustmentforlocationis
(0.95)($21,335,000)+$500,000 $20,800,000
Backtotop

5.10EstimateBasedonEngineer'sListofQuantities
Theengineer'sestimateisbasedonalistofitemsandtheassociatedquantitiesfromwhichthetotalconstructioncostis
derived.Thissamelistisalsomadeavailabletothebiddersifunitpricesoftheitemsonthelistarealsosolicitedfromthe
bidders.Thus,theitemizedcostssubmittedbythewinningcontractormaybeusedasthestartingpointforbudgetcontrol.
Ingeneral,theprogresspaymentstothecontractorarebasedontheunitsofworkcompletedandthecorrespondingunitprices
oftheworkitemsonthelist.Hence,theestimatebasedontheengineers'listofquanititiesforvariousworkitemsessentially
definesthelevelofdetailtowhichsubsequentmeasuresofprogressfortheprojectwillbemade.
Example515:Bidestimatebasedonengineer'slistofquantities

Usingtheunitpricesinthebidofcontractor1forthequantititesspecifiedbytheengineerinTable52(Example
53),wecancomputethetotalbidpriceofcontractor1fortheroadwayproject.Theitemizedcostsforvarious
workitemsaswellasthetotalbidpriceareshowninTable513.

TABLE513:BidPriceofContractor1inaHighwayProject
Items

Unit

Quantity

Unitprice

Itemcost

Mobilization
Removal,berm

ls
lf

1
8,020

115,000
1.00

115,000
8.020

Finishsubgrade
Surfaceditches

sy
lf

1,207,500
525

0.50
2.00

603,750
1,050

Excavationstructures

cy

7,000

3.00

21,000

Basecourse,untreated,3/4''
Leanconcrete,4''thick

ton
sy

362,200
820,310

4.50
3.10

1,629,900
2,542,961

PCC,pavement,10''thick
Concrete,ciAA(AE)

sy
ls

76,010
1

10.90
200,000

7,695,509
200,000

Smallstructure

cy

50

500

25,000

Barrier,precast
Flatwork,4''thick

lf
sy

7,920
7,410

15.00
10.00

118,800
74,100

10''thick
Slopeprotection

sy
sy

4,241
2,104

20.00
25.00

84,820
52,600

Metal,endsection,15''

ea

39

100

3,900

18''
Post,rightofway,modification

ea
lf

3
4,700

150
3.00

450
14,100

Salvageandrelaypipe
Looseriprap

lf
cy

1,680
32

5.00
40.00

8,400
1,280

Bracedposts

ea

54

100

5,400

Delineators,typeI
typeII

lb
ea

1,330
140

12.00
15.00

15,960
2,100

Constructivesignsfixed
Barricades,typeIII

sf
lf

52,600
29,500

0.10
0.20

5,260
5,900

Warninglights

day

6,300

0.10

630

Pavementmarking,epoxymaterial
Black

gal

475

90.00

42,750

Yellow
White

gal
gal

740
985

90.00
90.00

66,600
88,650

Plowable,onewaywhite
Topsoil,contractorfurnished

ea
cy

342
260

50.00
10.00

17,100
2,600

Seedling,methodA

acr

103

150

15,450

Excelsiorblanket
Corrugated,metalpipe,18''

sy
lf

500
580

2.00
20.00

1,000
11,600

Polyethylenepipe,12''
Catchbasingrateandframe

lf
ea

2,250
35

15.00
350

33,750
12,250

Equalopportunitytraining
Granularbackfillborrow

hr
cy

18,000
274

0.80
10.00

14,400
2,740

Drillcaisson,2'x6''

lf

722

100

72,200

Flagging

hr

20,000

8.25

165,000

Prestressedconcretemember

typeIV,141'x4''
132'x4''

ea
ea

7
6

12,000
11,000

84,000
66,000

Reinforcedsteel

lb

6,300

0.60

3,780

Epoxycoated

lb

122,241

0.55

67,232.55

Structuralsteel

ls

5,000

5,000

Sign,covering
typeC2woodpost

sf
sf

16
98

10.00
15.00

160
1,470

24''

ea

100

300

30''

ea

100

200

48''

ea

11

200

2,200

Auxiliary
Steelpost,48''x60''

sf
ea

61
11

15.00
500

915
5,500

type3,woodpost

sf

669

15.00

10,035

24''

ea

23

100

2,300

30''

ea

100

100

36''
42''x60''

ea
ea

12
8

150
150

1,800
1,200

48''

ea

200

1,400

Auxiliary

sf

135

15.00

2,025

Steelpost

sf

1,610

40.00

64,400

12''x36''
Foundation,concrete

ea
ea

28
60

100
300

2,800
18,000

Barricade,48''x42''

ea

40

100

4,000

Woodpost,roadclosed

lf

100

30.00

3,000

Total

$14,129,797.55

Backtotop

5.11AllocationofConstructionCostsOverTime
Sinceconstructioncostsareincurredovertheentireconstructionphaseofaproject,itisoftennecessarytodeterminethe
amountstobespentinvariousperiodstoderivethecashflowprofile,especiallyforlargeprojectswithlongdurations.
Consequently,itisimportanttoexaminethepercentageofworkexpectedtobecompletedatvarioustimeperiodstowhich
thecostswouldbecharged.Moreaccurateestimatesmaybeaccomplishedoncetheprojectisscheduledasdescribedin
Chapter10,butsomeroughestimateofthecashflowmayberequiredpriortothistime.
Considerthebasicproblemindeterminingthepercentageofworkcompletedduringconstruction.Onecommonmethodof
estimatingpercentageofcompletionisbasedontheamountofmoneyspentrelativetothetotalamountbudgetedforthe
entireproject.Thismethodhastheobviousdrawbackinassumingthattheamountofmoneyspenthasbeenusedefficiently
forproduction.Amorereliablemethodisbasedontheconceptofvalueofworkcompletedwhichisdefinedastheproductof
thebudgetedlaborhoursperunitofproductionandtheactualnumberofproductionunitscompleted,andisexpressedin
budgetedlaborhoursfortheworkcompleted.Then,thepercentageofcompletionatanystageistheratioofthevalueofwork
completedtodateandthevalueofworktobecompletedfortheentireproject.Regardlessofthemethodofmeasurement,itis
informativetounderstandthetrendofworkprogressduringconstructionforevaluationandcontrol.
Ingeneral,theworkonaconstructionprojectprogressesgraduallyfromthetimeofmobilizationuntilitreachesaplateau
thentheworkslowsdowngraduallyandfinallystopsatthetimeofcompletion.Therateofworkdoneduringvarioustime
periods(expressedinthepercentageofprojectcostperunittime)isshownschematicallyinFigure510inwhichtentime
periodshavebeenassumed.ThesolidlineArepresentsthecaseinwhichtherateofworkiszeroattimet=0andincreases
linearlyto12.5%ofprojectcostatt=2,whiletheratebeginstodecreasefrom12.5%att=8to0%att=10.Thedottedline
Brepresentsthecaseofrapidmobilizationbyreaching12.5%ofprojectcostatt=1whilebeginningtodecreasefrom12.5%
att=7to0%att=10.ThedashlineCrepresentsthecaseofslowmobilizationbyreaching12.5%ofprojectcostatt=3
whilebeginningtodecreasefrom12.5%att=9to0%att=10.

Figure510:RateofWorkProgressoverProjectTime

Thevalueofworkcompletedatagiventime(expressedasacumulativepercentageofprojectcost)isshownschematicallyin
Figure511.Ineachcase(A,BorC),thevalueofworkcompletedcanberepresentedbyan"Sshaped"curve.Theeffectsof
rapidmobilizationandslowmobilizationareindicatedbythepositionsofcurvesBandCrelativetocurveA,respectively.

Figure511:ValueofWorkCompletedoverProjectTime

WhilethecurvesshowninFigures510and511representhighlyidealizedcases,theydosuggestthelatitudeforadjusting
theschedulesforvariousactivitiesinaproject.Whiletherateofworkprogressmaybechangedquitedrasticallywithina
singleperiod,suchasthechangefromrapidmobilizationtoaslowmobilizationinperiods1,2and3inFigure510,the
effectonthevalueofworkcompletedovertimewilldiminishinsignificanceasindicatedbythecumulativepercentagesfor
laterperiodsinFigure511.Thus,adjustmentoftheschedulingofsomeactivitiesmayimprovetheutilizationoflabor,
materialandequipment,andanydelaycausedbysuchadjustmentsforindividualactivitiesisnotlikelytocauseproblemsfor
theeventualprogresstowardthecompletionofaproject.
Inadditiontothespeedofresourcemobilization,anotherimportantconsiderationistheoveralldurationofaprojectandthe
amountofresourcesapplied.Variousstrategiesmaybeappliedtoshortentheoveralldurationofaprojectsuchasoverlapping
designandconstructionactivities(asdescribedinChapter2)orincreasingthepeakamountsoflaborandequipmentworking
onasite.However,spatial,managerialandtechnicalfactorswilltypicallyplaceaminimumlimitontheprojectdurationor
causecoststoescalatewithshorterdurations.
Example516:CalculationofValueofWorkCompleted

FromtheareaofworkprogressinFigure510,thevalueofworkcompletedatanypointinFigure511canbe
derivedbynotingtheareaunderthecurveuptothatpointinFigure510.Theresultfort=0throught=10is
showninTable514andplottedinFigure511.

TABLE514CalculationofValueofWorkCompleted
Time

CaseA

CaseB

CaseC

0
1
2
3
4
5
6
7
8
9
10

0
3.1%
12.5
25.0
37.5
50.0
62.5
75.0
87.5
96.9
100.0

0
6.2%
18.7
31.2
43.7
56.2
68.7
81.2
91.7
97.9
100.0

0
2.1%
8.3
18.8
31.3
43.8
56.3
68.8
81.9
93.8
100.0

Backtotop

5.12ComputerAidedCostEstimation
Numerouscomputeraidedcostestimationsoftwaresystemsarenowavailable.Theserangeinsophisticationfromsimple
spreadsheetcalculationsoftwaretointegratedsystemsinvolvingdesignandpricenegotiationovertheInternet.Whilethis
softwareinvolvescostsforpurchase,maintenance,trainingandcomputerhardware,somesignificantefficienciesoftenresult.
Inparticular,costestimatesmaybepreparedmorerapidlyandwithlesseffort.
Someofthecommonfeaturesofcomputeraidedcostestimationsoftwareinclude:
Databasesforunitcostitemssuchasworkerwagerates,equipmentrentalormaterialprices.Thesedatabasescanbe
usedforanycostestimaterequired.Iftheserateschange,costestimatescanberapidlyrecomputedafterthedatabases
areupdated.
Databasesofexpectedproductivityfordifferentcomponentstypes,equiptmentandconstructionprocesses.
Importutilitiesfromcomputeraideddesignsoftwareforautomaticquantitytakeoffofcomponents.Alternatively,
specialuserinterfacesmayexisttoentergeometricdescriptionsofcomponentstoallowautomaticquantitytakeoff.
Exportutilitiestosendestimatestocostcontrolandschedulingsoftware.Thisisveryhelpfultobeginthemanagement
ofcostsduringconstruction.
Versioncontroltoallowsimulationofdifferentconstructionprocessesordesignchangesforthepurposeoftracking
changesinexpectedcosts.
Provisionsformanualreview,overrideandeditingofanycostelementresultingfromthecostestimationsystem
Flexiblereportingformats,includingprovisionsforelectronicreportingratherthansimplyprintingcostestimateson
paper.
Archivesofpastprojectstoallowrapidcostestimateupdatingormodificationforsimilardesigns.
Atypicalprocessfordevelopingacostestimateusingoneofthesesystemswouldinclude:
1. Ifasimilardesignhasalreadybeenestimatedorexistsinthecompanyarchive,theoldprojectinformationisretreived.
2. Acostengineermodifies,addordeletescomponentsintheprojectinformationset.Ifasimilarprojectexists,manyof
thecomponentsmayhavefewornoupdates,therebysavingtime.
3. Acostestimateiscalculatedusingtheunitcostmethodofestimation.Productivitiesandunitpricesareretrievedfrom
thesystemdatabases.Thus,thelatestpriceinformationisusedforthecostestimate.
4.
Thecostestimationissummarizedandreviewedforanyerrors.
Backtotop

5.13EstimationofOperatingCosts

Inordertoanalyzethelifecyclecostsofaproposedfacility,itisnecessarytoestimatetheoperationandmaintenancecosts
overtimeafterthestartupofthefacility.Thestreamofoperatingcostsoverthelifeofthefacilitydependsuponsubsequent
maintenancepoliciesandfacilityuse.Inparticular,themagnitudeofroutinemaintenancecostswillbereducedifthefacility
undergoesperiodicrepairsandrehabilitationatperiodicintervals.
Sincethetradeoffbetweenthecapitalcostandtheoperatingcostisanessentialpartoftheeconomicevaluationofafacility,
theoperatingcostisviewednotasaseparateentity,butasapartofthelargerparceloflifecyclecostattheplanningand
designstage.Thetechniquesofestimatinglifecyclecostsaresimilartothoseusedforestimatingcapitalcosts,including
empiricalcostfunctionsandtheunitcostmethodofestimatingthelabor,materialandequipmentcosts.However,itisthe
interactionoftheoperatingandcapitalcostswhichdeservespecialattention.
Assuggestedearlierinthediscussionoftheexponentialruleforestimating,thevalueofthecostexponentmayinfluencethe
decisionwhetherextracapacityshouldbebuilttoaccommodatefuturegrowth.Similarly,theeconomyofscalemayalso
influencethedecisiononrehabilitationatagiventime.Astherehabilitationworkbecomesextensive,itbecomesacapital
projectwithalltheimplicationsofitsownlifecycle.Hence,thecostestimationofarehabilitationprojectmayalsoinvolve
capitalandoperatingcosts.
WhiledeferringthediscussionoftheeconomicevaluationofconstructedfacilitiestoChapter6,itissufficienttopointout
thatthestreamofoperatingcostsovertimerepresentsaseriesofcostsatdifferenttimeperiodswhichhavedifferentvalues
withrespecttothepresent.Consequently,thecostdataatdifferenttimeperiodsmustbeconvertedtoacommonbaselineif
meaningfulcomparisonisdesired.
Example517:Maintenancecostonaroadway[6]
Maintenancecostsforconstructedroadwaystendtoincreasewithbothageanduseofthefacility.Asanexample,the
followingempiricalmodelwasestimatedformaintenanceexpendituresonsectionsoftheOhioTurnpike:
C=596+0.0019V+21.7A
whereCistheannualcostofroutinemaintenanceperlanemile(in1967dollars),Visthevolumeoftrafficontheroadway
(measuredinequivalentstandardaxleloads,ESAL,sothataheavytruckisrepresentedasequivalenttomanyautomobiles),
andAistheageofthepavementinyearssincethelastresurfacing.Accordingtothismodel,routinemaintenancecostswill
increaseeachyearasthepavementservicedeteriorates.Inaddition,maintenancecostsincreasewithadditionalpavement
stressduetoincreasedtrafficortoheavieraxleloads,asreflectedinthevariableV.
Forexample,forV=500,300ESALandA=5years,theannualcostofroutinemaintenanceperlanemileisestimatedtobe:
C=596+(0.0019)(500,300)+(21.7)(5)
=596+950.5+108.5=1,655(in1967dollars)
Example518:Timestreamofcostsoverthelifeofaroadway[7]
Thetimestreamofcostsoverthelifeofaroadwaydependsupontheintervalsatwhichrehabilitationiscarriedout.Ifthe
rehabilitationstrategyandthetrafficareknown,thetimestreamofcostscanbeestimated.
Usingalifecyclemodelwhichpredictstheeconomiclifeofhighwaypavementonthebasisoftheeffectsoftrafficandother
factors,anoptimalscheduleforrehabilitationcanbedeveloped.Forexample,atimestreamofcostsandresurfacingprojects
foronepavementsectionisshowninFigure511.Asdescribedinthepreviousexample,theroutinemaintenancecosts
increaseasthepavementages,butdeclineaftereachnewresurfacing.Asthepavementcontinuestoage,resurfacingbecomes
morefrequentuntiltheroadwayiscompletelyreconstructedattheendof35years.

Figure511:TimeStreamofCostsovertheLifeofaHighwayPavement
Backtotop

5.14References
1. Ahuja,H.N.andW.J.Campbell,Estimating:FromConcepttoCompletion,PrenticeHall,Inc.,EnglewoodCliffs,NJ,
1987.
2.
Clark,F.D.,andA.B.Lorenzoni,AppliedCostEngineering,MarcelDekker,Inc.,NewYork,1978.
3.
Clark,J.E.,StructuralConcreteCostEstimating,McGrawHill,Inc.,NewYork,1983.
4. Diekmann,J.R.,"ProbabilisticEstimating:MathematicsandApplications,"ASCEJournalofConstructionEngineering
andManagement,Vol.109,1983,pp.297308.
5.
Humphreys,K.K.(ed.)ProjectandCostEngineers'Handbook(sponsoredbyAmericanAssociationofCost
Engineers),2ndEd.,MarcelDekker,Inc.,NewYork,1984.
6. Maevis,A.C.,"ConstructionCostControlbytheOwners,"ASCEJournaloftheConstructionDivision,Vol.106,1980,
pp.435446.
7.Wohl,M.andC.Hendrickson,TransportationInvestmentandPricingPrinciples,JohnWiley&Sons,NewYork,1984.
Backtotop

5.15Problems
1. SupposethatthegroutingmethoddescribedinExample52isusedtoprovideagroutingsealbeneathanotherlandfill
of12acres.Thegroutlineisexpectedtobebetween4.5and5.5feetthickness.Thevoidsinthesoillayerarebetween
25%to35%.Usingthesameunitcostdata(in1978dollars),findtherangeofcostsinascreeningestimateforthe
groutingproject.
2. ToavoidsubmergingpartofU.S.Route40southandeastofSaltLakeCityduetotheconstructionoftheJardinalDam
andReservoir,22milesofhighwaywererelocatedtothewestaroundthesiteofthefuturereservoir.Threeseparate
contractswerelet,includingonecovering10milesoftheworkwhichhadanengineer'sestimateof$34,095,545.The
bidsweresubmittedonJuly21,1987andthecompletiondateoftheprojectunderthecontractwasAugust15,1989.
(SeeENR,October8,1987,p.34).Thethreelowestbidswere:
1)W.W.Clyde&Co.,Springville,Utah
$21,384,919
2)SlettenConstructioncompany,GreatFalls,Montana
$26,701,018
3)GilbertWesternCorporation,SaltLakecity,Utah
$30,896,203
Findthepercentageofeachofthesebiddersbelowtheengineer'scostestimate.
3. Inmakingascreeningestimateofanindustrialplantfortheproductionofbatteries,anempiricalformulabasedondata
ofasimilarbuildingscompletedbefore1987wasproposed:

C=(16,000)(Q+50,000)1/2
whereQisthedailyproductioncapacityofbatteriesandCisthecostofthebuildingin1987dollars.Ifasimilarplant
isplannedforadailyproductioncapacityof200,000batteries,findthescreeningestimateofthebuildingin1987
dollars.
4. ForthecostfactorK=$46,000(in1968dollars)andm=0.67foranaeratedlagoonbasinofawatertreatmentplantin
Table54(Example56),findtheestimatedcostofaproposednewplantwithasimilartreatmentprocesshavinga
capacityof480milliongallons(in1968dollars).Ifanothernewplantwasestimatedtocost$160,000byusingthe
sameexponentialrule,whatwouldbetheproposedcapacityofthatplant?
5. UsingthecostdatainFigure55(Example511),findthetotalcostincludingoverheadandprofitofexcavating90,000
cu.yd.ofbulkmaterialusingabackhoeof1.5cu.yd.capacityforadetailedestimate.Assumethattheexcavated
materialwillbeloadedontotrucksfordisposal.
6. Thebasiccosts(labor,materialandequipment)forvariouselementsofaconstructionprojectaregivenasfollows:
Excavation
Subgrade
Basecourse
Concretepavement
Total

$240,000
$100,000
$420,000
$640,000
$1,400,000

Assumingthatfieldsupervisioncostis10%ofthebasiccost,andthegeneralofficeoverheadis5%ofthedirectcosts
(sumofthebasiccostsandfieldsupervisioncost),findtheproratedfieldsupervisioncosts,generalofficeoverhead
costsandtotalcostsforthevariouselementsoftheproject.
7.

Inmakingapreliminaryestimateofachemicalprocessingplant,severalmajortypesofequipmentarethemost
significantcomponentsinaffectingtheinstallationcost.Thecostofpipingandotherancillaryitemsforeachtypeof
equipmentcanoftenbeexpressedasapercentageofthattypeofequipmentforagivencapacity.Thestandardcostsfor
themajorequipmenttypesfortwoplantswithdifferentdailyproductioncapacitiesareasshowninTable515.Ithas
beenestablishedthattheinstallationcostofallequipmentforaplantwithdailyproductioncapacitybetween150,000
bbland600,000bblcanbestbeestimatedbyusinglinerinterpolationofthestandarddata.Anewchemicalprocessing
plantwithadailyproductioncapacityof400,000bblisbeingplanned.Assumingthatallotherfactorsremainthesame,
estimatethecostofthenewplant.

Equipmenttype
Furnace
Tower
Drum
Pumps,etc.

8.

Table515
Equipmentcost($1,000)

Factorforancillaryitems

150,000bbl

600,000bbl

150,000bbl

600,000bbl

$3,000
2,000
1,500
1,000

$10,000
6,000
5,000
4,000

0.32
0.42
0.42
0.54

0.24
0.36
0.32
0.42

Thetotalconstructioncostofarefinerywithaproductioncapacityof100,000bbl/dayinCaracas,Venezuela,
completedin1977was$40million.Itwasproposedthatasimilarrefinerywithaproductioncapacityof$160,000
bbl/daybebuiltinNewOrleans,LAforcompletionin1980.Fortheadditionalinformationgivenbelow,makea
screeningestimateofthecostoftheproposedplant.
1.InthetotalconstructioncostfortheCaracus,Venezuelaplant,therewasanitemof$2millionforsitepreparation
andtravelwhichisnottypicalforsimilarplants.
2.
Thevariationofsizesoftherefineriescanbeapproximatedbytheexponentiallawwithm=0.6.
3.
TheinflationrateinU.S.dollarswasapproximately9%peryearfrom1977to1980.
4. Anadjustmentfactorof1.40wassuggestedfortheprojecttoaccountfortheincreaseoflaborcostfromCaracas,
VenezuelatoNewOrleans,LA.
5. NewairpollutionequipmentfortheNewOrleans,LAplantcost$4millionin1980dollars(notrequiredforthe
Caracasplant).
6. ThesiteconditionatNewOrleansrequiredspecialpilingfoundationwhichcost$2millionin1980dollars.

9. Thetotalcostofasewagetreatmentplantwithacapacityof50milliongallonsperdaycompleted1981foranewtown
inColoradowas$4.5million.Itwasproposedthatasimilartreatmentplantwithacapacityof80milliongallonsper
daybebuiltinanothertowninNewJerseyforcompletionin1985.Foradditionalinformationgivenbelow,makea
screeningestimateofthecostoftheproposedplant.
1.InthetotalconstructioncostinColorado,anitemof$300,000forsitepreparationisnottypicalforsimilarplants.
2. Thevariationofsizesforthistypeoftreatmentplantscanbeapproximatedbytheexponentiallawwithm=0.5.

3.
4.

Theinflationratewasapproximately5%peryearfrom1981to1985.
ThelocationalindicesofColoradoandNewJerseyareasare0.95and1.10,respectively,againstthenational
averageof1.00.
5. Theinstallationofaspecialequipmenttosatisfythenewenvironmentalstandardcostanextra$200,000in1985
dollarfortheNewJerseyplant.
6.
ThesiteconditioninNewJerseyrequiredspecialfoundationwhichcost$500,00in1985dollars.
10. UsingtheENRbuildingcostindex,estimatethe1985costofthegroutingsealonalandfilldescribedinExample52,
includingthemostlikelyestimateandtherangeofpossiblecost.
11. Usingtheunitpricesinthebidofcontractor2forthequantititesspecifiedbytheengineerinTable52(Example53),
computethetotalbidpriceofcontractor2fortheroadwayprojectincludingtheexpenditureoneachitemofwork.
12.

TherateofworkprogressinpercentofcompletionperperiodofaconstructionprojectisshowninFigure513in
which13timeperiodshavebeenassumed.ThecasesA,BandCrepresentthenormalmobilizationtime,rapid
mobilizationandslowmobilizationfortheproject,respectively.Calculatethevalueofworkcompletedincumulative
percentageforperiods1through13foreachofthecasesA,BandC.Alsoplotthevolumeofworkcompletedversus
timeforthesecases.

Figure513
13.

TherateofworkprogressinpercentofcompletionperperiodofaconstructionprojectisshowninFigure514in
which10timeperiodshavebeenassumed.ThecasesA,BandCrepresenttherapidmobilizationtime,normal
mobilizationandslowmobilizationfortheproject,respectively.Calculatethevalueofworkcompletedincumulative
percentageforperiods1through10foreachofthecasesA,BandC.Alsoplotthevolumeofworkcompletedversus
timeforthesecases.

Figure514
14. SupposethattheempiricalmodelforestimatingannualcostofroutinemaintenanceinExample517isapplicableto
sectionsofthePennsylvaniaTurnpikein1985iftheENRbuildingcostindexisappliedtoinflatethe1967dollars.
Estimatetheannualcostofmaintenanceperlanemileofthetunrpikeforwhichthetrafficvolumeontheroadwayis
750,000ESALandtheageofthepavementis4yearsin1985.
15. TheinitialconstructioncostforaelectricrowerlineisknowntobeafunctionofthecrosssectionalareaA(incm2)
andthelengthL(inkilometers).LetC1betheunitcostofconstruction(indollarspercm3).Then,theinitial

constructioncostP(indollars)isgivenby
P=C1AL(105)
Theannualoperatingcostofthepowerlineisassumedtobemeasuredbythepowerloss.ThepowerlossS(inkwh)is
knowntobe

whereJistheelectriccurrentinamperes,Ristheresistivityinohmcentimeters.LetC2betheunitoperatingcost(in
dollarsperkwh).Then,theannualoperatingcostU(indollars)isgivenby

SupposethatthepowerlineisexpectedtolastnyearsandthelifecyclecostTofthepowerlineisequalto:
T=P+UK
whereKisadiscountfactordependingontheusefullifecyclenandthediscountratei(tobeexplainedinChapter6).
Indesigningthepowerline,allquantititesareassumedtobeknownexceptAwhichistobedetermined.Iftheowner
wantstominimizethelifecyclecost,findthebestcrosssectionalareaAintermsoftheknownquantities.
Backtotop

5.16Footnotes
1.Thisexamplewasadaptedwithpermissionfromapaper,"ForecastingIndustryResources,"presentedbyA.R.Crosbyat
theInstitutionofChemicalEngineersinLondon,November4,1981.(Back)
2.ThisexampleisadaptedfromacostestimateinA.L.Tolman,A.P.Ballestero,W.W.BeckandG.H.Emrich,Guidance
ManualforMinimizingPollutionfromWasteDisposalSites,MunicipalEnvironmentalResearchLaboratory,U.S.
EnvironmentalProtectionAgency,Cincinatti,Ohio,1978.(Back)
3.See"UtahInterstateForgesOn,"ENR,July2,1987,p.39.(Back)
4.ThisandthenextexamplehavebeenadaptedfromP.M.Berthouex,"EvaluatingEconomyofScale,"JournaloftheWater
PollutionControlFederation,Vol.44,No.11,November1972,pp.21112118.(Back)
5.SeeH.T.JohnsonandR.S.Kaplan,RelevanceLost:TheRiseandFallofManagementAccounting,HarvardBusiness
SchoolPress,Boston,MA1987,p.185.(Back)
6.ThisexampleisadaptedfromMcNeil,S.andC.Hendrickson,"AStatisticalModelofPavementMaintenance
Expenditure,"TransportationResearchRecordNo.846,1982,pp.7176.(Back)
7.ThisexampleisadaptedfromS.McNeil,ThreeStatisticalModelsofRoadManagementBasedonTurnpikeData,M.S.
Thesis,CarnegieMellonUniversity,Pittsburgh,PA,1981.(Back)
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter5
(CostEstimation)

GoToChapter7
(FinancingofConstructedFacilities)

EconomicEvaluationofFacilityInvestments
ProjectLifeCycleandEconomicFeasibility
BasicConceptsofEconomicEvaluation
CostsandBenefitsofaConstructedFacility
InterestRatesandtheCostsofCapital
InvestmentProfitMeasures
MethodsofEconomicEvaluation
DepreciationandTaxEffects
PriceLevelChanges:InflationandDeflation
UncertaintyandRisk
EffectsofFinancingonProjectSelection
CombinedEffectsofOperatingandFinancingCashFlows
PublicversusPrivateOwnershipofFacilities
EconomicEvaluationofDifferentFormsofOwnership
References
Problems

6.EconomicEvaluationofFacilityInvestments
6.1ProjectLifeCycleandEconomicFeasibility
Facilityinvestmentdecisionsrepresentmajorcommitmentsofcorporateresourcesandhaveseriousconsequencesontheprofitabilityandfinancial
stabilityofacorporation.Inthepublicsector,suchdecisionsalsoaffecttheviabilityoffacilityinvestmentprogramsandthecredibilityoftheagencyin
chargeoftheprograms.Itisimportanttoevaluatefacilitiesrationallywithregardtoboththeeconomicfeasibilityofindividualprojectsandtherelative
netbenefitsofalternativeandmutuallyexclusiveprojects.
Thischapterwillpresentanoverviewofthedecisionprocessforeconomicevaluationoffacilitieswithregardtotheprojectlifecycle.Thecyclebegins
withtheinitialconceptionoftheprojectandcontinuesthoughplanning,design,procurement,construction,startup,operationandmaintenance.Itends
withthedisposalofafacilitywhenitisnolongerproductiveoruseful.Fourmajoraspectsofeconomicevaluationwillbeexamined:
1.Thebasicconceptsoffacilityinvestmentevaluation,includingtimepreferenceforconsumption,opportunitycost,minimumattractiverateof
return,cashflowsovertheplanninghorizonandprofitmeasures.
2.Methodsofeconomicevaluation,includingthenetpresentvaluemethod,theequivalentuniformannualvaluemethod,thebenefitcostratio
method,andtheinternalrateofreturnmethod.
3.Factorsaffectingcashflows,includingdepreciationandtaxeffects,pricelevelchanges,andtreatmentofriskanduncertainty.
4.Effectsofdifferentmethodsoffinancingontheselectionofprojects,includingtypesoffinancingandrisk,publicpoliciesonregulationand
subsidies,theeffectsofprojectfinancialplanning,andtheinteractionbetweenoperationalandfinancialplanning.
Insettingouttheengineeringeconomicanalysismethodsforfacilityinvestments,itisimportanttoemphasizethatnotallfacilityimpactscanbeeasily
estimatedindollaramounts.Forexample,firmsmaychoosetominimizeenvironmentalimpactsofconstructionorfacilitiesinpursuitofa"triplebottom
line:"economic,environmentalandsocial.Byreducingenvironmentalimpacts,thefirmmayreapbenefitsfromanimprovedreputationandamore
satisfiedworkforce.Nevertheless,arigorouseconomicevaluationcanaidinmakingdecisionsforbothquantifiableandqualitativefacilityimpacts.
Itisimportanttodistinguishbetweentheeconomicevaluationofalternativephysicalfacilitiesandtheevaluationofalternativefinancingplansfora
project.Theformerreferstotheevaluationofthecashflowrepresentingthebenefitsandcostsassociatedwiththeacquisitionandoperationofthefacility,
andthiscashflowovertheplanninghorizonisreferredtoastheeconomiccashflowortheoperatingcashflow.Thelatterreferstotheevaluationofthe
cashflowrepresentingtheincomesandexpendituresasaresultofadoptingaspecificfinancingplanforfundingtheproject,andthiscashflowoverthe
planninghorizonisreferredtoasthefinancialcashflow.Ingeneral,economicevaluationandfinancialevaluationarecarriedoutbydifferentgroupsinan
organizationsinceeconomicevaluationisrelatedtodesign,construction,operationsandmaintenanceofthefacilitywhilefinancialevaluationsrequire
knowledgeoffinancialassetssuchasequities,bonds,notesandmortgages.Theseparationofeconomicevaluationandfinancialevaluationdoesnot
necessarilymeanoneshouldignoretheinteractionofdifferentdesignsandfinancingrequirementsovertimewhichmayinfluencetherelativedesirability
ofspecificdesign/financingcombinations.Allsuchcombinationscanbedulyconsidered.Inpractice,however,thedivisionoflaboramongtwogroupsof
specialistsgenerallyleadstosequentialdecisionswithoutadequatecommunicationforanalyzingtheinteractionofvariousdesign/financingcombinations
becauseofthetimingofseparateanalyses.
Aslongasthesignificanceoftheinteractionofdesign/financingcombinationsisunderstood,itisconvenientfirsttoconsidertheeconomicevaluationand
financialevaluationseparately,andthencombinetheresultsofbothevaluationstoreachafinalconclusion.Consequently,thischapterisdevoted
primarilytotheeconomicevaluationofalternativephysicalfacilitieswhiletheeffectsofavarietyoffinancingmechanismswillbetreatedinthenext
chapter.Sincethemethodsofanalyzingeconomiccashflowsareequallyapplicabletotheanalysisoffinancialcashflows,thetechniquesforevaluating
financingplansandthecombinedeffectsofeconomicandfinancialcashflowsforprojectselectionarealsoincludedinthischapter.
Backtotop

6.2BasicConceptsofEconomicEvaluation
Asystematicapproachforeconomicevaluationoffacilitiesconsistsofthefollowingmajorsteps:
1.Generateasetofprojectsorpurchasesforinvestmentconsideration.
2.Establishtheplanninghorizonforeconomicanalysis.
3.Estimatethecashflowprofileforeachproject.
4.Specifytheminimumattractiverateofreturn(MARR).
5.Establishthecriterionforacceptingorrejectingaproposal,orforselectingthebestamongagroupofmutuallyexclusiveproposals,onthebasisof
theobjectiveoftheinvestment.
6.Performsensitivityoruncertaintyanalysis.

7.Acceptorrejectaproposalonthebasisoftheestablishedcriterion.
Itisimportanttoemphasizethatmanyassumptionsandpolicies,someimplicitandsomeexplicit,areintroducedineconomicevaluationbythedecision
maker.Thedecisionmakingprocesswillbeinfluencedbythesubjectivejudgmentofthemanagementasmuchasbytheresultofsystematicanalysis.
Theperiodoftimetowhichthemanagementofafirmoragencywishestolookaheadisreferredtoastheplanninghorizon.Sincethefutureisuncertain,
theperiodoftimeselectedislimitedbytheabilitytoforecastwithsomedegreeofaccuracy.Forcapitalinvestment,theselectionoftheplanninghorizon
isofteninfluencedbytheusefullifeoffacilities,sincethedisposalofusableassets,onceacquired,generallyinvolvessufferingfinanciallosses.
Ineconomicevaluations,projectalternativesarerepresentedbytheircashflowprofilesoverthenyearsorperiodsintheplanninghorizon.Thus,the
interestperiodsarenormallyassumedtobeinyearst=0,1,2,...,nwitht=0representingthepresenttime.LetBt,xbetheannualbenefitattheendofyear
tforainvestmentprojectxwherex=1,2,...refertoprojectsNo.1,No.2,etc.,respectively.LetCt,xbetheannualcostattheendofyeartforthesame
investmentprojectx.Thenetannualcashflowisdefinedastheannualbenefitinexcessoftheannualcost,andisdenotedbyAt,xattheendofyeartfor
aninvestmentprojectx.Then,fort=0,1,...,n:
(6.1)
whereAt,xispositive,negativeorzerodependsonthevaluesofBt,xandCt,x,bothofwhicharedefinedaspositivequantities.
Oncethemanagementhascommittedfundstoaspecificproject,itmustforegootherinvestmentopportunitieswhichmighthavebeenundertakenby
usingthesamefunds.Theopportunitycostreflectsthereturnthatcanbeearnedfromthebestalternativeinvestmentopportunityforegone.Theforegone
opportunitiesmayincludenotonlycapitalprojectsbutalsofinancialinvestmentsorothersociallydesirableprograms.Managementshouldinvestina
proposedprojectonlyifitwillyieldareturnatleastequaltotheminimumattractiverateofreturn(MARR)fromforegoneopportunitiesasenvisionedby
theorganization.
Ingeneral,theMARRspecifiedbythetopmanagementinaprivatefirmreflectstheopportunitycostofcapitalofthefirm,themarketinterestratesfor
lendingandborrowing,andtherisksassociatedwithinvestmentopportunities.Forpublicprojects,theMARRisspecifiedbyagovernmentagency,such
astheOfficeofManagementandBudgetortheCongressoftheUnitedStates.ThepublicMARRthusspecifiedreflectssocialandeconomicwelfare
considerations,andisreferredtoasthesocialrateofdiscount.
RegardlessofhowtheMARRisdeterminedbyanorganization,theMARRspecifiedfortheeconomicevaluationofinvestmentproposalsiscritically
importantindeterminingwhetheranyinvestmentproposalisworthwhilefromthestandpointoftheorganization.SincetheMARRofanorganization
oftencannotbedeterminedaccurately,itisadvisabletouseseveralvaluesoftheMARRtoassessthesensitivityofthepotentialoftheprojectto
variationsoftheMARRvalue.
Backtotop

6.3CostsandBenefitsofaConstructedFacility
Thebasicprincipleinassessingtheeconomiccostsandbenefitsofnewfacilityinvestmentsistofindtheaggregateofindividualchangesinthewelfareof
allpartiesaffectedbytheproposedprojects.Thechangesinwelfarearegenerallymeasuredinmonetaryterms,butthereareexceptions,sincesome
effectscannotbemeasureddirectlybycashreceiptsanddisbursements.Examplesincludethevalueofhumanlivessavedthroughsafetyimprovementsor
thecostofenvironmentaldegradation.Thedifficultiesinestimatingfuturecostsandbenefitslienotonlyinuncertaintiesandreliabilityofmeasurement,
butalsoonthesocialcostsandbenefitsgeneratedassideeffects.Furthermore,proceedsandexpendituresrelatedtofinancialtransactions,suchasinterest
andsubsidies,mustalsobeconsideredbyprivatefirmsandbypublicagencies.
Toobtainanaccurateestimateofcostsinthecashflowprofilefortheacquisitionandoperationofaproject,itisnecessarytospecifytheresources
requiredtoconstructandoperatetheproposedphysicalfacility,giventheavailabletechnologyandoperatingpolicy.Typically,eachofthelaborand
materialresourcesrequiredbythefacilityismultipliedbyitsprice,andtheproductsarethensummedtoobtainthetotalcosts.Privatecorporations
generallyignoreexternalsocialcostsunlessrequiredbylawtodoso.Inthepublicsector,externalitiesoftenmustbeproperlyaccountedfor.Anexample
isthecostofpropertydamagecausedbyairpollutionfromanewplant.Inanycase,themeasurementofexternalcostsisextremelydifficultand
somewhatsubjectiveforlackofamarketmechanismtoprovideevenapproximateanswerstotheappropriatevalue.
Intheprivatesector,thebenefitsderivedfromafacilityinvestmentareoftenmeasuredbytherevenuesgeneratedfromtheoperationofthefacility.
Revenuesareestimatedbythetotalofpricetimesquantitypurchased.Thedepreciationallowancesandtaxesonrevenuesmustbedeductedaccordingto
theprevailingtaxlaws.Inthepublicsector,incomemayalsobeaccruedtoapublicagencyfromtheoperationofthefacility.However,severalother
categoriesofbenefitsmayalsobeincludedintheevaluationofpublicprojects.First,privatebenefitscanbereceivedbyusersofafacilityorservicein
excessofcostssuchasuserchargesorpricecharged.Afterall,individualsonlyuseaserviceorfacilityiftheirprivatebenefitexceedstheircost.These
privatebenefitsorconsumersurplusrepresentadirectbenefittomembersofthepublic.Inmanypublicprojects,itisdifficult,impossibleorimpractical
tochargeforservicesreceived,sodirectrevenuesequalzeroandalluserbenefitsappearasconsumerssurplus.Examplesareaparkorroadwaysfor
whichentranceisfree.Asasecondspecialcategoryofpublicbenefit,theremaybeexternalorsecondarybeneficiariesofpublicprojects,suchasnew
jobscreatedandprofitstoprivatesuppliers.Estimatingthesesecondarybenefitsisextremelydifficultsinceresourcesdevotedtopublicprojectsmight
simplybedisplacedfromprivateemploymentandthusrepresentnonetbenefit.
Backtotop

6.4InterestRatesandtheCostsofCapital
Constructedfacilitiesareinherentlylongterminvestmentswithadeferredpayoff.ThecostofcapitalorMARRdependsontherealinterestrate(i.e.,
marketinterestratelesstheinflationrate)overtheperiodofinvestment.Asthecostofcapitalrises,itbecomeslessandlessattractivetoinvestinalarge
facilitybecauseoftheopportunitiesforegoneoveralongperiodoftime.
InFigure61,thechangesinthecostofcapitalfrom1974to2002areillustrated.ThisfigurepresentsthemarketinterestrateonshortandlongtermUS
treasuryborrowing,andthecorrespondingrealinterestrateoverthisperiod.Therealinterestrateiscalculatedasthemarketinterestratelessthegeneral
rateofinflation.Therealinterestrateshasvariedsubstantially,rangingfrom9%to7%.Theexceptionalnatureofthe1980to1985yearsisdramatically
evident:therealrateofinterestreachedremarkablyhighhistoriclevels.

Figure61NominalandRealInterestRatesonU.S.Bonds,

Withthesevolatileinterestrates,interestchargesandtheultimatecostofprojectsareuncertain.Organizationsandinstitutionalarrangementscapableof
dealingwiththisuncertaintyandabletorespondtointerestratechangeseffectivelywouldbequitevaluable.Forexample,banksofferbothfixedrateand
variableratemortgages.Anownerwhowantstolimititsownriskmaychoosetotakeafixedratemortgageeventhoughtheultimateinterestchargesmay
behigher.Ontheotherhand,anownerwhochoosesavariableratemortgagewillhavetoadjustitsannualinterestchargesaccordingtothemarket
interestrates.
Ineconomicevaluation,aconstantvalueofMARRovertheplanninghorizonisoftenusedtosimplifythecalculations.Theuseofaconstantvaluefor
MARRisjustifiedonthegroundoflongtermaverageofthecostofcapitalovertheperiodofinvestment.Ifthebenefitsandcostsovertimeareexpressed
inconstantdollars,theconstantvalueforMARRrepresentstheaveragerealinterestrateanticipatedovertheplanninghorizonifthebenefitsandcosts
overtimeareexpressedinthencurrentdollars,theconstantvalueforMARRreflectstheaveragemarketinterestrateanticipatedovertheplanning
horizon.
Backtotop

6.5InvestmentProfitMeasures
Aprofitmeasureisdefinedasanindicatorofthedesirabilityofaprojectfromthestandpointofadecisionmaker.Aprofitmeasuremayormaynotbe
usedasthebasisforprojectselection.Sincevariousprofitmeasuresareusedbydecisionmakersfordifferentpurposes,theadvantagesandrestrictionsfor
usingtheseprofitmeasuresshouldbefullyunderstood.
Thereareseveralprofitmeasuresthatarecommonlyusedbydecisionmakersinbothprivatecorporationsandpublicagencies.Eachofthesemeasuresis
intendedtobeanindicatorofprofitornetbenefitforaprojectunderconsideration.Someofthesemeasuresindicatethesizeoftheprofitataspecific
pointintimeothersgivetherateofreturnperperiodwhenthecapitalisinuseorwhenreinvestmentsoftheearlyprofitsarealsoincluded.Ifadecision
makerunderstandsclearlythemeaningofthevariousprofitmeasuresforagivenproject,thereisnoreasonwhyonecannotuseallofthemforthe
restrictivepurposesforwhichtheyareappropriate.Withtheavailabilityofcomputerbasedanalysisandcommercialsoftware,ittakesonlyafewseconds
tocomputetheseprofitmeasures.However,itisimportanttodefinethesemeasuresprecisely:
1.NetFutureValueandNetPresentValue.Whenanorganizationmakesaninvestment,thedecisionmakerlooksforwardtothegainoveraplanning
horizon,againstwhatmightbegainedifthemoneywereinvestedelsewhere.Aminimumattractiverateofreturn(MARR)isadoptedtoreflectthis
opportunitycostofcapital.TheMARRisusedforcompoundingtheestimatedcashflowstotheendoftheplanninghorizon,orfordiscountingthecash
flowtothepresent.Theprofitabilityismeasuredbythenetfuturevalue(NFV)whichisthenetreturnattheendoftheplanninghorizonabovewhat
mighthavebeengainedbyinvestingelsewhereattheMARR.Thenetpresentvalue(NPV)oftheestimatedcashflowsovertheplanninghorizonisthe
discountedvalueoftheNFVtothepresent.ApositiveNPVforaprojectindicatesthepresentvalueofthenetgaincorrespondingtotheprojectcash
flows.
2.EquivalentUniformAnnualNetValue.Theequivalentuniformannualnetvalue(NUV)isaconstantstreamofbenefitslesscostsatequallyspaced
timeperiodsovertheintendedplanninghorizonofaproject.Thisvaluecanbecalculatedasthenetpresentvaluemultipliedbyanappropriate"capital
recoveryfactor."Itisameasureofthenetreturnofaprojectonanannualizedoramortizedbasis.Theequivalentuniformannualcost(EUAC)canbe
obtainedbymultiplyingthepresentvalueofcostsbyanappropriatecapitalrecoveryfactor.TheuseofEUACalonepresupposesthatthediscounted
benefitsofallpotentialprojectsovertheplanninghorizonareidenticalandthereforeonlythediscountedcostsofvariousprojectsneedbeconsidered.
Therefore,theEUACisanindicatorofthenegativeattributeofaprojectwhichshouldbeminimized.
3.BenefitCostRatio.Thebenefitcostratio(BCR),definedastheratioofdiscountedbenefitstothediscountedcostsatthesamepointintime,isa
profitabilityindexbasedondiscountedbenefitsperunitofdiscountedcostsofaproject.Itissometimesreferredtoasthesavingstoinvestmentratio
(SIR)whenthebenefitsarederivedfromthereductionofundesirableeffects.ItsusealsorequiresthechoiceofaplanninghorizonandaMARR.Since
somesavingsmaybeinterpretedasanegativecosttobedeductedfromthedenominatororasapositivebenefittobeaddedtothenumeratoroftheratio,

theBCRorSIRisnotanabsolutenumericalmeasure.However,iftheratioofthepresentvalueofbenefittothepresentvalueofcostexceedsone,the
projectisprofitableirrespectiveofdifferentinterpretationsofsuchbenefitsorcosts.
4.InternalRateofReturn.Theinternalrateofreturn(IRR)isdefinedasthediscountratewhichsetsthenetpresentvalueofaseriesofcashflowsover
theplanninghorizonequaltozero.Itisusedasaprofitmeasuresinceithasbeenidentifiedasthe"marginalefficiencyofcapital"orthe"rateofreturn
overcost".TheIRRgivesthereturnofaninvestmentwhenthecapitalisinuseasiftheinvestmentconsistsofasingleoutlayatthebeginningand
generatesastreamofnetbenefitsafterwards.However,theIRRdoesnottakeintoconsiderationthereinvestmentopportunitiesrelatedtothetimingand
intensityoftheoutlaysandreturnsattheintermediatepointsovertheplanninghorizon.Forcashflowswithtwoormoresignreversalsofthecashflows
inanyperiod,theremayexistmultiplevaluesofIRRinsuchcases,themultiplevaluesaresubjecttovariousinterpretations.
5.AdjustedInternalRateofReturn.Ifthefinancingandreinvestmentpoliciesareincorporatedintotheevaluationofaproject,anadjustedinternalrate
ofreturn(AIRR)whichreflectssuchpoliciesmaybeausefulindicatorofprofitabilityunderrestrictedcircumstances.Becauseofthecomplexityof
financingandreinvestmentpoliciesusedbyanorganizationoverthelifeofaproject,theAIRRseldomcanreflecttherealityofactualcashflows.
However,itoffersanapproximatevalueoftheyieldonaninvestmentforwhichtwoormoresignreversalsinthecashflowswouldresultinmultiple
valuesofIRR.Theadjustedinternalrateofreturnisusuallycalculatedastheinternalrateofreturnontheprojectcashflowmodifiedsothatallcostsare
discountedtothepresentandallbenefitsarecompoundedtotheendoftheplanninghorizon.
6.ReturnonInvestment.Whenanaccountantreportsincomeineachyearofamultiyearproject,thestreamofcashflowsmustbebrokenupinto
annualratesofreturnforthoseyears.Thereturnoninvestment(ROI)asusedbyaccountantsusuallymeanstheaccountant'srateofreturnforeachyearof
theprojectdurationbasedontheratiooftheincome(revenuelessdepreciation)foreachyearandtheundepreciatedassetvalue(investment)forthatsame
year.Hence,theROIisdifferentfromyeartoyear,withaverylowvalueattheearlyyearsandahighvalueinthelateryearsoftheproject.
7.PaybackPeriod.Thepaybackperiod(PBP)referstothelengthoftimewithinwhichthebenefitsreceivedfromaninvestmentcanrepaythecosts
incurredduringthetimeinquestionwhileignoringtheremainingtimeperiodsintheplanninghorizon.Eventhediscountedpaybackperiodindicatingthe
"capitalrecoveryperiod"doesnotreflectthemagnitudeordirectionofthecashflowsintheremainingperiods.However,ifaprojectisfoundtobe
profitablebyothermeasures,thepaybackperiodcanbeusedasasecondarymeasureofthefinancingrequirementsforaproject.
Backtotop

6.6MethodsofEconomicEvaluation
Theobjectiveoffacilityinvestmentintheprivatesectorisgenerallyunderstoodtobeprofitmaximizationwithinaspecifictimeframe.Similarly,the
objectiveinthepublicsectoristhemaximizationofnetsocialbenefitwhichisanalogoustoprofitmaximizationinprivateorganizations.Giventhis
objective,amethodofeconomicanalysiswillbejudgedbythereliabilityandeasewithwhichacorrectconclusionmaybereachedinprojectselection.
Thebasicprincipleunderlyingthedecisionforacceptingandselectinginvestmentprojectsisthatifanorganizationcanlendorborrowasmuchmoneyas
itwishesattheMARR,thegoalofprofitmaximizationisbestservedbyacceptingallindependentprojectswhosenetpresentvaluesbasedonthe
specifiedMARRarenonnegative,orbyselectingtheprojectwiththemaximumnonnegativenetpresentvalueamongasetofmutuallyexclusive
proposals.Thenetpresentvaluecriterionreflectsthisprincipleandismoststraightforwardandunambiguouswhenthereisnobudgetconstraint.Various
methodsofeconomicevaluation,whenproperlyapplied,willproducethesameresultifthenetpresentvaluecriterionisusedasthebasisfordecision.For
convenienceofcomputation,asetoftablesforthevariouscompoundinterestfactorsisgiveninAppendixA.

NetPresentValueMethod
LetBPVxbethepresentvalueofbenefitsofaprojectxandCPVxbethepresentvalueofcostsoftheprojectx.Then,forMARR=ioveraplanning
horizonofnyears,

(6.2)

(6.3)

wherethesymbol(P|F,i,t)isadiscountfactorequalto(1+i)tandreadsasfollows:"TofindthepresentvalueP,giventhefuturevalueF=1,discountedat
anannualdiscountrateioveraperiodoftyears."Whenthebenefitorcostinyeartismultipliedbythisfactor,thepresentvalueisobtained.Then,thenet
presentvalueoftheprojectxiscalculatedas:
(6.4)
or

(6.5)

Ifthereisnobudgetconstraint,thenallindependentprojectshavingnetpresentvaluesgreaterthanorequaltozeroareacceptable.Thatis,projectxis
acceptableaslongas
(6.6)

Formutuallyexclusiveproposals(x=1,2,...,m),aproposaljshouldbeselectedifithasthemaximumnonnegativenetpresentvalueamongallm
proposals,i.e.
(6.7)
providedthatNPVj 0.

NetFutureValueMethod
Sincethecashflowprofileofaninvestmentcanberepresentedbyitsequivalentvalueatanyspecifiedreferencepointintime,thenetfuturevalue
(NFVx)ofaseriesofcashflowsAt,x(fort=0,1,2,...,n)forprojectxisasgoodameasureofeconomicpotentialasthenetpresentvalue.Equivalentfuture
valuesareobtainedbymultiplyingapresentvaluebythecompoundinterestfactor(F|P,i,n)whichis(1+i)n.Specifically,
(6.8)
Consequently,ifNPVx 0,itfollowsthatNFVx 0,andviceversa.

NetEquivalentUniformAnnualValueMethod
Thenetequivalentuniformannualvalue(NUVx)referstoauniformseriesoveraplanninghorizonofnyearswhosenetpresentvalueisthatofaseriesof
cashflowAt,x(fort=1,2,...,n)representingprojectx.Thatis,

(6.9)

wherethesymbol(U|P,i,n)isreferredtoasthecapitalrecoveryfactorandreadsasfollows:"TofindtheequivalentannualuniformamountU,giventhe
presentvalueP=1,discountedatanannualdiscountrateioveraperiodoftyears."Hence,ifNPVx 0,itfollowsthatNUVx 0,andviceversa.

BenefitCostRatioMethod
Thebenefitcostratiomethodisnotasstraightforwardandunambiguousasthenetpresentvaluemethodbut,ifappliedcorrectly,willproducethesame
resultsasthenetpresentvaluemethod.Whilethismethodisoftenusedintheevaluationofpublicprojects,theresultsmaybemisleadingifpropercareis
notexercisedinitsapplicationtomutuallyexclusiveproposals.
Thebenefitcostratioisdefinedastheratioofthediscountedbenefitstothediscountedcostatthesamepointintime.InviewofEqs.(6.4)and(6.6),it
followsthatthecriterionforacceptinganindependentprojectonthebasisofthebenefitcostratioiswhetherornotthebenefitcostratioisgreaterthanor
equaltoone:

(6.10)

However,aprojectwiththemaximumbenefitcostratioamongagroupofmutuallyexclusiveproposalsgenerallydoesnotnecessarilyleadtothe
maximumnetbenefit.Consequently,itisnecessarytoperformincrementalanalysisthroughpairwisecomparisonsofsuchproposalsinselectingthebest
inthegroup.Ineffect,pairwisecomparisonsareusedtodetermineifincrementalincreasesincostsbetweenprojectsyieldslargerincrementalincreasesin
benefits.Thisapproachisnotrecommendedforuseinselectingthebestamongmutuallyexclusiveproposals.

InternalRateofReturnMethod
Theterminternalrateofreturnmethodhasbeenusedbydifferentanalyststomeansomewhatdifferentproceduresforeconomicevaluation.Themethod
isoftenmisunderstoodandmisused,anditspopularityamonganalystsintheprivatesectorisundeservedevenwhenthemethodisdefinedandinterpreted
inthemostfavorablelight.ThemethodisusuallyappliedbycomparingtheMARRtotheinternalrateofreturnvalue(s)foraprojectorasetofprojects.
AmajordifficultyinapplyingtheinternalrateofreturnmethodtoeconomicevaluationisthepossibleexistenceofmultiplevaluesofIRRwhenthereare
twoormorechangesofsigninthecashflowprofileAt,x(fort=0,1,2,...,n).Whenthathappens,themethodisgenerallynotapplicableeitherin
determiningtheacceptanceofindependentprojectsorforselectionofthebestamongagroupofmutuallyexclusiveproposalsunlessasetofwelldefined
decisionrulesareintroducedforincrementalanalysis.Inanycase,noadvantageisgainedbyusingthismethodsincetheprocedureiscumbersomeevenif
themethodiscorrectlyapplied.Thismethodisnotrecommendedforuseeitherinacceptingindependentprojectsorinselectingthebestamongmutually
exclusiveproposals.
Example61:EvaluationofFourIndependentProjects
ThecashflowprofilesoffourindependentprojectsareshowninTable61.UsingaMARRof20%,determinetheacceptabilityofeachofthe
projectsonthebasisofthenetpresentvaluecriterionforacceptingindependentprojects.

t
0
1
2
3

TABLE61CashFlowProfilesofFourIndependentProjects(in$million)
At,1
At,2
At,3
77.0
0
0
0

75.3
28.0
28.0
28.0

39.9
28.0
28.0
28.0

At,4
18.0
10.0
40.0
60.0

4
5

0
235.0

28.0
28.0

28.0
80.0

30.0
50.0

Usingi=20%,wecancomputeNPVforx=1,2,3,and4fromEq.(6.5).Then,theacceptabilityofeachprojectcanbedeterminedfromEq.
(6.6).Thus,
[NPV1]20%=77+(235)(P|F,20%,5)=77+94.4=17.4
[NPV2]20%=75.3+(28)(P|U,20%,5)=75.3+83.7=8.4
[NPV3]20%=39.9+(28)(P|U,20%,4)(80)(P|F,20%,5)
=39.9+72.532.2=0.4
[NPV4]20%=18+(10)(P|F,20%,1)(40)(P|F,20%,2)
(60)(P|F,20%,3)+(30)(P|F,20%,4)+(50)(P|F,20%,5)
=18+8.327.834.7+14.5+20.1=1.6
Hence,thefirstthreeindependentprojectsareacceptable,butthelastprojectshouldberejected.
Itisinterestingtonotethatifthefourprojectsaremutuallyexclusive,thenetpresentvaluemethodcanstillbeusedtoevaluatetheprojects
and,accordingtoEq.(6.7),theproject(x=1)whichhasthehighestpositiveNPVshouldbeselected.Theuseofthenetequivalentuniform
annualvalueorthenetfuturevaluemethodwillleadtothesameconclusion.However,theprojectwiththehighestbenefitcostratioisnot
necessarilythebestchoiceamongagroupofmutuallyexclusivealternatives.Furthermore,theconventionalinternalrateofreturnmethod
cannotbeusedtomakeameaningfulevaluationoftheseprojectsastheIRRforbothx=1andx=2arefoundtobe25%whilemultiplevalues
ofIRRexistforboththex=3andx=4alternatives.
Backtotop

6.7DepreciationandTaxEffects
Forprivatecorporations,thecashflowprofileofaprojectisaffectedbytheamountoftaxation.Inthecontextoftaxliability,depreciationistheamount
allowedasadeductionduetocapitalexpensesincomputingtaxableincomeand,hence,incometaxinanyyear.Thus,depreciationresultsinareduction
intaxliabilities.
Itisimportanttodifferentiatebetweentheestimatedusefullifeusedindepreciationcomputationsandtheactualusefullifeofafacility.Theformeris
oftenanarbitrarylengthoftime,specifiedintheregulationsoftheU.S.InternalRevenueServiceoracomparableorganization.Thedepreciation
allowanceisabookkeepingentrythatdoesnotinvolveanoutlayofcash,butrepresentsasystematicallocationofthecostofaphysicalfacilityovertime.
TherearevariousmethodsofcomputingdepreciationwhichareacceptabletotheU.S.InternalRevenueService.Thedifferentmethodsofcomputing
depreciationhavedifferenteffectsonthestreamsofannualdepreciationcharges,andhenceonthestreamoftaxableincomeandtaxespaid.LetPbethe
costofanasset,Sitsestimatedsalvagevalue,andNtheestimatedusefullife(depreciablelife)inyears.Furthermore,letDtdenotethedepreciation
amountinyeart,Ttdenotetheaccumulateddepreciationuptoyeart,andBtdenotethebookvalueoftheassetattheendofyeart,wheret=1,2,...,orn
referstotheparticularyearunderconsideration.Then,
(6.11)
and
(6.12)
ThedepreciationmethodsmostcommonlyusedtocomputeDtandBtarethestraightlinemethod,sumoftheyears'digitsmethods,andthedouble
decliningbalancedmethod.TheU.S.InternalRevenueServiceprovidestablesofacceptabledepreciableschedulesusingthesemethods.Understraight
linedepreciation,thenetdepreciablevalueresultingfromthecostofthefacilitylesssalvagevalueisallocateduniformlytoeachyearoftheestimated
usefullife.Underthesumoftheyear'sdigits(SOYD)method,theannualdepreciationallowanceisobtainedbymultiplyingthenetdepreciablevalue
multipliedbyafraction,whichhasasitsnumeratorthenumberofyearsofremainingusefullifeanditsdenominatorthesumofallthedigitsfrom1ton.
Theannualdepreciationallowanceunderthedoubledecliningbalancemethodisobtainedbymultiplyingthebookvalueofthepreviousyearbya
constantdepreciationrate2/n.
Toconsidertaxeffectsinprojectevaluation,themostdirectapproachistoestimatetheaftertaxcashflowandthenapplyanevaluationmethodsuchas
thenetpresentvaluemethod.Sinceprojectsareoftenfinancedbyinternalfundsrepresentingtheoverallequitydebtmixoftheentirecorporation,the
deductibilityofinterestondebtmaybeconsideredonacorporatewidebasis.Forspecificprojectfinancingfrominternalfunds,letaftertaxcashflowin
yeartbeYt.Then,fort=0,1,2,...,n,
(6.13)
whereAtisthenetrevenuebeforetaxinyeart,DtisthedepreciationallowableforyeartandXtisthemarginalcorporateincometaxrateinyeart.
Besidescorporateincometaxes,thereareotherprovisionsinthefederalincometaxlawsthataffectfacilityinvestments,suchastaxcreditsforlow
incomehousing.Sincethetaxlawsarerevisedperiodically,theestimationoftaxliabilityinthefuturecanonlybeapproximate.
Example62:EffectsofTaxesonInvestment
Acompanyplanstoinvest$55,000inapieceofequipmentwhichisexpectedtoproduceauniformannualnetrevenuebeforetaxof$15,000
overthenextfiveyears.Theequipmenthasasalvagevalueof$5,000attheendof5yearsandthedepreciationallowanceiscomputedonthe
basisofthestraightlinedepreciationmethod.Themarginalincometaxrateforthiscompanyis34%,andthereisnoexpectationofinflation.
IftheaftertaxMARRspecifiedbythecompanyis8%,determinewhethertheproposedinvestmentisworthwhile,assumingthatthe
investmentwillbefinancedbyinternalfunds.
UsingEquations(6.11)and(6.13),theaftertaxcashflowcanbecomputedasshowninTable62.Then,thenetpresentvaluediscountedat
8%isobtainedfromEquation(6.5)asfollows:

Thepositiveresultindicatesthattheprojectisworthwhile.
TABLE62AfterTaxCashFlowComputation
BeforetaxCashFlow
StraightlineDepreciation
TaxableIncome IncomeTax AfterTaxCashFlow
Year
At
Dt
AtDt
Xt(AtDt)
Yt
t
0
15each
5only

$55,000
+$15,000
+$5,000

$10,000

$5,000

$1,700

$55,000
+$13,300
+$5,000

Backtotop

6.8PriceLevelChanges:InflationandDeflation
Intheeconomicevaluationofinvestmentproposals,twoapproachesmaybeusedtoreflecttheeffectsoffuturepricelevelchangesduetoinflationor
deflation.Thedifferencesbetweenthetwoapproachesareprimarilyphilosophicalandcanbesuccinctlystatedasfollows:
1.Theconstantdollarapproach.TheinvestorwantsaspecifiedMARRexcludinginflation.Consequently,thecashflowsshouldbeexpressedin
termsofbaseyearorconstantdollars,andadiscountrateexcludinginflationshouldbeusedincomputingthenetpresentvalue.
2.Theinflateddollarapproach.TheinvestorincludesaninflationcomponentinthespecifiedMARR.Hence,thecashflowsshouldbeexpressedin
termsofthencurrentorinflateddollars,andadiscountrateincludinginflationshouldbeusedincomputingthenetpresentvalue.
Iftheseapproachesareappliedcorrectly,theywillleadtoidenticalresults.
Letibethediscountrateexcludinginflation,i'bethediscountrateincludinginflation,andjbetheannualinflationrate.Then,
(6.14)
and

(6.15)

Whentheinflationratejissmall,theserelationscanbeapproximatedby
(6.16)
Notethatinflationovertimehasacompoundingeffectonthepricelevelsinvariousperiods,asdiscussedinconnectionwiththecostindicesinChapter5.
IfAtdenotesthecashflowinyeartexpressedintermsofconstant(baseyear)dollars,andA'tdenotesthecashflowinyeartexpressedintermsof
inflated(thencurrent)dollars,then

(6.17)
or
(6.18)

Itcanbeshownthattheresultsfromthesetwoequationsareidentical.Furthermore,therelationshipappliestoaftertaxcashflowaswellastobeforetax
cashflowbyreplacingAtandA'twithYtandY'trespectivelyinEquations(6.17)and(6.18).
Example63:EffectsofInflation
Supposethat,inthepreviousexample,theinflationexpectationis5%peryear,andtheaftertaxMARRspecifiedbythecompanyis8%
excludinginflation.Determinewhethertheinvestmentisworthwhile.
Inthiscase,thebeforetaxcashflowAtintermsofconstantdollarsatbaseyear0isinflatedatj=5%tothencurrentdollarsA'tforthe
computationofthetaxableincome(A'tDt)andincometaxes.TheresultingaftertaxflowY'tintermsofthencurrentdollarsisconverted
backtoconstantdollars.Thatis,forXt=34%andDt=$10,000.TheannualdepreciationchargesDtarenotinflatedtocurrentdollarsin
conformitywiththepracticerecommendedbytheU.S.InternalRevenueService.Thus:

A't=At(1+j)t=At(1+0.05)t
Y't=A'tXt(A'tDt)=A't(34%)(A't$10,000)
Yt=Y't(1+j)t=Y't(1+0.05)t
ThedetailedcomputationoftheaftertaxcashflowisrecordedinTable63.Thenetpresentvaluediscountedat8%excludinginflationis
obtainedbysubstitutingYtforAtinEq.(6.17).Hence,
[NPV]8%)=55,000+(13,138)(P|F,8%,1)+(12,985)(P|F,8%,2)+(12,837)(P|F,8%,3)
+(12,697)(P|F,8%,4)+(12,564+5,000)(P|F,8%,5)=$227
With5%inflation,theinvestmentisnolongerworthwhilebecausethevalueofthedepreciationtaxdeductionisnotincreasedtomatchthe
inflationrate.
TABLE63AfterTaxCashFlowIncludingInflation
Constant$B Current$B
Current$
Current$after
Current$
Current$A Constant$A
TaxCF
TaxCF
depreciation
depreciation
incometax
TaxCF
TaxCF
Time
At
A't
Dt
A'tDt
Xt(A'tDt)
Y't
Yt
t
0
$55,000
+$55,000
$55,000
$55,000
1
+15,000
+15,750
$10,000
$5,750
$1,955
+13,795
+13,138
2
+15,000
16,540
10,000
6,540
2,224
+14,316
+12,985
3
+15,000
17,365
10,000
7,365
2,504
+14,861
+12,837
4
+15,000
18,233
10,000
8,233
2,799
+15,434
+12,697
5
+15,000
19,145
10,000
9,145
3,109
+16,036
+12,564
5
+5,000
+5,000
Note:BTaxCFreferstoBeforeTaxCashFlow
ATaxCFreferstoAfterTaxCashFlow
Example64:InflationandtheBostonCentralArteryProject
Thecostofmajorconstructionprojectsareoftenreportedassimplythesumofallexpenses,nomatterwhatyearthecostwasincurred.Forprojects
extendingoveralengthyperiodoftime,thispracticecancombineamountsofconsiderablydifferentinherentvalues.AgoodexampleistheBoston
CentralArtery/TunnelProject,averylargeprojecttoconstructorrelocatetwoInterstatehighwayswithinthecityofBoston.
InTable64,weshowoneestimateoftheannualexpendituresfortheCentralArtery/Tunnelfrom1986to2006inmillionsofdollars,appearinginthe
columnlabelled"Expenses($M)."WealsoshowestimatesofconstructionpriceinflationintheBostonareaforthesameperiod,onebasedon1982
dollars(sothepriceindexequals100in1982)andoneon2002dollars.Ifthedollarexpendituresareaddedup,thetotalprojectcostis$14.6Billion
dollars,whichishowtheprojectcostisoftenreportedinsummarydocuments.However,ifthecostiscalculatedinconstant1982dollars(whenthe
originalprojectcostestimatewasdevelopedforplanningpurposes),theprojectcostwouldbeonly$8.4Billion,withpriceinflationincreasingexpenses
by$6.3Billion.AswithcostindicesdiscussedinChapter5,theconversionto1982$isaccomplishedbydividingbythe1982priceindexforthatyear
andthenmultiplyingby100(the1982priceindexvalue).Ifthecostiscalculatedinconstant2002dollars,theprojectcostincreasesto$15.8Billion.
Whencostsareincurredcansignificantlyaffectprojectexpenses!
TABLE64CashFlowsfortheBostonCentralArtery/TunnelProject
Year PriceIndex PriceIndex ProjectExpenses ProjectExpenses ProjectExpenses
t
1982$
2002$
($M)
(1982$M)
(2002$M)
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Sum
Backtotop

6.9UncertaintyandRisk

100
104
111
118
122
123
130
134
140
144
146
154
165
165
165
175
172
176
181
183
189
195
202
208
215

53
55
59
62
65
65
69
71
74
76
77
82
88
88
87
93
91
94
96
97
100
103
107
110
114

33,000
82,000
131,000
164,000
214,000
197,000
246,000
574,000
854,000
852,000
764,000
1,206,000
1,470,000
1,523,000
1,329,000
1,246,000
1,272,000
1,115,000
779,000
441,000
133,000

27,000
67,000
101,000
122,000
153,000
137,000
169,000
372,000
517,000
515,000
464,000
687,000
853,000
863,000
735,000
682,000
674,000
572,000
386,000
212,000
62,000

51,000
126,000
190,000
230,000
289,000
258,000
318,000
703,000
975,000
973,000
877,000
1,297,000
1,609,000
1,629,000
1,387,000
1,288,000
1,272,000
1,079,000
729,000
399,000
117,000

14,625,000

8,370,000

15,797,000

Sincefutureeventsarealwaysuncertain,allestimatesofcostsandbenefitsusedineconomicevaluationinvolveadegreeofuncertainty.Probabilistic
methodsareoftenusedindecisionanalysistodetermineexpectedcostsandbenefitsaswellastoassessthedegreeofriskinparticularprojects.
Inestimatingbenefitsandcosts,itiscommontoattempttoobtaintheexpectedoraveragevaluesofthesequantitiesdependinguponthedifferentevents
whichmightoccur.Statisticaltechniquessuchasregressionmodelscanbeuseddirectlyinthisregardtoprovideforecastsofaveragevalues.
Alternatively,thebenefitsandcostsassociatedwithdifferenteventscanbeestimatedandtheexpectedbenefitsandcostscalculatedasthesumoverall
possibleeventsoftheresultingbenefitsandcostsmultipliedbytheprobabilityofoccurrenceofaparticularevent:

(6.19)
and
(6.20)

whereq=1,....,mrepresentspossibleevents,(Bt|q)and(Ct|q)arebenefitsandcostsrespectivelyinperiodtduetotheoccurrenceofq,Pr{q}isthe
probabilitythatqoccurs,andE[Bt]andE[Ct]arerespectivelyexpectedbenefitandcostinperiodt.Hence,theexpectednetbenefitinperiodtisgivenby:
(6.21)
Forexample,theaveragecostofafacilityinanearthquakepronesitemightbecalculatedasthesumofthecostofoperationundernormalconditions
(multipliedbytheprobabilityofnoearthquake)plusthecostofoperationafteranearthquake(multipliedbytheprobabilityofanearthquake).Expected
benefitsandcostscanbeuseddirectlyinthecashflowcalculationsdescribedearlier.
Informulatingobjectives,someorganizationswishtoavoidrisksoastoavoidthepossibilityoflosses.Ineffect,ariskavoidingorganizationmightselect
aprojectwithlowerexpectedprofitornetsocialbenefitaslongasithadalowerriskoflosses.Thispreferenceresultsinariskpremiumorhigherdesired
profitforriskyprojects.AroughmethodofrepresentingariskpremiumistomakethedesiredMARRhigherforriskyprojects.Letrfbetheriskfree
marketrateofinterestasrepresentedbytheaveragerateofreturnofasafeinvestmentsuchasU.S.governmentbonds.However,U.S.governmentbonds
donotprotectfrominflationarychangesorexchangeratefluctuations,butonlyinsurethattheprincipalandinterestwillberepaid.Letrpbetherisk
premiumreflectinganadjustmentoftherateofreturnfortheperceivedrisk.Then,theriskadjustedrateofreturnrisgivenby:
(6.22)
InusingtheriskadjustedrateofreturnrtocomputethenetpresentvalueofanestimatednetcashflowAt(t=0,1,2,...,n)overnyears,itistacitly
assumedthatthevaluesofAtbecomemoreuncertainastimegoeson.Thatis:

(6.23)

Moredirectly,adecisionmakermaybeconfrontedwiththesubjectchoiceamongalternativeswithdifferentexpectedbenefitsoflevelsofrisksuchthatat
agivenperiodt,thedecisionmakeriswillingtoexchangeanuncertainAtwithasmallerbutcertainreturnatAtwhereatislessthanone.Considerthe
decisiontreeinFigure62inwhichthedecisionmakerisconfrontedwithachoicebetweenthecertainreturnofatAtandagamblewithpossible
outcomes(At)qandrespectiveprobabilitiesPr{q}forq=1,2,...,m.Then,thenetpresentvaluefortheseriesof"certaintyequivalents"overnyearsmay
becomputedonthebasisoftheriskfreerate.Hence:

(6.24)

Notethatifrfrpisnegligibleincomparisonwithr,then
(1+rf)(1+rp)=1+rf+rp+rfrp=1+r
Hence,forEq.(6.23)
At(1+r)t=(atAt/at)(1+rf)t(1+rp)t=[(atAt)(1+rf)t][(1+rp)t/at]
Ifat=(1+rp)tfort=1,2,...,n,thenEqs.(6.23)and(6.24)willbeidentical.Hence,theuseoftheriskadjustedraterforcomputingNPVhasthesame
effectasacceptingat=(1+rp)tasa"certaintyequivalent"factorinadjustingtheestimatedcashflowovertime.

Figure62DeterminationofaCertaintyEquivalentValue
Backtotop

6.10EffectsofFinancingonProjectSelection
Selectionofthebestdesignandfinancingplansforcapitalprojectsistypicallydoneseparatelyandsequentially.Threeapproachestofacilityinvestment
planningmostoftenadoptedbyanorganizationare:
1.Needordemanddriven:Publiccapitalinvestmentsaredefinedanddebatedintermsofanabsolute"need"forparticularfacilitiesorservices.Witha
predefined"need,"designandfinancinganalysisthenproceedseparately.Evenwheninvestmentsaremadeonthebasisofademandorrevenue
analysisofthemarket,theseparationofdesignandfinancinganalysisisstillprevalent.
2.Designdriven:Designsaregenerated,analyzedandapprovedpriortotheinvestigationoffinancingalternatives,becauseprojectsareapprovedfirst
andonlythenprogrammedforeventualfunding.
3.Financedriven:Theprocessofdevelopingafacilitywithinaparticularbudgettargetisfinancedrivensincethebudgetisformulatedpriortothe
finaldesign.Itisacommonprocedureinprivatedevelopmentsandincreasinglyusedforpublicprojects.
Typically,differentindividualsordivisionsofanorganizationconducttheanalysisfortheoperatingandfinancingprocesses.Financingalternativesare
sometimesnotexaminedatallsinceasinglemechanismisuniversallyadopted.Anexampleofasinglefinancingplaninthepublicsectoristheuseof
payasyougohighwaytrustfunds.However,theimportanceoffinancialanalysisisincreasingwiththeincreaseofprivateownershipandprivate
participationinthefinancingofpublicprojects.Theavailabilityofabroadspectrumofnewfinancinginstrumentshasaccentuatedtheneedsforbetter
financialanalysisinconnectionwithcapitalinvestmentsinboththepublicandprivatesectors.Whilesimultaneousassessmentofalldesignandfinancing
alternativesisnotalwaysessential,morecommunicationofinformationbetweenthetwoevaluationprocesseswouldbeadvantageousinordertoavoid
theselectionofinferioralternatives.
Thereisaneverincreasingvarietyofborrowingmechanismsavailable.First,theextenttowhichborrowingistiedtoaparticularprojectorassetmaybe
varied.Loansbackedbyspecific,tangibleandfungibleassetsandwithrestrictionsonthatasset'suseareregardedaslessrisky.Incontrast,specific
projectfinancemaybemorecostlytoarrangeduetotransactionscoststhanisgeneralcorporateorgovernmentborrowing.Also,backingbythefullgood
faithandcreditofanorganizationisconsideredlessriskythaninvestmentsbackedbygenerallyimmovableassets.Second,theoptionsoffixedversus
variablerateborrowingareavailable.Third,therepaymentscheduleandtimehorizonofborrowingmaybevaried.Adetaileddiscussionoffinancingof
constructedfacilitieswillbedeferreduntilthenextchapter.
Asageneralrule,itisadvisabletoborrowaslittleaspossiblewhenborrowingratesexceedtheminimumattractiverateofreturn.Equityorpayasyou
gofinancingmaybedesirableinthiscase.Itisgenerallypreferabletoobtainlowerborrowingrates,unlessborrowingassociatedwithlowerratesrequires
substantialtransactioncostsorreducestheflexibilityforrepaymentandrefinancing.Inthepublicsector,itmaybethatincreasingtaxesoruserchargesto
reduceborrowinginvolveseconomiccostsinexcessofthebenefitsofreducedborrowingcostsofborrowedfunds.Furthermore,sincecashflowanalysis
istypicallyconductedonthebasisofconstantdollarsandloanagreementsaremadewithrespecttocurrentdollars,removingtheeffectsofinflationwill
reducethecostofborrowing.Finally,deferringinvestmentsuntilpayasyougoorequityfinancingareavailablemayundulydeferthebenefitsofnew
investments.
Itisdifficulttoconcludeunambiguouslythatonefinancingmechanismisalwayssuperiortoothers.Consequently,evaluatingalternativefinancing
mechanismsisanimportantcomponentoftheinvestmentanalysisprocedure.Onepossibleapproachtosimultaneouslyconsideringdesignandfinancing
alternativesistoconsidereachcombinationofdesignandfinancingoptionsasaspecific,mutuallyexclusivealternative.Thecashflowofthiscombined
alternativewouldbethesumoftheeconomicoroperatingcashflow(assumingequityfinancing)andthefinancialcashflowovertheplanninghorizon.
Backtotop

6.11CombinedEffectsofOperatingandFinancingCashFlows
Ageneralapproachforobtainingthecombinedeffectsofoperatingandfinancingcashflowsofaprojectistomakeuseoftheadditivepropertyofnet
presentvaluesbycalculatinganadjustednetpresentvalue.Theadjustednetpresentvalue(APV)isthesumofthenetpresentvalue(NPV)ofthe
operatingcashflowplusthenetpresentvalueofthefinancialcashflowduetoborrowingorraisingcapital(FPV).Thus,
(6.25)

whereeachfunctionisevaluatedati=MARRifboththeoperatingandthefinancingcashflowshavethesamedegreeofriskoriftherisksaretakencare
ofinotherwayssuchasbytheuseofcertaintyequivalents.Then,projectselectioninvolvingbothdesignandfinancingalternativesisaccomplishedby
selectingthecombinationwhichhasthehighestpositiveadjustedpresentvalue.Theuseofthisadjustednetpresentvaluemethodwillresultinthesame
selectionasanevaluationbasedonthenetpresentvalueobtainedfromthecombinedcashflowofeachalternativecombinationdirectly.
Tobespecific,letAtbethenetoperatingcashflow,

bethenetfinancialcashflowresultingfromdebtfinancing,andAAtbethecombinednetcash

flow,allforyeartbeforetax.Then:

(6.26)

Similarly,let

andYYtbethecorrespondingcashflowsaftertaxsuchthat:

(6.27)

Thetaxshieldsforinterestonborrowing(fort=1,2,...,n)areusuallygivenby

(6.28)

whereItistheinterestpaidinyeartandXtisthemarginalcorporateincometaxrateinyeart.InviewofEqs.(6.13),(6.27)and(6.28),weobtain

(6.29)

WhenMARR=iisappliedtoboththeoperatingandthefinancialcashflowsinEqs.(6.13)and(6.28),respectively,incomputingthenetpresentvalues,
thecombinedeffectwillbethesameasthenetpresentvalueobtainedbyapplyingMARR=itothecombinedcashflowinEq.(6.29).
Inmanyinstances,ariskpremiumrelatedtothespecifiedtypeofoperationisaddedtotheMARRfordiscountingtheoperatingcashflow.Ontheother
hand,theMARRfordiscountingthefinancialcashflowforborrowingisoftenregardedasrelativelyriskfreebecausedebtorsorholdersofcorporate
bondsmustbepaidfirstbeforestockholdersincasefinancialdifficultiesareencounteredbyacorporation.Then,theadjustednetpresentvalueisgivenby
(6.30)
whereNPVisdiscountedatrandFPVisobtainedfromtherfrate.Notethatthenetpresentvalueofthefinancialcashflowincludesnotonlytaxshields
forinterestonloansandotherformsofgovernmentsubsidy,butalsoontransactionscostssuchasthoseforlegalandfinancialservicesassociatedwith
issuingnewbondsorstocks.
Theevaluationofcombinedalternativesbasedontheadjustednetpresentvaluemethodshouldalsobeperformedindollaramountswhicheither
consistentlyincludeorremovetheeffectsofinflation.TheMARRvalueusedwouldreflecttheinclusionorexclusionofinflationaccordingly.
Furthermore,itispreferabletouseaftertaxcashflowsintheevaluationofprojectsforprivatefirmssincedifferentdesignsandfinancingalternativesare
likelytohavequitedifferentimplicationsfortaxliabilitiesandtaxshields.
Intheory,thecorporatefinanceprocessdoesnotnecessarilyrequireadifferentapproachthanthatoftheAPVmethoddiscussedabove.Ratherthan
consideringsingleprojectsinisolation,groupsorsetsofprojectsalongwithfinancingalternativescanbeevaluated.Theevaluationprocesswouldbeto
selectthatgroupofoperatingandfinancingplanswhichhasthehighesttotalAPV.Unfortunately,thenumberofpossiblecombinationstoevaluatecan
becomeverylargeeventhoughmanycombinationscanberapidlyeliminatedinpracticebecausetheyareclearlyinferior.Morecommonly,heuristic
approachesaredevelopedsuchaschoosingprojectswiththehighestbenefit/costratiowithinaparticularbudgetorfinancialconstraint.Theseheuristic
schemeswillofteninvolvetheseparationofthefinancinganddesignalternativeevaluation.Thetypicalresultisdesigndrivenorfinancedrivenplanning
inwhichoneortheotherprocessisconductedfirst.
Example65:CombinedEffectsofOperatingandFinancingPlans
Apublicagencyplanstoconstructafacilityandisconsideringtwodesignalternativeswithdifferentcapacities.Theoperatingnetcashflows
forbothalternativesoveraplanninghorizonof5yearsareshowninTable64.Foreachdesignalternative,theprojectcanbefinancedeither
throughoverdraftonbankcreditorbyissuingbondsspanningoverthe5yearperiod,andthecashflowforeachfinancingalternativeisalso
showninTable64.ThepublicagencyhasspecifiedaMARRof10%fordiscountingtheoperatingandfinancingcashflowsforthisproject.
Determinethebestcombinationofdesignandfinancingplanif
(a)adesignisselectedbeforefinancingplansareconsidered,or
(b)thedecisionismadesimultaneouslyratherthansequentially.
Thenetpresentvalues(NPV)ofallcashflowscanbecomputedbyEq.(6.5),andtheresultsaregivenatthebottomofTable64.The
adjustednetpresentvalue(APV)combiningtheoperatingcashflowofeachdesignandanappropriatefinancingisobtainedaccordingtoEq.
(6.25),andtheresultsarealsotabulatedatthebottomofTable64.

Undercondition(a),designalternative2willbeselectedsinceNPV=$767,000isthehighervaluewhenonlyoperatingcashflowsare
considered.Subsequently,bondsfinancingwillbechosenbecauseAPV=$466,000indicatesthatitisthebestfinancingplanfordesign
alternative2.
Undercondition(b),however,thechoicewillbebasedonthehighestvalueofAPV,i.e.,APV=$484,000fordesignalternativeonein
combinationwilloverdraftfinancing.Thus,thesimultaneousdecisionapproachwillyieldthebestresults.

TABLE65IllustrationofDifferentDesignandFinancingAlternatives(in$thousands)
DesignAlternativeOne
DesignAlternativeTwo
Year
0
1
2
3
4
5
NPVorFPVat
10%

OperatingCash
Flow

Overdraft
Financing

Bond
Financing

OperatingCash
Flow

Overdraft
Financing

BondFinancing

$1,000
2,500
1,000
1,500
1,500
1,700

$1,000
2,500
1,000
1,500
1,500
921

$3,653
418
418
418
418
4,217

$2,500
1,000
1,000
1,500
1,500
1,930

$2,500
1,000
1,000
1,500
1,500
1,254

$3,805
435
435
435
435
4,392

761

277

290

767

347

301

484

471

420

466

APV=NPV+FPV
Backtotop

6.12PublicversusPrivateOwnershipofFacilities
Inrecentyears,variousorganizationalownershipschemeshavebeenproposedtoraisethelevelofinvestmentinconstructedfacilities.Forexample,
independentauthoritiesareassumingresponsibilityforsomewaterandsewersystems,whileprivateentrepreneursaretakingovertheownershipofpublic
buildingssuchasstadiumsandconventioncentersinjointventureswithlocalgovernments.Suchownershiparrangementsnotonlycangeneratethe
capitalfornewfacilities,butalsowillinfluencethemanagementoftheconstructionandoperationofthesefacilities.Inthissection,weshallreviewsome
oftheseimplications.
Aparticularorganizationalarrangementorfinancialschemeisnotnecessarilysuperiortoallothersineachcase.Evenforsimilarfacilities,these
arrangementsandschemesmaydifferfromplacetoplaceorovertime.Forexample,U.S.watersupplysystemsareownedandoperatedbothbyrelatively
largeandsmallorganizationsineithertheprivateorpublicsector.Modernportfoliotheorysuggestthattheremaybeadvantagesinusingavarietyof
financialschemestospreadrisks.Similarly,smallorlargeorganizationsmayhavedifferentrelativeadvantageswithrespecttopersonneltraining,
innovationorotheractivities.

DifferencesinRequiredRatesofReturn
Abasicdifferencebetweenpublicandprivateownershipoffacilitiesisthatprivateorganizationsaremotivatedbytheexpectationofprofitsinmaking
capitalinvestments.Consequently,privatefirmshaveahigherminimumattractiverateofreturn(MARR)oninvestmentsthandopublicagencies.The
MARRrepresentsthedesiredreturnorprofitformakingcapitalinvestments.Furthermore,privatefirmsoftenmustpayahigherinterestratefor
borrowingthanpublicagenciesbecauseofthetaxexemptorotherwisesubsidizedbondsavailabletopublicagencies.Internationalloansalsooffer
subsidizedinterestratestoqualifiedagenciesorprojectsinmanycases.Withhigherrequiredratesofreturn,weexpectthatprivatefirmswillrequire
greaterreceiptsthanwouldapublicagencytomakeaparticularinvestmentdesirable.
Inadditiontodifferentminimumattractiveratesofreturn,thereisalsoanimportantdistinctionbetweenpublicandprivateorganizationswithrespectto
theirevaluationofinvestmentbenefits.Forprivatefirms,thereturnsandbenefitstocovercostsandprovideprofitaremonetaryrevenues.Incontrast,
publicagenciesoftenconsidertotalsocialbenefitsinevaluatingprojects.Totalsocialbenefitsincludemonetaryuserpaymentsplususers'surplus(e.g.,
thevaluereceivedlesscostsincurredbyusers),externalbenefits(e.g.,benefitstolocalbusinessesorpropertyowners)andnonquantifiablefactors(e.g.,
psychologicalsupport,unemploymentrelief,etc.).Generally,totalsocialbenefitswillexceedmonetaryrevenues.
Whilethesedifferentvaluationsofbenefitsmayleadtoradicallydifferentresultswithrespecttotheextentofbenefitsassociatedwithaninvestment,they
donotnecessarilyrequirepublicagenciestoundertakesuchinvestmentsdirectly.First,manypublicenterprisesmustfundtheirinvestmentsandoperating
expensesfromuserfees.Mostpublicutilitiesfallintothiscategory,andtheimportanceofuserfeefinancingisincreasingformanycivilworkssuchas
waterways.Withuserfeefinancing,therequiredreturnsforthepublicandprivatefirmstoundertaketheaforementionedinvestmentare,infact,limitedto
monetaryrevenues.Asasecondpoint,itisalwayspossibleforapublicagencytocontractwithaprivatefirmtoundertakeaparticularproject.
Allotherthingsbeingequal,weexpectthatprivatefirmswillrequirelargerreturnsfromaparticularinvestmentthanwouldapublicagency.Fromthe
usersortaxpayerspointofview,thisimpliesthattotalpaymentswouldbehighertoprivatefirmsforidenticalservices.However,thereareanumberof
mitigatingfactorstocounterbalancethisdisadvantageforprivatefirms.

TaxImplicationsofPublicVersusPrivateOrganizations
Anotherdifferencebetweenpublicandprivatefacilityownersisintheirrelativeliabilityfortaxes.Publicentitiesareoftenexemptfromtaxesofvarious
kinds,whereasprivatefacilityownersincuravarietyofincome,propertyandexcisetaxes.However,theseprivatetaxliabilitiescanbeoffset,atleastin
part,bytaxdeductionsofvariouskinds.
Forprivatefirms,incometaxesrepresentasignificantcostofoperation.However,taxableincomeisbasedonthegrossrevenueslessallexpensesand
allowabledeductionsaspermittedbytheprevalenttaxlawsandregulations.Themostsignificantallowabledeductionsaredepreciationandinterest.By
selectingthemethodofdepreciationandthefinancingplanwhicharemostfavorable,afirmcanexertacertaindegreeofcontrolonitstaxableincome
and,thus,itsincometax.
Anotherformofreliefintaxliabilityisthetaxcreditwhichallowsadirectdeductionforincometaxpurposesofasmallpercentageofthevalueofcertain
newlyacquiredassets.Althoughtheprovisionsforinvestmenttaxcreditforphysicalfacilitiesandequipmenthadbeenintroducedatdifferenttimesinthe
USfederaltaxcode,theywereeliminatedinthe1986TaxReformationActexceptataxcreditforlowincomehousing.

Ofcourse,afirmmusthaveprofitstotakedirectadvantageofsuchtaxshields,i.e.,taxdeductionsonlyreducetaxliabilitiesifbeforetaxprofitsexist.In
manycases,investmentsinconstructedfacilitieshavenetoutlaysorlossesintheearlyyearsofconstruction.Generally,theselossesinearlyyearscanbe
offsetagainstprofitsoccurredelsewhereorlaterintime.Withoutsuchoffsettingprofits,lossescanbecarriedforwardbythefirmormergedwithother
firms'profits,butthesemechanismswillnotbereviewedhere.

EffectsofFinancingPlans
Majorinvestmentsinconstructedfacilitiestypicallyrelyuponborrowedfundsforalargeportionoftherequiredcapitalinvestments.Forprivate
organizations,theseborrowedfundscanbeusefulforleveragetoachieveahigherreturnontheorganizations'owncapitalinvestment.
Forpublicorganizations,borrowingcostswhicharelargerthantheMARRresultsinincreased"cost"andhigherrequiredreceipts.Incurringthesecosts
maybeessentialiftheinvestmentfundsarenototherwiseavailable:capitalfundsmustcomefromsomewhere.Butitisnotunusualfortheborrowingrate
toexceedtheMARRforpublicorganizations.Inthiscase,reducingtheamountofborrowinglowerscosts,whereasincreasingborrowinglowerscosts
whenevertheMARRisgreaterthantheborrowingrate.
Althoughprivateorganizationsgenerallyrequireahigherrateofreturnthandopublicbodies(sothattherequiredreceiptstomaketheinvestment
desirablearehigherfortheprivateorganizationthanforthepublicbody),considerationoftaxshieldsandintroductionofasuitablefinancingplanmay
reducethisdifference.TherelativelevelsoftheMARRforeachgroupandtheirborrowingratesarecriticalinthiscalculation.

EffectsofCapitalGrantSubsidies
Animportantelementinpublicinvestmentsistheavailabilityofcapitalgrantsubsidiesfromhigherlevelsofgovernment.Forexample,interstate
highwayconstructioniseligibleforfederalcapitalgrantsforupto90%ofthecost.Otherprogramshavedifferentmatchingamounts,with50/50
matchinggrantscurrentlyavailableforwastewatertreatmentplantsandvariouscategoriesoftrafficsystemsimprovementintheU.S.Thesecapitalgrants
areusuallymadeavailablesolelyforpublicbodiesandfordesignatedpurposes.
Whiletheavailabilityofcapitalgrantsubsidiesreducesthelocalcostofprojects,thetimingofinvestmentcanalsobeaffected.Inparticular,public
subsidiesmaybedelayedorspreadoveralongertimeperiodbecauseoflimitedfunds.Totheextentthat(discounted)benefitsexceedcostsforparticular
benefits,thesefundingdelayscanbecostly.Consequently,privatefinancingandinvestmentmaybeadesirablealternative,evenifsomesubsidyfundsare
available.

ImplicationsforDesignandConstruction
Differentperspectivesandfinancialconsiderationsalsomayhaveimplicationsfordesignandconstructionchoices.Forexample,animportantclassof
designdecisionsarisesrelativetothetradeoffbetweencapitalandoperatingcosts.Itisoftenthecasethatinitialinvestmentorconstructioncostscanbe
reduced,butattheexpenseofahigheroperatingcostsormorefrequentandextensiverehabilitationorrepairexpenditures.Itisthistradeoffwhichhas
ledtotheconsiderationof"lifecyclecosts"ofalternativedesigns.Thefinancialschemesreviewedearliercanprofoundlyeffectsuchevaluations.
Forfinancialreasons,itwouldoftenbeadvantageousforapublicbodytoselectamorecapitalintensivealternativewhichwouldreceivealargercapital
subsidyand,thereby,reducetheproject'slocalcosts.Ineffect,thecapitalgrantsubsidywoulddistortthetradeoffbetweencapitalandoperatingcostsin
favorofmorecapitalintensiveprojects.
Thevarioustaxandfinancingconsiderationswillalsoaffecttherelativemeritsofrelativelycapitalintensiveprojects.Forexample,astheborrowingrate
increases,morecapitalintensivealternativesbecomelessattractive.Taxprovisionssuchastheinvestmenttaxcreditoraccelerateddepreciationare
intendedtostimulateinvestmentandtherebymakemorecapitalintensiveprojectsrelativelymoredesirable.Incontrast,ahigherminimumattractiverate
ofreturntendstomakemorecapitalintensiveprojectslessattractive.
Backtotop

6.13EconomicEvaluationofDifferentFormsofOwnership
Whileitisdifficulttoconcludedefinitelythatoneoranotherorganizationalorfinancialarrangementisalwayssuperior,differentorganizationshave
systematicimplicationsforthewaysinwhichconstructedfacilitiesarefinanced,designedandconstructed.Moreover,theselectionofalternative
investmentsforconstructedfacilitiesislikelytobeaffectedbythetypeandscopeofthedecisionmakingorganization.
Asanexampleoftheperspectivesofpublicandprivateorganizations,considerthepotentialinvestmentonaconstructedfacilitywithaprojecteduseful
lifeofnyears.Lett=0bethebeginningoftheplanninghorizonandt=1,2,...ndenotetheendofeachofthesubsequentyears.Furthermore,letCobe
thecostofacquiringthefacilityatt=0,andCtbethecostofoperationinyeart.Then,thenetreceiptsAtinyeartisgivenbyAt=BtCtinwhichBtis
thebenefitinyeartandAtmaybepositiveornegativefort=0,1,2,...,n.
Lettheminimumattractiverateofreturn(MARR)fortheownerofthefacilitybedenotedbyi.Then,thenetpresentvalue(NPV)ofaprojectas
representedbythenetcashflowdiscountedtothepresenttimeisgivenby

(6.31)

Then,aprojectisacceptableifNPV 0.Whentheannualgrossreceiptisuniform,i.e.,Bt=Bfort=1,2,...,nandB0=0,then,forNPV=0:

(6.32)

Thus,theminimumuniformannualgrossreceiptBwhichmakestheprojecteconomicallyacceptablecanbedeterminedfromEquation(6.32),oncethe
acquisitionandoperationcostsCtofthefacilityareknownandtheMARRisspecified.

Example66:DifferentMARRsforPublicandPrivateOrganizations
Forthefacilitycoststreamofapotentialinvestmentwithn=7inTable65,therequireduniformannualgrossreceiptsBaredifferentfor
publicandprivateownershipssincethesetwotypesoforganizationsusuallychoosedifferentvaluesofMARR.WithagivenvalueofMARR
=iineachcase,thevalueofBcanbeobtainedfromEq.(6.32).WithaMARRof10%,apublicagencyrequiresatleastB=$184,000.By
contrast,aprivatefirmusinga20%MARRbeforetaxwhileneglectingothereffectssuchasdepreciationandtaxdeductionwouldrequireat
leastB=$219,000.Then,accordingtoEq.(6.31),thegrossreceiptstreamsforbothpublicandprivateownershipsinTable65willsatisfy
theconditionNPV=0wheneachofthemisnettedfromthecoststreamanddiscountedattheappropriatevalueofMARR,i.e.,10%fora
publicagencyand20%(beforetax)foraprivatefirm.Thus,thiscasesuggeststhatpublicprovisionofthefacilityhaslowerusercosts.
TABLE66RequiredUniformAnnualGrossReceiptsforPublicandPrivateOwnershipofaFacility(in$
thousands)
PublicOwnership
PrivateOwnership
Yeart
0
1
2
3
4
5
6
7

Facility
cost,Ct

GrossReceipt,
Bt

NetReceipt
At=BtCt

GrossReceipt,
Bt

NetReceipt
At=BtCt

$500
76
78
80
82
84
86
88

$0
184
184
184
184
184
184
184

$500
108
106
104
102
100
98
96

$0
219
219
219
219
219
219
219

$500
143
141
139
137
135
133
131

Example67:EffectsofDepreciationandTaxShieldsforPrivateFirms
UsingthesamedataasinExample66,wenowconsidertheeffectsofdepreciationandtaxdeductionforprivatefirms.Supposethatthe
marginaltaxrateofthefirmis34%ineachyearofoperation,andlossescanalwaysbeoffsetbycompanywideprofits.Supposefurtherthat
thesalvagevalueofthefacilityiszeroattheendofsevenyearssothattheentireamountofcostcanbedepreciatedbymeansofthesumof
theyears'digits(SOYD)method.Thus,forthesumofdigits1through7equalto28,thedepreciationallowancesforyears1to7are
respectively7/28,6/28,...,1/28ofthetotaldepreciablevalueof$500,000,andtheresultsarerecordedincolumn3ofTable66.Fora
uniformannualgrossreceiptB=$219,000,thenetreceiptbeforetaxinColumn6ofTable65inExample65canbeusedasthestarting
pointforcomputingtheaftertaxcashflowaccordingtoEquation(6.13)whichiscarriedoutstepbystepinTable66.(Dollaramountsare
giventothenearest$1,000).Bytrialanderror,itisfoundthatanaftertaxMARR=14.5%willproduceazerovalueforthenetpresentvalue
ofthediscountedaftertaxflowatt=0.Inotherwords,therequireduniformannualgrossreceiptforthisprojectat14.5%MARRaftertaxis
alsoB=$219,000.ItmeansthattheMARRofthisprivatefirmmustspecifya20%MARRbeforetaxinordertoreceivetheequivalentof
14.5%MARRaftertax.
TABLE67EffectsofDepreciationandTaxDeductionsforPrivateOwnershipinaFacility(in$thousands)
Aftertax
NetReceipt
Depreciation
Taxable
Income
CashFlow
Beforetax
(SOYD)
Income
Tax
At
Dt
(AtDt)
Xt(AtDt)
Yeart
0
1
2
3
4
5
6
7

$500
143
141
139
137
135
133
131

$0
125
107
89
71
54
36
18

$0
18
34
50
66
81
97
113

$0
6
12
17
22
28
33
38

$500
137
129
122
115
107
100
93

Example68:EffectsofBorrowingonPublicAgencies
SupposethatthegrossuniformannualreceiptforpublicownershipisB=$190,000insteadof$184,000forthefacilitywithcoststreamgiven
inColumn2ofTable65.Supposefurtherthatthepublicagencymustborrow$400,000(80%ofthefacilitycost)at12%annualinterest,
resultinginanannualuniformpaymentof$88,000forthesubsequentsevenyears.ThisinformationhasbeensummarizedinTable67.The
useofborrowedfundstofinanceafacilityisreferredtoasdebtfinancingorleveragedfinancing,andthecombinedcashflowresultingfrom
operatingandfinancialcashflowsisreferredtoastheleveredcashflow.
TothenetreceiptAtinColumn4ofTable67,whichhasbeenobtainedfromauniformannualgrossreceiptof$190,000,weaddthe
financialcashflow
,whichincludedaloanof$400,000withanannualrepaymentof$88,000correspondingtoaninterestrateof12%.
ThentheresultingcombinedcashflowAAtascomputedaccordingtoEquation(6.26)isshownincolumn6ofTable67.Notethatforaloan
at12%interest,thenetpresentvalueofthecombinedcashflowAAtiszerowhendiscountedata10%MARRforthepublicagency.Thisis
notacoincidence,butseveralvaluesofBhavebeentrieduntilB=$190,000isfoundtosatisfyNPV=0at10%MARR.Hence,the
minimumrequireduniformannualgrossreceiptisB=$190,000.

Year
t

Gross
receipt
Bt

0
1
2
3

$0
190
190
190

TABLE68EffectsofBorrowingonaPubliclyOwnedFacility(in$thousands)
Loanandpayment
Facility
Netreceipt
Combinedcashflow
(12%interest)
cost
(noloan)
(12%interest)
Ct
At
AAt
$500
76
78
80

$500
114
112
110

+$400
88
88
88

$100
26
24
22

4
5
6
7

190
190
190
190

82
84
86
88

108
106
104
102

88
88
88
88

20
18
16
14

Example69:EffectsofLeverageandTaxShieldsforPrivateOrganizations
SupposethattheuniformannualgrossreceiptforaprivatefirmisalsoB=$190,000(thesameasthatforthepublicagencyinExample67).
Thesalvagevalueofthefacilityiszeroattheendofsevenyearssothattheentireamountofcostcanbedepreciatedbymeansofthesumof
theyears'digit(SOYD)method.Themarginaltaxrateofthefirmis34%ineachyearofoperation,andlossescanalwaysbeoffsetby
companywideprofits.Supposefurtherthatthefirmmustborrow$400,000(80%ofthefacilitycost)ata12%annualinterest,resultinginan
annualuniformpaymentof$88,000forthesubsequentsevenyears.Theinterestchargeeachyearcanbecomputedas12%oftheremaining
balanceoftheloaninthepreviousyear,andtheinterestchargeisdeductiblefromthetaxliability.
ForB=$190,000andafacilitycoststreamidenticaltothatinExample67,thenetreceiptsbeforetaxAt(operatingcashflowwithnoloan)
inTable67canbeusedasthestartingpointforanalyzingtheeffectsoffinancialleveragethroughborrowing.Thus,column4ofTable67is
reproducedincolumn2ofTable68.
ThecomputationoftheaftertaxcashflowoftheprivatefirmincludingtheeffectsoftaxshieldsforinterestiscarriedoutinTable68.The
financialcashstream
inColumn4ofTable68indicatesaloanof$400,000whichissecuredatt=0foranannualinterestof12%,and
resultsinaseriesofuniformannualpaymentsof$88,000inordertorepaytheprincipalandinterest.TheleveredaftertaxcashflowYYtcan
beobtainedbyEq.(6.29),usingthesameinvestmentcredit,depreciationmethodandtaxrate,andisrecordedinColumn7ofTable68.
SincethenetpresentvalueofYYtinColumn7ofTable68discountedat14.5%happenstobezero,theminimumrequireduniformannual
grossreceiptforthepotentialinvestmentis$190,000.Byborrowing$400,000(80%ofthefacilitycost)at12%annualinterest,the
investmentbecomesmoreattractivetotheprivatefirm.Thisisexpectedbecauseofthetaxshieldfortheinterestandthe12%borrowingrate
whichislowerthanthe14.5%MARRaftertaxforthefirm.
TABLE69EffectsofFinancialLeverageandTaxShieldsonPrivateOwnershipofaFacility(in$thousands)
Loanand
NetReceipt
AfterTax
Scheduled
BeforeTax
Depreciation
Interest
IncomeTax
CashFlow
Payment
(noloan)
(SOYD)
OnLoan
(34%rate)
(levered)
Year
A
D
It
Xt(AtDtIt)
YYt
t
t
t
0
$500
$0
$400
$0
$0
$100
1
114
125
88
48
19
45
2
112
107
88
43
13
37
3
110
89
88
38
6
28
4
108
71
88
32
2
18
5
106
54
88
25
9
9
6
104
36
88
18
17
1
7
102
18
88
9
26
12

Example610:ComparisonofPublicandPrivateOwnership.
IneachoftheanalysesinExamples65through68,aminimumrequireduniformannualgrossreceiptBiscomputedforeachgiven
conditionwhethertheownerisapublicagencyoraprivatefirm.ByfindingthevalueofBwhichwillleadtoNPV=0forthespecified
MARRfortheorganizationineachcase,variousorganizationaleffectswithorwithoutborrowingcanbeanalyzed.Theresultsare
summarizedinTable69forcomparison.Inthisexample,publicownershipwitha80%loananda10%MARRhasthesamerequiredbenefit
asprivateownershipwithanidentical80%loananda14.5%aftertaxMARR.
TABLE610SummaryeffectsofFinancialLeverageandTaxShieldsonPrivateOwnership
Organizational
Financial
Minimumbenefit
condition
arrangement
required
Public,notax
(MARR=10%)

Noloan
80%loanat12%interest

$184,000
190,000

Private,beforetax
(MARR=20%)
Private,aftertax
(MARR=14.5%)

Noloan

219,000
219,000
219,000
190,000

Noloan
80%loanat12%interest

Backtotop

6.14References
1.Au,T.,"ProfitMeasuresandMethodsofEconomicAnalysisforCapitalProjectSelection,"ASCEJournalofManagementinEngineering,Vol.4,
No.3,1988.
2.Au,T.andT.P.Au,EngineeringEconomicsforCapitalInvestmentAnalysis,AllynandBacon,Newton,MA,1983.
3.Bierman,H.,Jr.,andS.Smidt,TheCapitalBudgetingDecision,5thEd.,Macmillan,NewYork,1984.
4.Brealey,R.andS.Myers,PrinciplesofCorporateFinance,SecondEdition,McGrawHill,NewYork,1984.
5.Edwards,W.C.andJ.F.Wong,"AComputerModeltoEstimateCapitalandOperatingCosts,"CostEngineering,Vol.29,No.10,1987,pp.1521.
6.Hendrickson,C.andT.Au,"PrivateversusPublicOwnershipofConstructedFacilities,"ASCEJournalofManagementinEngineering,Vol.1,No.
3,1985,pp.119131.
7.Wohl,M.andC.Hendrickson,TransportationInvestmentandPricingPrinciples,JohnWiley,NewYork,1984.

Backtotop

6.15Problems
1.TheSalisburyCorporationisconsideringfourmutuallyexclusivealternativesforamajorcapitalinvestmentproject.Allalternativeshaveauseful
lifeof10yearswithnosalvagevalueattheend.Straightlinedepreciationwillbeused.Thecorporationpaysfederalandstatetaxatarateof34%,
andexpectsanaftertaxMARRof10%.Determinewhichalternativeshouldbeselected,usingtheNPVmethod.
Beforetaxuniform
Initialcost annualnetbenefits
Alternatives ($million)
($million)
1
2
3
4

$4.0
3.5
3.0
3.7

$1.5
1.1
1.0
1.3

2.TheoperatingcashflowfortheacquisitionandmaintenanceofaclamshellforexcavationisgivenbyAtinthetablebelow.Threefinancingplans,
eachchargingaborrowingrateof8%buthavingadifferentmethodofrepayment,arerepresentedbythreedifferentcashflowsof
.Findthe
netpresentvalueforeachofthethreecombinedcashflowsAAtforoperatingandfinancingiftheMARRisspecifiedtobe8%.
Year
t

Operating

0
1
2
3
4
5

$80,000
30,000
30,000
30,000
30,000
30,000

Financing
(a)

(b)

(c)

$40,000
10,020
10,020
10,020
10,020
10,020

$40,000
3,200
3,200
3,200
3,200
43,200

$40,000
13,200
12,400
11,600
10,800
0

3.FindthenetpresentvalueforeachofthethreecasesinProblem2iftheMARRisspecifiedtobe
(a)5%
(b)10%.
4.SupposetheclamshellinProblem2ispurchasedbyaprivatefirmwhichpayscorporatetaxesatarateof34%.Depreciationisbasedonthestraight
linemethodwithnosalvagevalueattheendoffiveyears.IftheaftertaxMARRofthefirmis8%,findthenetpresentvalueforeachofthe
combinedcashflowsforoperatingandfinancing,includingtheinterestdeduction.Theinterestpaymentsincludedintheannualrepaymentsofeach
oftheloansare8%timestheunpaidprincipalineachyear,withthefollowingvalues:
Year(t)

(a)

(b)

(c)

1
2
3
4
5

$800
664
516
357
185

$3,200
3,200
3,200
3,200
3,200

$3,200
2,400
1,600
800
0

5.Aninvestmentinahaulerwillcost$40,000andhavenosalvagevalueattheendof5years.Thehaulerwillgenerateagrossincomeof$12,000per
year,butitsoperatingcostwillbe$2,000duringthefirstyear,increasingby$500peryearuntilitreaches$5,000inthefifthyear.Thestraightline
depreciationmethodisused.Thetaxrateis34%andtheaftertaxMARRis10%.Determinethenetpresentvalueofthehaulerpurchaseforafive
yearplanninghorizon.
6.TheBaileyConstructionCompanyisconsideringthepurchaseofadieselpowershoveltoimproveitsproductivity.Theshovel,whichcosts
$80,000,isexpectedtoproduceabeforetaxbenefitof$36,000inthefirstyear,and$4,000lessineachsucceedingyearforatotaloffiveyears
(i.e.,beforetaxbenefitof$32,000inthesecondyear,$28,000inthethirdyear,continuingto$20,000inthefifthyear).Thesalvagevalueofthe
equipmentwillbe$5,000attheendof5years.Thefirmusesthesumofyears'digitsdepreciationfortheequipmentandhasanannualtaxrateof
34%.IftheMARRaftertaxis10%,isthepurchaseworthwhile?
7.TheABCCorporationisconsideringthepurchaseofanumberofpipelayingmachinesinordertofacilitatetheoperationinanewpipelineproject
expectedtolastsixyears.Eachmachinewillcost$26,000andwillhavenosalvagevalueaftertheprojectiscomplete.Thefirmusesthestraight
linedepreciationmethodandpaysannualincometaxesonprofitsattherateof34%.Ifthefirm'sMARRis8%,whichistheminimumuniform
annualbenefitbeforetaxthatmustbegeneratedbythismachineinordertojustifyitspurchase?
8.TheSpringdaleCorporationplanstopurchaseademolitionandwreckingmachinetosavelaborcosts.Themachinecosts$60,000andhasasalvage
valueof$10,000attheendof5years.Themachineisexpectedtobeinoperationfor5years,anditwillbedepreciatedbythestraightlinemethod
uptothesalvagevalue.ThecorporationspecifiesanaftertaxMARRincludinginflationof10%andhasanincometaxrateof34%.Theannual
inflationrateisexpectedtobe5%duringthenext5years.Iftheuniformannualnetbenefitbeforetaxintermsofbaseyeardollarsforthenext5
yearsis$20,000,isthenewinvestmentworthwhile?
9.XYZCompanyplanstoinvest$2millioninanewplantwhichisexpectedtoproduceauniformannualnetbenefitbeforetaxof$600,000interms
ofthebaseyeardollarsoverthenext6years.Theplanthasasalvagevalueof$250,000attheendof6yearsandthedepreciationallowanceis
basedonthestraightlinedepreciationmethod.Thecorporatetaxrateis34%,andtheaftertaxMARRspecifiedbythefirmis10%excluding

inflation.Iftheannualinflationrateduringthenext6yearsisexpectedtobe5%,determinewhethertheinvestmentisworthwhile.
10.Asewagetreatmentplantisbeingplannedbyapublicauthority.Twoproposeddesignsrequireinitialandannualmaintenancecostsasshown
below.
Year
t
0
116(each)

DesignNo.1
($1000s)
1,000
150

DesignNo.2
($1000s)
900
180

Bothdesignswilllast16yearswithnosalvagevalue.Thefederalgovernmentwillsubsidize50%oftheinitialcapitalcost,andthestate
governmenthasapolicytosubsidize10%oftheannualmaintenancecost.Thelocalcommunityintendstoobtainaloantofinance30%ofthe
initialcapitalcostataborrowingrateof10%withsixteenequalannualpaymentsincludingprincipalandinterest.TheMARRforthistypeof
projectis12%reflectingitsoperatingrisk.Whatistheuniformannualrevenuethatmustbecollectedinthenext16yearstomakeeachofthetwo
designsworthwhilefromtheviewofthelocalauthority?Whichdesignhaslowercostfromthisperspective?

PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter6
GoToChapter8
(EconomicEvaluationofFacilityInvestments) (ConstructionPricingandContracting)
FinancingofConstructedFacilities
TheFinancingProblem
InstitutionalArrangementsforFacilityFinancing
EvaluationofAlternativeFinancingPlans
SecuredLoanswithBonds,NotesandMortgages
OverdraftAccounts
RefinancingofDebts
ProjectversusCorporateFinance
ShiftingFinancialBurdens
ConstructionFinancingforContractors
EffectsofOtherFactorsonaContractor'sProfits
References
Problems
Footnotes

7.FinancingofConstructedFacilities
7.1TheFinancingProblem
Investmentinaconstructedfacilityrepresentsacostintheshorttermthatreturnsbenefitsonlyoverthelongtermuseofthefacility.Thus,costsoccur
earlierthanthebenefits,andownersoffacilitiesmustobtainthecapitalresourcestofinancethecostsofconstruction.Aprojectcannotproceedwithout
adequatefinancing,andthecostofprovidingadequatefinancingcanbequitelarge.Forthesereasons,attentiontoprojectfinanceisanimportantaspectof
projectmanagement.Financeisalsoaconcerntotheotherorganizationsinvolvedinaprojectsuchasthegeneralcontractorandmaterialsuppliers.Unless
anownerimmediatelyandcompletelycoversthecostsincurredbyeachparticipant,theseorganizationsfacefinancingproblemsoftheirown.
Atamoregenerallevel,projectfinanceisonlyoneaspectofthegeneralproblemofcorporatefinance.Ifnumerousprojectsareconsideredandfinanced
together,thenthenetcashflowrequirementsconstitutesthecorporatefinancingproblemforcapitalinvestment.Whetherprojectfinanceisperformedat
theprojectoratthecorporateleveldoesnotalterthebasicfinancingproblem.
Inessence,theprojectfinanceproblemistoobtainfundstobridgethetimebetweenmakingexpendituresandobtainingrevenues.Basedontheconceptual
plan,thecostestimateandtheconstructionplan,thecashflowofcostsandreceiptsforaprojectcanbeestimated.Normally,thiscashflowwillinvolve
expendituresinearlyperiods.Coveringthisnegativecashbalanceinthemostbeneficialorcosteffectivefashionistheprojectfinanceproblem.During
planninganddesign,expendituresoftheowneraremodest,whereassubstantialcostsareincurredduringconstruction.Onlyafterthefacilityiscomplete
dorevenuesbegin.Incontrast,acontractorwouldreceiveperiodicpaymentsfromtheownerasconstructionproceeds.However,acontractoralsomay
haveanegativecashbalanceduetodelaysinpaymentandretainageofprofitsorcostreimbursementsonthepartoftheowner.
Plansconsideredbyownersforfacilityfinancingtypicallyhavebothlongandshorttermaspects.Inthelongterm,sourcesofrevenueincludesales,grants,
andtaxrevenues.Borrowedfundsmustbeeventuallypaidbackfromtheseothersources.Intheshortterm,awidervarietyoffinancingoptionsexist,
includingborrowing,grants,corporateinvestmentfunds,paymentdelaysandothers.Manyofthesefinancingoptionsinvolvetheparticipationofthird
partiessuchasbanksorbondunderwriters.Forprivatefacilitiessuchasofficebuildings,itiscustomarytohavecompletelydifferentfinancing
arrangementsduringtheconstructionperiodandduringtheperiodoffacilityuse.Duringthelatterperiod,mortgageorloanfundscanbesecuredbythe
valueofthefacilityitself.Thus,differentarrangementsoffinancingoptionsandparticipantsarepossibleatdifferentstagesofaproject,sothepracticeof
financialplanningisoftencomplicated.
Ontheotherhand,theoptionsforborrowingbycontractorstobridgetheirexpendituresandreceiptsduringconstructionarerelativelylimited.Forsmallor
mediumsizeprojects,overdraftsfrombankaccountsarethemostcommonformofconstructionfinancing.Usually,amaximumlimitisimposedonan
overdraftaccountbythebankonthebasisofexpectedexpendituresandreceiptsforthedurationofconstruction.Contractorswhoareengagedinlarge
projectsoftenownsubstantialassetsandcanmakeuseofotherformsoffinancingwhichhavelowerinterestchargesthanoverdrafting.
Inrecentyears,therehasbeengrowinginterestindesignbuildoperateprojectsinwhichownersprescribefunctionalrequirementsandacontractorhandles
financing.Contractorsarerepaidoveraperiodoftimefromprojectrevenuesorgovernmentpayments.Eventually,ownershipofthefacilitiesistransferred
toagovernmententity.AnexampleofthistypeofprojectistheConfederationBridgetoPrinceEdwardIslandinCanada.
Inthischapter,wewillfirstconsiderfacilityfinancingfromtheowner'sperspective,withdueconsiderationforitsinteractionwithotherorganizations
involvedinaproject.Later,wediscusstheproblemsofconstructionfinancingwhicharecrucialtotheprofitabilityandsolvencyofconstruction
contractors.
Backtotop

7.2InstitutionalArrangementsforFacilityFinancing
Financingarrangementsdiffersharplybytypeofownerandbythetypeoffacilityconstruction.Asoneexample,manymunicipalprojectsarefinancedin
theUnitedStateswithtaxexemptbondsforwhichinterestpaymentstoalenderareexemptfromincometaxes.Asaresult,taxexemptmunicipalbondsare
availableatlowerinterestcharges.Differentinstitutionalarrangementshaveevolvedforspecifictypesoffacilitiesandorganizations.
Aprivatecorporationwhichplanstoundertakelargecapitalprojectsmayuseitsretainedearnings,seekequitypartnersintheproject,issuebonds,offer
newstocksinthefinancialmarkets,orseekborrowedfundsinanotherfashion.Potentialsourcesoffundswouldincludepensionfunds,insurance
companies,investmenttrusts,commercialbanksandothers.Developerswhoinvestinrealestatepropertiesforrentalpurposeshavesimilarsources,plus
quasigovernmentalcorporationssuchasurbandevelopmentauthorities.Syndicatorsforinvestmentsuchasrealestateinvestmenttrusts(REITs)aswellas
domesticandforeignpensionfundsrepresentrelativelynewentriestothefinancialmarketforbuildingmortgagemoney.
Publicprojectsmaybefundedbytaxreceipts,generalrevenuebonds,orspecialbondswithincomededicatedtothespecifiedfacilities.Generalrevenue
bondswouldberepaidfromgeneraltaxesorotherrevenuesources,whilespecialbondswouldberedeemedeitherbyspecialtaxesoruserfeescollected
fortheproject.Grantsfromhigherlevelsofgovernmentarealsoanimportantsourceoffundsforstate,county,cityorotherlocalagencies.

Despitethedifferentsourcesofborrowedfunds,thereisaroughequivalenceintheactualcostofborrowingmoneyforparticulartypesofprojects.
Becauselenderscanparticipateinmanydifferentfinancialmarkets,theytendtoswitchtowardsloansthatreturnthehighestyieldforaparticularlevelof
risk.Asaresult,borrowedfundsthatcanbeobtainedfromdifferentsourcestendtohaveverysimilarcosts,includinginterestchargesandissuingcosts.
Asageneralprinciple,however,thecostsoffundsforconstructionwillvaryinverselywiththeriskofaloan.Lendersusuallyrequiresecurityforaloan
representedbyatangibleasset.Ifforsomereasontheborrowercannotrepayaloan,thentheborrowercantakepossessionoftheloansecurity.Tothe
extentthatanassetusedassecurityisofuncertainvalue,thenthelenderwilldemandagreaterreturnandhigherinterestpayments.Loansmadefor
projectsunderconstructionrepresentconsiderablerisktoafinancialinstitution.Ifalenderacquiresanunfinishedfacility,thenitfacesthedifficulttaskof
reassemblingtheprojectteam.Moreover,adefaultonafacilitymayresultifaproblemoccurssuchasfoundationproblemsoranticipatedunprofitability
ofthefuturefacility.Asaresultoftheseuncertainties,constructionlendingforunfinishedfacilitiescommandsapremiuminterestchargeofseveralpercent
comparedtomortgagelendingforcompletedfacilities.
Financingplanswilltypicallyincludeareserveamounttocoverunforeseenexpenses,costincreasesorcashflowproblems.Thisreservecanbe
representedbyaspecialreserveoracontingencyamountintheprojectbudget.Inthesimplestcase,thisreservemightrepresentaborrowingagreement
withafinancialinstitutiontoestablishalineofcreditincaseofneed.Forpubliclytradedbonds,specificreservefundsadministeredbyathirdpartymay
beestablished.Thecostofthesereservefundsisthedifferencebetweentheinterestpaidtobondholdersandtheinterestreceivedonthereservefundsplus
anyadministrativecosts.
Finally,arrangingfinancingmayinvolvealengthyperiodofnegotiationandreview.Particularlyforpubliclytradedbondfinancing,specificlegal
requirementsintheissuemustbemet.AtypicalsevenmonthscheduletoissuerevenuebondswouldincludethevariousstepsoutlinedinTable71.[1]In
manycases,thespeedinwhichfundsmaybeobtainedwilldetermineaproject'sfinancingmechanism.
TABLE71IllustrativeProcessandTimingforIssuing
RevenueBonds
Activities
TimeofActivities
Analysisoffinancialalternatives
Weeks04
Preparationoflegaldocuments
Weeks117
Preparationofdisclosuredocuments Weeks220
Forecastsofcostsandrevenues
Weeks420
BondRatings
Weeks2023
BondMarketing
Weeks2124
BondClosingandReceiptofFunds Weeks2326
Example71:Exampleoffinancingoptions
Supposethatyourepresentaprivatecorporationattemptingtoarrangefinancingforanewheadquartersbuilding.Theseareseveraloptions
thatmightbeconsidered:
Usecorporateequityandretainedearnings:Thebuildingcouldbefinancedbydirectlycommittingcorporateresources.Inthiscase,
nootherinstitutionalpartieswouldbeinvolvedinthefinance.However,thesecorporatefundsmightbetoolimitedtosupportthefull
costofconstruction.
Constructionloanandlongtermmortgage:Inthisplan,aloanisobtainedfromabankorotherfinancialinstitutiontofinancethecost
ofconstruction.Oncethebuildingiscomplete,avarietyofinstitutionsmaybeapproachedtosupplymortgageorlongtermfundingfor
thebuilding.Thisfinancingplanwouldinvolvebothshortandlongtermborrowing,andthetwoperiodsmightinvolvedifferentlenders.
Thelongtermfundingwouldhavegreatersecuritysincethebuildingwouldthenbecomplete.Asaresult,moreorganizationsmightbe
interestedinprovidingfunds(includingpensionfunds)andtheinterestchargemightbelower.Also,thisbasicfinancingplanmightbe
supplementedbyothersourcessuchascorporateretainedearningsorassistancefromalocaldevelopmentagency.
Leasethebuildingfromathirdparty:Inthisoption,thecorporationwouldcontracttoleasespaceinaheadquartersbuildingfroma
developer.Thisdeveloperwouldberesponsibleforobtainingfundingandarrangingconstruction.Thisplanhastheadvantageof
minimizingtheamountoffundsborrowedbythecorporation.Undertermsoftheleasecontract,thecorporationstillmighthave
considerableinfluenceoverthedesignoftheheadquartersbuildingeventhoughthedeveloperwasresponsiblefordesignand
construction.
InitiateaJointVenturewithLocalGovernment:Inmanyareas,localgovernmentswillhelplocalcompanieswithmajornew
venturessuchasanewheadquarters.Thishelpmightincludeassistanceinassemblingproperty,lowinterestloansorproertytax
reductions.Intheextreme,localgovernmentsmayforcesaleoflandthroughtheirpowerofeminentdomaintoassemblenecessaryplots.
Backtotop

7.3EvaluationofAlternativeFinancingPlans
Sincetherearenumerousdifferentsourcesandarrangementsforobtainingthefundsnecessaryforfacilityconstruction,ownersandotherproject
participantsrequiresomemechanismforevaluatingthedifferentpotentialsources.Therelativecostsofdifferentfinancingplansarecertainlyimportantin
thisregard.Inaddition,theflexibilityoftheplanandavailabilityofreservesmaybecritical.Asaprojectmanager,itisimportanttoassureadequate
financingtocompleteaproject.Alternativefinancingplanscanbeevaluatedusingthesametechniquesthatareemployedfortheevaluationofinvestment
alternatives.
AsdescribedinChapter6,theavailabilityofdifferentfinancingplanscanaffecttheselectionofalternativeprojects.Ageneralapproachforobtainingthe
combinedeffectsofoperatingandfinancingcashflowsofaprojectistodeterminetheadjustednetpresentvalue(APV)whichisthesumofthenetpresent
valueoftheoperatingcashflow(NPV)andthenetpresentvalueofthefinancialcashflow(FPV),discountedattheirrespectiveminimumattractiverates
ofreturn(MARR),i.e.,
(7.1)
whereristheMARRreflectingtheriskoftheoperatingcashflowandrfistheMARRrepresentingthecostofborrowingforthefinancialcashflow.Thus,

(7.2)

whereAtand

arerespectivelytheoperatingandfinancialcashflowsinperiodt.

Forthesakeofsimplicity,weshallemphasizeinthischaptertheevaluationoffinancingplans,withoccasionalreferencestothecombinedeffectsof
operatingandfinancingcashflows.Inalldiscussions,weshallpresentvariousfinancingschemeswithexampleslimitingtocasesofbeforetaxcashflows
discountedatabeforetaxMARRofr=rfforbothoperatingandfinancialcashflows.Oncethebasicconceptsofvariousfinancingschemesareclearly
understood,theirapplicationtomorecomplicatedsituationsinvolvingdepreciation,taxliabilityandriskfactorscanbeconsideredincombinationwiththe
principlesfordealingwithsuchtopicsenunciatedinChapter6.
Inthissection,weshallconcentrateonthecomputationaltechniquesassociatedwiththemostcommontypesoffinancingarrangements.Moredetailed
descriptionsofvariousfinancingschemesandthecomparisonsoftheiradvantagesanddisadvantageswillbediscussedinlatersections.
Typically,theinterestrateforborrowingisstatedintermsofannualpercentagerate(A.P.R.),buttheinterestisaccruedaccordingtotherateforthe
interestperiodspecifiedintheborrowingagreement.Letipbethenominalannualpercentagerate,andibetheinterestrateforeachofthepinterest
periodsperyear.Bydefinition

(7.3)

Ifinterestisaccruedsemiannually,i.e.,p=2,theinterestrateperperiodisip/2similarlyiftheinterestisaccruedmonthly,i.e.,p=12,theinterestrateper
periodisip/12.Ontheotherhand,theeffectiveannualinterestrateieisgivenby:

(7.4)

Notethattheeffectiveannualinterestrate,ie,takesintoaccountcompoundingwithintheyear.Asaresult,ieisgreaterthanipforthetypicalcaseofmore
thanonecompoundingperiodperyear.
Foracouponbond,thefacevalueofthebonddenotestheamountborrowed(calledprincipal)whichmustberepaidinfullatamaturityorduedate,while
eachcoupondesignatestheinteresttobepaidperiodicallyforthetotalnumberofcouponscoveringallperiodsuntilmaturity.LetQbetheamount
borrowed,andIpbetheinterestpaymentperperiodwhichisoftensixmonthsforcouponbonds.Ifthecouponbondisprescribedtoreachmaturityinn
yearsfromthedateofissue,thetotalnumberofinterestperiodswillbepn=2n.Thesemiannualinterestpaymentisgivenby:
(7.5)
Inpurchasingacouponbond,adiscountfromorapremiumabovethefacevaluemaybepaid.
Analternativeloanarrangementistomakeaseriesofuniformpaymentsincludingbothinterestandpartoftheprincipalforapredefinednumberof
repaymentperiods.Inthecaseofuniformpaymentsataninterestrateifornrepaymentperiods,theuniformrepaymentamountUisgivenby:

(7.6)

where(U|P,i,n)isacapitalrecoveryfactorwhichreads:"tofindU,givenP=1,foraninterestrateiovernperiods."Compoundinterestfactorsareas
tabulatedinAppendixA.Thenumberofrepaymentperiodsnwillclearlyinfluencetheamountsofpaymentsinthisuniformpaymentcase.Uniform
paymentbondsormortgagesarebasedonthisformofrepayment.
Usually,thereisanoriginationfeeassociatedwithborrowingforlegalandotherprofessionalserviceswhichispayableuponthereceiptoftheloan.This
feemayappearintheformofissuancechargesforrevenuebondsorpercentagepointchargesformortgages.Theborrowermustallowforsuchfeesin
additiontotheconstructioncostindeterminingtherequiredoriginalamountofborrowing.SupposethatasumofPomustbereservedatt=0forthe
constructioncost,andKistheoriginationfee.Thentheoriginalloanneededtocoverbothis:
(7.7)
Iftheoriginationfeeisexpressedaskpercentoftheoriginalloan,i.e.,K=kQ0,then:

(7.8)

Sinceinterestandsometimespartsoftheprincipalmustberepaidperiodicallyinmostfinancingarrangements,anamountQconsiderablylargerthanQ0is
usuallyborrowedinthebeginningtoprovideadequatereservefundstocoverinterestpayments,constructioncostincreasesandotherunanticipated
shortfalls.Thenetamountreceivedfromborrowingisdepositedinaseparateinterestbearingaccountfromwhichfundswillbewithdrawnperiodicallyfor
necessarypayments.Lettheborrowingrateperperiodbedenotedbyiandtheinterestfortherunningbalanceaccruedtotheprojectreserveaccountbe

denotedbyh.LetAtbethenetoperatingcashflowforperiodt(negativeforconstructioncostinperiodt)and

bethenetfinancialcashflowinperiod

t(negativeforpaymentofinterestorprincipaloracombinationofboth).Then,therunningbalanceNtoftheprojectreserveaccountcanbedeterminedby
notingthatatt=0,
(7.9)
andatt=1,2,...,n:
(7.10)

wherethevalueofAtortmaybezeroforsomeperiod(s).Equations(7.9)and(7.10)areapproximateinthatinterestmightbeearnedonintermediate
balancesbasedonthepatternofpaymentsduringaperiodinsteadofattheendofaperiod.
Becausetheborrowingrateiwillgenerallyexceedtheinvestmentratehfortherunningbalanceintheprojectaccountandsincetheoriginationfee
increaseswiththeamountborrowed,thefinancialplannershouldminimizetheamountofmoneyborrowedunderthisfinancestrategy.Thus,thereisan
optimalvalueforQsuchthatallestimatedshortfallsarecovered,interestpaymentsandexpensesareminimized,andadequatereservefundsareavailable
tocoverunanticipatedfactorssuchasconstructioncostincreases.ThisoptimalvalueofQcaneitherbeidentifiedanalyticallyorbytrialanderror.
Finally,variationsinownershiparrangementsmayalsobeusedtoprovideatleastpartialfinancing.Leasingafacilityremovestheneedfordirectfinancing
ofthefacility.Saleleasebackinvolvessaleofafacilitytoathirdpartywithaseparateagreementinvolvinguseofthefacilityforaprespecifiedperiodof
time.Inonesense,leasingarrangementscanbeviewedasaparticularformoffinancing.Inreturnforobtainingtheuseofafacilityorpieceofequipment,
theuser(lesser)agreestopaytheowner(lesser)aleasepaymenteveryperiodforaspecifiednumberofperiods.Usually,theleasepaymentisatafixed
leveldueeverymonth,semiannually,orannually.Thus,thecashflowassociatedwiththeequipmentorfacilityuseisaseriesofuniformpayments.This
cashflowwouldbeidenticaltoacashflowresultingfromfinancingthefacilityorpurchasewithsufficientborrowedfundstocoverinitialconstruction(or
purchase)andwitharepaymentscheduleofuniformamounts.Ofcourse,attheendoftheleaseperiod,theownershipofthefacilityorequipmentwould
residewiththelesser.However,theleasetermsmayincludeaprovisionfortransferringownershiptothelesserafterafixedperiod.
Example72:Acouponbondcashflowandcost
Aprivatecorporationwishestoborrow$10.5millionfortheconstructionofanewbuildingbyissuingatwentyyearcouponbondatanannual
percentageinterestrateof10%tobepaidsemiannually,i.e.5%perinterestperiodofsixmonths.Theprincipalwillberepaidattheendof20
years.Theamountborrowedwillcovertheconstructioncostof$10.331millionandanoriginationfeeof$169,000forissuingthecoupon
bond.
Theinterestpaymentperperiodis(5%)(10.5)=$0.525millionoveralifetimeof(2)(20)=40interestperiods.Thus,thecashflowof
financingbythecouponbondconsistsofa$10.5millionreceiptatperiod0,$0.525millioneachforperiods1through40,andanadditional
$10.5millionforperiod40.AssumingaMARRof5%perperiod,thenetpresentvalueofthefinancialcashflowisgivenby:
[FPV]5%)=10.5(0.525)(P|U,5%,40)(10.5)(P|F,5%,40)=0
ThisresultisexpectedsincethecorporationwillbeindifferentbetweenborrowinganddivertingcapitalfromotheruseswhentheMARRis
identicaltotheborrowingrate.NotethattheeffectiveannualrateofthebondmaybecomputedaccordingtoEq.(7.4)asfollows:
ie=(1+0.05)21=0.1025=10.25%
Iftheinterestpaymentsweremadeonlyattheendofeachyearovertwentyyears,theannualpaymentshouldbe:
0.525(1+0.05)+0.525=1.076
wherethefirsttermindicatesthedeferredpaymentatthemidyearwhichwouldaccrueinterestat5%untiltheendoftheyear,then:
[FPV]10.25%=10.5(1.076)(P|U,10.25%,20)(10.5)(P|F,10.25%,20)=0
Inotherwords,iftheinterestispaidat10.25%annuallyovertwentyyearsoftheloan,theresultisequivalenttothecaseofsemiannual
interestpaymentsat5%overthesamelifetime.
Example73:Anexampleofleasingversusownershipanalysis
Supposethatadeveloperofferedabuildingtoacorporationforanannualleasepaymentof$10millionoverathirtyyearlifetime.Forthesake
ofsimplicity,letusassumethatthedeveloperalsoofferstodonatethebuildingtothecorporationattheendofthirtyyearsor,alternatively,the
buildingwouldthenhavenocommercialvalue.Also,supposethattheinitialcostofthebuildingwas$65.66million.Forthecorporation,the
leaseisequivalenttoreceivingaloanwithuniformpaymentsoverthirtyyearsataninterestrateof15%sincethepresentvalueofthelease
paymentsisequaltotheinitialcostatthisinterestrate:

Iftheminimumattractiverateofreturnofthecorporationisgreaterthan15%,thenthisleasearrangementisadvantageousasafinancing
schemesincethenetpresentvalueoftheleasingcashflowwouldbelessthanthecashflowassociatedwithconstructionfromretained
earnings.Forexample,withMARRequalto20%:
[FPV]20%=$65.66million($10million)(P|U,20%,30)=$15.871million
Ontheotherhand,withMARRequalto10%:

[FPV]10%=$65.66million($10million)(P|U,20%,30)=$28.609million
andtheleasearrangementisnotadvantageous.
Example74:Exampleevaluationofalternativefinancingplans.
Supposethatasmallcorporationwishestobuildaheadquartersbuilding.Theconstructionwillrequiretwoyearsandcostatotalof$12
million,assumingthat$5millionisspentattheendofthefirstyearand$7millionattheendofthesecondyear.Tofinancethisconstruction,
severaloptionsarepossible,including:
Investmentfromretainedcorporateearnings
Borrowingfromalocalbankataninterestrateof11.2%withuniformannualpaymentsovertwentyyearstopayfortheconstruction
costs.Theshortfallsforrepaymentsonloanswillcomefromcorporateearnings.Anoriginationfeeof0.75%oftheoriginalloanis
requiredtocoverengineer'sreports,legalissues,etcor
Atwentyyearcouponbondatanannualinterestrateof10.25%withinterestpaymentsannually,repaymentoftheprincipalinyear20,
anda$169,000originationfeetopayfortheconstructioncostonly.
ThecurrentcorporateMARRis15%,andshorttermcashfundscanbedepositedinanaccounthavinga10%annualinterestrate.
Thefirststepinevaluationistocalculatetherequiredamountsandcashflowsassociatedwiththesethreealternativefinancingplans.First,
investmentusingretainedearningswillrequireacommitmentof$5millioninyear1and$7millioninyear2.
Second,borrowingfromthelocalbankmustyieldsufficientfundstocoverbothyearsofconstructionplustheissuingfee.Withtheunused
fundaccumulatinginterestatarateof10%,theamountofdollarsneededatthebeginningofthefirstyearforfutureconstructioncost
paymentsis:
P0=($5million)/(1.1)+($7million)/(1.1)2=$10.331million
Discountingattenpercentinthiscalculationreflectstheinterestearnedintheintermediateperiods.Witha10%annualinterestrate,the
accruedinterestsforthefirsttwoyearsfromtheprojectaccountof$10.331att=0willbe:
Year1:I1=(10%)(10.331million)=$1.033million
Year2:I2=(10%)(10.331million+$1.033million$5.0million)=0.636million
Sincetheissuancechargeis0.75%oftheloan,theamountborrowedfromthebankatt=0tocoverboththeconstructioncostandtheissuance
chargeis
Q0=($10.331million)/(10.0075)=$10.409million
Theissuancechargeis10.40910.331=$0.078millionor$78,000.Ifthisloanistoberepaidbyannualuniformpaymentsfromcorporate
earnings,theamountofeachpaymentoverthetwentyyearlifetimeoftheloancanbecalculatedbyEq.(7.6)asfollows:
U=($10.409million)[(0.112)(1.112)20]/[(1.112)201]=$1.324million
Finally,thetwentyyearcouponbondwouldhavetobeissuedintheamountof$10.5millionwhichwillreflectahigheroriginationfeeof
$169,000.Thus,theamountforfinancingis:
Q0=$10.331million+$0.169million=$10.5million
Withanannualinterestchargeof10.25%overatwentyyearlifetime,theannualpaymentwouldbe$1.076millionexceptinyear20whenthe
sumofprincipalandinterestwouldbe10.5+1.076=$11.576million.ThecomputationforthiscaseofborrowinghasbeengiveninExample
72.
Table72summarizesthecashflowsassociatedwiththethreealternativefinancingplans.Notethatannualincomesgeneratedfromtheuseof
thisbuildinghavenotbeenincludedinthecomputation.Theadjustednetpresentvalueofthecombinedoperatingandfinancialcashflowsfor
eachofthethreeplansdiscountedatthecorporateMARRof15%isalsoshowninthetable.Inthiscase,thecouponbondistheleast
expensivefinancingplan.SincetheborrowingratesforboththebankloanandthecouponbondarelowerthanthecorporateMARR,these
resultsareexpected.
TABLE72CashFlowIllustrationofThreeAlternativeFinancingPlans(in$
millions)
Year
Source
RetainedEarnings BankLoan CouponBond
0
Principal

$10.409
$10.500
0
IssuingCost

0.078
0.169
1
EarnedInterest

1.033
1.033
1
ContractorPayment
5.000
5.000
5.000
1
LoanRepayment

1.324
1.076
2
EarnedInterest

0.636
0.636
2
ContractorPayment
7.000
7.000
7.000
2
LoanRepayment

1.324
1.076
319
LoanRepayment

1.324
1.076
20
LoanRepayment

1.324
11.576
[APV]15%

9.641

6.217

5.308

Backtotop

7.4SecuredLoanswithBonds,NotesandMortgages
Securedlendinginvolvesacontractbetweenaborrowerandlender,wherethelendercanbeanindividual,afinancialinstitutionoratrustorganization.
Notesandmortgagesrepresentformalcontractsbetweenfinancialinstitutionsandowners.Usually,repaymentamountsandtimingarespecifiedintheloan

agreement.Publicfacilitiesareoftenfinancedbybondissuesforeitherspecificprojectsorforgroupsofprojects.Forpubliclyissuedbonds,atrust
companyisusuallydesignatedtorepresentthediversebondholdersincaseofanyproblemsintherepayment.Theborrowedfundsareusuallysecuredby
grantingthelendersomerightstothefacilityorotherassetsincaseofdefaultsonrequiredpayments.Incontrast,corporatebondssuchasdebenturescan
representloanssecuredonlybythegoodfaithandcreditworthinessoftheborrower.
Underthetermsofmanybondagreements,theborrowerreservestherighttorepurchasethebondsatanytimebeforethematuritydatebyrepayingthe
principalandallinterestuptothetimeofpurchase.TherequiredrepaymentRcattheendofperiodcisthenetfuturevalueoftheborrowedamountQ
lessthepayment
madeatintermediateperiodscompoundedattheborrowingrateitoperiodcasfollows:

(7.11)

TherequiredrepaymentRcattheendoftheperiodccanalsobeobtainedbynotingthenetpresentvalueoftherepaymentsintheremaining(nc)periods
discountedattheborrowingrateitot=casfollows:

(7.12)

Forcouponbonds,therequiredrepaymentRcaftertheredemptionofthecouponattheendofperiodcissimplytheoriginalborrowedamountQ.For
uniformpaymentbonds,therequiredrepaymentRcafterthelastpaymentattheendofperiodcis:

(7.13)

Manytypesofbondscanbetradedinasecondarymarketbythebondholder.Asinterestratesfluctuateovertime,bondswillgainorloseinvalue.The
actualvalueofabondisreflectedinthemarketdiscountorpremiumpaidrelativetotheoriginalprincipalamount(thefacevalue).Anotherindicatorof
thisvalueistheyieldtomaturityorinternalrateofreturnofthebond.Thisyieldiscalculatedbyfindingtheinterestratethatsetsthe(discounted)future
cashflowofthebondequaltothecurrentmarketprice:

(7.14)

whereVcisthecurrentmarketvalueaftercperiodshavelapsedsincetheissuanceofthebond,

isthebondcashflowinperiodt,andristhemarket

yield.Sinceallthebondcashflowsarepositiveaftertheinitialissuance,onlyonevalueoftheyieldtomaturitywillresultfromEq.(7.14).
Severalotherfactorscomeintoplayinevaluationofbondvaluesfromthelenderspointofview,however.First,thelendermustadjustforthepossibility
thattheborrowermaydefaultonrequiredinterestandprincipalpayments.Inthecaseofpubliclytradedbonds,specialratingcompaniesdividebondsinto
differentcategoriesofriskforjustthispurpose.Obviously,bondsthataremorelikelytodefaultwillhavealowervalue.Secondly,lenderswilltypically
makeadjustmentstoaccountforchangesinthetaxcodeaffectingtheiraftertaxreturnfromabond.Finally,expectationsoffutureinflationordeflationas
wellasexchangerateswillinfluencemarketvalues.
Anothercommonfeatureinborrowingagreementsistohaveavariableinterestrate.Inthiscase,interestpaymentswouldvarywiththeoverallmarket
interestrateinsomeprespecifiedfashion.Fromtheborrower'sperspective,thisislessdesirablesincecashflowsarelesspredictable.However,variable
rateloansaretypicallyavailableatlowerinterestratesbecausethelendersareprotectedinsomemeasurefromlargeincreasesinthemarketinterestrate
andtheconsequentdecreaseinvalueoftheirexpectedrepayments.Variablerateloanscanhavefloorsandceilingsontheapplicableinterestrateoronrate
changesineachyear.
Example75:Exampleofacorporatepromissorynote
AcorporationwishestoconsidertheoptionoffinancingtheheadquartersbuildinginExample74byissuingafiveyearpromissorynote
whichrequiresanoriginationfeeforthenoteis$25,000.Thenatotalborrowedamountneededatthebeginningofthefirstyeartopayforthe
constructioncostsandoriginationfeeis10.331+0.025=$10.356million.Interestpaymentsaremadeannuallyatanannualrateof10.8%
withrepaymentoftheprincipalattheendofthefifthyear.Thus,theannualinterestpaymentis(10.8%)(10.356)=$1.118million.Withthe
datainExample74forconstructioncostsandaccruedinterestsforthefirsttwoyear,thecombinedoperatingandandfinancialcashflowsin
milliondollarscanbeobtained:
Year0,AA0=10.3560.025=10.331
Year1,AA1=1.0335.01.118=5.085
Year2,AA2=0.6367.01.118=7.482
Year3,AA3=1.118
Year4,AA4=1.118
Year5,AA5=1.11810.356=11.474
AtthecurrentcorporateMARRof15%,

whichisinferiortothe20yearcouponbondanalyzedinTable73.
ForthisproblemaswellasforthefinancingarrangementsinExample74,theprojectaccountismaintainedtopaytheconstructioncostsonly,
whiletheinterestandprincipalpaymentsarerepaidfromcorporateearnings.Consequently,the
termsinEq.(7.10)willdisappearwhen
theaccountbalanceineachperiodiscomputedforthisproblem:
Att=0,N0=10.3560.025=$10.331million
Att=1,N1=(1+0.1)(10.331)5.0=$6.364million
Att=2,N2=(1+0.1)(6.364)7.0=$0
Example76:Bondfinancingmechanisms.
Supposethatthenetoperatingexpendituresandreceiptsofafacilityinvestmentoverafiveyeartimehorizonareasshownincolumn2of
Table73inwhicheachperiodissixmonths.Thisisahypotheticalexamplewithadeliberatelyshortlifetimeperiodtoreducetherequired
numberofcalculations.Considertwoalternativebondfinancingmechanismsforthisproject.Bothinvolveborrowing$2.5millionatan
issuingcostoffivepercentoftheloanwithsemiannualrepaymentsatanominalannualinterestrateoftenpercenti.e.,5%perperiod.Any
excessfundscanearnaninterestoffourpercenteachsemiannualperiod.Thecouponbondinvolvesonlyinterestpaymentsinintermediate
periods,plustherepaymentoftheprincipalattheend,whereastheuniformpaymentbondrequirestenuniformpaymentstocoverboth
interestsandtheprincipal.Bothbondsaresubjecttooptionalredemptionbytheborrowerbeforematurity.
Theoperatingcashflowincolumn2ofTable73representstheconstructionexpendituresintheearlyperiodsandrentalreceiptsinlater
periodsoverthelifetimeofthefacility.BytrialanderrorwithEqs.(7.9)and(7.10),itcanbefoundthatQ=$2.5million(K=$0.125or5%of
Q)isnecessarytoinsureanonnegativebalanceintheprojectaccountfortheuniformpaymentbond,asshowninColumn6ofTable73.For
thepurposeofcomparison,thesameamountisborrowedforthecouponbondoptioneventhoughasmallerloanwillbesufficientforthe
constructionexpendituresinthiscase.
ThefinancialcashflowofthecouponbondcaneasilybederivedfromQ=$2.5millionandK=$0.125million.UsingEq.(7.5),Ip=(5%)
(2.5)=$0.125million,andtherepaymentinPeriod10isQ+Ip=$2.625millionasshowninColumn3ofTable73.Theaccountbalancefor
thecouponbondinColumn4isobtainedfromEqs.(7.9)and(7.10).Ontheotherhand,theuniformannualpaymentU=$0.324millionfor
thefinancialcashflowoftheuniformpaymentbond(Column5)canbeobtainedfromEq.(7.6),andthebondaccountforthistypeofbalance
iscomputedbyEqs.(7.9)and(7.10).
Becauseoftheoptionalredemptionprovisionforbothtypesofbonds,itisadvantageoustograduallyredeembothoptionsattheendofperiod
3toavoidinterestpaymentsresultingfromi=5%andh=4%unlesstheaccountbalancebeyondperiod3isneededtofundothercorporate
investments.corporateearningsareavailableforrepurchasingthebondsatendofperiod3,therequiredrepaymentforcouponbondafter
redeemingthelastcouponattheendofperiod3issimply$2.625million.Inthecaseoftheuniformpaymentbond,therequiredpaymentafter
thelastuniformpaymentattheendofperiod3isobtainedfromEquation(713)as:
R3=(0.324)(P|U,5%,7)=(0.324)(5.7864)=$1.875million.
TABLE73ExampleofTwoBorrowingCashFlows(in$thousands)
Period OperatingCashFlow CouponCashFlow AccountBalance UniformCashFlow AccountBalance
0

$2,375
$2,375
$2,375
$2,375
1
$800
125
1,545
324
1,346
2
700
125
782
324
376
3
60
125
628
324
8
4
400
125
928
324
84
5
600
125
1,440
324
364
6
800
125
2,173
324
854
7
1,000
125
3,135
324
1,565
8
1,000
125
4,135
324
2,304
9
1,000
125
5,176
324
3,072
10
1,000
2,625
3,758
324
3,871
Example77:ProvisionofReserveFunds
Typicalborrowingagreementsmayincludevariousrequiredreservefunds.[2]Consideraneighteenmonthprojectcostingfivemilliondollars.
Tofinancethisfacility,couponbondswillbeissuedtogeneraterevenueswhichmustbesufficienttopayinterestchargesduringtheeighteen
monthsofconstruction,tocoverallconstructioncosts,topayissuanceexpenses,andtomaintainadebtservicereservefund.Thereservefund
isintroducedtoassurebondholdersofpaymentsincaseofunanticipatedconstructionproblems.Itisestimatedthatatotalamountof$7.4
millionofbondproceedsisrequired,includingatwopercentdiscounttounderwritersandanissuanceexpenseof$100,000.
Threeinterestbearingaccountsareestablishedwiththebondproceedstoseparatevariouscategoriesoffunds:
Aconstructionfundtoprovidepaymentstocontractors,withaninitialbalanceof$4,721,600.Includinginterestearnings,thisfundwill
besufficienttocoverthe$5,000,000inconstructionexpenses.
Acapitalizedinterestfundtoprovideinterestpaymentsduringtheconstructionperiod./li>
Adebtservicereservefundtobeusedforretiringoutstandingdebtsafterthecompletionofconstruction.
Thetotalsourcesoffunds(includinginterestfromaccountbalances)andusesoffundsaresummarizedinTable74
TABLE74IllustrativeSourcesandUsesofFundsfromRevenueBondsDuring
Construction
SourcesofFunds

BondProceeds
InterestEarningsonConstructionFund
InterestEarningsofCapitalizedInterestFund
InterestEarningsonDebtServiceReserveFund
TotalSourcesofFunds

$7,400,000
278,400
77,600
287,640
$8,043,640

UsesofFunds
ConstructionCosts
InterestPayments
DebtServiceReserveFund
BondDiscount(2.0%)
IssuanceExpense
TotalUsesofFunds

$5,000,000
904,100
1,891,540
148,000
100,000
$8,043,640

Example78:Variableraterevenuebondsprospectus
TheinformationinTable75isabstractedfromtheProspectusforanewissueofrevenuebondsfortheAtwoodCity.Thisprospectuslanguage
istypicalformunicipalbonds.Noticetheprovisionforvariablerateaftertheinitialinterestperiods.Theborrowerreservestherightto
repurchasethebondbeforethedateforconversiontovariableratetakeseffectinordertoprotectitselffromdecliningmarketinterestratesin
thefuturesothattheborrowercanobtainotherfinancingarrangementsatlowerrates.
TABLE75ProvisionofVariableRateforBonds
Firstseriesof1987:$12,000,000
Date:December1,1987

Due:November1,2017

TheBondswillbeissuedasfullyregisteredbondsinthedenominationof$5,000oranymultiplethereof.Principalor
redemptionpriceofthebondswillbepayableuponsurrenderthereof.InterestontheBondswillbepayableonMay1,
1988,andsemiannuallythereafteronNovember1andMay1bycheckmailedtotheBondownersregisteredontheState
Authority'sbooksontheRecordDate.TheproceedsoftheBondswillbeloanedtoAtwoodCityunderaloanagreement,
datedasofNovember1,1987betweentheStateAuthorityandGeraldBankasTrusteeandPayingAgent.TheBondswill
bearinterestatasemiannualfixedrateof4%fortheinitialinterestperiodsfromDecember1,1987throughApril1,
1990,afterwhichtheBondsmaybeconvertedtosemiannualvariablemodeattheoptionofAtwoodCityuponproper
notice.Ifthebondsaresoconverted,suchBondsmustbetenderedformandatorypurchaseatpar,plus1/8thof1%of
principalamountundercertaincircumstancesandaccruedinteresttothePurchaseDate(unlesstheBondownerfilesa
NontenderElection).Tobesopurchased,Bondsmustbedelivered,accompaniedbyanoticeofelectiontotenderthe
Bonds,tothePayingAgentbetweentheopeningofbusinessonthefirstdayofthemonthprecedingtheeffectiveratedate
oftheBondsand4:00pmNewYorkCitytimeonthefifteenthdayprecedingsucheffectiveratedatefortheBonds.

Backtotop

7.5OverdraftAccounts
Overdraftscanbearrangedwithabankinginstitutiontoallowaccountstohaveeitherapositiveoranegativebalance.Withapositivebalance,interestis
paidontheaccountbalance,whereasanegativebalanceincursinterestcharges.Usually,anoverdraftaccountwillhaveamaximumoverdraftlimit
imposed.Also,theinterestratehavailableonpositivebalancesislessthantheinterestrateichargedforborrowing.
Clearly,theeffectsofoverdraftfinancingdependsuponthepatternofcashflowsovertime.Supposethatthenetcashflowforperiodtintheaccountis
denotedbyAtwhichisthedifferencebetweenthereceiptPtandthepaymentEtinperiodt.Hence,Atcaneitherbepositiveornegative.Theamountof
overdraftattheendofperiodtisthecumulativenetcashflowNtwhichmayalsobepositiveornegative.IfNtispositive,asurplusisindicatedandthe
subsequentinterestwouldbepaidtotheborrower.Mostoften,Ntisnegativeduringtheearlytimeperiodsofaprojectandbecomespositiveinthelater
periodswhentheborrowerhasreceivedpaymentsexceedingexpenses.
Iftheborrowerusesoverdraftfinancingandpaystheinterestperperiodontheaccumulatedoverdraftataborrowingrateiineachperiod,thentheinterest
perperiodfortheaccumulatedoverdraftNt1fromthepreviousperiod(t1)isIt=iNt1whereItwouldbenegativeforanegativeaccountbalanceNt1.For
apositiveaccountbalance,theinterestreceivedisIt=hNt1whereItwouldbepositiveforapositiveaccountbalance.
TheaccountbalanceNtateachperiodtisthesumofreceiptsPt,paymentsEt,interestItandtheaccountbalancefromthepreviousperiodNt1.Thus,
(7.15)
whereIt=iNt1foranegativeNt1andIt=hNt1forapositiveNt1.ThenetcashflowAt=PtEtispositiveforanetreceiptandnegativeforanet
payment.Thisequationisapproximateinthattheinterestmightbeearnedonintermediatebalancesbasedonthepatternofpaymentsduringtheperiod
insteadofattheendofaperiod.Theaccountbalanceineachperiodisofinterestbecausetherewillalwaysbeamaximumlimitontheamountofoverdraft
available.
Forthepurposeofseparatingprojectfinanceswithotherreceiptsandpaymentsinanorganization,itisconvenienttoestablishacreditaccountintowhich
receiptsrelatedtotheprojectmustbedepositedwhentheyarereceived,andallpaymentsrelatedtotheprojectwillbewithdrawnfromthisaccountwhen
theyareneeded.Sincereceiptstypicallylagbehindpaymentsforaproject,thiscreditaccountwillhaveanegativebalanceuntilsuchtimewhenthe
receiptsplusaccruedinterestsareequaltoorexceedpaymentsintheperiod.Whenthathappens,anysurpluswillnotbedepositedinthecreditaccount,
andtheaccountisthenclosedwithazerobalance.Inthatcase,fornegativeNt1,Eq.(7.15)canbeexpressedas:

(7.16)

andassoonasNtreachesapositivevalueorzero,theaccountisclosed.
Example79:OverdraftFinancingwithGrantstoaLocalAgency
Apublicprojectwhichcosts$61,525,000isfundedeightypercentbyafederalgrantandtwentypercentfromastategrant.Theanticipated
durationoftheprojectissixyearswithreceiptsfromgrantfundsallocatedattheendofeachyeartoalocalagencytocoverpartialpayments
tocontractorsforthatyearwhiletheremainingpaymentstocontractorswillbeallocatedattheendofthesixthyear.Theendofyearpayments
aregiveninTable76inwhicht=0referstothebeginningoftheproject,andeachperiodisoneyear.
Ifthisprojectisfinancedwithanoverdraftatanannualinterestratei=10%,thentheaccountbalancearecomputedbyEq.(7.15)andthe
resultsareshowninTable76.
Inthisproject,thetotalgrantfundstothelocalagencycoveredthecostofconstructioninthesensethatthesumofreceiptsequaledthesumof
constructionpaymentsof$61,525,000.However,thetimingofreceiptslaggedpayments,andtheagencyincurredasubstantialfinancingcost,
equalinthisplantotheoverdraftamountof$1,780,000attheendofyear6whichmustbepaidtoclosethecreditaccount.Clearly,this
financingproblemwouldbeasignificantconcerntothelocalagency.
TABLE76IllustrativePayments,ReceiptsandOverdraftsforaSixYearProject
ReceiptsPt
PaymentsEt
InterestIt
AccountNt
Periodt
0
1
2
3
4
5
6
Total

0
$5.826
8.401
12.013
15.149
13.984
6.152
$61.525

0
$6.473
9.334
13.348
16.832
15.538
0
$61.525

0
0
$0.065
0.165
0.315
0.514
0.721
$1.780

0
$0.647
1.645
3.145
5.143
7.211
1.780

Example710:Useofoverdraftfinancingforafacility
Acorporationiscontemplatinganinvestmentinafacilitywiththefollowingbeforetaxoperatingnetcashflow(inthousandsofdollars)at
yearends:
Year
CashFlow

0
500

1
110

2
112

3
114

4
116

5
118

6
120

7
238

TheMARRofthecorporationbeforetaxis10%.Thecorporationwillfinancethefacilitybeusing$200,000fromretainedearningsandby
borrowingtheremaining$300,000throughanoverdraftcreditaccountwhichcharges14%interestforborrowing.Isthisproposedproject
includingfinancingcostsworthwhile?
TheresultsoftheanalysisofthisprojectisshowninTable77asfollows:
N0=500+200=300
N1=(1.14)(300)+110=232
N2=(1.14)(232)+112=152.48
N3=(1.14)(152.48)+114=59.827
N4=(1.14)(59.827)+116=+47.797
SinceN4ispositive,itisrevisedtoexcludethenetreceiptof116forthisperiod.Then,therevisedvalueforthelastbalanceis
N4'=N4116=68.203
Thefinancialcashflow

resultingfromusingoverdraftsandmakingrepaymentsfromprojectreceiptswillbe:

=N0=300
=A1=110
=A2=112
=A3=114
=N4A4=68.203
Theadjustednetpresentvalueofthecombinedcashflowdiscountedat15%is$27,679asshowninTable77.Hence,theprojectincludingthe
financingchargesisworthwhile.
EndofYear
t
0
1
2
3
4
5

TABLE77EvaluationofFacilityFinancingUsingOverdraft(in$thousands)
OperatingCashFlow
OverdraftBalance
FinancingCashFlow
CombinedCashFlow
At
Nt
AAt
$500
110
112
114
116
118

$300
232
152.480
59.827
0

&300
110
112
114
68.203
0

$200
0
0
0
47.797
118

6
7
[PV]15%

120
122
$21.971

0
0
0

0
0
$5.708

120
122
$27.679

Backontop

7.6RefinancingofDebts
Refinancingofdebtshastwomajoradvantagesforanowner.First,theyallowrefinancingatintermediatestagestosaveinterestcharges.Ifaborrowing
agreementismadeduringaperiodofrelativelyhighinterestcharges,thenarepurchaseagreementallowstheborrowertorefinanceatalowerinterestrate.
Whenevertheborrowinginterestratedeclinessuchthatthesavingsininterestpaymentswillcoveranytransactionexpenses(forpurchasingoutstanding
notesorbondsandarrangingnewfinancing),thenitisadvantageoustodoso.
Anotherreasontorepurchasebondsistopermitchangesintheoperationofafacilityornewinvestments.Underthetermsofmanybondagreements,there
mayberestrictionsontheuseofrevenuesfromaparticularfacilitywhileanybondsareoutstanding.Theserestrictionsareinsertedtoinsurebondholders
thatdebtswillberepaid.Byrepurchasingbonds,theserestrictionsareremoved.Forexample,severalbridgeauthoritieshadbondsthatrestrictedany
diversionoftollrevenuestoothertransportationservicessuchastransit.Byrepurchasingthesebonds,theauthoritycouldundertakenewoperations.This
typeofrepurchasemayoccurvoluntarilyevenwithoutarepurchaseagreementintheoriginalbond.Theborrowermaygivebondholdersapremiumto
retirebondsearly.
Example711:Refinancingaloan.
SupposethatthebankloanshowninExample74hadaprovisionpermittingtheborrowertorepaytheloanwithoutpenaltyatanytime.
Further,supposethatinterestratesfornewloansdroppedtoninepercentattheendofyearsixoftheloan.Issuingcostsforanewloanwould
be$50,000.Woulditbeadvantageoustorefinancetheloanatthattime?
Torepaytheoriginalloanattheendofyearsixwouldrequireapaymentoftheremainingprincipalplustheinterestdueattheendofyearsix.
ThisamountR6isequaltothepresentvalueofremainingfourteenpaymentsdiscountedattheloaninterestrate11.2%totheendofyear6as
giveninEquation(713)asfollows:

Thenewloanwouldbeintheamountof$9.152millionplustheissuingcostof$0.05millionforatotalof$9.202million.Basedonthenew
loaninterestrateof9%,thenewuniformannualpaymentonthisloanfromyears7to20wouldbe:

ThenetpresentvalueofthefinancialcashflowforthenewloanwouldbeobtainedbydiscountingatthecorporateMARRof15%totheend
ofyearsixasfollows:

Sincetheannualpaymentonthenewloanislessthantheexistingloan($1.182versus$1.324million),thenewloanispreferable.
Backtotop

7.7ProjectversusCorporateFinance
Wehavefocusedsofaronproblemsandconcernsattheprojectlevel.Whilethisistheappropriateviewpointforprojectmanagers,itisalwaysworth
bearinginmindthatprojectsmustfitintobroaderorganizationaldecisionsandstructures.Thisisparticularlytruefortheproblemofprojectfinance,since
itisoftenthecasethatfinancingisplannedonacorporateoragencylevel,ratherthanaprojectlevel.Accordingly,projectmanagersshouldbeawareof
theconcernsatthislevelofdecisionmaking.
Aconstructionprojectisonlyaportionofthegeneralcapitalbudgetingproblemfacedbyanowner.Unlesstheprojectisverylargeinscoperelativetothe
owner,aparticularconstructionprojectisonlyasmallportionofthecapitalbudgetingproblem.Numerousconstructionprojectsmaybelumpedtogether
asasinglecategoryintheallocationofinvestmentfunds.Constructionprojectswouldcompeteforattentionwithequipmentpurchasesorother
investmentsinaprivatecorporation.
Financingisusuallyperformedatthecorporatelevelusingamixtureoflongtermcorporatedebtandretainedearnings.Atypicalsetofcorporatedebt
instrumentswouldincludethedifferentbondsandnotesdiscussedinthischapter.Variationswouldtypicallyincludedifferentmaturitydates,different
levelsofsecurityinterests,differentcurrencydenominations,and,ofcourse,differentinterestrates.
Groupingprojectstogetherforfinancinginfluencesthetypeoffinancingthatmightbeobtained.Asnotedearlier,smallandlargeprojectsusuallyinvolve
differentinstitutionalarrangementsandfinancingarrangements.Forsmallprojects,thefixedcostsofundertakingparticularkindsoffinancingmaybe
prohibitivelyexpensive.Forexample,municipalbondsrequirefixedcostsassociatedwithprintingandpreparationthatdonotvarysignificantlywiththe
sizeoftheissue.Bycombiningnumeroussmallconstructionprojects,differentfinancingarrangementsbecomemorepractical.
Whileindividualprojectsmaynotbeconsideredatthecorporatefinancelevel,theproblemsandanalysisproceduresdescribedearlieraredirectlyrelevant
tofinancialplanningforgroupsofprojectsandotherinvestments.Thus,thenetpresentvaluesofdifferentfinancingarrangementscanbecomputedand

compared.Sincethenetpresentvaluesofdifferentsubsetsofeitherinvestmentsorfinancingalternativesareadditive,eachprojectorfinancealternative
canbedisaggregatedforcloserattentionoraggregatedtoprovideinformationatahigherdecisionmakinglevel.
Example712:Basictypesofrepaymentschedulesforloans.
Couponbondsareusedtoobtainloanswhichinvolvenopaymentofprincipaluntilthematuritydate.Bycombiningloansofdifferent
maturities,however,itispossibletoachievealmostanypatternofprincipalrepayments.However,theinterestrateschargedonloansof
differentmaturitieswillreflectmarketforcessuchasforecastsofhowinterestrateswillvaryovertime.Asanexample,Table78illustrates
thecashflowsofdebtserviceforaseriesofcouponbondsusedtofundamunicipalconstructionprojectforsimplicitynotallyearsof
paymentsareshowninthetable.
Inthisfinancingplan,aseriesofcouponbondsweresoldwithmaturitydatesrangingfromJune1988toJune2012.Couponinterestpayments
onalloutstandingbondsweretobepaideverysixmonths,onDecember1andJune1ofeachyear.Theinterestrateor"couponrate"was
largeronbondswithlongermaturities,reflectinganassumptionthatinflationwouldincreaseduringthisperiod.Thetotalprincipalobtained
forconstructionwas$26,250,000fromsaleofthesebonds.Thisamountrepresentedthegrosssaleamountbeforesubtractingissuingcostsor
anysalesdiscountstheamountavailabletosupportconstructionwouldbelower.Thematuritydatesforbondswereselectedtorequire
relativehighrepaymentamountsuntilDecember1995,withadecliningrepaymentamountsubsequently.Byshiftingthematuritydatesand
amountsofbonds,thispatternofrepaymentscouldbealtered.Theinitialinterestpayment(of$819,760onDecember1,1987),reflecteda
paymentforonlyaportionofasixmonthperiodsincethebondswereissuedinlateJuneof1987.
Date

TABLE78IllustrationofaTwentyfiveYearMaturityScheduleforBonds
MaturingPrincipal CorrespondingInterestRate InterestDue AnnualDebtService

Dec.1,1987
June1,1988
Dec.1,1988
June1,1989
Dec.1,1989
June1,1990
Dec.1,1990
June1,1991
Dec.1,1991
June1,1992
Dec.1,1992
June1,1993
Dec.1,1993
.
.
.
June1,2011
Dec.1,2011
June1,2012
Dec.1,2012

$1,350,000

5.00%

1,450,000

5.25

1,550,000

5.50

1,600,000

5.80

1,700,000

6.00

1,800,000

6.20

.
.
.
880,000

.
.
.
8.00

96,000

8.00

$819,760
894,429
860,540
860,540
822,480
822,480
779,850
779,850
733,450
733,450
682,450
682,450
626,650
.
.
.
68,000
36,000
36,000

$819,760
3,104,969
3,133,020
3,152,330
3,113,300
3,115,900
3,109,100
.
.
.
984,000
996,000

Backtotop

7.8ShiftingFinancialBurdens
Thedifferentparticipantsintheconstructionprocesshavequitedistinctperspectivesonfinancing.Intherealmofprojectfinance,therevenuestoone
participantrepresentanexpendituretosomeotherparticipant.Paymentdelaysfromoneparticipantresultinafinancialburdenandacashflowproblemto
otherparticipants.Itiscommonoccurrenceinconstructiontoreducefinancingcostsbydelayingpaymentsinjustthisfashion.Shiftingpaymenttimesdoes
noteliminatefinancingcosts,however,sincethefinancialburdenstillexists.
Traditionally,manyorganizationshaveusedpaymentdelaysbothtoshiftfinancingexpensestoothersortoovercomemomentaryshortfallsinfinancial
resources.Fromtheowner'sperspective,thispolicymayhaveshorttermbenefits,butitcertainlyhaslongtermcosts.Sincecontractorsdonothavelarge
capitalassets,theytypicallydonothavelargeamountsofcreditavailabletocoverpaymentdelays.Contractorsarealsoperceivedascreditrisksinmany
cases,soloansoftenrequireapremiuminterestcharge.Contractorsfacedwithlargefinancingproblemsarelikelytoaddpremiumstobidsornotbidatall
onparticularwork.Forexample,A.Maevisnoted:[3]
...thereweredaysinNewYorkCitywhencityagencieshadtroubleattractingbiddersyetcontractorswerebeatingonthedoortogetwork
fromConsolidatedEdison,thelocalutility.Why?First,thecitywasanotoriouslyslowpayer,COs(changeorders)yearsbehind,decision
processchaotic,andpaymentsmade60daysaftercloseofestimate.ConEdisonpaidonthe20thofthemonthforworkdonetothefirstofthe
month.Changeordersnegotiatedandpaidwithin30days60days.Ifadecisionwasneeded,itcamein10days.Thenumberofbidsyou
receiveonyourprojectsareonemeasureofyouradministrativeefficiency.Further,competitionisboundtogiveyouthelowestpossible
constructionprice.
Evenafterbidsarereceivedandcontractssigned,delaysinpaymentsmayformthebasisforasuccessfulclaimagainstanagencyonthepartofthe
contractor.
Theownerofaconstructedfacilityusuallyhasabettercreditratingandcansecureloansatalowerborrowingrate,buttherearesomenotableexceptions
tothisrule,particularlyforconstructionprojectsindevelopingcountries.Undercertaincircumstances,itisadvisablefortheownertoadvanceperiodic
paymentstothecontractorinreturnforsomeconcessioninthecontractprice.Thisisparticularlytrueforlargescaleconstructionprojectswithlong
durationsforwhichfinancingcostsandcapitalrequirementsarehigh.Iftheowneriswillingtoadvancetheseamountstothecontractor,thegaininlower
financingcostscanbesharedbybothpartiesthroughprioragreement.
Unfortunately,thechoiceoffinancingduringtheconstructionperiodisoftenlefttothecontractorwhocannottakeadvantageofallavailableoptionsalone.
Theownerisoftenshieldedfromparticipationthroughthetraditionalmethodofpricequotationforconstructioncontracts.Thispracticemerely
exacerbatestheproblembyexcludingtheownerfromparticipatingindecisionswhichmayreducethecostoftheproject.
Underconditionsofeconomicuncertainty,apremiumtohedgetheriskmustbeaddedtotheestimationofconstructioncostbyboththeownerandthe
contractor.Thelargerandlongertheprojectis,thegreateristherisk.Foranunsophisticatedownerwhotriestoavoidallrisksandtoplacethefinancing

burdensofconstructiononthecontractor,thecontractpricesforconstructionfacilitiesarelikelytobeincreasedtoreflecttheriskpremiumchargedbythe
contractors.Indealingwithsmallprojectswithshortdurations,thispracticemaybeacceptableparticularlywhentheownerlacksanyexpertisetoevaluate
theprojectfinancingalternativesorthefinancialstabilitytoadoptinnovativefinancingschemes.However,forlargescaleprojectsoflongduration,the
ownercannotescapetheresponsibilityofparticipationifitwantstoavoidcatastrophesofrunawaycostsandexpensivelitigation.Theconstructionof
nuclearpowerplantsintheprivatesectorandtheconstructionoftransportationfacilitiesinthepublicsectorofferampleexamplesofsuchproblems.Ifthe
responsibilitiesofrisksharingamongvariouspartiesinaconstructionprojectcanbeclearlydefinedintheplanningstage,allpartiescanbebenefitedto
takeadvantageofcostsavingandearlyuseoftheconstructedfacility.
Example713:Effectsofpaymentdelays
Table79showsanexampleoftheeffectsofpaymenttimingonthegeneralcontractorandsubcontractors.Thetotalcontractpriceforthis
projectis$5,100,000withscheduledpaymentsfromtheownershowninColumn2.Thegeneralcontractor'sexpensesineachperiodoverthe
lifetimeoftheprojectaregiveninColumn3whilethesubcontractor'sexpensesareshowninColumn4.Ifthegeneralcontractormustpaythe
subcontractor'sexpensesaswellasitsownattheendofeachperiod,thenetcashflowofthegeneralcontractorisobtainedinColumn5,and
itscumulativecashflowinColumn6.
TABLE79AnExampleoftheEffectsofPaymentTiming
GeneralContractor's Subcontractor's GeneralContractor's
Period OwnerPayments
Expenses
Expenses
NetCashFlow
1

$100,000
$900,000
$1,000,000
2
$950,000
100,000
900,000
50,000
3
950,000
100,000
900,000
50,000
4
950,000
100,000
900,000
50,000
5
950,000
100,000
900,000
50,000
6
1,300,000

1,300,000
Total
$5,100,000
$500,000
$4,500,000
$100,000

Cumulative
CashFlow
$1,000,000
1,050,000
1,100,000
1,150,000
1,200,000
100,000

Note:Cumulativecashflowincludesnofinancingcharges.

Inthisexample,theownerwithholdsafivepercentretainageoncostaswellasapaymentof$100,000untilthecompletionoftheproject.This
$100,000isequaltotheexpectedgrossprofitofthecontractorwithoutconsideringfinancingcostsorcashflowdiscounting.Processingtime
andcontractualagreementswiththeownerresultinadelayofoneperiodinreceivingpayments.Theactualconstructionexpensesfromthe
viewpointofthegeneralcontractorconsistof$100,000ineachconstructionperiodpluspaymentsduetosubcontractorsof$900,000ineach
period.Whilethenetcashflowwithoutregardtodiscountingorfinancingisequaltoa$100,000profitforthegeneralcontractor,financial
costsarelikelytobesubstantial.Withimmediatepaymenttosubcontractors,over$1,000,000mustbefinancedbythecontractorthroughout
thedurationoftheproject.Ifthegeneralcontractorusesborrowingtofinanceitsexpenses,amaximumborrowingamountof$1,200,000in
periodfiveisrequiredevenwithoutconsideringintermediateinterestcharges.Financingthisamountislikelytobequiteexpensiveandmay
easilyexceedtheexpectedprojectprofit.
Bydelayingpaymentstosubcontractors,thegeneralcontractorcansubstantiallyreduceitsfinancingrequirement.Forexample,Table710
showstheresultingcashflowsfromdelayingpaymentstosubcontractorsforoneperiodandfortwoperiods,respectively.Withaoneperiod
delay,amaximumamountof$300,000(plusintermediateinterestcharges)wouldhavetobefinancedbythegeneralcontractor.Thatis,from
thedatainTable710,thenetcashflowinperiod1is$100,000,andthenetcashflowforeachoftheperiods2through5isgivenby:
$950,000$100,000$900,000=$50,000
Finally,thenetcashflowforperiod6is:
$1,300,000$900,000=$400,000
Thus,thecumulativenetcashflowfromperiods1through5asshowninColumn2ofTable710resultsinmaximumshortfallof$300,000in
period5inColumn3.Forthecaseofatwoperiodpaymentdelaytothesubcontractors,thegeneralcontractorevenrunsapositivebalance
duringconstructionasshowninColumn5.Thepositivebalanceresultsfromthereceiptofownerpaymentspriortoreimbursingthe
subcontractor'sexpenses.Thispositivebalancecanbeplacedinaninterestbearingaccounttoearnadditionalrevenuesforthegeneral
contractor.Needlesstosay,however,thesepaymentdelaysmeanextracostsandfinancingproblemstothesubcontractors.Withatwoperiod
delayinpaymentsfromthegeneralcontractor,thesubcontractorshaveanunpaidbalanceof$1,800,000,whichwouldrepresentaconsiderable
financialcost.
TABLE710AnExampleoftheCashFlowEffectsofDelayedPayments
OnePeriodPaymentDelay
TwoPeriodPaymentDelay
Period NetCashFlow CumulativeCashFlow NetCashFlow CumulativeCashFlow
1
$100,000
$100,000
$100,000
$100,000
2
50,000
150,000
850,000
750,000
3
50,000
200,000
50,000
700,000
4
50,000
250,000
50,000
650,000
5
50,000
300,000
50,000
600,000
6
400,000
100,000
400,000
1,000,000
7
900,000
100,000

Backtotop

7.9ConstructionFinancingforContractors
Forageneralcontractororsubcontractor,thecashflowprofileofexpensesandincomesforaconstructionprojecttypicallyfollowstheworkinprogress
forwhichthecontractorwillbepaidperiodically.Themarkupbythecontractorabovetheestimatedexpensesisincludedinthetotalcontractpriceandthe
termsofmostcontractsgenerallycallformonthlyreimbursementsofworkcompletedlessretainage.Attimeperiod0,whichdenotesthebeginningofthe
constructioncontract,aconsiderablesummayhavebeenspentinpreparation.Thecontractor'sexpenseswhichoccurmoreorlesscontinuouslyforthe

projectdurationaredepictedbyapiecewisecontinuouscurvewhilethereceipts(suchasprogresspaymentsfromtheowner)arerepresentedbyastep
functionasshowninFig.71.Theowner'spaymentsfortheworkcompletedareassumedtolagoneperiodbehindexpensesexceptthatawithholding
proportionorremainderispaidattheendofconstruction.Thismethodofanalysisisapplicabletorealisticsituationswhereatimeperiodisrepresentedby
onemonthandthenumberoftimeperiodsisextendedtocoverdelayedreceiptsasaresultofretainage.

Figure71Contractor'sExpensesandOwner'sPayments

Whilethecashflowprofilesofexpensesandreceiptsareexpectedtovaryfordifferentprojects,thecharacteristicsofthecurvesdepictedinFig.71are
sufficientlygeneralformostcases.LetEtrepresentthecontractor'sexpensesinperiodt,andPtrepresentowner'spaymentsinperiodt,fort=0,1,2,...,nfor
n=5inthiscase.Thenetoperatingcashflowattheendofperiodtfort 0isgivenby:
(7.17)
whereAtispositiveforasurplusandnegativeforashortfall.
ThecumulativeoperatingcashflowattheendofperiodtjustbeforereceivingpaymentPt(fort 1)is:
(7.18)
whereNt1isthecumulativenetcashflowsfromperiod0toperiod(t1).Furthermore,thecumulativenetoperatingcashflowafterreceivingpaymentPtat
theendofperiodt(fort 1)is:
(7.19)
ThegrossoperatingprofitGforanperiodprojectisdefinedasnetoperatingcashflowatt=nandisgivenby:

(7.20)

TheuseofNnasameasureofthegrossoperatingprofithasthedisadvantagethatitisnotadjustedforthetimevalueofmoney.
SincethenetcashflowAt(fort=0,1,...,n)foraconstructionprojectrepresentstheamountofcashrequiredoraccruedaftertheowner'spaymentisplowed
backtotheprojectattheendofperiodt,theinternalrateofreturn(IRR)ofthiscashflowisoftencitedinthetraditionalliteratureinconstructionasa
profitmeasure.TocomputeIRR,letthenetpresentvalue(NPV)ofAtdiscountedatadiscountrateiperperiodbezero,i.e.,

(7.21)

Theresultingi(ifitisunique)fromthesolutionofEq.(7.21)istheIRRofthenetcashflowAt.Asidefromthecomplicationsthatmaybeinvolvedinthe
solutionofEq.(7.21),theresultingi=IRRhasameaningtothecontractoronlyifthefirmfinancestheentireprojectfromitsownequity.Thisisseldomif
everthecasesincemostconstructionfirmsarehighlyleveraged,i.e.theyhaverelativelysmallequityinfixedassetssuchasconstructionequipment,and
dependalmostentirelyonborrowinginfinancingindividualconstructionprojects.TheuseoftheIRRofthenetcashflowsasameasureofprofitforthe
contractoristhusmisleading.ItdoesnotrepresenteventheIRRofthebankwhenthecontractorfinancestheprojectthroughoverdraftsincethegross
operatingprofitwouldnotbegiventothebank.
Sinceoverdraftisthemostcommonformoffinancingforsmallormediumsizeprojects,weshallconsiderthefinancingcostsandeffectsonprofitofthe
useofoverdrafts.Let bethecumulativecashflowbeforetheowner'spaymentinperiodtincludinginterestand
bethecumulativenetcashflowin
periodtincludinginterest.Att=0whenthereisnoaccruedinterest,

=F0and

=N0.Fort inperiodtcanbeobtainedbyconsideringthe

contractor'sexpensesIEttobedisperseduniformlyduringtheperiod.
Theinclusionofenterestoncontractor'sexpensesEtduringperiodt(forG1)isbasedontherationalethattheSshapedcurvedepictingthecontractor's
expensesinFigure71isfairlytypicalofactualsituations,wheretheowner'spaymentsaretypicallymadeattheendofwelldefinedperiods.Hence,
interestonexpensesduringperiodtisapproximatedbyonehalfoftheamountasiftheexpenseswerepaidatthebeginningoftheperiod.Infact,Etisthe
accumulationofallexpensesinperiodtandistreatedasanexpenseattheendoftheperiod.Thus,theinterestperperiod (fort 1)isthe
combinationofinterestchargeforNt1inperiodtandthatforonehalfofEtinthesameperiodt.If

isnegativeandiistheborrowingrateforthe

shortfall,

(7.22)
If

ispositiveandhistheinvestmentrateforthesurplus,

(7.23)

Hence,ifthecumulativenetcashflow

isnegative,theinterestontheoverdraftforeachperiodtispaidbythecontractorattheendofeachperiod.If

Ntispositive,asurplusisindicatedandthesubsequentinterestwouldbepaidtothecontractor.Mostoften,Ntisnegativeduringtheearlytimeperiodsofa
projectandbecomespositiveinthelaterperiodswhenthecontractorhasreceivedpaymentsexceedingexpenses.
Includingtheinterestaccruedinperiodt,thecumulativecashflowattheendofperiodtjustbeforereceivingpaymentPt(fort 1)is:

(7.24)

Furthermore,thecumulativenetcashflowafterreceivingpaymentPtattheendofperiodt(fort 1)is:

(7.25)

Thegrossoperatingprofit

attheendofanperiodprojectincludinginterestchargesis:

(7.26)

where

isthecumulativenetcashflowfort=n.

Example714:Contractor'sgrossprofitfromaproject
Thecontractor'sexpensesandowner'spaymentsforamultiyearconstructionprojectaregiveninColumns2and3,respectively,ofTable7
11.Eachtimeperiodisrepresentedbyoneyear,andtheannualinterestrateiisforborrowing11%.Thecomputationhasbeencarriedoutin
Table711,andthecontractor'sgrossprofitGisfoundtobeN5=$8.025millioninthelastcolumnofthetable.
TABLE711ExampleofContractor'sExpensesandOwner'sPayments($Million)
CumulativeCash
Period Contractor'sExpenses Owner'sPayments NetCashFlow BeforePayments CumulativeNetCash
Et
Pt
At
Ft
Nt
t

0
1
2
3
4
5
Total

$3.782
7.458
10.425
14.736
11.420
5.679
$53.500

$0
6.473
9.334
13.348
16.832
15.538
$61.525

$3.782
0.985
1.091
1.388
+5.412
+9.859
+$8.025

$3.782
11.240
15.192
20.594
18.666
7.513

$3.782
4.767
5.858
7.246
1.834
+8.025

Example715:EffectsofConstructionFinancing
Thecomputationofthecumulativecashflowsincludinginterestchargesati=11%forExample714isshowninTable712withgrossprofit
=
=$1.384million.TheresultsofcomputationarealsoshowninFigure72.
TABLE712ExampleCumulativeCashFlowsIncludingInterestsforaContractor($Million)
Cumulative
Cumulative
AnnualInterest BeforePayments NetCashFlow
Period(year) ConstructionExpenses Owner'sPayments
Et
Pt
t
0
$3.782
0
0
$3.782
$3.782
1
7.458
$6.473
$0.826
12.066
5.593
2
10.425
9.334
1.188
17.206
7.872
3
14.736
13.348
1.676
24.284
10.936
4
11.420
16.832
1.831
24.187
7.354
5
5.679
15.538
1.121
14.154
+1.384

Figure72EffectsofOverdraftFinancing
Backtotop

7.10EffectsofOtherFactorsonaContractor'sProfits
Intimesofeconomicuncertainty,thefluctuationsininflationratesandmarketinterestratesaffectprofitssignificantly.Thetotalcontractpriceisusuallya
compositeofexpensesandpaymentsinthencurrentdollarsatdifferentpaymentperiods.Inthiscase,estimatedexpensesarealsoexpressedinthencurrent
dollars.
Duringperiodsofhighinflation,thecontractor'sprofitsareparticularlyvulnerabletodelayscausedbyuncontrollableeventsforwhichtheownerwillnot
beresponsible.Hence,theowner'spaymentswillnotbechangedwhilethecontractor'sexpenseswillincreasewithinflation.
Example716:EffectsofInflation

SupposethatbothexpensesandreceiptsfortheconstructionprojectintheExample714arenowexpressedinthencurrentdollars(with
annualinflationrateof4%)inTable713.Themarketinterestratereflectingthisinflationisnow15%.Inconsideringtheseexpensesand
receiptsinthencurrentdollarsandusinganinterestrateof15%includinginflation,wecanrecomputethecumulativenetcashflow(with
interest).Thus,thegrossprofitlessfinancingcostsbecomes =
=$0.4million.Therewillbealossratherthanaprofitafterdeducting
financingcostsandadjustingfortheeffectsofinflationwiththisproject.
TABLE713ExampleofOverdraftFinancingBasedonInflatedDollars($Million)
Cumulative
Cumulative
AnnualInterest BeforePayments NetCashFlow
ConstructionExpenses
Owner'sPayments
Period(year)
Et
Pt
t
0
1
2
3
4
5

$3.782
7.756
11.276
16.576
13.360
6.909

0
$6.732
10.096
15.015
16.691
18.904

0
$1.149
1.739
2.574
2.953
1.964

$3.782
12.687
18.970
28.024
29.322
18.504

$3.782
5.955
8.874
13.009
9.631
+0.400

Example717:EffectsofWorkStoppageatPeriodsofInflation
Supposefurtherthatbesidestheinflationrateof4%,theprojectinExample716issuspendedattheendofyear2duetoalaborstrikeandresumedafter
oneyear.Also,assumethatwhilethecontractorwillincurhigherinterestexpensesduetotheworkstoppage,theownerwillnotincreasethepaymentsto
thecontractor.ThecumulativenetcashflowsforthecasesofoperationandfinancingexpensesarerecomputedandtabulatedinTable714.The
constructionexpensesandreceiptsinthencurrentdollarsresultingfromtheworkstoppingandthecorrespondingnetcashflowoftheprojectincluding
financing(withannualinterestaccumulatedintheoverdrafttotheendoftheproject)isshowninFig.73.Itisnoteworthythat,withorwithoutthework
stoppage,thegrossoperatingprofitdeclinesinvalueattheendoftheprojectasaresultofinflation,butwiththeworkstoppageithaserodedfurthertoa
lossof$3.524millionasindicatedby
=3.524inTable714.
TABLE714ExampleoftheEffectsofWorkStoppageandInflationonaContractor($Million)
Cumulative
Cumulative
AnnualInterest BeforePayments NetCashFlow
ConstructionExpenses
Owner'sPayments
Period(year)
Et
Pt
t
0
1
2
3
4
5
6

$3.782
7.756
11.276
0
17.239
13.894
7.185

0
$6.732
10.096
0
15.015
16.691
18.904

0
$1.149
1.739
1.331
2.824
3.330
2.457

$3.782
12.687
18.970
10.205
30.268
32.477
22.428

$3.782
5.955
8.874
10.205
15.253
12.786
3.524

Figure73EffectsofInflationandWorkStoppage
Example718:ExchangeRateFluctuation.Contractingfirmsengagedininternationalpracticealsofacefinancialissuesassociatedwithexchangerate
fluctuations.Firmsaretypicallypaidinlocalcurrencies,andthelocalcurrencymayloosevaluerelativetothecontractor'shomecurrency.Moreover,a
constructioncontractormayhavetopurchasecomponentpartsinthehomecurrency.Variousstrategiescanbeusedtoreducethisexchangeraterisk,
including:
Poolingexpensesandincomesfrommultipleprojectstoreducetheamountofcurrencyexchanged.
Purchasingfuturescontractstoexchangecurrencyatafuturedateataguaranteedrate.Iftheexchangeratedoesnotchangeorchangesinafavorable
direction,thecontractormaydecidenottoexerciseorusethefuturescontract.
Borrowingfundsinlocalcurrenciesandimmediatelyexchangingtheexpectedprofit,withtheborrowingpaidbyeventualpaymentsfromtheowner.
Backtotop

7.11References
1.Au,T.,andC.Hendrickson,"ProfitMeasuresforConstructionProjects,"ASCEJournalofConstructionEngineeringandManagement,Vol.112,No.
CO2,1986,pp.273286.
2.Brealey,R.andS.Myers,PrinciplesofCorporateFinance,McGrawHill,SixthEdition,2002.
3.Collier,C.A.andD.A.Halperin,ConstructionFunding:WheretheMoneyComesFrom,SecondEdition,JohnWileyandSons,NewYork,1984.
4.Dipasquale,D.andC.Hendrickson,"OptionsforFinancingaRegionalTransitAuthority,"TransportationResearchRecord,No.858,1982,pp.29
35.
5.Kapila,PrashantandChrisHendrickson,"ExchangeRateRiskManagementinInternationalConstructionVentures,"ASCEJ.ofConstructionEng.
andMgmt,17(4),October2001.
6.Goss,C.A.,"Financing:TheContractor'sPerspective,"ConstructionContracting,Vol.62,No.10,pp.1517,1980.
Backtotop

7.12Problems
1.Computetheeffectiveannualinterestratewithanominalannualrateof12%andcompoundingperiodsof:
1.monthly,
2.quarterly,and
3.semiannually(i.e.twiceayear).
2.Acorporationiscontemplatinginvestmentinafacilitywiththefollowingbeforetaxoperatingcashflow(inthousandsofconstantdollars)atyear
ends:
Year
Cash
Flow

$500

1
$110

2
$112

3
$114

4
$116

5
$118

6
$120

7
$122

TheMARRofthecorporationbeforetaxis10%.Thecorporationwillfinancethefacilitybyusing$200,000fromretainedearningandbyborrowing
theremainingamountthroughoneofthefollowingtwoplans:
1.Asevenyearcouponbondwith5%issuancecostand12%interestratepayableannually.
2.Overdraftfromabankat13%interest
Whichfinancingplanispreferable?
3.SupposethatanoverseasconstructorproposedtobuildthefacilityinProblemP72atacostof$550,000(ratherthan$500,000),butwouldalso
arrangefinancingwitha5%issuingchargeanduniformpaymentsoverasevenyearperiod.Thisfinancingisavailablefromanexportbankwitha
specialinterestrateof9%.Isthisofferattractive?
4.Theoriginalfinancingarrangementtoobtaina$550,000loanforasevenyearprojectwith5%issuingchargeistorepayboththeloanandissue
chargethroughuniformannualpaymentswitha9%annualinterestrateoverthesevenyearperiod.Ifthisarrangementistoberefinancedafter2
yearsbycouponbondswhichpays8%nominalannualinterest(4%per6monthperiod)fortheremaining5yearsattheendofwhichtheprincipal
willbedue.Assuminganoriginationfeeof2%,determinethetotalamountofcouponbondsnecessaryforrefinancing,andtheinterestpaymentper
period.
5.Apublicagencyiscontemplatingconstructionofafacilitywiththefollowingoperatingcashflow(inthousandsofconstantdollars)atyearends.
Year
CashFlow

0
$400

1
$200

2
$280

3
$300

4
$320

5
$340

TheMARRoftheagencyis10%includinginflation.Iftheagencycanfinancingthisfacilityinoneofthefollowingtwoways,whichfinancing
schemeispreferable?
1.Overdraftfinancingataninterestrateof12%perannum.
2.Fiveyearcouponbonds(sothatallprincipalisrepaidattheendofyear5)intheamountof$672,000includinganissuingcostof5%andata
10%interestrate.
6.SupposethatthecouponbondsinProblem5aretoberefinancedaftertwoyearsbyauniformpaymentmortgagefortheremainingthreeyears,for
anissuingcostof$10,000inthencurrentdollars.Ifthemortgageisrepaidwithuniformmonthlypaymentsfor36monthsandthemonthlyinterest
rateis1%,determinetheamountofmonthlypayment.
7.Supposetheinvestmentinafacilitybyapublicagencyresultsinanetoperatingcashflowatyearends(inthousandsofdollars)asfollows:
Year
CashFlow

0
$850

1
$250

2
$250

3
$250

4
$450

5
$450

6
$450

TheagencyhasaMARRof9%andisnotsubjecttotax.Iftheprojectcanbefinancedinoneofthetwofollowingways,whichfinancingschemeis
preferable?
1.Sixyearuniformpaymentbondsat11%interestrateforatotalamountofborrowingof$875,000whichincludes$25,000ofissuingcost.
2.Fiveyearcouponbondsat10%interestrateforatotalamountofborrowingof$900,000whichincludes$50,000ofissuingcost.
8.SupposethatthefiveyearcouponbondinProblem7istoberefinanced,afterthepaymentofinterestattheendofyear3,byauniformmortgage
whichrequiresanissuancecostof2%.Iftheannualinterestrateis9%,whatistheuniformannualpaymentonthemortgageforanother5years.
9.Acorporationplanstoinvestinasmallprojectwhichcostsaonetimeexpenditureof$700,000andoffersanannualreturnof$250,000eachinthe
nextfouryears.Itintendstofinancethisprojectbyissuingafiveyearpromissorynotewhichrequiresanoriginationfeeof$10,000.Interest
paymentsaremadeannuallyat9%withtherepaymentoftheprincipalattheendoffiveyears.IfthebeforetaxMARRoftheCorporationis11%,
findtheadjustednetpresentvalueoftheinvestmentinconjunctionwiththeproposedfinancing.
10.Alocaltransportationagencyisreceivingaconstructiongrantinannualinstallmentsfromthefederalandstategovernmentsforaconstruction
project.However,itmustmakepaymentstothecontractorperiodicallyforconstructionexpenditures.Supposethatallreceiptsandexpenditures(in
milliondollars)aremadeatyearendsasshownbelow.Determinetheoverdraftattheendofyear5iftheprojectisfinancedwithanoverdraftatan
annualinterestrateof10%.
Year
Receipts
Expenditures

0
0
$1.250

1
$4.764
$6.821

2
$7.456
9.362

3
$8.287
7.744

4
$6.525
4.323

5
$2.468
0

11.Theoperatingcashflowsofcontractor'sexpensesandtheowner'spaymentsforaconstructionprojectasstipulatedinthecontractagreementare
showninTable715.Thecontractorhasestablishedalineofcreditfromthebankatamonthlyinterestrateof1.5%,andthecontractorisallowedto
borrowtheshortfallbetweenexpenseandreceiptattheendofeachmonthbutmustdepositanyexcessofnetoperatingcashflowtoreducetheloan
amount.Assumingthatthereisnoinflation,determinethecumulativenetcashflowincludinginterestduetooverdrafting.Alsofindthecontractor's
grossprofit.
Table715
EndofMonth Contractor'sExpenses Owner'sPayments
0
$200,000
0
1
250,000
$225,000
2
400,000
360,000
3
520,000
468,000
4
630,000
567,000
5
780,000
702,000
6
750,000
675,000
7
660,000
594,000
8
430,000
387,000
9
380,000
342,000
10
332,000
298,800
11
256,000
230,400

12
13
14
Total

412,000
0
0
$6,000,000

370,800
1,080,000
600,000
6,900,000

12.Supposethatbothcontractor'sexpensesandowner'sreceiptsforaconstructionprojectareexpressedinthencurrentinflateddollarsinTable716.
Supposealsothatthemonthlyinterestraterequiredbythebankis1.5%.Supposethattheworkisstoppedfortwomonthsattheendofmonth5due
tolaborstrikewhilethemonthlyinflationrateis0.5%.Underthetermsofthecontractbetweentheownerandthecontractor,supposethatthe
owner'spaymentswillbedelayedbutnotadjustedforinflation.Findthecumulativenetcashflowwithinterestduetooverdrafting.
Table716
EndofMonth Contractor'sExpenses Owner'sPayments
0
$200,000
0
1
251,250
$225,000
2
404,000
360,000
3
527,852
468,000
4
642,726
567,000
5
799,734
702,000
6
772,800
675,000
7
683,430
594,000
8
447,501
387,000
9
397,442
342,000
10
348,965
298,800
11
270,438
230,400
12
437,420
370,800
13
0
1,080,000
14
0
600,000
Total
$6,183,558
6,900,000

13.Thecontractor'sconstructionexpensesandtheowner'spaymentsforaconstructionprojectinthencurrentdollarsasstipulatedinthecontract
agreementareshowninTable717.Thecontractorhasestablishedalineofcreditfromthebankatamonthlyinterestrateof2%(basedonthen
currentdollars),andthecontractorisallowedtoborrowtheshortfallsbetweenexpenseandreceiptattheendofeachmonthbutmustdepositany
excessofnetoperatingcashflowtoreducetheloanamount.Determinethecumulativenetcashflowincludinginterestduetooverdrafting.Also,
findthecontractor'sgrossprofit.
Table717
EndofMonth Contractor'sExpenses Owner'sPayments
0
1
2
3
4
5
6
7
8
9
Total

$50,000
85,000
176,000
240,000
284,000
252,000
192,000
123,000
98,000
0
$1,500,000

0
$47,500
80,700
167,200
228,000
270,000
237,500
182,400
116,800
319,900
1,650,000

14.Supposethatboththecontractor'sexpensesandowner'spaymentsforaconstructionprojectareexpressedinthencurrentdollarsinTable717
(Problem13).Themonthlyinterestraterequiredbythebankis2.5%basedonthencurrentdollars.Supposethattheworkisstoppedforthree
monthsattheendofmonth4duetoalaborstrikewhilethemonthlyinflationrateis0.5%.Theowner'spaymentswillbedelayedbutnotadjusted
forinflation.Findthecumulativenetcashflowexpressedinthencurrentdollars,withinterestcompoundedandaccumulatedtotheendofthe
project.
Backtotop

7.13Footnotes
1.ThistableisadaptedfromA.J.Henkel,"TheMechanicsofaRevenueBondFinancing:AnOverview,"InfrastructureFinancing,Kidder,Peabody&
Co.,NewYork,1984.(Back)
2.ThecalculationsforthisbondissueareadaptedfromahypotheticalexampleinF.H.Fuller,"AnalyzingCashFlowsforRevenueBondFinancing,"
InfrastructureFinancing,Kidder,Peabody&Co.,Inc.,NewYork,1984,pp.3747.(Back)
3.Maevis,AlfredC.,"ConstructionCostControlbytheOwner,"ASCEJournaloftheConstructionDivision,Vol.106,No.4,December,1980,pg.444.
(Back)
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter7
(FinancingofConstructed
Facilities)

GoToChapter9
(Construction
Planning)

ConstructionPricingandContracting
PricingforConstructedFacilities
ContractProvisionsforRiskAllocation
RisksandIncentivesonConstruction
Quality
TypesofConstructionContracts
RelativeCostsofConstructionContracts
PrinciplesofCompetitiveBidding
PrinciplesofContractNegotiation
NegotiationSimulation:AnExample
ResolutionofContractDisputes
References
Problems
Footnotes

8.ConstructionPricingandContracting
8.1PricingforConstructedFacilities
Becauseoftheuniquenatureofconstructedfacilities,itisalmostimperativetohaveaseparatepriceforeach
facility.Theconstructioncontractpriceincludesthedirectprojectcostincludingfieldsupervisionexpenses
plusthemarkupimposedbycontractorsforgeneraloverheadexpensesandprofit.Thefactorsinfluencinga
facilitypricewillvarybytypeoffacilityandlocationaswell.Withineachofthemajorcategoriesof
constructionsuchasresidentialhousing,commercialbuildings,industrialcomplexesandinfrastructure,there
aresmallersegmentswhichhaveverydifferentenvironmentswithregardtopricesetting.However,all
pricingarrangementshavesomecommonfeaturesintheformofthelegaldocumentsbindingtheownerand
thesupplier(s)ofthefacility.Withoutaddressingspecialissuesinvariousindustrysegments,themost
commontypesofpricingarrangementscanbedescribedbroadlytoillustratethebasicprinciples.

CompetitiveBidding
Thebasicstructureofthebiddingprocessconsistsoftheformulationofdetailedplansandspecificationsofa
facilitybasedontheobjectivesandrequirementsoftheowner,andtheinvitationofqualifiedcontractorsto
bidfortherighttoexecutetheproject.Thedefinitionofaqualifiedcontractorusuallycallsforaminimal
evidenceofpreviousexperienceandfinancialstability.Intheprivatesector,theownerhasconsiderable
latitudeinselectingthebidders,rangingfromopencompetitiontotherestrictionofbidderstoafewfavored
contractors.Inthepublicsector,therulesarecarefullydelineatedtoplaceallqualifiedcontractorsonan
equalfootingforcompetition,andstrictlyenforcedtopreventcollusionamongcontractorsandunethicalor
illegalactionsbypublicofficials.
Detailedplansandspecificationsareusuallypreparedbyanarchitectural/engineeringfirmwhichoversees
thebiddingprocessonbehalfoftheowner.Thefinalbidsarenormallysubmittedoneitheralumpsumor
unitpricebasis,asstipulatedbytheowner.Alumpsumbidrepresentsthetotalpriceforwhichacontractor
offerstocompleteafacilityaccordingtothedetailedplansandspecifications.Unitpricebiddingisusedin
projectsforwhichthequantityofmaterialsortheamountoflaborinvolvedinsomekeytasksisparticularly
uncertain.Insuchcases,thecontractorispermittedtosubmitalistofunitpricesforthosetasks,andthefinal
priceusedtodeterminethelowestbidderisbasedonthelumpsumpricecomputedbymultiplyingthe
quotedunitpriceforeachspecifiedtaskbythecorrespondingquantityintheowner'sestimatesforquantities.

However,thetotalpaymenttothewinningcontractorwillbebasedontheactualquantitiesmultipliedbythe
respectivequotedunitprices.

NegotiatedContracts
Insteadofinvitingcompetitivebidding,privateownersoftenchoosetoawardconstructioncontractswithone
ormoreselectedcontractors.Amajorreasonforusingnegotiatedcontractsistheflexibilityofthistypeof
pricingarrangement,particularlyforprojectsoflargesizeandgreatcomplexityorforprojectswhich
substantiallyduplicatepreviousfacilitiessponsoredbytheowner.Anownermayvaluetheexpertiseand
integrityofaparticularcontractorwhohasagoodreputationorhasworkedsuccessfullyfortheownerinthe
past.Ifitbecomesnecessarytomeetadeadlineforcompletionoftheproject,theconstructionofaproject
mayproceedwithoutwaitingforthecompletionofthedetailedplansandspecificationswithacontractorthat
theownercantrust.However,theowner'sstaffmustbehighlyknowledgeableandcompetentinevaluating
contractorproposalsandmonitoringsubsequentperformance.
Generally,negotiatedcontractsrequirethereimbursementofdirectprojectcostplusthecontractor'sfeeas
determinedbyoneofthefollowingmethods:
1.Costplusfixedpercentage
2.Costplusfixedfee
3.Costplusvariablefee
4.Targetestimate
5.Guaranteedmaximumpriceorcost
Thefixedpercentageorfixedfeeisdeterminedattheoutsetoftheproject,whilevariablefeeandtarget
estimatesareusedasanincentivetoreducecostsbysharinganycostsavings.Aguaranteedmaximumcost
arrangementimposesapenaltyonacontractorforcostoverrunsandfailuretocompletetheprojectontime.
Withaguaranteedmaximumpricecontract,amountsbelowthemaximumaretypicallysharedbetweenthe
ownerandthecontractor,whilethecontractorisresponsibleforcostsabovethemaximum.

SpeculativeResidentialConstruction
Inresidentialconstruction,developersoftenbuildhousesandcondominiumsinanticipationofthedemandof
homebuyers.Becausethebasicneedsofhomebuyersareverysimilarandhomedesignscanbestandardized
tosomedegree,theprobabilityoffindingbuyersofgoodhousingunitswithinarelativelyshorttimeisquite
high.Consequently,developersarewillingtoundertakespeculativebuildingandlendinginstitutionsarealso
willingtofinancesuchconstruction.Thedeveloperessentiallysetthepriceforeachhousingunitasthe
marketwillbear,andcanadjustthepricesofremainingunitsatanygiventimeaccordingtothemarkettrend.

ForceAccountConstruction
Someownersuseinhouselaborforcestoperformasubstantialamountofconstruction,particularlyfor
addition,renovationandrepairwork.Then,thetotaloftheforceaccountchargesincludinginhouse
overheadexpenseswillbethepricingarrangementfortheconstruction.
Backtotop

8.2ContractProvisionsforRiskAllocation
Provisionsfortheallocationofriskamongpartiestoacontractcanappearinnumerousareasinadditionto
thetotalconstructionprice.Typically,theseprovisionsassignresponsibilityforcoveringthecostsofpossible
orunforeseenoccurances.Apartiallistofresponsibilitieswithconcomitantriskthatcanbeassignedto
differentpartieswouldinclude:
Forcemajeure(i.e.,thisprovisionabsolvesanowneroracontractorforpaymentforcostsdueto"Acts
ofGod"andotherexternaleventssuchaswarorlaborstrikes)

Indemnification(i.e.,thisprovisionabsolvestheindemifiedpartyfromanypaymentforlossesand
damagesincurredbyathirdpartysuchasadjacentpropertyowners.)
Liens(i.e.,assurancesthatthirdpartyclaimsaresettledsuchas"mechanicsliens"forworkerwages),
Laborlaws(i.e.,paymentsforanyviolationoflaborlawsandregulationsonthejobsite),
Differingsiteconditions(i.e.,responsibilityforextracostsduetounexpectedsiteconditions),
Delaysandextensionsoftime,
Liquidateddamages(i.e.,paymentsforanyfacilitydefectswithpaymentamountsagreedtoin
advance)
Consequentialdamages(i.e.,paymentsforactualdamagecostsassesseduponimpactoffacility
defects),
Occupationalsafetyandhealthofworkers,
Permits,licenses,laws,andregulations,
Equalemploymentopportunityregulations,
Terminationfordefaultbycontractor,
Suspensionofwork,
Warrantiesandguarantees.
Thelanguageusedforspecifyingtheriskassignmentsintheseareasmustconformtolegalrequirementsand
pastinterpretationswhichmayvaryindifferentjurisdictionsorovertime.Withoutusingstandardlegal
language,contractprovisionsmaybeunenforceable.Unfortunately,standardlegallanguageforthispurpose
maybedifficulttounderstand.Asaresult,projectmanagersoftenhavedifficultyininterpretingtheir
particularresponsibilities.Competentlegalcounselisrequiredtoadvisethedifferentpartiestoanagreement
abouttheirrespectiveresponsibilities.
Standardformsforcontractscanbeobtainedfromnumeroussources,suchastheAmericanInstituteof
Architects(AIA)ortheAssociatedGeneralContractors(AGC).Thesestandardformsmayincluderiskand
responsibilityallocationswhichareunacceptabletooneormoreofthecontractingparties.Inparticular,
standardformsmaybebiasedtoreducetheriskandresponsibilityoftheoriginatingorganizationorgroup.
Partiestoacontractshouldreadandreviewallcontractdocumentscarefully.
Thethreeexamplesappearingbelowillustratecontractlanguageresultingindifferentriskassignments
betweenacontractor(CONTRACTOR)andanowner(COMPANY).Eachcontractprovisionallocates
differentlevelsofindemnificationrisktothecontractor.[1]
Example81:AContractProvisionExamplewithHighContractorRisk
"ExceptwherethesolenegligenceofCOMPANYisinvolvedoralleged,CONTRACTORshall
indemnifyandholdharmlessCOMPANY,itsofficers,agentsandemployees,fromandagainst
anyandallloss,damage,andliabilityandfromanyandallclaimsfordamagesonaccountofor
byreasonofbodilyinjury,includingdeath,notlimitedtotheemployeesofCONTRACTOR,
COMPANY,andofanysubcontractororCONTRACTOR,andfromandagainstanyandall
damagestoproperty,includingpropertyofCOMPANYandthirdparties,directand/or
consequential,causedbyorarisingoutof,inwhileorinpart,orclaimedtohavebeencausedby
ortohavearisenoutof,inwholeorinpart,anactofomissionofCONTRACTORoritsagents,
employees,vendors,orsubcontractors,oftheiremployeesoragentsinconnectionwiththe
performanceoftheContractDocuments,whetherornotinsuredagainstandCONTRACTOR
shall,atitsowncostandexpense,defendanyclaim,suit,actionorproceeding,whether
groundlessornot,whichmaybecommencedagainstCOMPANYbyreasonthereoforin
connectiontherewith,andCONTRACTORshallpayanyandalljudgmentswhichmaybe
recoveredinsuchaction,claim,proceedingorsuit,anddefrayanyandallexpenses,including
costsandattorney'sfeeswhichmaybeincurredbyreasonofsuchactions,claims,proceedings,
orsuits."
Comment:Thisisaveryburdensomeprovisionforthecontractor.Itmakesthecontractorresponsiblefor
practicallyeveryconceivableoccurrenceandtypeofdamage,exceptwhenaclaimforlossordamagesisdue
tothesolenegligenceoftheowner.Asapracticalmatter,solenegligenceonaconstructionprojectisvery
difficulttoascertainbecausetheworkissointertwined.Sincethereisnodollarlimitationtothecontractor's
exposure,sufficientliabilitycoveragetocoverworstscenarioriskswillbedifficulttoobtain.Thebestthe

contractorcandoistoobtainascompleteandbroadexcessliabilityinsurancecoverageascanbepurchased.
Thisinsuranceiscostly,sothecontractorshouldinsurethecontractpriceissufficientlyhightocoverthe
expense.
Example82:AnExampleContractProvisionwithMediumRiskAllocationtoContractor
"CONTRACTORshallprotect,defend,holdharmless,andindemnifyCOMPANYfromand
againstanyloss,damage,claim,action,liability,ordemandwhatsoever(including,with
limitation,costs,expenses,andattorney'sfees,whetherforappealsorotherwise,inconnection
therewith),arisingoutofanypersonalinjury(including,withoutlimitation,injurytoany
employeeofCOMPANY,CONTRACTORoranysubcontractor),arisingoutofanypersonal
injury(including,withoutlimitation,injurytoanyemployeeofCOMPANY,CONTRACTOR,
oranysubcontractor),includingdeathresultingtherefromoroutofanydamagetoorlossor
destructionofproperty,realandorpersonal(includingpropertyofCOMPANY,
CONTRACTOR,andanysubcontractor,andincludingtoolsandequipmentwhetherowned,
rented,orusedbyCONTRACTOR,anysubcontractor,oranyworkman)inanymannerbased
upon,occasionedby,orattributableorrelatedtotheperformance,whetherbythe
CONTRACTORoranysubcontractor,oftheWorkoranypartthereof,andCONTRACTOR
shallatitsownexpensedefendanyandallactionsbasedthereon,exceptwheresaidpersonal
injuryorpropertydamageiscausedbythenegligenceofCOMPANYorCOMPANY'S
employees.Anyloss,damage,costexpenseorattorney'sfeesincurredbyCOMPANYin
connectionwiththeforegoingmay,inadditiontootherremedies,bedeductedfrom
CONTRACTOR'Scompensation,thendueorthereaftertobecomedue.COMPANYshalleffect
forthebenefitofCONTRACTORawaiverofsubrogationontheexistingfacilities,including
consequentialdamagessuchas,butnotbywayoflimitation,lossofprofitandlossofproductor
plantdowntimebutexcludinganydeductibleswhichshallexistasatthedateofthis
CONTRACTprovided,however,thatsaidwaiverofsubrogationshallbeexpandedtoinclude
allsaiddeductibleamountsontheacceptanceoftheWorkbyCOMPANY."
Comment:Thisclauseprovidesthecontractorconsiderablerelief.Hestillhasunlimitedexposureforinjury
toallpersonsandthirdpartypropertybutonlytotheextentcausedbythecontractor'snegligence.The"sole"
negligenceissuedoesnotarise.Furthermore,thecontractor'sliabilityfordamagestotheowner'spropertya
majorconcernforcontractorsworkinginpetrochemicalcomplexes,attimesworthbillionsislimitedtothe
owner'sinsurancedeductible,andtheowner'sinsurancecarriershavenorightofrecourseagainstthe
contractor.Thecontractor'slimitedexposureregardingtheowner'sfacilitiesendsoncompletionofthework.
Example83:AnExampleContractProvisionwithLowRiskAllocationtoContractor
"CONTRACTORherebyagreestoindemnifyandholdCOMPANYand/oranyparent,
subsidiary,oraffiliate,orCOMPANYand/orofficers,agents,oremployeesofanyofthem,
harmlessfromandagainstanylossorliabilityarisingdirectlyorindirectlyoutofanyclaimor
causeofactionforlossordamagetopropertyincluding,butnotlimitedto,CONTRACTOR'S
propertyandCOMPANY'Spropertyandforinjuriestoordeathofpersonsincludingbutnot
limitedtoCONTRACTOR'Semployees,causedbyorresultingfromtheperformanceofthe
workbyCONTRACTOR,itsemployees,agents,andsubcontractorsandshall,attheoptionof
COMPANY,defendCOMPANYatCONTRACTOR'Ssoleexpenseinanylitigationinvolving
thesameregardlessofwhethersuchworkisperformedbyCONTRACTOR,itsemployees,or
byitssubcontractors,theiremployees,oralloreitherofthem.Inallinstances,CONTRACTOR'S
indemnitytoCOMPANYshallbelimitedtotheproceedsofCONTRACTOR'Sumbrellaliability
insurancecoverage."
Comment:Withrespecttoindemnifyingtheowner,thecontractorinthisprovisionhasminimaloutof
pocketrisk.Exposureislimitedtowhatevercanbecollectedfromthecontractor'sinsurancecompany.
Backtotop

8.3RisksandIncentivesonConstructionQuality

Allownerswantqualityconstructionwithreasonablecosts,butnotallarewillingtosharerisksand/or
provideincentivestoenhancethequalityofconstruction.Inrecentyears,moreownersrecognizethattheydo
notgetthebestqualityofconstructionbysqueezingthelastdollarofprofitfromthecontractor,andthey
accepttheconceptofrisksharing/riskassignmentinprincipleinlettingconstructioncontracts.However,the
implementationofsuchaconceptinthepastdecadehasreceivedmixedresults.
Manypublicownershavebeenthevictimsoftheirownschemes,notonlybecauseoftheusualrequirement
inlettingcontractsofpublicworksthroughcompetitivebiddingtoavoidfavoritism,butattimesbecauseof
thesheerweightofentrenchedbureaucracy.Somecontractorssteerawayfrompublicworksaltogether
otherssubmitbidsathigherpricestocompensatefortherestrictiveprovisionsofcontractterms.Asaresult,
somepublicauthoritiesfindthateithertherearefewresponsiblecontractorsrespondingtotheirinvitationsto
submitbidsorthebidpricesfarexceedtheirengineers'estimates.Thosepublicownerswhohaveadopted
thefederalgovernment'srisksharing/riskassignmentcontractconceptshavefoundthatwhileinitialbid
pricesmayhavedecreasedsomewhat,claimsanddisputesoncontractsaremorefrequentthanbefore,and
notablymoresothaninprivatelyfundedconstruction.Someoftheseclaimsanddisputescannodoubtbe
avoidedbyimprovingthecontractprovisions.[2]
Sincemostclaimsanddisputesarisemostfrequentlyfromlumpsumcontractsforbothpublicandprivate
owners,thefollowingfactorsassociatedwithlumpsumcontractsareparticularlynoteworthy:
unbalancedbidsinunitpricesonwhichperiodicpaymentestimatesarebased.
changeorderssubjecttonegotiatedpayments
changesindesignorconstructiontechnology
incentivesforearlycompletion
Anunbalancedbidreferstoraisingtheunitpricesonitemstobecompletedintheearlystageoftheproject
andloweringtheunitpricesonitemstobecompletedinthelaterstages.Thepurposeofthispracticeonthe
partofthecontractoristoeaseitsburdenofconstructionfinancing.Itisbetterforownerstoofferexplicit
incentivestoaidconstructionfinancinginexchangeforlowerbidpricesthantoallowtheuseofhidden
unbalancedbids.Unbalancedbidsmayalsooccurifacontractorfeelssomeitemofworkwas
underestimatedinamount,sothatahighunitpriceonthatitemwouldincreaseprofits.Sincelumpsum
contractsareawardedonthebasisoflowbids,itisdifficulttochallengethelowbiddersonthevalidityof
theirunitpricesexceptforflagrantviolations.Consequentlyremediesshouldbesoughtbyrequestingthe
contractortosubmitpertinentrecordsoffinancialtransactionstosubstantiatetheexpendituresassociated
withitsmonthlybillingsforpaymentsofworkcompletedduringtheperiod.
Oneofthemostcontentiousissuesincontractprovisionsconcernsthepaymentforchangeorders.Theowner
anditsengineershouldhaveanappreciationoftheeffectsofchangesforspecificitemsofworkand
negotiatewiththecontractorontheidentifiablecostofsuchitems.Theownershouldrequirethecontractor
tosubmitthepricequotationwithinacertainperiodoftimeaftertheissuanceofachangeorderandtoassess
whetherthechangeordermaycausedelaydamages.Ifthecontractdoesnotcontainspecificprovisionson
costdisclosuresforevaluatingchangeordercosts,itwillbedifficulttonegotiatepaymentsforchangeorders
andclaimsettlementslater.
Insomeprojects,thecontractprovisionsmayallowthecontractortoprovidealternativedesignand/or
constructiontechnology.Theownermayimposedifferentmechanismsforpricingthesechanges.For
example,acontractormaysuggestadesignorconstructionmethodchangethatfulfillstheperformance
requirements.Savingsduetosuchchangesmayaccruetothecontractorortheowner,ormaybedividedin
somefashionbetweenthetwo.Thecontractprovisionsmustreflecttheownersriskrewardobjectivesin
callingforalternatedesignand/orconstructiontechnology.Whileinnovationsareoftensoughttosave
moneyandtime,unsuccessfulinnovationsmayrequireadditionalmoneyandtimetocorrectearlier
misjudgment.Atworse,afailurecouldhaveseriousconsequences.
Inspiteofadmonitionsandgoodintentionsforbetterplanningbeforeinitiatingaconstructionproject,most
ownerswantafacilitytobeinoperationassoonaspossibleonceadecisionismadetoproceedwithits
construction.Manyconstructioncontractscontainprovisionsofpenaltiesforlatecompletionbeyonda
specifieddeadlinehowever,unlesssuchprovisionsareaccompaniedbysimilarincentivesforearly
completion,theymayberuledunenforceableincourt.Earlycompletionmayresultinsignificantsavings,

particularlyinrehabilitationprojectsinwhichthefacilityusersareinconveniencedbythelossofthefacility
andthedisruptionduetoconstructionoperations.
Example84:ArkansasRiceGrowersCooperativeAssociationv.AlchemyIndustries
A1986courtcasecanillustratetheassumptionofriskonthepartofcontractorsanddesign
professionals.[3]TheArkansasRiceGrowersCooperativecontractedwithAlchemyIndustries,
Inc.toprovideengineeringandconstructionservicesforanewfacilityintendedtogenerate
steambyburningricehulls.Underthetermsofthecontract,AlchemyIndustriesguaranteedthat
thecompletedplantwouldbecapableof"reducingaminimumofsevenandonehalftonsofrice
hullsperhourtoanashandproducingaminimumof48millionBTU'sperhourofsteamat200
poundspressure."Unfortunately,thefinishedplantdidnotmeetthisperformancestandard,and
theArkansasRiceGrowersCooperativeAssociationsuedAlchemyIndustriesandits
subcontractorsforbreachofwarranty.Damagesofalmost$1.5millionwereawardedtothe
Association.
Backtotop

8.4TypesofConstructionContracts
Whileconstructioncontractsserveasameansofpricingconstruction,theyalsostructuretheallocationof
risktothevariouspartiesinvolved.Theownerhasthesolepowertodecidewhattypeofcontractshouldbe
usedforaspecificfacilitytobeconstructedandtosetforththetermsinacontractualagreement.Itis
importanttounderstandtherisksofthecontractorsassociatedwithdifferenttypesofconstructioncontracts.

LumpSumContract
Inalumpsumcontract,theownerhasessentiallyassignedalltherisktothecontractor,whointurncanbe
expectedtoaskforahighermarkupinordertotakecareofunforeseencontingencies.Besidethefixedlump
sumprice,othercommitmentsareoftenmadebythecontractorintheformofsubmittalssuchasaspecific
schedule,themanagementreportingsystemoraqualitycontrolprogram.Iftheactualcostoftheprojectis
underestimated,theunderestimatedcostwillreducethecontractor'sprofitbythatamount.Anoverestimate
hasanoppositeeffect,butmayreducethechanceofbeingalowbidderfortheproject.

UnitPriceContract
Inaunitpricecontract,theriskofinaccurateestimationofuncertainquantitiesforsomekeytaskshasbeen
removedfromthecontractor.However,somecontractorsmaysubmitan"unbalancedbid"whenitdiscovers
largediscrepanciesbetweenitsestimatesandtheowner'sestimatesofthesequantities.Dependingonthe
confidenceofthecontractoronitsownestimatesanditspropensityonrisk,acontractorcanslightlyraisethe
unitpricesontheunderestimatedtaskswhileloweringtheunitpricesonothertasks.Ifthecontractoris
correctinitsassessment,itcanincreaseitsprofitsubstantiallysincethepaymentismadeontheactual
quantitiesoftasksandifthereverseistrue,itcanloseonthisbasis.Furthermore,theownermaydisqualify
acontractorifthebidappearstobeheavilyunbalanced.Totheextentthatanunderestimateoroverestimate
iscausedbychangesinthequantitiesofwork,neithererrorwilleffectthecontractor'sprofitbeyondthe
markupintheunitprices.

CostPlusFixedPercentageContract
Forcertaintypesofconstructioninvolvingnewtechnologyorextremelypressingneeds,theowneris
sometimesforcedtoassumeallrisksofcostoverruns.Thecontractorwillreceivetheactualdirectjobcost
plusafixedpercentage,andhavelittleincentivetoreducejobcost.Furthermore,iftherearepressingneeds
tocompletetheproject,overtimepaymentstoworkersarecommonandwillfurtherincreasethejobcost.
Unlesstherearecompellingreasons,suchastheurgencyintheconstructionofmilitaryinstallations,the
ownershouldnotusethistypeofcontract.

CostPlusFixedFeeContract
Underthistypeofcontract,thecontractorwillreceivetheactualdirectjobcostplusafixedfee,andwill
havesomeincentivetocompletethejobquicklysinceitsfeeisfixedregardlessofthedurationoftheproject.
However,theownerstillassumestherisksofdirectjobcostoverrunwhilethecontractormayriskthe
erosionofitsprofitsiftheprojectisdraggedonbeyondtheexpectedtime.

CostPlusVariablePercentageContract
Forthistypeofcontract,thecontractoragreestoapenaltyiftheactualcostexceedstheestimatedjobcost,or
arewardiftheactualcostisbelowtheestimatedjobcost.Inreturnfortakingtheriskonitsownestimate,
thecontractorisallowedavariablepercentageofthedirectjobcostforitsfee.Furthermore,theproject
durationisusuallyspecifiedandthecontractormustabidebythedeadlineforcompletion.Thistypeof
contractallocatesconsiderableriskforcostoverrunstotheowner,butalsoprovidesincentivestocontractors
toreducecostsasmuchaspossible.

TargetEstimateContract
Thisisanotherformofcontractwhichspecifiesapenaltyorrewardtoacontractor,dependingonwhether
theactualcostisgreaterthanorlessthanthecontractor'sestimateddirectjobcost.Usually,thepercentages
ofsavingsoroverruntobesharedbytheownerandthecontractorarepredeterminedandtheprojectduration
isspecifiedinthecontract.Bonusesorpenaltiesmaybestipulatedfordifferentprojectcompletiondates.

GuaranteedMaximumCostContract
Whentheprojectscopeiswelldefined,anownermaychoosetoaskthecontractortotakealltherisks,both
intermsofactualprojectcostandprojecttime.Anyworkchangeordersfromtheownermustbeextremely
minorifatall,sinceperformancespecificationsareprovidedtotheownerattheoutsetofconstruction.The
ownerandthecontractoragreetoaprojectcostguaranteedbythecontractorasmaximum.Theremaybeor
maynotbeadditionalprovisionstoshareanysavingsifanyinthecontract.Thistypeofcontractis
particularlysuitableforturnkeyoperation.
Backtotop

8.5RelativeCostsofConstructionContracts
Regardlessofthetypeofconstructioncontractselectedbytheowner,thecontractorrecognizesthatthe
actualconstructioncostwillneverbeidenticaltoitsownestimatebecauseofimperfectinformation.
Furthermore,itiscommonfortheownertoplaceworkchangeorderstomodifytheoriginalscopeofwork
forwhichthecontractorwillreceiveadditionalpaymentsasstipulatedinthecontract.Thecontractorwilluse
differentmarkupscommensuratewithitsmarketcircumstancesandwiththerisksinvolvedindifferenttypes
ofcontracts,leadingtodifferentcontractpricesatthetimeofbiddingornegotiation.Thetypeofcontract
agreeduponmayalsoprovidethecontractorwithgreaterincentivestotrytoreducecostsasmuchas
possible.Thecontractor'sgrossprofitatthecompletionofaprojectisaffectedbythetypeofcontract,the
accuracyofitsoriginalestimate,andthenatureofworkchangeorders.Theowner'sactualpaymentforthe
projectisalsoaffectedbythecontractandthenatureofworkchangeorders.
Inordertoillustratetherelativecostsofseveraltypesofconstructioncontracts,thepricingmechanismsfor
suchconstructioncontractsareformulatedonthesamedirectjobcostpluscorrespondingmarkupsreflecting
therisks.Letusadoptthefollowingnotation:
E=
contractor'soriginalestimateofthedirectjobcostatthetimeofcontractaward
M=
amountofmarkupbythecontractorinthecontract
B=

estimatedconstructionpriceatthetimeofsigningcontract
A=
contractor'sactualcostfortheoriginalscopeofworkinthecontract
U=
underestimateofthecostofworkintheoriginalestimate(withnegativevalueofUdenotingan
overestimate)
C=
additionalcostofworkduetochangeorders
P=
actualpaymenttocontractorbytheowner
F=
contractor'sgrossprofit
R=
basicpercentagemarkupabovetheoriginalestimateforfixedfeecontract
Ri=
premiumpercentagemarkupforcontracttypeisuchthatthetotalpercentagemarkupis(R+Ri),e.g.
(R+R1)foralumpsumcontract,(R+R2)foraunitpricecontract,and(R+R3)foraguaranteed
maximumcostcontract
N=
afactorinthetargetestimateforsharingthesavingsincostasagreeduponbytheownerandthe
contractor,with0 N 1.
Atthetimeofacontractaward,thecontractpriceisgivenby:
(8.1)
Theunderestimationofthecostofworkintheoriginalcontractisdefinedas:
(8.2)
Then,atthecompletionoftheproject,thecontractor'sactualcostfortheoriginalscopeofworkis:
(8.3)
Forvarioustypesofconstructioncontracts,thecontractor'smarkupandthepriceforconstructionagreedto
inthecontractareshowninTable81.Notethatatthetimeofcontractaward,itisassumedthatA=E,even
thoughtheeffectsofunderestimationonthecontractor'sgrossprofitsaredifferentforvarioustypesof
constructioncontractswhentheactualcostoftheprojectisassesseduponitscompletion.
TABLE81OriginalEstimatedContractPrices
TypeofContract
Markup
ContractPrice
M=(R+R1)E
B=(1+R+R1)E
1.Lumpsum
M=(R+R2)E
B=(1+R+R2)E
2.Unitprice
3.Costplusfixed%
M=RA=RE
B=(1+R)E
4.Costplusfixedfee M=RE
B=(1+R)E
5.Costplusvariable% M=R(2EA)=RE
B=(1+R)E
6.Targetestimate
M=RE+N(EA)=RE B=(1+R)E
7.Guaranteedmaxcost M=(R+R3)E
B=(1+R+R3)E

Paymentsofchangeordersarealsodifferentincontractprovisionsfordifferenttypesofcontracts.Suppose
thatpaymentsforchangeordersagreeduponforvarioustypesofcontractsareasshownincolumn2of
Table82.Theowner'sactualpaymentsbasedontheseprovisionsaswellastheincentiveprovisionsfor
varioustypesofcontractsaregivenincolumn3ofTable82.Thecorrespondingcontractor'sprofitsunder
variouscontractualarrangementsareshowninTable83.
TABLE82Owner'sActualPaymentwithDifferentContractProvisions
TypeofContract
ChangeOrderPayment
Owner'sPayment
C(1+R+R1)
P=B+C(1+R+R1)
1.Lumpsum
2.Unitprice
C(1+R+R2)
P=(1+R+R2)A+C
3.Costplusfixed%
C(1+R)
P=(1+R)(A+C)
4.Costplusfixedfee C
P=RE+A+C
5.Costplusvariable% C(1+R)
P=R(2EA+C)+A+C
6.Targetestimate
C
P=RE+N(EA)+A+C
7.Guaranteedmaxcost 0
P=B

TABLE83Contractor'sGrossProfitwithDifferentContractProvisions
TypeofContract
ProfitfromChangeOrder Contractor'sGrossProfit
F=EA+(R+R1)(E+C)
C(R+R1)
1.Lumpsum
F=(R+R2)(A+C)
2.Unitprice
C(R+R2
3.Costplusfixed%
F=R(A+C)
CR
4.Costplusfixedfee 0
F=RE
5.Costplusvariable% CR
F=R(2EA+C)
6.Targetestimate
F=RE+N(EA)
0
7.Guaranteedmaxcost C
F=(1+R+R3)EAC

ItisimportanttonotethattheequationsinTables81through83areillustrative,subjecttothesimplified
conditionsofpaymentsassumedunderthevarioustypesofcontracts.Whenthenegotiatedconditionsof
paymentaredifferent,theequationsmustalsobemodified.
Example85:Contractor'sGrossProfitsunderDifferentContractArrangements
Consideraconstructionprojectforwhichthecontractor'soriginalestimateis$6,000,000.Forvarioustypes
ofcontracts,R=10%,R1=2%,R2=1%,R3=5%andN=0.5.Thecontractorisnotcompensatedfor
changeordersundertheguaranteedmaximumcostcontractifthetotalcostforthechangeordersiswithin
6%($360,000)oftheoriginalestimate.Determinethecontractor'sgrossprofitforeachoftheseventypesof
constructioncontractsforeachofthefollowingconditions.
(a)U=0,C=0
(b)U=0,C=6%E=$360,000
(c)U=4%E=$240,000,C=0
(d)U=4%E=$240,000C=6%E=$360,000
(e)U=4%E=$240,000,C=0
(f)U=4%E=$240,000,C=6%E=$360,000
Inthisexample,thepercentagemarkupforthecostplusfixedpercentagecontractis10%whichisusedas
thebenchmarkforcomparison.Thepercentagemarkupforthelumpsumcontractis12%whilethatforthe
unitpricecontractis11%,reflectingthedegreesofhigherrisk.Thefixedfeeforthecostplusfixedfeeis
basedon10%oftheestimatedcost,whichiscomparabletothecostplusfixedpercentagecontractifthereis
nooverestimateorunderestimateincost.Thebasicpercentagemarkupis10%forboththecostplusvariable
percentagecontractandthetargetestimatorcontract,buttheyaresubjecttoincentivebonusesandpenalties
thatarebuiltintheformulasforowners'payments.Thepercentagemarkupfortheguaranteedmaximumcost

contractis15%toaccountforthehighriskundertakenbythecontractor.Theresultsofcomputationforall
seventypesofcontractsunderdifferentconditionsofunderestimationUandchangeorderCareshownin
Table84
TABLE84Contractor'sGrossProfitsunderDifferentConditions(in$1,000)
U=0
U=0
U=4%E U=4%E U=4%E U=4%E
TypeofContract
C=0 C=6%E
C=0
C=6%E
C=0
C=6%E
1.lumpsum
$720
$763
$480
$523
$960
$1,003
2.unitprice
660
700
686
726
634
674
3.cost+fixed%
600
636
624
660
576
612
4.cost+fixedfee
600
600
600
600
600
600
5.cost+Var%
600
636
576
616
624
660
6.targetestimate
600
600
480
480
720
720
7.guar.max.cost
900
540
660
300
1,140
780

Example86:Owner'sPaymentsunderDifferentContractArrangements
UsingthedatainExample85,determinetheowner'sactualpaymentforeachoftheseventypesof
constructioncontractsforthesameconditionsofUandC.TheresultsofcomputationareshowninTable8
5.
TABLE85Owner'sActualPaymentsunderDifferentConditions(in$1,000)
U=0
U=0
U=4%E U=4%E U=4%E U=4%E
TypeofContract
C=0 C=6%E
C=0
C=6%E
C=0
C=6%E
1.lumpsum
$6,720 $7,123
$6,720 $7,123
$6,720
$7,123
2.unitprice
6,660
7,060
6,926
7,326
6,394
6,794
3.cost+fixed%
6,600
6,996
6,864
7,260
6,336
6,732
4.cost+fixedfee
6,600
6,960
6,840
7,200
6,360
6,720
5.cost+Var%
6,600
6,996
6,816
7,212
6,384
6,780
6.targetestimate
6,600
6,960
6,720
7,080
6,480
6,840
7.guar.max.cost
6,900
6,900
6,900
6,900
6,900
6,900

Backtotop

8.6PrinciplesofCompetitiveBidding
Competitivebiddingonconstructionprojectsinvolvesdecisionmakingunderuncertaintywhereoneofthe
greatestsourcesoftheuncertaintyforeachbidderisduetotheunpredictablenatureofhiscompetitors.Each
bidsubmittedforaparticularjobbyacontractorwillbedeterminedbyalargenumberoffactors,including
anestimateofthedirectjobcost,thegeneraloverhead,theconfidencethatthemanagementhasinthis
estimate,andtheimmediateandlongrangeobjectivesofmanagement.Somanyfactorsareinvolvedthatit
isimpossibleforaparticularbiddertoattempttopredictexactlywhatthebidssubmittedbyitscompetitors
willbe.
Itisusefultothinkofabidasbeingmadeupoftwobasicelements:(1)theestimateofdirectjobcost,which
includesdirectlaborcosts,materialcosts,equipmentcosts,anddirectfiledsupervisionand(2)themarkup
orreturn,whichmustbesufficienttocoveraportionofgeneraloverheadcostsandallowafairprofitonthe
investment.Alargereturncanbeassuredsimplybyincludingasufficientlyhighmarkup.However,the
higherthemarkup,thelesschancetherewillbeofgettingthejob.Consequentlyacontractorwhoincludesa
verylargemarkuponeverybidcouldbecomebankruptfromlackofbusiness.Conversely,thestrategyof
biddingwithverylittlemarkupinordertoobtainhighvolumeisalsolikelytoleadtobankruptcy.
Somewhereinbetweenthetwoextremeapproachestobiddingliesan"optimummarkup"whichconsiders

boththereturnandthelikelihoodofbeinglowbidderinsuchawaythat,overthelongrun,theaverage
returnismaximized.
Fromallindications,mostcontractorsconfrontuncertainbiddingconditionsbyexercisingahighdegreeof
subjectivejudgment,andeachcontractormaygivedifferentweightstovariousfactors.Thedecisiononthe
bidprice,ifabidisindeedsubmitted,reflectsthecontractor'sbestjudgmentonhowwelltheproposed
projectfitsintotheoverallstrategyforthesurvivalandgrowthofthecompany,aswellasthecontractor's
propensitytoriskgreaterprofitversusthechanceofnotgettingacontract.
Onemajorconcerninbiddingcompetitionsistheamountof"moneyleftonthetable,"ofthedifference
betweenthewinningandthenextbestbid.Thewinningbidderwouldliketheamountof"moneyleftonthe
table"tobeassmallaspossible.Forexample,ifacontractorwinswithabidof$200,000,andthenext
lowestbidwas$225,000(representing$25,000of"moneyleftonthetable"),thenthewinningcontractor
wouldhavepreferredtohavebid$220,000(orperhaps$224,999)toincreasepotentialprofits.
Someofthemajorfactorsimpactingbiddingcompetitionsinclude:

ExogenousEconomicFactors
Contractorsgenerallytendtospecializeinasubmarketofconstructionandconcentratetheirworkin
particulargeographiclocations.Thelevelofdemandinasubmarketataparticulartimecaninfluencethe
numberofbiddersandtheirbidprices.Whenworkisscarceinthesubmarket,theaveragenumberofbidders
forprojectswillbelargerthanattimesofplenty.Thenetresultofscarcityislikelytobetheincreaseinthe
numberofbiddersperprojectanddownwardpressureonthebidpriceforeachprojectinthesubmarket.At
timesofseverescarcity,somecontractorsmaycrossthelinebetweensegmentstoexpandtheiractivities,or
moveintonewgeographiclocationstogetalargershareoftheexistingsubmarket.Eitheractionwill
increasetherisksincurredbysuchcontractorsastheymoveintolessfamiliarsegmentsorterritories.The
trendofmarketdemandinconstructionandoftheeconomyatlargemayalsoinfluencethebiddingdecisions
ofacontractorinotherways.Ifacontractorperceivesdrasticincreasesinlaborwagesandmaterialpricesas
aresultofrecentlaborcontractsettlements,itmaytakeintoconsiderationpossibleincreasesinunitprices
fordeterminingthedirectprojectcost.Furthermore,theperceptionsofincreaseininflationratesandinterest
ratesmayalsocausethecontractortouseahighermarkuptohedgetheuncertainty.Consequently,attimesof
economicexpansionand/orhigherinflationrate,contractorsarereluctanttocommitthemselvestolongterm
fixedpricecontracts.

CharacteristicsofBiddingCompetition
Allotherthingsbeingequal,theprobabilityofwinningacontractdiminishesasmorebiddersparticipatein
thecompetition.Consequently,acontractortriestofindoutasmuchinformationaspossibleaboutthe
numberandidentitiesofpotentialbiddersonaspecificproject.Suchinformationisoftenavailableinthe
DodgeBulletin<DodgeBulletin(dailypublication),F.W.DodgeCorp.,NewYork,NY.>orsimilar
publicationswhichprovidedataofpotentialprojectsandnamesofcontractorswhohavetakenoutplansand
specifications.Forcertainsegments,potentialcompetitorsmaybeidentifiedthroughprivatecontacts,and
biddersoftenconfrontthesamecompetitor'sprojectafterprojectsincetheyhavesimilarcapabilitiesand
interestsinundertakingthesametypeofwork,includingsize,complexityandgeographicallocationofthe
projects.Ageneralcontractormayalsoobtaininformationofpotentialsubcontractorsfrompublicationssuch
asCreditReports(CreditReports,BuildingConstructionDivision,andBradstreet,Inc.,NewYork,N.Y.)
publishedbyDunandBradstreet,Inc.However,mostcontractorsformanextensivenetworkwithagroupof
subcontractorswithwhomtheyhavehadpreviousbusinesstransactions.Theyusuallyrelyontheirown
experienceinsolicitingsubcontractbidsbeforefinalizingabidpricefortheproject.

ObjectivesofGeneralContractorsinBidding
Thebiddingstrategyofsomecontractorsareinfluencedbyapolicyofminimumpercentagemarkupfor
generaloverheadandprofit.However,thepercentagemarkupmayalsoreflectadditionalfactorsstipulated
bytheownersuchashighretentionandslowpaymentsforcompletedwork,orperceptionsofuncontrollable
factorsintheeconomy.Theintensityofacontractor'seffortsinbiddingaspecificprojectisinfluencedbythe

contractor'sdesiretoobtainadditionalwork.Thewinningofaparticularprojectmaybepotentially
importanttotheoverallmixofworkinprogressorthecashflowimplicationsforthecontractor.The
contractor'sdecisionisalsoinfluencedbytheavailabilityofkeypersonnelinthecontractororganization.
Thecompanysometimeswantstoreserveitsresourcesforfutureprojects,orcommitsitselftothecurrent
opportunityfordifferentreasons.

Contractor'sComparativeAdvantages
Afinalimportantconsiderationinformingbidpricesonthepartofcontractorsarethepossiblespecial
advantagesenjoyedbyaparticularfirm.Asaresultoflowercosts,aparticularcontractormaybeableto
imposeahigherprofitmarkupyetstillhavealowertotalbidthancompetitors.Theselowercostsmayresult
fromsuperiortechnology,greaterexperience,bettermanagement,betterpersonnelorlowerunitcosts.A
comparativecostadvantageisthemostdesirableofallcircumstancesinenteringabidcompetition.
Backtotop

8.7PrinciplesofContractNegotiation
Negotiationisanotherimportantmechanismforarrangingconstructioncontracts.Projectmanagersoften
findthemselvesasparticipantsinnegotiations,eitherasprincipalnegotiatorsorasexpertadvisors.These
negotiationscanbecomplexandoftenpresentimportantopportunitiesandrisksforthevariousparties
involved.Forexample,negotiationonworkcontractscaninvolveissuessuchascompletiondate,arbitration
procedures,specialworkitemcompensation,contingencyallowancesaswellastheoverallprice.Asa
generalrule,exogenousfactorssuchasthehistoryofacontractorandthegeneraleconomicclimateinthe
constructionindustrywilldeterminetheresultsofnegotiations.However,theskillofanegotiatorcanaffect
thepossibilityofreachinganagreement,theprofitabilityoftheproject,thescopeofanyeventualdisputes,
andthepossibilityforadditionalworkamongtheparticipants.Thus,negotiationsareanimportanttaskfor
manyprojectmanagers.Evenafteracontractisawardedonthebasisofcompetitivebidding,therearemany
occasionsinwhichsubsequentnegotiationsarerequiredasconditionschangeovertime.
Inconductingnegotiationsbetweentwoparties,eachsidewillhaveaseriesofobjectivesandconstraints.
Theoverallobjectiveofeachpartyistoobtainthemostfavorable,acceptableagreement.Atwoparty,one
issuenegotiationillustratesthisfundamentalpoint.Supposethatadeveloperiswillingtopayupto$500,000
foraparticularplotofland,whereastheownerwouldbewillingtosellthelandfor$450,000ormore.These
maximumandminimumsalespricesrepresentconstraintsonanyeventualagreement.Inthisexample,any
purchasepricebetween$450,000and$500,000isacceptabletobothoftheinvolvedparties.Thisrange
representsafeasibleagreementspace.Successfulnegotiationswouldconcludeinasalespricewithinthis
range.Whichpartyreceivesthe$50,000inthemiddlerangebetween$450,000and$500,000would
typicallydependuponthenegotiatingskillsandspecialknowledgeofthepartiesinvolved.Forexample,if
thedeveloperwasabetternegotiator,thenthesalespricewouldtendtobeclosetotheminimum$450,000
level.
Withdifferentconstraints,itmightbeimpossibletoreachanagreement.Forexample,iftheownerwasonly
willingtosellatapriceof$550,000whilethedeveloperremainswillingtopayonly$500,000,thenthere
wouldbenopossibilityforanagreementbetweenthetwoparties.Ofcourse,thetwopartiestypicallydonot
knowatthebeginningofnegotiationsifagreementswillbepossible.Butitisquiteimportantforeachparty
tothenegotiationtohaveasenseoftheirownreservationprice,suchastheowner'sminimumsellingprice
orthebuyer'smaximumpurchasepriceintheaboveexample.Thisreservationpriceisequaltothevalueof
thebestalternativetoanegotiatedagreement.
Poornegotiatingstrategiesadoptedbyoneortheotherpartymayalsoprecludeanagreementevenwiththe
existenceofafeasibleagreementrange.Forexample,onepartymaybesodemandingthattheotherparty
simplybreaksoffnegotiations.Ineffect,negotiationsarenotawellbehavedsolutionmethodologyforthe
resolutionofdisputes.
Thepossibilityofnegotiatingfailuresinthelandsaleexamplehighlightstheimportanceofnegotiatingstyle
andstrategywithrespecttorevealinginformation.Styleincludestheextenttowhichnegotiatorsarewilling

toseemreasonable,thetypeofargumentschosen,theforcefulnessoflanguageused,etc.Clearly,different
negotiatingstylescanbemoreorlesseffective.Culturalfactorsarealsoextremelyimportant.Americanand
Japanesenegotiatingstylesdifferconsiderably,forexample.Revealinginformationisalsoanegotiating
decision.Inthelandsalecase,somenegotiatorswouldreadilyrevealtheirreserveorconstraintprices,
whereasotherswouldconcealasmuchinformationaspossible(i.e."playtheircardsclosetothevest")or
providemisleadinginformation.
Inlightofthesetacticalproblems,itisoftenbeneficialtoallpartiestoadoptobjectivestandardsin
determiningappropriatecontractprovisions.Thesestandardswouldprescribeaparticularagreementora
methodtoarriveatappropriatevaluesinanegotiation.Objectivestandardscanbederivedfromnumerous
sources,includingmarketvalues,precedent,professionalstandards,whatacourtwoulddecide,etc.Byusing
objectivecriteriaofthissort,personalitiesanddisruptivenegotiatingtacticsdonotbecomeimpedimentsto
reachingmutuallybeneficialagreements.
Withadditionalissues,negotiationsbecomemorecomplexbothinprocedureandinresult.Withrespectto
procedure,thesequenceinwhichissuesaredefinedorconsideredcanbeveryimportant.Forexample,
negotiationsmayproceedonanissuebyissuebasis,andtheoutcomemaydependupontheexactsequence
ofissuesconsidered.Alternatively,thepartiesmayproceedbyproposingcompleteagreementpackagesand
thenproceedtocomparepackages.Withrespecttooutcomes,thepossibilityofthepartieshavingdifferent
valuationsorweightsonparticularissuesarises.Inthiscircumstance,itispossibletotradeofftheoutcomes
ondifferentissuestothebenefitofbothparties.Byyieldingonanissueoflowvaluetohimselfbuthigh
valuetotheotherparty,concessionsonotherissuesmaybeobtained.
ThenotionofParetooptimalagreementscanbeintroducedtoidentifynegotiatedagreementsinwhichno
changeintheagreementcansimultaneouslymakebothpartiesbetteroff.Figure81illustratesPareto
optimalagreementswhichcanbehelpfulinassessingtheresultofmultipleissuenegotiations.Inthisfigure,
theaxesrepresentthesatisfactionordesirabilityofagreementstotheparties,denotedIandII.This
representationassumesthatonecanplaceadollarorutilityvalueonvariousagreementsreachedina
multipleissuenegotiationbetweentwoparties.Pointsinthegraphrepresentparticularagreementsonthe
differentissuesunderconsideration.Aparticularpointmaybeobtainedbymorethanonecontract
agreement.Thecurvedlineenclosesthesetofallfeasibleagreementsanypointinthisareaisanacceptable
agreement.Eachpartyhasaminimumacceptablesatisfactionlevelinthisgraph.Pointsontheinteriorofthis
feasiblearearepresentinferioragreementssincesomeotheragreementispossiblethatbenefitsbothparties.
Forexample,pointBrepresentsamoredesirableagreementthanpointA.Inthepreviousexample,pointB
mightrepresentapurchasepriceof$490,000andanimmediatepurchase,whereaspointAmightrepresenta
$475,000salepriceandasixmonthdelay.ThefeasiblepointsthatarenotinferiorconstitutethesetofPareto
optimalorefficientagreementsthesepointslieonthenortheastquadrantofthefeasibleregionasmarked
onthefigure.

Figure81IllustrationofaParetoOptimalAgreementSet

ThedefinitionofParetooptimalagreementsallowsonetoassessatleastoneaspectofnegotiatedoutcomes.
Iftwopartiesarriveataninferioragreement(suchaspointAinFigure81),thentheagreementcouldbe
improvedtothebenefitofbothparties.Incontrast,differentParetooptimalagreements(suchaspointsBand
CinFigure81)canrepresentwidelydifferentresultstotheindividualpartiesbutdonothavethepossibility
forjointimprovement.
Ofcourse,knowledgeoftheconceptofParetooptimalagreementsdoesnotautomaticallygiveanyguidance
onwhatmightconstitutethebestagreements.Muchoftheskillincontractnegotiationcomesfromthe
abilitytoinventnewoptionsthatrepresentmutualgains.Forexample,devisingcontractincentivesfor
speediercompletionofprojectsmayresultinbenefitstobothcontractorsandtheowner.
Example87:Effectsofdifferentvalueperceptions.
Supposethattheclosingdateforsaleofthelandinthepreviouscasemustalsobedecidedin
negotiation.Thecurrentownerwouldliketodelaythesaleforsixmonths,whichwould
representrentalsavingsof$10,000.However,thedeveloperestimatesthatthecostofasix
monthdelaywouldbe$20,000.Afternegotiation,supposethatapurchasepriceof$475,000and
asixmonthpurchasedelayareagreedupon.Thisagreementisacceptablebutnotoptimalfor
bothparties.Inparticular,bothsideswouldbebetteroffifthepurchasepricewasincreasedby
$15,000andimmediateclosinginstituted.Thecurrentownerwouldreceiveanadditional
paymentof$15,000,incuracostof$10,000,andhaveanetgainof$5,000.Similarly,the
developerwouldpay$15,000moreforthelandbutsave$20,000indelaycosts.Whilethis
superiorresultmayseemobviousandeasilyachievable,recognizingsuchopportunitiesduringa
negotiationbecomesincreasinglydifficultasthenumberandcomplexityofissuesincreases.
Backtotop

8.8NegotiationSimulation:AnExample

Thisconstructionnegotiationgamesimulatesacontractnegotiationbetweenautility,"CMGGas"anda
design/constructfirm,"PipelineConstructors,Inc."[4]Thenegotiationinvolvesonlytwopartiesbut
multipleissues.Participantsinthegameareassignedtorepresentonepartyortheotherandtonegotiatewith
adesignatedpartner.Inaclasssetting,numerousnegotiatingpartnersarecreated.Thefollowingoverview
fromtheCMGGasparticipants'instructionsdescribesthesettingforthegame:
CMGGashastheopportunitytoprovidenaturalgastoanautomobilefactoryunder
construction.Servicewillrequireanewsixteenmilepipelinethroughfarmsandlightforest.The
terrainishillywithmoderateslopes,andequipmentaccessisrelativelygood.Thepipelineisto
beburiedthreefeetdeep.Constructionofthepipelineitselfwillbecontractedtoaqualified
design/constructionfirm,whilerequiredcompressionstationsandancillaryworkwillbedone
byCMGGas.AsprojectmanagerforCMGGas,youareabouttoenternegotiationswithalocal
contractor,"PipelineConstructors,Inc."Thisfirmistheonlylocalcontractorqualifiedtohandle
suchalargeproject.Ifasuitablecontractagreementcannotbereached,thenyouwillhaveto
breakoffnegotiationssoonandturntoanothercompany.
ThePipelineConstructors,Inc.instructionsoffersasimilaroverview.
Tofocusthenegotiations,theissuestobedecidedinthecontractarealreadydefined:
Duration
Thefinalcontractmustspecifyarequiredcompletiondate.
PenaltyforLateCompletion
Thefinalcontractmayincludeadailypenaltyforlateprojectcompletiononthepartofthecontractor.
BonusforEarlyCompletion
Thefinalcontractmayincludeadailybonusforearlyprojectcompletion.
ReportFormat
ContractorprogressreportswilleitherconformtothetraditionalCMGGasformatortoanewformat
proposedbythestate.
FrequencyofProgressReports
Progressreportscanberequireddaily,weekly,biweeklyormonthly.
ConformtoPendingLegislationRegardingPipelineMarking
Statelegislationispendingtorequirespecialmarkingsanddrawingsforpipelines.Thepartieshaveto
decidewhethertoconformtothispendinglegislation.
ContractType
Theconstructioncontractmaybeaflatfee,acostplusapercentageprofit,oraguaranteedmaximum
withcostplusapercentageprofitbelowthemaximum.
AmountofFlatFee
Ifthecontractisaflatfee,thedollaramountmustbespecified.
PercentageofProfit
Ifthecontractinvolvesapercentageprofit,thenthepercentagemustbeagreedupon.
CMGGasClerkonSite
ThecontractmayspecifythataCMGGasClerkmaybeonsiteandhaveaccesstoallaccountsorthat
onlyprogressreportsaremadebyPipelineConstructors,Inc.
PenaltyforLateStartingDate
CMGGasisresponsibleforobtainingrightofwayagreementsforthenewpipeline.Thepartiesmay
agreetoadailypenaltyifCMGGascannotobtaintheseagreements.
Afinalcontractrequiresanagreementoneachoftheseissues,representedonaformsignedbyboth
negotiators.
Asafurtheraid,eachparticipantisprovidedwithadditionalinformationandascoringsystemtoindicatethe
relativedesirabilityofdifferentcontractagreements.Additionalinformationincludesitemssuchasestimated
constructioncostandexpecteddurationaswellascompanypoliciessuchasdesiredreportingformatsor
workarrangements.Thisinformationmayberevealedorwithheldfromtheotherpartydependinguponan
individual'snegotiatingstrategy.Thenumericalscoringsystemincludespointtotalsfordifferentagreements
onspecificissues,includinginteractionsamongthevariousissues.Forexample,theamountofpoints
receivedbyPipelineConstructors,Inc.forabonusforearlycompletionincreasesasthecompletiondate

becomelater.Anearliercompletionbecomesmorelikelywithalatercompletiondate,andhencethe
probabilityofreceivingabonusincreases,sotheresultingpointtotallikewiseincreases.
Thetwofirmshavedifferingperceptionsofthedesirabilityofdifferentagreements.Insomecases,their
viewswillbedirectlyconflicting.Forexample,increasesinaflatfeeimplygreaterprofitsforPipeline
Constructors,Inc.andgreatercostsforCMGGas.Insomecases,onepartymayfeelstronglyabouta
particularissue,whereastheotherisnotparticularlyconcerned.Forexample,CMGGasmaywantaclerkon
site,whilePipelineConstructors,Inc.maynotcare.Asdescribedintheprevioussection,thesedifferencesin
theevaluationofanissueprovideopportunitiesfornegotiators.Byconcedinganunimportantissuetothe
otherparty,anegotiatormaytradeforprogressonanissuethatismoreimportanttohisorherfirm.
Examplesofinstructionstothenegotiatorsappearbelow.

InstructionstothePipelinesConstructors,Inc.Representative
Afterexaminingtheprojectsite,yourcompany'sestimatorsareconvincedthattheprojectcanbecompleted
inthirtysixweeks.Inbargainingfortheduration,keeptwothingsinmindthelongerpastthirtysixweeks
thecontractdurationis,themoremoneythatcanbemadeoffthe"bonusesforbeingearly"andthechances
ofbeinglatearereduced.Thatreducestheriskofpayinga"penaltyforlateness".
Throughouttheprojectthegascompanywillwantprogressreports.Thesereportstaketimetocompileand
thereforethefeweryouneedtosubmit,thebetter.Inaddition,StatelawdictatesthattheRequiredStandard
Reportbeusedunlessthecontractorandtheowneragreeotherwise.Thesestandardreportsareevenmore
timeconsumingtoproducethanmoretraditionalreports.
TheStateLegislatureisconsideringalawthatrequiresaccuratedrawingsandmarkersofallpipelinesbyall
utilities.Youwouldprefernottoconformtothisuncertainsetofrequirements,butthisisnegotiable.
Whattypeofcontractandtheamountyourcompanywillbepaidaretwoofthemostimportantissuesin
negotiations.IntheFlatFeecontract,yourcompanywillreceiveanagreedamountfromCMGGas.
Therefore,whenthereareanydelayorcostoverruns,itwillbethefullresponsibilityofyourcompany.with
thistypeofcontract,yourcompanyassumesalltheriskandwillinturnwantahigherprice.Yourestimators
believeacostandcontingencyamountof4,500,000dollars.Youwouldlikeahigherfee,ofcourse.
WiththeCostPlusContract,theriskissharedbythegascompanyandyourcompany.Withthistypeof
contract,yourcompanywillbillCMGGasforallofitscosts,plusaspecifiedpercentageofthosecosts.In
thiscase,costoverrunswillbepaidbythegascompany.Notonlydoesthepercentageabovecosthavetobe
decideduponbutalsowhetherornotyourcompanywillallowaFieldClerkfromthegascompanytobeat
thejobsitetomonitorreportedcosts.Whetherornotheisaroundisofnoconcerntoyourcompanysinceits
policyisnottoinflatecosts.thispointcanbeusedasabargainingweapon.
Finally,yourcompanyisworriedwhetherthegascompanywillobtainthelandrightstolaythepipe.
Therefore,youshoulddemandapenaltyforthepotentialdelayoftheprojectstartingdate.

InstructionstotheCMGGasCompanyRepresentative
Inordertosatisfytheautomanufacturer,thepipelinemustbecompletedinfortyweeks.Anearlier
completiondatewillnotresultinreceivingrevenueanyearlier.Thus,theonlyreasontobargainforshorter
durationistofeelsaferabouthavingtheprojectdoneontime.Iftheprojectdoesexceedthefortyweek
maximum,apenaltywillhavetobepaidtotheautomanufacturer.Consequently,iftheprojectexceedsthe
agreeduponduration,thecontractorshouldpayyouapenalty.Thepenaltyforlatecompletionmightbe
relatedtotheprojectduration.Forexample,ifthedurationisagreedtobethirtysixweeks,thenthepenalty
forbeinglateneednotbesosevere.Also,itisnormalthatthecontractorgetabonusforearlycompletion.Of
course,completionbeforefortyweeksdoesn'tyieldanybenefitotherthanyourownpeaceofmind.Tryto
keeptheearlybonusaslowaspossible.
Throughouttheprojectyouwillwantprogressreports.Themoreoftenthesereportsarereceived,thebetter
tomonitortheprogress.StatelawdictatesthattheRequiredStandardReportbeusedunlessthecontractor

andtheowneragreeotherwise.Thesereportsareverydetailedandtimeconsumingtoreview.Youwould
prefertousethetraditionalCMGGasreports.
Thestatelegislatureisconsideringalawthatrequiresaccuratedrawingsandmarkersofallpipelinesbyall
utilities.Forthisprojectitwillcostanadditional$250,000todothisnow,or$750,000todothiswhenthe
lawispassed.
Oneofthemostimportantissuesisthetypeofcontract,andtheamountofbepaid.TheFlatFeecontract
meansthatCMGGaswillpaythecontractorasetamount.Therefore,whentherearedelaysandcost
overruns,thecontractorassumesfullresponsibilityfortheindividualcosts.However,thisevasionofriskhas
tobepaidforandresultsinahigherprice.IfFlatFeeischosen,onlythecontractpriceistobedetermined.
Yourcompany'sestimatorshavedeterminedthattheprojectshouldcostabout$5,000,000.
TheCostPlusPercentcontractmaybecheaper,buttheriskisshared.Withthistypeofcontract,the
contractorwillbillthegascompanyforallcosts,plusaspecifiedpercentageofthosecosts.Inthiscase,cost
overrunswillbepaidbythegascompany.Ifthistypeofcontractischosen,notonlymusttheprofit
percentagebechosen,butalsowhetherornotagascompanyrepresentativewillbeallowedonsiteallofthe
timeactingasaFieldClerk,toensurethataproperamountofmaterialandlaborisbilled.Theusual
percentageagreeduponisabouttenpercent.
Contractorsalsohaveaconcernwhetherornottheywillreceiveapenaltyifthegasrightofwayisnot
obtainedintimetostarttheproject.Inthiscase,CMGGashasalreadysecuredtherightofways.But,ifthe
penaltyistoohigh,thisisadangerousprecedentforfuturenegotiations.However,youmighttrytousethis
asabargainingtool.
Example88:Anexampleofanegotiatedcontract
AtypicalcontractresultingfromasimulationofthenegotiationbetweenCMGGasandPipeline
Constructors,Inc.appearsinTable86.Anagreementwithrespecttoeachpredefinedissueis
included,andtheresultingcontractsignedbybothnegotiators.
TABLE86ExampleofaNegotiatedContractbetweenCMGGasandPipeline
Constructors,Inc
Duration
38weeks
PenaltyforLateCompletion

$6,800perday

BonusforEarlyCompletion
ReportFormat

$0perday
traditionalCMGform

FrequencyofProgressReports
ConformtoPendingPipelineMarkingLegislation

weekly
yes

ContractType
AmountofFlatFee

flatfee
$5,050,000

PercentageofProfit
CMGGasClerkonSite

Notapplicable
yes

PenaltyforLateStartingDate

$3,000perday

Signed:
CMGGasRepresentative
PipelineConstructors,Inc.

Example89:Scoringsystemsforthenegotiatedcontractgames
Tomeasuretheperformanceofthenegotiatorsinthepreviousexample,ascoringsystemis
neededfortherepresentativeofPipelineConstructors,Inc.andanotherscoringsystemforthe
representativeofCMGGas.Thesescoringsystemsforthecompaniesassociatedwiththeissues
describedinExample87aredesignatedassystemA.
Inordertomakethenegotiatinggameviableforclassroomuse,anothersetofinstructionsfor
eachcompanyisdescribedinthisexample,andtheassociatedscoringsystemsforthetwo
companiesaredesignatedasSystemB.Ineachgameplay,theinstructormaychooseadifferent
combinationofinstructionsandnegotiatingteams,leadingtofourpossiblecombinationsof
scoringsystemsforPipelineConstructors,Inc.andCMGGas.[5]

InstructionToThePipelineConstructors,Inc.Representative
Inordertohelpyou,yourbosshasleftyouwithascoringtableforalltheissuesandalternatives.Two
differentscoringsystemsarelistedhereyouwillbeassignedtouseoneortheother.Instructionsforscoring
systemAareincludedinSection8.9.TheinstructionsforscoringsystemBareasfollows:
Afterexaminingthesite,yourestimatorbelievesthattheprojectwillrequire38weeks.Youarehappyto
conformwithanyreportingorpipelinemarkingsystem,sinceyourcomputerbasedprojectcontroland
designsystemscaneasilyproducethesesubmissions.Youwouldprefertodelaythestartofthecontractas
longaspossible,sinceyourforcesarebusyonanotherjobhence,youdonotwanttoimposeapenaltyfor
latestart.Trytomaximizetheamountofpoints,astheyreflectprofitbroughtintoyourcompany,oracost
savings.InParts3and4,besuretousetheprojectdurationagreedupontocalculateyourscore.Finally,do
notdiscussyourscoringsystemwiththeCMGGasrepresentativethisisproprietaryinformation!
SCORINGFORPIPELINECONSTRUCTORS,INC.
NOTE:NAmeansnotacceptableandthedealwillnotbeapprovedbyyourbosswithanyofthese
provisions.also,thealternativeslistedaretheonlyonesinthecontextofthisproblemnootheralternatives
areacceptable.
1.COMPLETIONDATE
SystemA
NA
0
+5
+10
+20
+40

SystemB
NA
NA
10
0
+10
+20

2.REPORTS
StateStandardReport
CMGReports

20
5

0
0

3.PENALTYFORLATENESS($PERDAY)
DURATION (WEEKS)
ScoringSystemA
36
ScoringSystemB
37
0999
1
1,0001,999
2
2,0002,999
4
3,0003,999
6
4,0004,999
8
5,0005,999
11
6,0006,999
14

37
38
1
2
3
5
7
9
12

Under36Weeks
36weeks
37weeks
38weeks
39weeks
40weeks

38
39
1
2
3
4
5
7
9

39
40
0
1
2
3
4
5
6

40
41
0
0
1
1
2
2
3

7,0007,999
Over8,000

18
NA

14
NA

11
NA

7
NA

3
NA

37
38
0
0
2
4
6
8
10
12
14
16
18

38
39
0
2
4
6
8
10
14
18
22
26
30

39
40
0
2
4
6
10
14
18
24
28
32
36

40
41
2
2
4
8
12
16
22
28
36
40
45

5.CONFORMTOPENDINGLEGISLATION(MARKINGPIPELINES)
A
Yes
+5
No
+15

B
+10
+10

4.BONUSFORBEINGEARLY($PERDAY)
ScoringSystemA
36
ScoringSystemB
37
0999
0
1,0001,999
0
2,0002,999
0
3,0003,999
1
4,0004,999
2
5,0005,999
3
6,0006,999
4
7,0007,999
5
8,0008,999
6
9,0009,999
7
Over10,000
8

6.HOWOFTENFORTHEPROGRESSREPORTS
Daily
Weekly
Biweekly
Monthly

A
NA
20
10
6

B
0
0
0
0

7.CONTRACTTYPE
A
FlatFee
5
Cost+X%
+25
IfFlatFeedopart8andskipparts9and10.
IfCost+X%doparts9and10andskippart8.

B
5
+25

8.FLATFEE($)
Below4,500,000
Over4,500,000

A
NA
+1foreach10,000

B
15foreach10,000
+2foreach10,000

A
NA
+250
+375
+450
+475
+500
+525
+550
+600
+725
+900

B
NA
NA
+300
+330
+360
+400
+440
+480
+540
+600
+800

9.IFCOSTPLUSX%
Below6%
6%
7%
8%
9%
10%
11%
12%
13%
14%
Over14%
10.GASCO.FIELDCLERKONSITE

Yes
No

0
0

0
+10

11.PENALTYFORDELAYEDSTARTINGDATEDUETOGASCOMPANYERROR($PERDAY)
A
B
0499
NA
NA
5001499
6
10
15002499
4
7
15003499
2
5
35004499
1
3
45005499
0
1
55006499
+1
0
65007499
+2
+3
7500ormore
+4
+6

InstructionstotheCMGGasCompanyRepresentative
Inordertohelpyou,yourbosshasleftyouwithascoringtableforalltheissuesandalternatives.Two
differentscoringsystemsarelistedhereyouwillbeassignedtouseoneortheother.Instructionsforscoring
systemAareincludedinSection8.9.TheinstructionsforscoringsystemBaredescribedasfollows:
Yourcontractwiththeautomobilecompanyprovidesanincentiveforcompletionofthepipelineearlierthan
38weeksandapenaltyforcompletionafter38weeks.Toinsuretimelycompletionoftheproject,youwould
liketoreceivedetailedprojectreportsasoftenaspossible.
Trytomaximizethenumberofpointsfromthefinalcontractprovisionsthiscorrespondstominimizing
costs.DonotdiscussyourscoringsystemswithPipelineConstructors,Inc.
SCORINGSYSTEMFORCMGGAS
NOTE:NAmeansnotacceptableandthedealwillnotbeapprovedbyyourbosswithanyofthese
provisions.Ifyoucan'tnegotiateacontract,yourscorewillbe+450.Also,thealternativeslistedaretheonly
onesinthecontextofthisproblemnootheralternativesareacceptable.
1.DURATION

POINTS
Over40weeks
40weeks
39weeks
38weeks
37weeks
036weeks

SystemA
NA
0
+2
+4
+5
+6

SystemB
40
10
+2
+8
+14
+14

A
+2
+10

B
0
0

2.REPORTS
RequiredStandardReport
"Traditional"CMGGasReports
3.PENALTYFORLATENESS($PERDAY)
DURATION
ScoringSystemA
ScoringSystemB
0999
1,0001,999
2,0002,999
3,0003,999
4,0004,999

(WEEKS)
36
38
NA
9
10
11

37
39
NA
7
9
10

38
40
NA
6
8
9

39
41
NA
3
5
6

40
42
NA
0
2
4

11

10

4,0004,999
5,0005,999
6,0006,999
7,0007,999
8,0008,999
9,0009,999
10,000ormore

12
13
14
15
16
17
18

11
12
13
15
15
16
16

10
11
12
13
14
15
15

7
8
9
11
12
13
13

4.BONUSFORBEINGEARLY($PERDAY)
8000ormore
70007999
60006999
50005999
40004999
30003999
20002999
10001999
0999

A
NA
+3
+6
+8
+10
+12
+13
+14
+15

5.CONFORMTOPENDINGLEGISLATION(MARKINGPIPELINES)
A
Yes
+25
No
25

B
5
2
1
0
+5
+7
+9
+13
+17
B
0
NA

6.HOWOFTENFORTHEPROGRESSREPORTS
Daily
Weekly
Biweekly
Monthly

A
+45
+50
+30
NA

B
+50
+30
+10
+5

7.CONTRACTTYPE
A
FlatFee
25
Cost+X%
0
IfFlatFeedopart8andskipparts9and10.
IfCost+X%doparts9and10andskippart8.

B
25
0

8.FLATFEE($)
A
NA
+1foreach10,000
below5,000,000

B
NA
+1foreach10,000
below5,000,000

Below5%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%

A
+950
+800
+700
+600
+550
+525
+500
+475
+450
+400
+300

B
+700
+660
+620
+590
+570
+550
+535
+500
+440
+380
+300

15%

+200

+100

Over5,000,000
05,000,000
9.IFCOSTPLUSX%

5
6
7
8
9
10
11

15%
Over14%

+200
NA

+100
+10

A
+20
+5

B
+10
0

10.GASCO.FIELDCLERKONSITE
Yes
No

11.PENALTYFORDELAYEDSTARTINGDATEDUETOUNAVAILABLERIGHTOFWAYS($PER
DAY)
A
B
01,999
+10
+3
2,0003,999
+8
+2
4,0005,999
+6
+1
6,0007,999
+4
0
8,0009,999
+2
10
10,000ormore
NA
20
Backtotop

8.9ResolutionofContractDisputes
Onceacontractisreached,avarietyofproblemsmayemergeduringthecourseofwork.Disputesmayarise
overqualityofwork,overresponsibilityfordelays,overappropriatepaymentsduetochangedconditions,or
amultitudeofotherconsiderations.Resolutionofcontractdisputesisanimportanttaskforprojectmanagers.
Themechanismforcontractdisputeresolutioncanbespecifiedintheoriginalcontractor,lessdesireably,
decidedwhenadisputearises.
Themostprominentmechanismfordisputeresolutionisadjudicationinacourtoflaw.Thisprocesstendsto
beexpensiveandtimeconsumingsinceitinvolveslegalrepresentationandwaitinginqueuesofcasesfor
availablecourttimes.Anypartytoacontractcanbringasuit.Inadjudication,thedisputeisdecidedbya
neutral,thirdpartywithnonecessaryspecializedexpertiseinthedisputedsubject.Afterall,itisnota
prerequisiteforjudgestobefamiliarwithconstructionprocedures!Legalproceduresarehighlystructured
withrigid,formalrulesforpresentationsandfactfinding.Onthepositiveside,legaladjudicationstrivesfor
consistencyandpredictabilityofresults.Theresultsofpreviouscasesarepublishedandcanbeusedas
precedentsforresolutionofnewdisputes.
Negotiationamongthecontractpartiesisasecondimportantdisputeresolutionmechanism.These
negotiationscaninvolvethesamesortsofconcernsandissuesaswiththeoriginalcontracts.Negotiation
typicallydoesnotinvolvethirdpartiessuchasjudges.Thenegotiationprocessisusuallyinformal,
unstructuredandrelativelyinexpensive.Ifanagreementisnotreachedbetweentheparties,thenadjudication
isapossibleremedy.
Athirddisputeresolutionmechanismistheresorttoarbitrationormediationandconciliation.Inthese
procedures,athirdpartyservesacentralroleintheresolution.Theseoutsidepartiesareusuallychosenby
mutuallyagreementofthepartiesinvolvedandwillhavespecializedknowledgeofthedisputesubject.In
arbitration,thethirdpartymaymakeadecisionwhichisbindingontheparticipants.Inmediationand
conciliation,thethirdpartyservesonlyasafacilitatortohelptheparticipantsreachamutuallyacceptable
resolution.Likenegotiation,theseprocedurescanbeinformalandunstructured.
Finally,thehighcostofadjudicationhasinspiredaseriesofnontraditionaldisputeresolutionmechanisms
thathavesomeofthecharacteristicsofjudicialproceedings.Thesemechanismsinclude:
Privatejudginginwhichtheparticipantshireathirdpartyjudgetomakeadecision,
Neutralexpertfactfindinginwhichathirdpartywithspecializedknowledgemakesa
recommendation,and

Minitrialinwhichlegalsummariesoftheparticipants'positionsarepresentedtoajurycomprisedof
principalsoftheaffectedparties.
Someoftheseproceduresmaybecourtsponsoredorrequiredforparticulartypesofdisputes.
Whilethesevariousdisputesresolutionmechanismsinvolvevaryingcosts,itisimportanttonotethatthe
mostimportantmechanismforreducingcostsandproblemsindisputeresolutionisthereasonablenessofthe
initialcontractamongthepartiesaswellasthecompetenceoftheprojectmanager.
Backtotop

8.10References
1.Au,T.,R.L.BostlemanandE.W.Parti,"ConstructionManagementGameDeterministicModel,"Asce
JournaloftheConstructionDivision,Vol.95,1969,pp.2538.
2.BuildingResearchAdvisoryBoard,ExploratoryStudyonResponsibility,LiabilityandAccountability
forRisksinConstruction,NationalAcademyofSciences,Washington,D.C.,1978.
3.ConstructionIndustryCostEffectivenessProject,"ContractualArrangements,"ReportA7,The
BusinessRoundtable,NewYork,October1982.
4.Dudziak,W.andC.Hendrickson,"ANegotiatingSimulationGame,"ASCEJournalofManagementin
Engineering,Vol.4,No.2,1988.
5.Graham,P.H.,"OwnerManagementofRiskinConstructionContracts,"CurrentPracticeinCost
EstimatingandCostControl,ProceedingsofanASCEConference,Austin,Texas,April1983,pp.
207215.
6.Green,E.D.,"GettingOutofCourtPrivateResolutionofCivilDisputes,"BostonBarJournal,May
June1986,pp.1120.
7.Park,WilliamR.,TheStrategyofContractingforProfit,2ndEdition,PrenticeHall,EnglewoodCliffs,
NJ,1986.
8.Raiffa,Howard,TheArtandScienceofNegotiation,HarvardUniversityPress,Cambridge,MA,1982.
9.Walker,N.,E.N.WalkerandT.K.Rohdenburg,LegalPitfallsinArchitecture,Engineeringand
BuildingConstruction,2ndEdition,McGrawHillBookCo.,NewYork,1979.
Backtotop

8.11Problems
1.SupposethatinExample85,thetermsfortheguaranteedmaximumcostcontractaresuchthatchange
orderswillnotbecompensatediftheirtotalcostiswithin3%oftheoriginalestimate,butwillbe
compensatedinfullfortheamountbeyond3%oftheoriginalestimate.Ifallotherconditionsremain
unchanged,determinethecontractor'sprofitandtheowner'sactualpaymentunderthiscontractforthe
followingconditionsofUandC:
1.U=0,
C=6%E
2.U=4%E, C=6%E
3.U=4%E, C=6%E
2.SupposethatinExample85,thetermsofthetargetestimatecontractcallforN=0.3insteadofN=
0.5,meaningthatthecontractorwillreceive30%ofthesavings.Ifallotherconditionsremain
unchanged,determinethecontractor'sprofitandtheowner'sactualpaymentunderthiscontractforthe
givenconditionsofUandC.
3.SupposethatinExample85,thetermsofthecostplusvariablepercentagecontractallowanincentive
bonusforearlycompletionandapenaltyforlatecompletionoftheproject.LetDbethenumberof
daysearly,withnegativevaluedenotingDdayslate.Thebonusperdaysearlyorthepenaltyperday
latewithbeTdollars.Theagreedformulaforowner'spaymentis:
P=R(2EA+C)+A+C+DT(1+0.4C/E)

ThevalueofTissetat$5,000perday,andtheprojectiscompleted30daysbehindschedule.Ifall
otherconditionsremainunchanged,findthecontractor'sprofitandtheowner'sactualpaymentunder
thiscontractforthegivenconditionsofUandC.
4.Consideraconstructionprojectforwhichthecontractor'sestimateis$3,000,000.Forvarioustypesof
contracts,R=10%,R1=3%,R2=1.5%,R3=6%andN=0.6.Thecontractorisnotcompensatedfor
changeordersundertheguaranteedmaximumcostcontractifthetotalcostforthechangeorderis
within5%($150,000)oftheoriginalestimate.Determinethecontractor'sgrossprofitforeachofthe
seventypesofconstructioncontractsforeachofthefollowingconditionsofUandC:
1.U=0,
C=0
2.U=0,
C=4%E=$120,000
3.U=5%E=$150,000, C=0
4.U=5%E=$150,000, C=4%E=120,000
5.U=2%E=$60,000, C=0
6.U=2%E=$60,000, C=4%E=120,000
5.UsingthedatainProblem4,determinetheowner'sactualpaymentforeachoftheseventypesof
constructioncontractsforthesameconditionsofUandC.
6.SupposethatinProblem4,thetermsoftheguaranteedmaximumcostcontractaresuchthatchange
orderswillnotbecompensatediftheirtotalcostiswithin3%oftheoriginalestimate,butwillbe
compensatedinfullfortheamountbeyond3%oftheoriginalestimate.Ifallconditionsremained
unchanged,determinethecontractor'sprofitandtheowner'sactualpaymentunderthiscontractforthe
followingconditionsofUandC:
1.U=0, C=5%E
2.U=2%, C=5%E
3.U=2%, C=5%E
7.SupposethatinProblem4,thetermsofthetargetestimatecontractcallforN=0.7insteadofN=0.3,
meaningthatthecontractorwillreceive70%ofthesavings.Ifallotherconditionsremainunchanged,
determinethecontractor'sprofitandtheowner'sactualpaymentunderthiscontractforthegiven
conditionsofUandC.
8.SupposethatinProblem4,thetermsofthecostplusvariablepercentagecontractallowanincentive
bonusforearlycompletionandapenaltyforlatecompletionoftheproject.LetDbethenumberof
daysearly,withnegativevaluedenotingDdayslate.Thebonusperdaysearlyorthepenaltyperday
latewillbeTdollars.Theagreedformulaforowner'spaymentis:
P=R(2EA+C)+A+C+DT(1+0.2C/E)
ThevalueofTissetat$10,000perday,andtheprojectiscompleted20daysaheadschedule.Ifall
otherconditionsremainunchanged,findthecontractor'sprofitandtheowner'sactualpaymentunder
thiscontractforthegivenconditionsofUandC.
9.InplayingtheconstructionnegotiatinggamedescribedinSection8.8,yourinstructormaychooseone
ofthefollowingcombinationsofcompaniesandissuesleadingtodifferentcombinationsofthescoring
systems:

a.
b.
c.
d.

PipelineConstructorsInc.

CMGGas

SystemA
SystemA
SystemB
SystemB

SystemA
SystemB
SystemA
SystemB

Sincethescoringsystemsareconfidentialinformation,yourinstructorwillnotdisclose
thecombinationusedfortheassignment.Yourinstructormaydividetheclassintogroups

oftwostudents,eachgroupactingasnegotiatorsrepresentingthetwocompaniesinthe
game.Tokeepthegameinterestingandfair,donottrytofindoutthescoringsystemof
yournegotiatingcounterpart.Toseekinsiderinformationisunethicalandillegal!
Backtotop

8.12Footnotes
1.TheseexamplesaretakendirectlyfromAConstructionIndustryCostEffectivenessProjectReport,
"ContractualArrangements,"TheBusinessRoundtable,NewYork,AppendixD,1982.Permissiontoquote
thismaterialfromtheBusinessRoundtableisgratefullyacknowledged.Back
2.SeeC.D.SutliffandJ.G.Zack,Jr."ContractProvisionsthatEnsureCompleteCostDisclosures",Cost
Engineering,Vol.29,No.10,October1987,pp.1014.Back
3.ArkansasRiceGrowersv.AlchemyIndustries,Inc.,UnitedStatesCourtofAppeals,EighthCircuit,1986.
Thecourtdecisionappearsin797FederalReporter,2dSeries,pp.565574.Back
4.ThisgameisfurtherdescribedinW.DudziakandC.Hendrickson,"ANegotiationSimulationGame,"
ASCEJournalofManagementinEngineering,Vol.4,No.2,1988.Back
5.Toundertakethisexercise,theinstructorneedstodividestudentsintonegotiatingteams,witheach
individualassignedscoringsystemAorB.NegotiatorswillrepresentPipelineConstructors,Inc.orCMG
Gas.Negotiatingpairsshouldnotbetoldwhichscoringsystemtheircounterpartisassigned.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter8
GoToChapter10
(ConstructionPricingandContracting) (FundamentalSchedulingProcedures)
ConstructionPlanning
BasicConceptsintheDevelopmentofConstructionPlans
ChoiceofTechnologyandConstructionMethod
DefiningWorkTasks
DefiningPrecedenceRelationshipsAmongActivities
EstimatingActivityDurations
EstimatingResourceRequirementsforWorkActivities
CodingSystems
References
Problems
Footnotes

9.ConstructionPlanning
9.1BasicConceptsintheDevelopmentofConstructionPlans
Constructionplanningisafundamentalandchallengingactivityinthemanagementandexecutionofconstructionprojects.Itinvolvesthechoiceof
technology,thedefinitionofworktasks,theestimationoftherequiredresourcesanddurationsforindividualtasks,andtheidentificationofany
interactionsamongthedifferentworktasks.Agoodconstructionplanisthebasisfordevelopingthebudgetandthescheduleforwork.Developingthe
constructionplanisacriticaltaskinthemanagementofconstruction,eveniftheplanisnotwrittenorotherwiseformallyrecorded.Inadditiontothese
technicalaspectsofconstructionplanning,itmayalsobenecessarytomakeorganizationaldecisionsabouttherelationshipsbetweenprojectparticipants
andevenwhichorganizationstoincludeinaproject.Forexample,theextenttowhichsubcontractorswillbeusedonaprojectisoftendeterminedduring
constructionplanning.
Formingaconstructionplanisahighlychallengingtask.AsSherlockHolmesnoted:
Mostpeople,ifyoudescribeatrainofeventstothem,willtellyouwhattheresultwouldbe.Theycanputthoseeventstogetherintheirminds,
andarguefromthemthatsomethingwillcometopass.Therearefewpeople,however,who,ifyoutoldthemaresult,wouldbeabletoevolve
fromtheirowninnerconsciousnesswhatthestepswerewhichleduptothatresult.ThispoweriswhatImeanwhenItalkofreasoning
backward.[1]
Likeadetective,aplannerbeginswitharesult(i.e.afacilitydesign)andmustsynthesizethestepsrequiredtoyieldthisresult.Essentialaspectsof
constructionplanningincludethegenerationofrequiredactivities,analysisoftheimplicationsoftheseactivities,andchoiceamongthevariousalternative
meansofperformingactivities.Incontrasttoadetectivediscoveringasingletrainofevents,however,constructionplannersalsofacethenormative
problemofchoosingthebestamongnumerousalternativeplans.Moreover,adetectiveisfacedwithanobservableresult,whereasaplannermustimagine
thefinalfacilityasdescribedintheplansandspecifications.
Indevelopingaconstructionplan,itiscommontoadoptaprimaryemphasisoneithercostcontroloronschedulecontrolasillustratedinFig.91.Some
projectsareprimarilydividedintoexpensecategorieswithassociatedcosts.Inthesecases,constructionplanningiscostorexpenseoriented.Withinthe
categoriesofexpenditure,adistinctionismadebetweencostsincurreddirectlyintheperformanceofanactivityandindirectlyfortheaccomplishmentof
theproject.Forexample,borrowingexpensesforprojectfinancingandoverheaditemsarecommonlytreatedasindirectcosts.Forotherprojects,
schedulingofworkactivitiesovertimeiscriticalandisemphasizedintheplanningprocess.Inthiscase,theplannerinsuresthattheproperprecedences
amongactivitiesaremaintainedandthatefficientschedulingoftheavailableresourcesprevails.Traditionalschedulingproceduresemphasizethe
maintenanceoftaskprecedences(resultingincriticalpathschedulingprocedures)orefficientuseofresourcesovertime(resultinginjobshopscheduling
procedures).Finally,mostcomplexprojectsrequireconsiderationofbothcostandschedulingovertime,sothatplanning,monitoringandrecordkeeping
mustconsiderbothdimensions.Inthesecases,theintegrationofscheduleandbudgetinformationisamajorconcern.

Figure91AlternativeEmphasesinConstructionPlanning

Inthischapter,weshallconsiderthefunctionalrequirementsforconstructionplanningsuchastechnologychoice,workbreakdown,andbudgeting.
Constructionplanningisnotanactivitywhichisrestrictedtotheperiodaftertheawardofacontractforconstruction.Itshouldbeanessentialactivity
duringthefacilitydesign.Also,ifproblemsariseduringconstruction,replanningisrequired.
Backtotop

9.2ChoiceofTechnologyandConstructionMethod
Asinthedevelopmentofappropriatealternativesforfacilitydesign,choicesofappropriatetechnologyandmethodsforconstructionareoftenill
structuredyetcriticalingredientsinthesuccessoftheproject.Forexample,adecisionwhethertopumportotransportconcreteinbucketswilldirectly
affectthecostanddurationoftasksinvolvedinbuildingconstruction.Adecisionbetweenthesetwoalternativesshouldconsidertherelativecosts,
reliabilities,andavailabilityofequipmentforthetwotransportmethods.Unfortunately,theexactimplicationsofdifferentmethodsdependuponnumerous
considerationsforwhichinformationmaybesketchyduringtheplanningphase,suchastheexperienceandexpertiseofworkersortheparticular
undergroundconditionatasite.
Inselectingamongalternativemethodsandtechnologies,itmaybenecessarytoformulateanumberofconstructionplansbasedonalternativemethodsor
assumptions.Oncethefullplanisavailable,thenthecost,timeandreliabilityimpactsofthealternativeapproachescanbereviewed.Thisexaminationof
severalalternativesisoftenmadeexplicitinbiddingcompetitionsinwhichseveralalternativedesignsmaybeproposedorvalueengineeringfor
alternativeconstructionmethodsmaybepermitted.Inthiscase,potentialconstructorsmaywishtoprepareplansforeachalternativedesignusingthe
suggestedconstructionmethodaswellastoprepareplansforalternativeconstructionmethodswhichwouldbeproposedaspartofthevalueengineering
process.
Informingaconstructionplan,ausefulapproachistosimulatetheconstructionprocesseitherintheimaginationoftheplannerorwithaformalcomputer
basedsimulationtechnique.[2]Byobservingtheresult,comparisonsamongdifferentplansorproblemswiththeexistingplancanbeidentified.For
example,adecisiontouseaparticularpieceofequipmentforanoperationimmediatelyleadstothequestionofwhetherornotthereissufficientaccess
spacefortheequipment.Threedimensionalgeometricmodelsinacomputeraideddesign(CAD)systemmaybehelpfulinsimulatingspacerequirements
foroperationsandforidentifyinganyinterferences.Similarly,problemsinresourceavailabilityidentifiedduringthesimulationoftheconstructionprocess
mightbeeffectivelyforestalledbyprovidingadditionalresourcesaspartoftheconstructionplan.
Example91:Aroadwayrehabilitation
AnexamplefromaroadwayrehabilitationprojectinPittsburgh,PAcanservetoillustratetheimportanceofgoodconstructionplanningand
theeffectoftechnologychoice.Inthisproject,thedecksonoverpassbridgesaswellasthepavementonthehighwayitselfweretobe
replaced.Theinitialconstructionplanwastoworkoutwardfromeachendoftheoverpassbridgeswhilethehighwaysurfacewasreplaced
belowthebridges.Asaresult,accessofequipmentandconcretetruckstotheoverpassbridgeswasaconsiderableproblem.However,the
highwayworkcouldbestagedsothateachoverpassbridgewasaccessiblefrombelowatprescribedtimes.Bypumpingconcreteuptothe
overpassbridgedeckfromthehighwaybelow,costswerereducedandtheworkwasaccomplishedmuchmorequickly.
Example92:LaserLeveling
Anexampleoftechnologychoiceistheuseoflaserlevelingequipmenttoimprovetheproductivityofexcavationandgrading.[3]Inthese
systems,lasersurveyingequipmentiserectedonasitesothattherelativeheightofmobileequipmentisknownexactly.Thisheight
measurementisaccomplishedbyflashingarotatinglaserlightonalevelplaneacrosstheconstructionsiteandobservingexactlywherethe
lightshinesonreceptorsonmobileequipmentsuchasgraders.Sincelaserlightdoesnotdisperseappreciably,theheightatwhichthelaser
shinesanywhereontheconstructionsitegivesanaccurateindicationoftheheightofareceptoronapieceofmobileequipment.Inturn,the
receptorheightcanbeusedtomeasuretheheightofablade,excavatorbucketorotherpieceofequipment.Combinedwithelectrohydraulic
controlsystemsmountedonmobileequipmentsuchasbulldozers,gradersandscrapers,theheightofexcavationandgradingbladescanbe
preciselyandautomaticallycontrolledinthesesystems.Thisautomationofbladeheightshasreducedcostsinsomecasesbyover80%and
improvedqualityinthefinishedproduct,asmeasuredbythedesiredamountofexcavationortheextenttowhichafinalgradeachievesthe
desiredangle.Thesesystemsalsopermittheuseofsmallermachinesandlessskilledoperators.However,theuseofthesesemiautomated
systemsrequireinvestmentsinthelasersurveyingequipmentaswellasmodificationtoequipmenttopermitelectronicfeedbackcontrolunits.
Still,laserlevelingappearstobeanexcellenttechnologicalchoiceinmanyinstances.
Backtotop

9.3DefiningWorkTasks
Atthesametimethatthechoiceoftechnologyandgeneralmethodareconsidered,aparallelstepintheplanningprocessistodefinethevariousworktasks
thatmustbeaccomplished.Theseworktasksrepresentthenecessaryframeworktopermitschedulingofconstructionactivities,alongwithestimatingthe
resourcesrequiredbytheindividualworktasks,andanynecessaryprecedencesorrequiredsequenceamongthetasks.Thetermswork"tasks"or
"activities"areoftenusedinterchangeablyinconstructionplanstorefertospecific,defineditemsofwork.Injobshopormanufacturingterminology,a
projectwouldbecalleda"job"andanactivitycalledan"operation",butthesenseofthetermsisequivalent.[4]Theschedulingproblemistodeterminean
appropriatesetofactivitystarttime,resourceallocationsandcompletiontimesthatwillresultincompletionoftheprojectinatimelyandefficientfashion.
Constructionplanningisthenecessaryforerunnertoscheduling.Inthisplanning,definingworktasks,technologyandconstructionmethodistypically
doneeithersimultaeouslyorinaseriesofiterations.
Thedefinitionofappropriateworktaskscanbealaboriousandtediousprocess,yetitrepresentsthenecessaryinformationforapplicationofformal
schedulingprocedures.Sinceconstructionprojectscaninvolvethousandsofindividualworktasks,thisdefinitionphasecanalsobeexpensiveandtime
consuming.Fortunately,manytasksmayberepeatedindifferentpartsofthefacilityorpastfacilityconstructionplanscanbeusedasgeneralmodelsfor
newprojects.Forexample,thetasksinvolvedintheconstructionofabuildingfloormayberepeatedwithonlyminordifferencesforeachofthefloorsin
thebuilding.Also,standarddefinitionsandnomenclaturesformosttasksexist.Asaresult,theindividualplannerdefiningworktasksdoesnothaveto
approacheachfacetoftheprojectentirelyfromscratch.
Whilerepetitionofactivitiesindifferentlocationsorreproductionofactivitiesfrompastprojectsreducestheworkinvolved,thereareveryfewcomputer
aidsfortheprocessofdefiningactivities.Databasesandinformationsystemscanassistinthestorageandrecalloftheactivitiesassociatedwithpast
projectsasdescribedinChapter14.Fortheschedulingprocessitself,numerouscomputerprogramsareavailable.Butfortheimportanttaskofdefining
activities,relianceontheskill,judgmentandexperienceoftheconstructionplannerislikelytocontinue.
Moreformally,anactivityisanysubdivisionofprojecttasks.Thesetofactivitiesdefinedforaprojectshouldbecomprehensiveorcompletelyexhaustive
sothatallnecessaryworktasksareincludedinoneormoreactivities.Typically,eachdesignelementintheplannedfacilitywillhaveoneormore
associatedprojectactivities.Executionofanactivityrequirestimeandresources,includingmanpowerandequipment,asdescribedinthenextsection.The

timerequiredtoperformanactivityiscalledthedurationoftheactivity.Thebeginningandtheendofactivitiesaresignpostsormilestones,indicatingthe
progressoftheproject.Occasionally,itisusefultodefineactivitieswhichhavenodurationtomarkimportantevents.Forexample,receiptofequipment
ontheconstructionsitemaybedefinedasanactivitysinceotheractivitieswoulddependupontheequipmentavailabilityandtheprojectmanagermight
appreciateformalnoticeofthearrival.Similarly,receiptofregulatoryapprovalswouldalsobespeciallymarkedintheprojectplan.
Theextentofworkinvolvedinanyoneactivitycanvarytremendouslyinconstructionprojectplans.Indeed,itiscommontobeginwithfairlycoarse
definitionsofactivitiesandthentofurthersubdividetasksastheplanbecomesbetterdefined.Asaresult,thedefinitionofactivitiesevolvesduringthe
preparationoftheplan.Aresultofthisprocessisanaturalhierarchyofactivitieswithlarge,abstractfunctionalactivitiesrepeatedlysubdividedintomore
andmorespecificsubtasks.Forexample,theproblemofplacingconcreteonsitewouldhavesubactivitiesassociatedwithplacingforms,installing
reinforcingsteel,pouringconcrete,finishingtheconcrete,removingformsandothers.Evenmorespecifically,subtaskssuchasremovalandcleaningof
formsafterconcreteplacementcanbedefined.Evenfurther,thesubtask"cleanconcreteforms"couldbesubdividedintothevariousoperations:
Transportformsfromonsitestorageandunloadontothecleaningstation.
Positionformsonthecleaningstation.
Washformswithwater.
Cleanconcretedebrisfromtheform'ssurface.
Coattheformsurfacewithanoilreleaseagentforthenextuse.
Unloadtheformfromthecleaningstationandtransporttothestoragelocation.
Thisdetailedtaskbreakdownoftheactivity"cleanconcreteforms"wouldnotgenerallybedoneinstandardconstructionplanning,butitisessentialinthe
processofprogrammingordesigningarobottoundertakethisactivitysincethevariousspecifictasksmustbewelldefinedforarobotimplementation.[5]
Itisgenerallyadvantageoustointroduceanexplicithierarchyofworkactivitiesforthepurposeofsimplifyingthepresentationanddevelopmentofa
schedule.Forexample,theinitialplanmightdefineasingleactivityassociatedwith"siteclearance."Later,thissingleactivitymightbesubdividedinto
"relocatingutilities,""removingvegetation,""grading",etc.However,theseactivitiescouldcontinuetobeidentifiedassubactivitiesunderthegeneral
activityof"siteclearance."Thishierarchicalstructurealsofacilitatesthepreparationofsummarychartsandreportsinwhichdetailedoperationsare
combinedintoaggregateor"super"activities.
Moreformally,ahierarchicalapproachtoworktaskdefinitiondecomposestheworkactivityintocomponentpartsintheformofatree.Higherlevelsin
thetreerepresentdecisionnodesorsummaryactivities,whilebranchesinthetreeleadtosmallercomponentsandworkactivities.Avarietyofconstraints
amongthevariousnodesmaybedefinedorimposed,includingprecedencerelationshipsamongdifferenttasksasdefinedbelow.Technologychoicesmay
bedecomposedtodecisionsmadeatparticularnodesinthetree.Forexample,choicesonplumbingtechnologymightbemadewithoutreferencetochoices
forotherfunctionalactivities.
Ofcourse,numerousdifferentactivityhierarchiescanbedefinedforeachconstructionplan.Forexample,upperlevelactivitiesmightberelatedtofacility
componentssuchasfoundationelements,andthenlowerlevelactivitydivisionsintotherequiredconstructionoperationsmightbemade.Alternatively,
upperleveldivisionsmightrepresentgeneraltypesofactivitiessuchaselectricalwork,whilelowerworkdivisionsrepresenttheapplicationofthese
operationstospecificfacilitycomponents.Asathirdalternative,initialdivisionsmightrepresentdifferentspatiallocationsintheplannedfacility.The
choiceofahierarchydependsuponthedesiredschemeforsummarizingworkinformationandontheconvenienceoftheplanner.Incomputerized
databases,multiplehierarchiescanbestoredsothatdifferentaggregationsorviewsoftheworkbreakdownstructurecanbeobtained.
Thenumberanddetailoftheactivitiesinaconstructionplanisamatterofjudgmentorconvention.Constructionplanscaneasilyrangebetweenlessthan
ahundredtomanythousanddefinedtasks,dependingontheplanner'sdecisionsandthescopeoftheproject.Ifsubdividedactivitiesaretoorefined,the
sizeofthenetworkbecomesunwieldyandthecostofplanningexcessive.Subdivisionyieldsnobenefitifreasonablyaccurateestimatesofactivity
durationsandtherequiredresourcescannotbemadeatthedetailedworkbreakdownlevel.Ontheotherhand,ifthespecifiedactivitiesaretoocoarse,itis
impossibletodeveloprealisticschedulesanddetailsofresourcerequirementsduringtheproject.Moredetailedtaskdefinitionspermitbettercontroland
morerealisticscheduling.Itisusefultodefineseparateworktasksfor:
thoseactivitieswhichinvolvedifferentresources,or
thoseactivitieswhichdonotrequirecontinuousperformance.
Forexample,theactivity"prepareandcheckshopdrawings"shouldbedividedintoataskforpreparationandataskforcheckingsincedifferent
individualsareinvolvedinthetwotasksandtheremaybeatimelagbetweenpreparationandchecking.
Inpractice,theproperlevelofdetailwilldependuponthesize,importanceanddifficultyoftheprojectaswellasthespecificschedulingandaccounting
procedureswhichareadopted.However,itisgenerallythecasethatmostschedulesarepreparedwithtoolittledetailthantoomuch.Itisimportanttokeep
inmindthattaskdefinitionwillserveasthebasisforscheduling,forcommunicatingtheconstructionplanandforconstructionmonitoring.Completionof
taskswillalsooftenserveasabasisforprogresspaymentsfromtheowner.Thus,moredetailedtaskdefinitionscanbequiteuseful.Butmoredetailedtask
breakdownsareonlyvaluabletotheextentthattheresourcesrequired,durationsandactivityrelationshipsarerealisticallyestimatedforeachactivity.
Providingdetailedworktaskbreakdownsisnothelpfulwithoutacommensurateefforttoproviderealisticresourcerequirementestimates.Asmore
powerful,computerbasedschedulingandmonitoringproceduresareintroduced,theeaseofdefiningandmanipulatingtaskswillincrease,andthenumber
ofworktaskscanreasonablybeexpectedtoexpand.
Example93:TaskDefinitionforaRoadBuildingProject
Asanexampleofconstructionplanning,supposethatwewishtodevelopaplanforaroadconstructionprojectincludingtwoculverts.[6]
Initially,wedivideprojectactivitiesintothreecategoriesasshowninFigure92:structures,roadway,andgeneral.Thisdivisionisbasedon
themajortypesofdesignelementstobeconstructed.Withintheroadwaywork,afurthersubdivisionisintoearthworkandpavement.Within
thesesubdivisions,weidentifyclearing,excavation,fillingandfinishing(includingseedingandsodding)associatedwithearthwork,andwe
definewatering,compactionandpavingsubactivitiesassociatedwithpavement.Finally,wenotethattheroadwaysegmentisfairlylong,and
soindividualactivitiescanbedefinedfordifferentphysicalsegmentsalongtheroadwaypath.InFigure92,wedivideeachpavingand
earthworkactivityintoactivitiesspecifictoeachoftworoadwaysegments.Fortheculvertconstruction,wedefinethesubdivisionsof
structuralexcavation,concreting,andreinforcing.Evenmorespecifically,structuralexcavationisdividedintoexcavationitselfandthe
requiredbackfillandcompaction.Similarly,concretingisdividedintoplacingconcreteforms,pouringconcrete,strippingforms,andcuring
theconcrete.Asafinalstepinthestructuralplanning,detailedactivitiesaredefinedforreinforcingeachofthetwoculverts.Generalwork
activitiesaredefinedformovein,generalsupervision,andcleanup.Asaresultofthisplanning,overthirtydifferentdetailedactivitieshave
beendefined.
Attheoptionoftheplanner,additionalactivitiesmightalsobedefinedforthisproject.Forexample,materialsorderingorlanestripingmight
beincludedasseparateactivities.Itmightalsobethecasethataplannerwoulddefineadifferenthierarchyofworkbreakdownsthanthat
showninFigure92.Forexample,placingreinforcingmighthavebeenasubactivityunderconcretingforculverts.Onereasonforseparating
reinforcementplacementmightbetoemphasizethedifferentmaterialandresourcesrequiredforthisactivity.Also,thedivisionintoseparate

roadwaysegmentsandculvertsmighthavebeenintroducedearlyinthehierarchy.Withallthesepotentialdifferences,theimportantaspectis
toinsurethatallnecessaryactivitiesareincludedsomewhereinthefinalplan.

Figure92IllustrativeHierarchicalActivityDivisionsforaRoadwayProject
Backtotop

9.4DefiningPrecedenceRelationshipsAmongActivities
Onceworkactivitieshavebeendefined,therelationshipsamongtheactivitiescanbespecified.Precedencerelationsbetweenactivitiessignifythatthe
activitiesmusttakeplaceinaparticularsequence.Numerousnaturalsequencesexistforconstructionactivitiesduetorequirementsforstructuralintegrity,
regulations,andothertechnicalrequirements.Forexample,designdrawingscannotbecheckedbeforetheyaredrawn.Diagramatically,precedence
relationshipscanbeillustratedbyanetworkorgraphinwhichtheactivitiesarerepresentedbyarrowsasinFigure90.ThearrowsinFigure93arecalled
branchesorlinksintheactivitynetwork,whilethecirclesmarkingthebeginningorendofeacharrowarecallednodesorevents.Inthisfigure,links
representparticularactivities,whilethenodesrepresentmilestoneevents.

Figure93IllustrativeSetofFourActivitieswithPrecedences

Morecomplicatedprecedencerelationshipscanalsobespecified.Forexample,oneactivitymightnotbeabletostartforseveraldaysafterthecompletion
ofanotheractivity.Asacommonexample,concretemighthavetocure(orset)forseveraldaysbeforeformworkisremoved.Thisrestrictiononthe
removalofformsactivityiscalledalagbetweenthecompletionofoneactivity(i.e.,pouringconcreteinthiscase)andthestartofanotheractivity(i.e.,
removingformworkinthiscase).Manycomputerbasedschedulingprogramspermittheuseofavarietyofprecedencerelationships.
Threemistakesshouldbeavoidedinspecifyingpredecessorrelationshipsforconstructionplans.First,acircleofactivityprecedenceswillresultinan
impossibleplan.Forexample,ifactivityAprecedesactivityB,activityBprecedesactivityC,andactivityCprecedesactivityA,thentheprojectcannever
bestartedorcompleted!Figure94illustratestheresultingactivitynetwork.Fortunately,formalschedulingmethodsandgoodcomputerscheduling
programswillfindanysucherrorsinthelogicoftheconstructionplan.

Figure94ExampleofanImpossibleWorkPlan

Forgettinganecessaryprecedencerelationshipcanbemoreinsidious.Forexample,supposethatinstallationofdrywallshouldbedonepriortofloor
finishing.Ignoringthisprecedencerelationshipmayresultinbothactivitiesbeingscheduledatthesametime.Correctionsonthespotmayresultin
increasedcostsorproblemsofqualityinthecompletedproject.Unfortunately,therearefewwaysinwhichprecedenceomissionscanbefoundotherthan
withchecksbyknowledgeablemanagersorbycomparisontocomparableprojects.Oneotherpossiblebutlittleusedmechanismforcheckingprecedences
istoconductaphysicalorcomputerbasedsimulationoftheconstructionprocessandobserveanyproblems.
Finally,itisimportanttorealizethatdifferenttypesofprecedencerelationshipscanbedefinedandthateachhasdifferentimplicationsforthescheduleof
activities:
Someactivitieshaveanecessarytechnicalorphysicalrelationshipthatcannotbesuperseded.Forexample,concretepourscannotproceedbefore
formworkandreinforcementareinplace.
Someactivitieshaveanecessaryprecedencerelationshipoveracontinuousspaceratherthanasdiscreteworktaskrelationships.Forexample,
formworkmaybeplacedinthefirstpartofanexcavationtrenchevenastheexcavationequipmentcontinuestoworkfurtheralonginthetrench.
Formworkplacementcannotproceedfurtherthantheexcavation,butthetwoactivitiescanbestartedandstoppedindependentlywithinthis
constraint.
Some"precedencerelationships"arenottechnicallynecessarybutareimposedduetoimplicitdecisionswithintheconstructionplan.Forexample,
twoactivitiesmayrequirethesamepieceofequipmentsoaprecedencerelationshipmightbedefinedbetweenthetwotoinsurethattheyarenot
scheduledforthesametimeperiod.Whichactivityisscheduledfirstisarbitrary.Asasecondexample,reversingthesequenceoftwoactivitiesmay
betechnicallypossiblebutmoreexpensive.Inthiscase,theprecedencerelationshipisnotphysicallynecessarybutonlyappliedtoreducecostsas
perceivedatthetimeofscheduling.
Inrevisingschedulesasworkproceeds,itisimportanttorealizethatdifferenttypesofprecedencerelationshipshavequitedifferentimplicationsforthe
flexibilityandcostofchangingtheconstructionplan.Unfortunately,manyformalschedulingsystemsdonotpossessthecapabilityofindicatingthistype
offlexibility.Asaresult,theburdenisplaceduponthemanagerofmakingsuchdecisionsandinsuringrealisticandeffectiveschedules.Withalltheother
responsibilitiesofaprojectmanager,itisnosurprisethatpreparingorrevisingtheformal,computerbasedconstructionplanisalowprioritytoamanager
insuchcases.Nevertheless,formalconstructionplansmaybeessentialforgoodmanagementofcomplicatedprojects.
Example94:PrecedenceDefinitionforSitePreparationandFoundationWork
Supposethatasitepreparationandconcreteslabfoundationconstructionprojectconsistsofninedifferentactivities:
A.Siteclearing(ofbrushandminordebris),
B.Removaloftrees,
C.Generalexcavation,
D.Gradinggeneralarea,
E.Excavationforutilitytrenches,
F.Placingformworkandreinforcementforconcrete,
G.Installingsewerlines,
H.Installingotherutilities,
I.Pouringconcrete.
ActivitiesA(siteclearing)andB(treeremoval)donothaveprecedingactivitiessincetheydependonnoneoftheotheractivities.Weassume
thatactivitiesC(generalexcavation)andD(generalgrading)areprecededbyactivityA(siteclearing).Itmightalsobethecasethatthe
plannerwishedtodelayanyexcavationuntiltreeswereremoved,sothatB(treeremoval)wouldbeaprecedentactivitytoC(general
excavation)andD(generalgrading).ActivitiesE(trenchexcavation)andF(concretepreparation)cannotbeginuntilthecompletionofgeneral
excavationandtreeremoval,sincetheyinvolvesubsequentexcavationandtrenchpreparation.ActivitiesG(installlines)andH(install
utilities)representinstallationintheutilitytrenchesandcannotbeattempteduntilthetrenchesareprepared,sothatactivityE(trench
excavation)isaprecedingactivity.Wealsoassumethattheutilitiesshouldnotbeinstalleduntilgradingiscompletedtoavoidequipment
conflicts,soactivityD(generalgrading)isalsoprecedingactivitiesG(installsewers)andH(installutilities).Finally,activityI(pour
concrete)cannotbeginuntilthesewerlineisinstalledandformworkandreinforcementareready,soactivitiesFandGarepreceding.Other
utilitiesmayberoutedovertheslabfoundation,soactivityH(installutilities)isnotnecessarilyaprecedingactivityforactivityI(pour
concrete).TheresultofourplanningaretheimmediateprecedencesshowninTable91.
TABLE91PrecedenceRelationsforaNineActivityProjectExample
Activity
Description
Predecessors
A
Siteclearing

B
Removaloftrees

C
Generalexcavation
A
D
Gradinggeneralarea
A
E
Excavationforutilitytrenches
B,C
F
Placingformworkandreinforcementforconcrete
B,C
G
Installingsewerlines
D,E
H
Installingotherutilities
D,E
I
Pouringconcrete
F,G

Withthisinformation,thenextproblemistorepresenttheactivitiesinanetworkdiagramandtodeterminealltheprecedencerelationships
amongtheactivities.OnenetworkrepresentationofthesenineactivitiesisshowninFigure95,inwhichtheactivitiesappearasbranchesor
linksbetweennodes.Thenodesrepresentmilestonesofpossiblebeginningandstartingtimes.Thisrepresentationiscalledanactivityon
branchdiagram.Notethataninitialeventbeginningactivityisdefined(Node0inFigure95),whilenode5representsthecompletionofall
activities.

Figure95ActivityonBranchRepresentationofaNineActivityProject

Alternatively,thenineactivitiescouldberepresentedbynodesandpredecessorrelationshipsbybranchesorlinks,asinFigure96.Theresult
isanactivityonnodediagram.InFigure96,newactivitynodesrepresentingthebeginningandtheendofconstructionhavebeenaddedto
marktheseimportantmilestones.
Thesenetworkrepresentationsofactivitiescanbeveryhelpfulinvisualizingthevariousactivitiesandtheirrelationshipsforaproject.
Whetheractivitiesarerepresentedasbranches(asinFigure95)orasnodes(asinFigure95)islargelyamatteroforganizationalorpersonal
choice.SomeconsiderationsinchoosingoneformoranotherarediscussedinChapter10.

Figure96ActivityonNodeRepresentationofaNineActivityProject

ItisalsonotablethatTable91listsonlytheimmediatepredecessorrelationships.Clearly,thereareotherprecedencerelationshipswhich
involvemorethanoneactivity.Forexample,"installingsewerlines"(activityG)cannotbeundertakenbefore"siteclearing"(ActivityA)is
completesincetheactivity"gradinggeneralarea"(ActivityD)mustprecedeactivityGandmustfollowactivityA.Table91isanimplicit
precedencelistsinceonlyimmediatepredecessorsarerecorded.Anexplicitpredecessorlistwouldincludealloftheprecedingactivitiesfor
activityG.Table92showsallsuchpredecessorrelationshipsimpliedbytheprojectplan.Thistablecanbeproducedbytracingallpaths
throughthenetworkbackfromaparticularactivityandcanbeperformedalgorithmically.[7]Forexample,inspectingFigure96revealsthat
eachactivityexceptforactivityBdependsuponthecompletionofactivityA.
TABLE92AllActivityPrecedenceRelationshipsforaNineActivityProject
PredecessorActivity DirectSuccessorActivities AllSuccessorActivities AllPredecessorActivities
A
B
C
D
E
F
G
H
I

Backtotop

9.5EstimatingActivityDurations

C,D
E,F
E,F
G,H
G,H
I
I

E,F,G,H,I
G,H,I
G,H,I
I
I

A
A
A,B,C
A,B,C
A,B,C,D,E
A,B,C,D,E
A,B,C,D,E,F,G

Inmostschedulingprocedures,eachworkactivityhasanassociatedtimeduration.Thesedurationsareusedextensivelyinpreparingaschedule.For
example,supposethatthedurationsshowninTable93wereestimatedfortheprojectdiagrammedinFigure90.Theentiresetofactivitieswouldthen
requireatleast3days,sincetheactivitiesfollowoneanotherdirectlyandrequireatotalof1.0+0.5+0.5+1.0=3days.Ifanotheractivityproceededin
parallelwiththissequence,the3dayminimumdurationofthesefouractivitiesisunaffected.Morethan3dayswouldberequiredforthesequenceifthere
wasadelayoralagbetweenthecompletionofoneactivityandthestartofanother.
TABLE93DurationsandPredecessorsforaFour
ActivityProjectIllustration
Activity
Predecessor Duration(Days)
Excavatetrench

1.0
Placeformwork Excavatetrench
0.5
Placereinforcing Placeformwork
0.5
Pourconcrete Placereinforcing
1.0

Allformalschedulingproceduresrelyuponestimatesofthedurationsofthevariousprojectactivitiesaswellasthedefinitionsofthepredecessor
relationshipsamongtasks.Thevariabilityofanactivity'sdurationmayalsobeconsidered.Formally,theprobabilitydistributionofanactivity'sdurationas
wellastheexpectedormostlikelydurationmaybeusedinscheduling.Aprobabilitydistributionindicatesthechancethataparticularactivityduration
willoccur.Inadvanceofactuallydoingaparticulartask,wecannotbecertainexactlyhowlongthetaskwillrequire.
Astraightforwardapproachtotheestimationofactivitydurationsistokeephistoricalrecordsofparticularactivitiesandrelyontheaveragedurationsfrom
thisexperienceinmakingnewdurationestimates.Sincethescopeofactivitiesareunlikelytobeidenticalbetweendifferentprojects,unitproductivity
ratesaretypicallyemployedforthispurpose.Forexample,thedurationofanactivityDijsuchasconcreteformworkassemblymightbeestimatedas:

(9.1)

whereAijistherequiredformworkareatoassemble(insquareyards),Pijistheaverageproductivityofastandardcrewinthistask(measuredinsquare
yardsperhour),andNijisthenumberofcrewsassignedtothetask.Insomeorganizations,unitproductiontime,Tij,isdefinedasthetimerequiredto
completeaunitofworkbyastandardcrew(measuredinhourspersquareyards)isusedasaproductivitymeasuresuchthatTijisareciprocalofPij.
AformulasuchasEq.(9.1)canbeusedfornearlyallconstructionactivities.Typically,therequiredquantityofwork,Aijisdeterminedfromdetailed
examinationofthefinalfacilitydesign.Thisquantitytakeofftoobtaintherequiredamountsofmaterials,volumes,andareasisaverycommonprocessin
bidpreparationbycontractors.Insomecountries,specializedquantitysurveyorsprovidetheinformationonrequiredquantitiesforallpotentialcontractors
andtheowner.Thenumberofcrewsworking,Nij,isdecidedbytheplanner.Inmanycases,thenumberoramountofresourcesappliedtoparticular
activitiesmaybemodifiedinlightoftheresultingprojectplanandschedule.Finally,someestimateoftheexpectedworkproductivity,Pijmustbe
providedtoapplyEquation(9.1).Aswithcostfactors,commercialservicescanprovideaverageproductivityfiguresformanystandardactivitiesofthis
sort.Historicalrecordsinafirmcanalsoprovidedataforestimationofproductivities.
ThecalculationofadurationasinEquation(9.1)isonlyanapproximationtotheactualactivitydurationforanumberofreasons.First,itisusuallythe
casethatpeculiaritiesoftheprojectmaketheaccomplishmentofaparticularactivitymoreorlessdifficult.Forexample,accesstotheformsinaparticular
locationmaybedifficultasaresult,theproductivityofassemblingformsmaybelowerthantheaveragevalueforaparticularproject.Often,adjustments
basedonengineeringjudgmentaremadetothecalculateddurationsfromEquation(9.1)forthisreason.
Inaddition,productivityratesmayvaryinbothsystematicandrandomfashionsfromtheaverage.Anexampleofsystematicvariationistheeffectof
learningonproductivity.Asacrewbecomesfamiliarwithanactivityandtheworkhabitsofthecrew,theirproductivitywilltypicallyimprove.Figure97
illustratesthetypeofproductivityincreasethatmightoccurwithexperiencethiscurveiscalledalearningcurve.TheresultisthatproductivityPijisa
functionofthedurationofanactivityorproject.Acommonconstructionexampleisthattheassemblyoffloorsinabuildingmightgofasterathigher
levelsduetoimprovedproductivityeventhoughthetransportationtimeuptotheactiveconstructionareaislonger.Again,historicalrecordsorsubjective
adjustmentsmightbemadetorepresentlearningcurvevariationsinaverageproductivity.[8]

Figure97IllustrationofProductivityChangesDuetoLearning

Randomfactorswillalsoinfluenceproductivityratesandmakeestimationofactivitydurationsuncertain.Forexample,aschedulerwilltypicallynotknow
atthetimeofmakingtheinitialschedulehowskillfulthecrewandmanagerwillbethatareassignedtoaparticularproject.Theproductivityofaskilled
designermaybemanytimesthatofanunskilledengineer.Intheabsenceofspecificknowledge,theestimatorcanonlyuseaveragevaluesofproductivity.
Weathereffectsareoftenveryimportantandthusdeserveparticularattentioninestimatingdurations.Weatherhasbothsystematicandrandominfluences
onactivitydurations.Whetherornotarainstormwillcomeonaparticulardayiscertainlyarandomeffectthatwillinfluencetheproductivityofmany
activities.However,thelikelihoodofarainstormislikelytovarysystematicallyfromonemonthoronesitetothenext.Adjustmentfactorsforinclement
weatheraswellasmeteorologicalrecordscanbeusedtoincorporatetheeffectsofweatherondurations.Asasimpleexample,anactivitymightrequireten
daysinperfectweather,buttheactivitycouldnotproceedintherain.Furthermore,supposethatrainisexpectedtenpercentofthedaysinaparticular
month.Inthiscase,theexpectedactivitydurationiselevendaysincludingoneexpectedrainday.
Finally,theuseofaverageproductivityfactorsthemselvescauseproblemsinthecalculationpresentedinEquation(9.1).Theexpectedvalueofthe
multiplicativereciprocalofavariableisnotexactlyequaltothereciprocalofthevariable'sexpectedvalue.Forexample,ifproductivityonanactivityis
eithersixingoodweather(ie.,P=6)ortwoinbadweather(ie.,P=2)andgoodorbadweatherisequallylikely,thentheexpectedproductivityisP=(6)
(0.5)+(2)(0.5)=4,andthereciprocalofexpectedproductivityis1/4.However,theexpectedreciprocalofproductivityisE[1/P]=(0.5)/6+(0.5)/2=1/3.
Thereciprocalofexpectedproductivityis25%lessthantheexpectedvalueofthereciprocalinthiscase!Byrepresentingonlytwopossibleproductivity
values,thisexamplerepresentsanextremecase,butitisalwaystruethattheuseofaverageproductivityfactorsinEquation(9.1)willresultinoptimistic
estimatesofactivitydurations.Theuseofactualaveragesforthereciprocalsofproductivityorsmalladjustmentfactorsmaybeusedtocorrectforthis
nonlinearityproblem.
ThesimpledurationcalculationshowninEquation(9.1)alsoassumesaninverselinearrelationshipbetweenthenumberofcrewsassignedtoanactivity
andthetotaldurationofwork.Whilethisisareasonableassumptioninsituationsforwhichcrewscanworkindependentlyandrequirenospecial
coordination,itneednotalwaysbetrue.Forexample,designtasksmaybedividedamongnumerousarchitectsandengineers,butdelaystoinsureproper
coordinationandcommunicationincreaseasthenumberofworkersincrease.Asanotherexample,insuringasmoothflowofmaterialtoallcrewsonasite
maybeincreasinglydifficultasthenumberofcrewsincrease.Intheselattercases,therelationshipbetweenactivitydurationandthenumberofcrewsis
unlikelytobeinverselyproportionalasshowninEquation(9.1).Asaresult,adjustmentstotheestimatedproductivityfromEquation(9.1)mustbemade.
Alternatively,morecomplicatedfunctionalrelationshipsmightbeestimatedbetweendurationandresourcesusedinthesamewaythatnonlinear
preliminaryorconceptualcostestimatemodelsareprepared.
Onemechanismtoformalizetheestimationofactivitydurationsistoemployahierarchicalestimationframework.Thisapproachdecomposesthe
estimationproblemintocomponentpartsinwhichthehigherlevelsinthehierarchyrepresentattributeswhichdependuponthedetailsoflowerlevel
adjustmentsandcalculations.Forexample,Figure98representsvariouslevelsintheestimationofthedurationofmasonryconstruction.[9]Atthelowest
level,themaximumproductivityfortheactivityisestimatedbasedupongeneralworkconditions.Table94illustratessomepossiblemaximum
productivityvaluesthatmightbeemployedinthisestimation.Atthenexthigherlevel,adjustmentstothesemaximumproductivitiesaremadetoaccount
forspecialsiteconditionsandcrewcompositionstable95illustratessomepossibleadjustmentrules.Atthehighestlevel,adjustmentsforoveralleffects
suchasweatherareintroduced.AlsoshowninFigure98arenodestoestimatedownorunproductivetimeassociatedwiththemasonryconstruction
activity.TheformalizationoftheestimationprocessillustratedinFigure98permitsthedevelopmentofcomputeraidsfortheestimationprocessorcan
serveasaconceptualframeworkforahumanestimator.
Masonryunitsize

TABLE94MaximumProductivityEstimatesforMasonryWork
Condition(s)
Maximumprodustivityachievable

8inchblock

None

400units/day/mason

6inch

Wallis"long"

430units/day/mason

6inch
12inch

Wallisnot"long"
Laborisnonunion

370units/day/mason
300units/day/mason

4inch

Wallis"long"
Weatheris"warmanddry"
orhighstrengthmortarisused

480units/day/mason

4inch

Wallisnot"long"
Weatheris"warmanddry"
orhighstrengthmortarisused

430units/day/mason

4inch

Wallis"long"
Weatherisnot"warmanddry"
orhighstrengthmortarisnotused

370units/day/mason

4inch

Wallisnot"long"
Weatherisnot"warmanddry"
orhighstrengthmortarisnotused

320units/day/mason

8inch

Thereissupportfromexistingwall

1,000units/day/mason

8inch
12inch

Thereisnosupportfromexistingwall
Thereissupportfromexistingwall

750units/day/mason
700units/day/mason

12inch

Thereisnosupportfromexistingwall

550

TABLE95PossibleAdjustmentstoMaximumProductivitiesforMasonryConstruction/caption>
Adjustmentmagnitude
Impact
Condition(s)
(%ofmaximum)
Crewtype

Crewtypeisnonunion
Jobis"large"

15%

Crewtype

Crewtypeisunion
Jobis"small"

10%

Supportinglabor
Supportinglabor

Therearelessthantwolaborerspercrew
Therearemorethantwomasons/laborers

20%
10%

Elevation

Steelframebuildingwithmasonryexterior
wallhas"insufficient"supportlabor

10%

wallhas"insufficient"supportlabor
Elevation

Solidmasonrybuildingwithworkonexteriorusesnonunionlabor

Visibility

blockisnotcovered

12%
7%

Temperature

Temperatureisbelow45oF

15%

Temperature

Temperatureisabove45oF

10%

Bricktexture

bricksarebakedhigh
Weatheriscoldormoist

10%

Figure98AHierarchicalEstimationFrameworkforMasonryConstruction

Inadditiontotheproblemofestimatingtheexpecteddurationofanactivity,someschedulingproceduresexplicitlyconsidertheuncertaintyinactivity
durationestimatesbyusingtheprobabilisticdistributionofactivitydurations.Thatis,thedurationofaparticularactivityisassumedtobearandom
variablethatisdistributedinaparticularfashion.Forexample,anactivitydurationmightbeassumedtobedistributedasanormalorabetadistributed
randomvariableasillustratedinFigure99.Thisfigureshowstheprobabilityorchanceofexperiencingaparticularactivitydurationbasedona
probabilisticdistribution.Thebetadistributionisoftenusedtocharacterizeactivitydurations,sinceitcanhaveanabsoluteminimumandanabsolute
maximumofpossibledurationtimes.Thenormaldistributionisagoodapproximationtothebetadistributioninthecenterofthedistributionandiseasyto
workwith,soitisoftenusedasanapproximation.

Figure99BetaandNormallyDistributedActivityDurations

Ifastandardrandomvariableisusedtocharacterizethedistributionofactivitydurations,thenonlyafewparametersarerequiredtocalculatethe
probabilityofanyparticularduration.Still,theestimationproblemisincreasedconsiderablysincemorethanoneparameterisrequiredtocharacterize
mostoftheprobabilisticdistributionusedtorepresentactivitydurations.Forthebetadistribution,threeorfourparametersarerequireddependingonits
generality,whereasthenormaldistributionrequirestwoparameters.
Asanexample,thenormaldistributionischaracterizedbytwoparameters,
duration,respectively.Alternatively,thevarianceofthedistribution

and

representingtheaveragedurationandthestandarddeviationofthe

couldbeusedtodescribeorcharacterizethevariabilityofdurationtimesthe

varianceisthevalueofthestandarddeviationmultipliedbyitself.Fromhistoricaldata,thesetwoparameterscanbeestimatedas:

(9.2)

(9.3)

whereweassumethatndifferentobservationsxkoftherandomvariablexareavailable.Thisestimationprocessmightbeappliedtoactivitydurations
directly(sothatxkwouldbearecordofanactivitydurationDijonapastproject)ortotheestimationofthedistributionofproductivities(sothatxkwould
bearecordoftheproductivityinanactivityPi)onapastproject)which,inturn,isusedtoestimatedurationsusingEquation(9.4).Ifmoreaccuracyis
desired,theestimationequationsformeanandstandarddeviation,Equations(9.2)and(9.3)wouldbeusedtoestimatethemeanandstandarddeviationof
thereciprocalofproductivitytoavoidnonlineareffects.Usingestimatesofproductivities,thestandarddeviationofactivitydurationwouldbecalculated
as:

(9.4)

where

istheestimatedstandarddeviationofthereciprocalofproductivitythatiscalculatedfromEquation(9.3)bysubstituting1/Pforx.

Backtotop

9.6EstimatingResourceRequirementsforWorkActivities
Inadditiontoprecedencerelationshipsandtimedurations,resourcerequirementsareusuallyestimatedforeachactivity.Sincetheworkactivitiesdefined
foraprojectarecomprehensive,thetotalresourcesrequiredfortheprojectarethesumoftheresourcesrequiredforthevariousactivities.Bymaking
resourcerequirementestimatesforeachactivity,therequirementsforparticularresourcesduringthecourseoftheprojectcanbeidentified.Potential
bottleneckscanthusbeidentified,andschedule,resourceallocationortechnologychangesmadetoavoidproblems.
Manyformalschedulingprocedurescanincorporateconstraintsimposedbytheavailabilityofparticularresources.Forexample,theunavailabilityofa
specificpieceofequipmentorcrewmayprohibitactivitiesfrombeingundertakenataparticulartime.Anothertypeofresourceisspace.Aplanner
typicallywillscheduleonlyoneactivityinthesamelocationatthesametime.Whileactivitiesrequiringthesamespacemayhavenonecessarytechnical
precedence,simultaneousworkmightnotbepossible.ComputationalproceduresforthesevariousschedulingproblemswillbedescribedinChapters10
and11.Inthissection,weshalldiscusstheestimationofrequiredresources.
Theinitialprobleminestimatingresourcerequirementsistodecidetheextentandnumberofresourcesthatmightbedefined.Ataveryaggregatelevel,
resourcescategoriesmightbelimitedtotheamountoflabor(measuredinmanhoursorindollars),theamountofmaterialsrequiredforanactivity,andthe
totalcostoftheactivity.Atthisaggregatelevel,theresourceestimatesmaybeusefulforpurposesofprojectmonitoringandcashflowplanning.For
example,actualexpendituresonanactivitycanbecomparedwiththeestimatedrequiredresourcestorevealanyproblemsthatarebeingencountered
duringthecourseofaproject.MonitoringproceduresofthissortaredescribedinChapter12.However,thisaggregatedefinitionofresourceusewouldnot
revealbottlenecksassociatedwithparticulartypesofequipmentorworkers.
Moredetaileddefinitionsofrequiredresourceswouldincludethenumberandtypeofbothworkersandequipmentrequiredbyanactivityaswellasthe
amountandtypesofmaterials.Standardresourcerequirementsforparticularactivitiescanberecordedandadjustedforthespecialconditionsofparticular
projects.Asaresult,theresourcestypesrequiredforparticularactivitiesmayalreadybedefined.Relianceonhistoricalorstandardactivitydefinitionsof
thistyperequiresastandardcodingsystemforactivities.
Inmakingadjustmentsfortheresourcesrequiredbyaparticularactivity,mostoftheproblemsencounteredinformingdurationestimationsdescribedin
theprevioussectionarealsopresent.Inparticular,resourcessuchaslaborrequirementswillvaryinproportiontotheworkproductivity,Pij,usedto
estimateactivitydurationsinEquation(9.1).Mathematically,atypicalestimatingequationwouldbe:
(9.5)
whereRkijaretheresourcesoftypekrequiredbyactivityij,Dijisthedurationofactivityij,Nijisthenumberofstandardcrewsallocatedtoactivityij,
andUkijistheamountofresourcetypekusedperstandardcrew.Forexample,ifanactivityrequiredeighthourswithtwocrewsassignedandeachcrew
requiredthreeworkers,theeffortwouldbeR=8*2*3=48laborhours.
Fromtheplanningperspective,theimportantdecisionsinestimatingresourcerequirementsaretodeterminethetypeoftechnologyandequipmentto
employandthenumberofcrewstoallocatetoeachtask.Clearly,assigningadditionalcrewsmightresultinfastercompletionofaparticularactivity.
However,additionalcrewsmightresultincongestionandcoordinationproblems,sothatworkproductivitymightdecline.Further,completingaparticular
activityearliermightnotresultinearliercompletionoftheentireproject,asdiscussedinChapter10.

Example95:ResourceRequirementsforBlockFoundations
Inplacingconcreteblockfoundationwalls,atypicalcrewwouldconsistofthreebricklayersandtwobricklayerhelpers.Ifsufficientspace
wasavailableonthesite,severalcrewscouldworkonthesamejobatthesametime,therebyspeedingupcompletionoftheactivityin
proportiontothenumberofcrews.Inmorerestrictedsites,multiplecrewsmightinterferewithoneanother.Forspecialconsiderationssuchas
complicatedscaffoldingorlargeblocks(suchastwelveinchblock),abricklayerhelperforeachbricklayermightberequiredtoinsuresmooth
andproductivework.Ingeneral,standardcrewcompositiondependsuponthespecificconstructiontaskandtheequipmentortechnology
employed.Thesestandardcrewsarethenadjustedinresponsetospecialcharacteristicsofaparticularsite.
Example96:PouringConcreteSlabs
Forlargeconcretepoursonhorizontalslabs,itisimportanttoplantheactivitysothattheslabforafullblockcanbecompletedcontinuously
inasingleday.Resourcesrequiredforpouringtheconcretedependuponthetechnologyused.Forexample,astandardcrewforpumping
concretetotheslabmightincludeaforeman,fivelaborers,onefinisher,andoneequipmentoperator.Relatedequipmentwouldbevibrators
andtheconcretepumpitself.Fordeliveringconcretewithachutedirectlyfromthedeliverytruck,thestandardcrewmightconsistofa
foreman,fourlaborersandafinisher.Thenumberofcrewswouldbechosentoinsurethatthedesiredamountofconcretecouldbeplacedina
singleday.Inadditiontotheresourcesinvolvedintheactualplacement,itwouldalsobenecessarytoinsureasufficientnumberofdelivery
trucksandavailabilityoftheconcreteitself.
Backtotop

9.7CodingSystems
Oneobjectiveinmanyconstructionplanningeffortsistodefinetheplanwithintheconstraintsofauniversalcodingsystemforidentifyingactivities.Each
activitydefinedforaprojectwouldbeidentifiedbyapredefinedcodespecifictothatactivity.Theuseofacommonnomenclatureoridentificationsystem
isbasicallymotivatedbythedesireforbetterintegrationoforganizationaleffortsandimprovedinformationflow.Inparticular,codingsystemsareadopted
toprovideanumberingsystemtoreplaceverbaldescriptionsofitems.Thesecodesreducethelengthorcomplexityoftheinformationtoberecorded.A
commoncodingsystemwithinanorganizationalsoaidsconsistencyindefinitionsandcategoriesbetweenprojectsandamongthevariouspartiesinvolved
inaproject.Commoncodingsystemsalsoaidintheretrievalofhistoricalrecordsofcost,productivityanddurationonparticularactivities.Finally,
electronicdatastorageandretrievaloperationsaremuchmoreefficientwithstandardcodingsystems,asdescribedinChapter14.
InNorthAmerica,themostwidelyusedstandardcodingsystemforconstructedfacilitiesistheMASTERFORMATsystemdevelopedbytheConstruction
SpecificationsInstitute(CSI)oftheUnitedStatesandConstructionSpecificationsofCanada.[10]Afterdevelopmentofseparatesystems,thiscombined
systemwasoriginallyintroducedastheUniformConstructionIndex(UCI)in1972andwassubsequentlyadoptedforusebynumerousfirms,information
providers,professionalsocietiesandtradeorganizations.ThetermMASTERFORMATwasintroducedwiththe1978revisionoftheUCIcodes.
MASTERFORMATprovidesastandardidentificationcodefornearlyalltheelementsassociatedwithbuildingconstruction.
MASTERFORMATinvolvesahierarchicalcodingsystemwithmultiplelevelspluskeywordtextdescriptionsofeachitem.Inthenumericalcoding
system,thefirsttwodigitsrepresentoneofthesixteendivisionsforworkaseventeenthdivisionisusedtocodeconditionsofthecontractfora
constructor.InthelatestversionoftheMASTERFORMAT,athirddigitisaddedtoindicateasubdivisionwithineachdivision.Eachdivisionisfurther
specifiedbyathreedigitextensionindicatinganotherlevelofsubdivisions.Inmanycases,thesesubdivisionsarefurtherdividedwithanadditionalthree
digitstoidentifymorespecificworkitemsormaterials.Forexample,thecode16950960,"ElectricalEquipmentTesting"aredefinedaswithinDivision
16(Electrical)andSubDivision950(Testing).Thekeywords"ElectricalEquipmentTesting"isastandarddescriptionoftheactivity.Theseventeenmajor
divisionsintheUCI/CSIMASTERFORMATsystemareshowninTable96.Asanexample,siteworksecondleveldivisionsareshowninTable97.
TABLE96MajorDivisionsintheUniformConstructionIndex
0Conditionsofthecontract
9Finishes
1Generalrequirements
10Specialties
2Sitework
11Equipment
3Concrete
12Furnishings
4Masonry
13Specialconstruction
5Metals
14Conveyingsystem
6Woodandplastics
15Mechanical
7Thermalandmoistureprevention
16Electrical
8Doorsandwindows

WhileMASTERFORMATprovidesaveryusefulmeansoforganizingandcommunicatinginformation,ithassomeobviouslimitationsasacomplete
projectcodingsystem.First,morespecificinformationsuchaslocationofworkorresponsibleorganizationmightberequiredforprojectcostcontrol.
CodeextensionsarethenaddedinadditiontothedigitsinthebasicMASTERFORMATcodes.Forexample,atypicalextendedcodemighthavethe
followingelements:
0534.02220.21.A.00.cf34
Thefirstfourdigitsindicatetheprojectforthisactivitythiscodereferstoanactivityonprojectnumber0534.Thenextfivedigitsrefertothe
MASTERFORMATsecondarydivisionreferringtoTable97,thisactivitywouldbe02220"Excavating,BackfillingandCompacting."Thenexttwo
digitsrefertospecificactivitiesdefinedwithinthisMASTERFORMATcodethedigits21inthisexamplemightrefertoexcavationofcolumnfootings.
Thenextcharacterreferstotheblockorgeneralareaonthesitethattheactivitywilltakeplaceinthiscase,blockAisindicated.Thedigits00couldbe
replacedbyacodetoindicatetheresponsibleorganizationfortheactivity.Finally,thecharacterscf34refertotheparticulardesignelementnumberfor
whichthisexcavationisintendedinthiscase,columnfootingnumber34isintended.Thus,thisactivityistoperformtheexcavationforcolumnfooting
number34inblockAonthesite.Notethatanumberofadditionalactivitieswouldbeassociatedwithcolumnfooting34,includingformworkand
concreting.Additionalfieldsinthecodingsystemsmightalsobeaddedtoindicatetheresponsiblecrewforthisactivityortoidentifythespecificlocation
oftheactivityonthesite(defined,forexample,asx,yandzcoordinateswithrespecttoabasepoint).
Asasecondproblem,theMASTERFORMATsystemwasoriginallydesignedforbuildingconstructionactivities,soitisdifficulttoincludevarious
constructionactivitiesforothertypesoffacilitiesoractivitiesassociatedwithplanningordesign.Differentcodingsystemshavebeenprovidedbyother
organizationsinparticularsubfieldssuchaspowerplantsorroadways.Nevertheless,MASTERFORMATprovidesausefulstartingpointfororganizing
informationindifferentconstructiondomains.
Indevisingorganizationalcodesforprojectactivities,thereisacontinualtensionbetweenadoptingsystemsthatareconvenientorexpedientforone
projectorforoneprojectmanagerandsystemsappropriateforanentireorganization.Asageneralrule,therecordkeepingandcommunicationadvantages

ofstandardsystemsareexcellentargumentsfortheiradoption.Eveninsmallprojects,however,adhocorhaphazardcodingsystemscanleadtoproblems
asthesystemisrevisedandextendedovertime.
TABLE97SecondaryDivisionsinMASTERFORMATforSiteWork[11]
02010
02012
02016
02050
02060
02070
02075
02080
02100
02110
02115
02120
02140
02150

Subsurfaceinvestigation
Standardpenetrationtests
Seismicinvestigation
Demolition
Buildingdemolition
Selectivedemolition
Concreteremoval
Asbestosremoval
Sitepreparation
Siteclearing
Selectiveclearing
Structuremoving
Dewatering
Shoringandunderpinning

02160
02170

Excavationsupportingsystem
Cofferdams

02200
02210
02220
02230
02240
02250
02270
02280
02290
02300
02305
02310
02320
02330
02340

Earthwork
Grading
Excavating,backfillingandcompaction
Basecourse
Soilstabilization
Vibrofloatation
Slopeprotection
Soiltreatment
Earthdams
Tunneling
Tunnelventilation
Tunnelexcavating
Tunnellining
Tunnelgrouting
Tunnelsupportsystems

02350
02355
02360
02370
02380
02450
02480

Pilesandcaissons
Piledriving
Drivenpiles
Bored/augeredpiles
Caissons
Railroadwork
Marinework

02500
02510
02515
02525
02530
02540
02545
02550
02560
02575
02580

Pavingandsurfacing
Walk,roadandparkingpaving
Unitpavers
Curbs
Athleticpavingandsurfacing
Syntheticsurfacing
Surfacing
Highwaypaving
Airfieldpaving
Pavementrepair
Pavementmarking

02600
02660
02680

Pipedutilitymaterials
Waterdistribution
Fueldistribution

02700
02760

Sewageanddrainage
Restorationofundergroundpipelines

02770
02800
02880

Pondsandreservoirs
Powerandcommunications
Siteimprovements

02900

Landscaping

Backtotop

9.8References
1.BaraccoMiller,E.,"PlanningforConstruction,"UnpublishedMSThesis,Dept.ofCivilEngineering,CarnegieMellonUniversity,1987.
2.ConstructionSpecificationsInstitute,MASTERFORMATMasterListofSectionTitlesandNumbers,ReleasingIndustryGroup,Alexandria,VA,
1983.
3.Jackson,M.J.ComputersinConstructionPlanningandControl,Allen&Unwin,London,1986.
4.Sacerdoti,E.D.AStructureforPlansandBehavior,ElsevierNorthHolland,NewYork,1977.
5.ZozayaGorostiza,C.,"AnExpertSystemforConstructionProjectPlanning,"UnpublishedPhDDissertation,Dept.ofCivilEngineering,Carnegie
MellonUniversity,1988.
Backtotop

9.9Problems
1.DevelopanalternativeworkbreakdownfortheactivitiesshowninFigure92(Example93).Beginfirstwithaspatialdivisiononthesite(i.e.by
roadwaysegmentandstructurenumber),andthenincludefunctionaldivisionstodevelopadifferenthierarchyofactivities.
2.Consideracoldweatherstructurebuiltbyinflatingaspecialrubbertent,sprayingwateronthetent,lettingthewaterfreeze,andthendeflatingand
removingthetent.Developaworkbreakdownforthisstructure,precedencerelationships,andestimatetherequiredresources.Assumethatthetent
istwentyfeetbyfifteenfeetbyeightfeettall.
3.Developaworkbreakdownandactivitynetworkfortheprojectofdesigningatowertosupportaradiotransmissionantenna.
4.Selectavacantsiteinyourvicinityanddefinethevariousactivitiesandprecedencesamongtheseactivitiesthatwouldberequiredtopreparethesite
fortheplacementofprefabricatedresidences.UsethecodingsystemforsiteworkshowninTable97forexecutingthisproblem.
5.DevelopprecedencerelationshipsfortheroadwayprojectactivitiesappearinginFigure92(Example93).
6.Supposethatyouhavearobotcapableofperformingtwotasksinmanipulatingblocksonalargetabletop:
PLACEBLOCKXONBLOCKY:Thisactionplacestheblockxontopoftheblocky.Preconditionsforapplyingthisactionarethatboth
blockxandblockyhavecleartops(sothereisnoblockontopofxory).Therobotwillautomaticallylocatethespecifiedblocks.
CLEARBLOCKX:Thisactionremovesanyblockfromthetopofblockx.Anecessarypreconditionforthisactionisthatblockxhasone
andonlyoneblockontop.Theblockremovedisplacedonthetabletop.

Forthisrobot,answerthefollowingquestions:
1.Usingonlythetworobotactions,specifyasequenceofrobotactionstotakethefiveblocksshowninFigure910(a)tothepositionshownin
Figure910(b)infiveorsixrobotactions.
2.Specifyasequenceofrobotactionstomovetheblocksfromposition(b)toposition(c)inFigure910insixmoves.
3.Developanactivitynetworkfortherobotactionsinmovingfromposition(b)toposition(c)inFigure910.Preparebothactivityonnodeand
activityonlinkrepresentations.Aretherealternativesequencesofactivitiesthattherobotmightperformtoaccomplishthedesiredposition?

Figure910IllustrativeBlockPositionsforRobotMotionPlanning
7.Inthepreviousproblem,supposethatswitchingfromthePLACEBLOCKactiontotheCLEARBLOCKactionorviceversarequiresanextraten
seconds.Movementsthemselvesrequire8seconds.Whatisthesequenceofactionsofshortestdurationtogofromposition(b)toposition(a)in
Figure910?
8.RepeatProblem6aboveforthemovementfromposition(a)toposition(c)inFigure910.
9.RepeatProblem7aboveforthemovementfromposition(a)toposition(c)inFigure910.
10.Supposethatyouhaveanenhancedrobotwithtwoadditionalcommandscapabilities:
CARRYBLOCKSXYtoBLOCKZ:ThisactionmovesblocksXYtothetopofblockZ.BlocksXYmayinvolveanynumberofblocksas
longasXisonthebottomandYisonthetop.ThismoveassumesthatZhasacleartop.
CLEARALLBLOCKXTOBLOCKZ:ThisactionmovesallblocksontopofblockXtothetopofblockZ.IfablockZisnotspecified,
thentheblocksaremovedtothetabletop.
HowdothesecapabilitieschangeyouranswertoProblems6and7?
11.HowdoestheadditionalcapabilitydescribedinProblem10changeyouranswertoProblems8and?
Backtotop

9.10Footnotes
1.A.C.Doyle,"AStudyinScarlet,"TheCompleteSherlockHolmes,Doubleday&Co.,pg.83,1930.Back
2.See,forexample,Paulson,B.C.,S.A.Douglas,A.Kalk,A.TouranandG.A.Victor,"SimulationandAnalysisofConstructionOperations,"ASCE
JournalofTechnicalTopicsinCivilEngineering,109(2),August,1983,pp.89,orCarr,R.I.,"SimulationofConstructionProjectDuration,"ASCEJournal
oftheConstructionDivision,105(2),June1979,117128.Back
3.Foradescriptionofalaserlevelingsystem,seePaulson,B.C.,Jr.,"AutomationandRoboticsforConstruction,"ASCEJournalofConstruction
EngineeringandManagement,(111)3,pp.190207,Sept.1985.Back
4.SeeBaker,K.R.,IntroductiontoSequencingandScheduling,JohnWileyandSons,NewYork,1974,foranintroductiontoschedulinginmanufacturing.
Back
5.SeeSkibniewski,M.J.andC.T.Hendrickson,"EvaluationMethodforRoboticsImplementation:ApplicationtoConcreteFormCleaning,"Proc.Second
Intl.Conf.onRoboticsinConstruction,CarnegieMellonUniversity,Pittsburgh,PA.,1985,formoredetailontheworkprocessdesignofaconcreteform
cleaningrobot.Back
6.ThisexampleisadaptedfromAras,R.andJ.Surkis,"PERTandCPMTechniquesinProjectManagement,"ASCEJournaloftheConstructionDivision,
Vol.90,No.CO1,March,1964.Back
7.Foradiscussionofnetworkreachabilityandconnectivitycomputationalalgorithms,seeChapters2and7inN.Christofides,GraphTheory:An
AlgorithmicApproach,London:AcademicPress,1975,oranyothertextongraphtheory.Back

8.SeeH.R.Thomas,C.T.MatthewsandJ.G.Ward,"LearningCurveModelsofConstructionProductivity,"ASCEJournalofConstructionEngineering
andManagement,Vol.112,No.2,June1986,pp.245258.Back
9.Foramoreextensiondiscussionanddescriptionofthisestimationprocedure,seeHendrickson,C.,D.Martinelli,andD.Rehak,"HierarchicalRule
basedActivityDurationEstimation,"ASCEJournalofConstructionEngineeringandManagement,Vol113,No.2,1987,pp.288301.Back
10.InformationontheMASTERFORMATcodingsystemcanbeobtainedfrom:TheConstructionSpecificationsInstitute,601MadisonSt.,Alexandria
VA22314.Back
11.Source:MASTERFORMAT:MasterListofSectionTitlesandNumbers,1983Edition,TheconstructionSpeculationsInstitute,Alexandria,VA,1983.
Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter9
(ConstructionPlanning)

GoToChapter11
(AdvancedSchedulingTechniques)

FundamentalSchedulingProcedures
RelevanceofConstructionSchedules
TheCriticalPathMethod
CalculationsforCriticalPathScheduling
ActivityFloatandSchedules
PresentingProjectSchedules
CriticalPathSchedulingforActivityonNodeandwithLeads,
Lags,andWindows
CalculationsforSchedulingwithLeads,LagsandWindows
ResourceOrientedScheduling
SchedulingwithResourceConstraintsandPrecedences
References
Problems
Footnotes

10.FundamentalSchedulingProcedures
10.1RelevanceofConstructionSchedules
Inadditiontoassigningdatestoprojectactivities,projectschedulingisintendedtomatchtheresourcesofequipment,materials
andlaborwithprojectworktasksovertime.Goodschedulingcaneliminateproblemsduetoproductionbottlenecks,facilitate
thetimelyprocurementofnecessarymaterials,andotherwiseinsurethecompletionofaprojectassoonaspossible.Incontrast,
poorschedulingcanresultinconsiderablewasteaslaborersandequipmentwaitfortheavailabilityofneededresourcesorthe
completionofprecedingtasks.Delaysinthecompletionofanentireprojectduetopoorschedulingcanalsocreatehavocfor
ownerswhoareeagertostartusingtheconstructedfacilities.
Attitudestowardtheformalschedulingofprojectsareoftenextreme.Manyownersrequiredetailedconstructionschedulestobe
submittedbycontractorsasameansofmonitoringtheworkprogress.Theactualworkperformediscommonlycomparedtothe
scheduletodetermineifconstructionisproceedingsatisfactorily.Afterthecompletionofconstruction,similarcomparisons
betweentheplannedscheduleandtheactualaccomplishmentsmaybeperformedtoallocatetheliabilityforprojectdelaysdue
tochangesrequestedbytheowner,workerstrikesorotherunforeseencircumstances.
Incontrasttotheseinstancesofrelianceuponformalschedules,manyfieldsupervisorsdisdainanddislikeformalscheduling
procedures.Inparticular,thecriticalpathmethodofschedulingiscommonlyrequiredbyownersandhasbeentaughtin
universitiesforovertwodecades,butisoftenregardedinthefieldasirrelevanttoactualoperationsandatimeconsuming
distraction.Theresultis"seatofthepants"schedulingthatcanbegoodorthatcanresultingrosslyinefficientschedulesand
poorproductivity.Progressiveconstructionfirmsuseformalschedulingprocedureswheneverthecomplexityofworktasksis
highandthecoordinationofdifferentworkersisrequired.
Formalschedulingprocedureshavebecomemuchmorecommonwiththeadventofpersonalcomputersonconstructionsites
andeasytousesoftwareprograms.SharingscheduleinformationviatheInternethasalsoprovidedagreaterincentivetouse
formalschedulingmethods.Savvyconstructionsupervisorsoftencarryscheduleandbudgetinformationaroundwithwearable
orhandheldcomputers.Asaresult,thecontinueddevelopmentofeasytousecomputerprogramsandimprovedmethodsof
presentingscheduleshavovercomethepracticalproblemsassociatedwithformalschedulingmechanisms.Butproblemswith
theuseofschedulingtechniqueswillcontinueuntilmanagersunderstandtheirproperuseandlimitations.
Abasicdistinctionexistsbetweenresourceorientedandtimeorientedschedulingtechniques.Forresourceorientedscheduling,
thefocusisonusingandschedulingparticularresourcesinaneffectivefashion.Forexample,theprojectmanager'smain
concernonahighrisebuildingsitemightbetoinsurethatcranesareusedeffectivelyformovingmaterialswithouteffective
schedulinginthiscase,deliverytrucksmightqueueonthegroundandworkerswaitfordeliveriesonupperfloors.Fortime
orientedscheduling,theemphasisisondeterminingthecompletiontimeoftheprojectgiventhenecessaryprecedence
relationshipsamongactivities.Hybridtechniquesforresourcelevelingorresourceconstrainedschedulinginthepresenceof
precedencerelationshipsalsoexist.Mostschedulingsoftwareistimeoriented,althoughvirtuallyalloftheprogramshavethe
capabilitytointroduceresourceconstaints.
Thischapterwillintroducethefundamentalsofschedulingmethods.Ourdiscussionwillgenerallyassumethatcomputerbased
schedulingprogramswillbeapplied.Consequently,thewidevarietyofmanualormechanicalschedulingtechniqueswillnotbe
discussedinanydetail.Thesemanualmethodsarenotascapableorasconvenientascomputerbasedscheduling.Withthe
availabilityofthesecomputerbasedschedulingprograms,itisimportantformanagerstounderstandthebasicoperations
performedbyschedulingprograms.Moreover,evenifformalmethodsarenotappliedinparticularcases,theconceptual

frameworkofformalschedulingmethodsprovidesavaluablereferenceforamanager.Accordingly,examplesinvolvinghand
calculationswillbeprovidedthroughoutthechaptertofacilitateunderstanding.
Backtotop

10.2TheCriticalPathMethod
Themostwidelyusedschedulingtechniqueisthecriticalpathmethod(CPM)forscheduling,oftenreferredtoascriticalpath
scheduling.Thismethodcalculatestheminimumcompletiontimeforaprojectalongwiththepossiblestartandfinishtimesfor
theprojectactivities.Indeed,manytextsandmanagersregardcriticalpathschedulingastheonlyusableandpractical
schedulingprocedure.Computerprogramsandalgorithmsforcriticalpathschedulingarewidelyavailableandcanefficiently
handleprojectswiththousandsofactivities.
Thecriticalpathitselfrepresentsthesetorsequenceofpredecessor/successoractivitieswhichwilltakethelongesttimeto
complete.Thedurationofthecriticalpathisthesumoftheactivities'durationsalongthepath.Thus,thecriticalpathcanbe
definedasthelongestpossiblepaththroughthe"network"ofprojectactivities,asdescribedinChapter9.Thedurationofthe
criticalpathrepresentstheminimumtimerequiredtocompleteaproject.Anydelaysalongthecriticalpathwouldimplythat
additionaltimewouldberequiredtocompletetheproject.
Theremaybemorethanonecriticalpathamongalltheprojectactivities,socompletionoftheentireprojectcouldbedelayed
bydelayingactivitiesalonganyoneofthecriticalpaths.Forexample,aprojectconsistingoftwoactivitiesperformedinparallel
thateachrequirethreedayswouldhaveeachactivitycriticalforacompletioninthreedays.
Formally,criticalpathschedulingassumesthataprojecthasbeendividedintoactivitiesoffixeddurationandwelldefined
predecessorrelationships.Apredecessorrelationshipimpliesthatoneactivitymustcomebeforeanotherintheschedule.No
resourceconstraintsotherthanthoseimpliedbyprecedencerelationshipsarerecognizedinthesimplestformofcriticalpath
scheduling.
Tousecriticalpathschedulinginpractice,constructionplannersoftenrepresentaresourceconstraintbyaprecedencerelation.
Aconstraintissimplyarestrictionontheoptionsavailabletoamanager,andaresourceconstraintisaconstraintderivingfrom
thelimitedavailabilityofsomeresourceofequipment,material,spaceorlabor.Forexample,oneoftwoactivitiesrequiringthe
samepieceofequipmentmightbearbitrarilyassumedtoprecedetheotheractivity.Thisartificialprecedenceconstraintinsures
thatthetwoactivitiesrequiringthesameresourcewillnotbescheduledatthesametime.Also,mostcriticalpathscheduling
algorithmsimposerestrictionsonthegeneralityoftheactivityrelationshipsornetworkgeometrieswhichareused.Inessence,
theserestrictionsimplythattheconstructionplancanberepresentedbyanetworkplaninwhichactivitiesappearasnodesina
network,asinFigure96.Nodesarenumbered,andnotwonodescanhavethesamenumberordesignation.Twonodesare
introducedtorepresentthestartandcompletionoftheprojectitself.
Theactualcomputerrepresentationoftheprojectschedulegenerallyconsistsofalistofactivitiesalongwiththeirassociated
durations,requiredresourcesandpredecessoractivities.Graphicalnetworkrepresentationsratherthanalistarehelpfulfor
visualizationoftheplanandtoinsurethatmathematicalrequirementsaremet.Theactualinputofthedatatoacomputer
programmaybeaccomplishedbyfillinginblanksonascreenmenu,readinganexistingdatafile,ortypingdatadirectlytothe
programwithidentifiersforthetypeofinformationbeingprovided.
Withanactivityonbranchnetwork,dummyactivitiesmaybeintroducedforthepurposesofprovidinguniqueactivity
designationsandmaintainingthecorrectsequenceofactivities.Adummyactivityisassumedtohavenotimedurationandcan
begraphicallyrepresentedbyadashedlineinanetwork.Severalcasesinwhichdummyactivitiesareusefulareillustratedin
Fig.101.InFig.101(a),theeliminationofactivityCwouldmeanthatbothactivitiesBandDwouldbeidentifiedasbeing
betweennodes1and3.However,ifadummyactivityXisintroduced,asshowninpart(b)ofthefigure,theunique
designationsforactivityB(node1to2)andD(node1to3)willbepreserved.Furthermore,iftheprobleminpart(a)ischanged
sothatactivityEcannotstartuntilbothCandDarecompletedbutthatFcanstartafterDaloneiscompleted,theorderinthe
newsequencecanbeindicatedbytheadditionofadummyactivityY,asshowninpart(c).Ingeneral,dummyactivitiesmaybe
necessarytomeettherequirementsofspecificcomputerschedulingalgorithms,butitisimportanttolimitthenumberofsuch
dummylinkinsertionstotheextentpossible.

Figure101DummyActivitiesinaProjectNetwork

Manycomputerschedulingsystemssupportonlyonenetworkrepresentation,eitheractivityonbranchoracitivityonnode.A
goodprojectmanagerisfamiliarwitheitherrepresentation.
Example101:Formulatinganetworkdiagram
Supposethatwewishtoformanactivitynetworkforasevenactivitynetworkwiththefollowingprecedences:
Activity
A
B
C
D
E
F
G

Predecessors

A,B
C
C
D
D,E

ForminganactivityonbranchnetworkforthissetofactivitiesmightbeginbedrawingactivitiesA,BandCas
showninFigure102(a).Atthispoint,wenotethattwoactivities(AandB)liebetweenthesametwoeventnodes
forclarity,weinsertadummyactivityXandcontinuetoplaceotheractivitiesasinFigure102(b).Placingactivity
Ginthefigurepresentsaproblem,however,sincewewishbothactivityDandactivityEtobepredecessors.
InsertinganadditionaldummyactivityYalongwithactivityGcompletestheactivitynetwork,asshowninFigure
102(c).AcomparableactivityonnoderepresentationisshowninFigure103,includingprojectstartandfinish
nodes.Notethatdummyactivitiesarenotrequiredforexpressingprecedencerelationshipsinactivityonnode
networks.

Figure102AnActivityonBranchNetworkforCriticalPathScheduling

Figure103AnActivityonNodeNetworkforCriticalPathScheduling
Backtotop

10.3CalculationsforCriticalPathScheduling
Withthebackgroundprovidedbytheprevioussections,wecanformulatethecriticalpathschedulingmathematically.Weshall
presentanalgorithmorsetofinstructionsforcriticalpathschedulingassuminganactivityonbranchprojectnetwork.Wealso
assumethatallprecedencesareofafinishtostartnature,sothatasucceedingactivitycannotstartuntilthecompletionofa
precedingactivity.Inalatersection,wepresentacomparablealgorithmforactivityonnoderepresentationswithmultiple
precedencetypes.
Supposethatourprojectnetworkhasn+1nodes,theinitialeventbeing0andthelasteventbeingn.Letthetimeatwhichnode
eventsoccurbex1,x2,....,xn,respectively.Thestartoftheprojectatx0willbedefinedastime0.Nodaleventtimesmustbe
consistentwithactivitydurations,sothatanactivity'ssuccessornodeeventtimemustbelargerthananactivity'spredecessor
nodeeventtimeplusitsduration.Foranactivitydefinedasstartingfromeventiandendingateventj,thisrelationshipcanbe
expressedastheinequalityconstraint,xj xi+DijwhereDijisthedurationofactivity(i,j).Thissameexpressioncanbe
writtenforeveryactivityandmustholdtrueinanyfeasibleschedule.Mathematically,then,thecriticalpathschedulingproblem

istominimizethetimeofprojectcompletion(xn)subjecttotheconstraintsthateachnodecompletioneventcannotoccuruntil
eachofthepredecessoractivitieshavebeencompleted:
Minimize
(10.1)
subjectto

Thisisalinearprogrammingproblemsincetheobjectivevaluetobeminimizedandeachoftheconstraintsisalinearequation.
[1]
Ratherthansolvingthecriticalpathschedulingproblemwithalinearprogrammingalgorithm(suchastheSimplexmethod),
moreefficienttechniquesareavailablethattakeadvantageofthenetworkstructureoftheproblem.Thesesolutionmethodsare
veryefficientwithrespecttotherequiredcomputations,sothatverylargenetworkscanbetreatedevenwithpersonal
computers.Thesemethodsalsogivesomeveryusefulinformationaboutpossibleactivityschedules.Theprogramscancompute
theearliestandlatestpossiblestartingtimesforeachactivitywhichareconsistentwithcompletingtheprojectintheshortest
possibletime.Thiscalculationisofparticularinterestforactivitieswhicharenotonthecriticalpath(orpaths),sincethese
activitiesmightbeslightlydelayedorrescheduledovertimeasamanagerdesireswithoutdelayingtheentireproject.
AnefficientsolutionprocessforcriticalpathschedulingbaseduponnodelabelingisshowninTable101.Threealgorithms
appearinthetable.Theeventnumberingalgorithmnumbersthenodes(orevents)oftheprojectsuchthatthebeginningevent
hasalowernumberthantheendingeventforeachactivity.Technically,thisalgorithmaccomplishesa"topologicalsort"ofthe
activities.Theprojectstartnodeisgivennumber0.Aslongastheprojectactivitiesfulfilltheconditionsforanactivityon
branchnetwork,thistypeofnumberingsystemisalwayspossible.Somesoftwarepackagesforcriticalpathschedulingdonot
havethisnumberingalgorithmprogrammed,sothattheconstructionprojectplannersmustinsurethatappropriatenumberingis
done.
TABLE101CriticalPathSchedulingAlgorithms(ActivityonBranchRepresentation)
EventNumberingAlgorithm
Step1:Givethestartingeventnumber0.
Step2:Givethenextnumbertoanyunnumberedeventwhosepredecessorevents
areeachalreadynumbered.
RepeatStep2untilalleventsarenumbered.
EarliestEventTimeAlgorithm
Step1:LetE(0)=0.
Step2:Forj=1,2,3,...,n(wherenisthelastevent),let
E(j)=maximum{E(i)+Dij}
wherethemaximumiscomputedoverallactivities(i,j)thathavejastheendingevent.
LatestEventTimeAlgorithm
Step1:LetL(n)equaltherequiredcompletiontimeoftheproject.
Note:L(n)mustequalorexceedE(n).
Step2:Fori=n1,n2,...,0,let
L(i)=minimum{L(j)Dij}
wheretheminimumiscomputedoverallactivities(i,j)thathaveiasthestartingevent.

Theearliesteventtimealgorithmcomputestheearliestpossibletime,E(i),atwhicheachevent,i,inthenetworkcanoccur.
Earliesteventtimesarecomputedasthemaximumoftheearlieststarttimesplusactivitydurationsforeachoftheactivities
immediatelyprecedinganevent.Theearlieststarttimeforeachactivity(i,j)isequaltotheearliestpossibletimeforthe
precedingeventE(i):
(10.2)

Theearliestfinishtimeofeachactivity(i,j)canbecalculatedby:
(10.3)

Activitiesareidentifiedinthisalgorithmbythepredecessornode(orevent)iandthesuccessornodej.Thealgorithmsimply
requiresthateacheventinthenetworkshouldbeexaminedinturnbeginningwiththeprojectstart(node0).
Thelatesteventtimealgorithmcomputesthelatestpossibletime,L(j),atwhicheacheventjinthenetworkcanoccur,giventhe
desiredcompletiontimeoftheproject,L(n)forthelasteventn.Usually,thedesiredcompletiontimewillbeequaltotheearliest
possiblecompletiontime,sothatE(n)=L(n)forthefinalnoden.Theprocedureforfindingthelatesteventtimeisanalogousto
thatfortheearliesteventtimeexceptthattheprocedurebeginswiththefinaleventandworksbackwardsthroughtheproject
activities.Thus,theearliesteventtimealgorithmisoftencalledaforwardpassthroughthenetwork,whereasthelatestevent
timealgorithmisthethebackwardpassthroughthenetwork.Thelatestfinishtimeconsistentwithcompletionoftheprojectin
thedesiredtimeframeofL(n)foreachactivity(i,j)isequaltothelatestpossibletimeL(j)forthesucceedingevent:
(10.4)

Thelateststarttimeofeachactivity(i,j)canbecalculatedby:
(10.5)

Theearlieststartandlatestfinishtimesforeacheventareusefulpiecesofinformationindevelopingaprojectschedule.Events
whichhaveequalearliestandlatesttimes,E(i)=L(i),lieonthecriticalpathorpaths.Anactivity(i,j)isacriticalactivityifit
satisfiesallofthefollowingconditions:
(10.6)
(10.7)
(10.8)

Hence,activitiesbetweencriticaleventsarealsoonacriticalpathaslongastheactivity'searlieststarttimeequalsitslateststart
time,ES(i,j)=LS(i,j).Toavoiddelayingtheproject,alltheactivitiesonacriticalpathshouldbeginassoonaspossible,soeach
criticalactivity(i,j)mustbescheduledtobeginattheearliestpossiblestarttime,E(i).
Example102:Criticalpathschedulingcalculations
ConsiderthenetworkshowninFigure104inwhichtheprojectstartisgivennumber0.Then,theonlyeventthat
haseachpredecessornumberedisthesuccessortoactivityA,soitreceivesnumber1.Afterthis,theonlyeventthat
haseachpredecessornumberedisthesuccessortothetwoactivitiesBandC,soitreceivesnumber2.Theother
eventnumbersresultingfromthealgorithmarealsoshowninthefigure.Forthissimpleprojectnetwork,eachstage
inthenumberingprocessfoundonlyonepossibleeventtonumberatanytime.Withmorethanonefeasibleevent
tonumber,thechoiceofwhichtonumbernextisarbitrary.Forexample,ifactivityCdidnotexistintheprojectfor
Figure104,thesuccessoreventforactivityAorforactivityBcouldhavebeennumbered1.

Figure104ANineActivityProjectNetwork

Oncethenodenumbersareestablished,agoodaidformanualschedulingistodrawasmallrectangleneareach
nodewithtwopossibleentries.Thelefthandsidewouldcontaintheearliesttimetheeventcouldoccur,whereasthe
righthandsidewouldcontainthelatesttimetheeventcouldoccurwithoutdelayingtheentireproject.Figure105
illustratesatypicalbox.

Figure105E(i)andL(i)DisplayforHandCalculationofCriticalPathforActivityonBranchRepresentation
TABLE102PrecedenceRelationsandDurationsforaNineActivityProject
Example
Activity
Description
Predecessors Duration
A
B
C
D
E
F
G
H
I

Siteclearing
Removaloftrees
Generalexcavation
Gradinggeneralarea
Excavationfortrenches
Placingformworkandreinforcementforconcrete
Installingsewerlines
Installingotherutilities
Pouringconcrete

A
A
B,C
B,C
D,E
D,E
F,G

4
3
8
7
9
12
2
5
6

ForthenetworkinFigure104withactivitydurationsinTable102,theearliesteventtimecalculationsproceedas
follows:
Step1

E(0)=0

Step2
j=1

E(1)=Max{E(0)+D01}=Max{0+4}=4

j=2

E(2)=Max{E(0)+D02E(1)+D12}=Max{0+34+8}=12

j=3

E(3)=Max{E(1)+D13E(2)+D23}=Max{4+712+9}=21

j=4

E(4)=Max{E(2)+D24E(3)+D34}=Max{12+1221+2}=24

j=5

E(5)=Max{E(3)+D35E(4)+D45}=Max{21+524+6}=30

Thus,theminimumtimerequiredtocompletetheprojectis30sinceE(5)=30.Inthiscase,eacheventhadatmost
twopredecessors.
Forthe"backwardpass,"thelatesteventtimecalculationsare:
Step1

L(5)=E(5)=30

Step2
j=4

L(4)=Min{L(5)D45}=Min{306}=24

j=3

L(3)=Min{L(5)D35L(4)D34}=Min{305242}=22

j=2

L(2)=Min{L(4)D24L(3)D23}=Min{2412229}=12

j=1

L(1)=Min{L(3)D13L(2)D12}=Min{227128}=4

j=0

L(0)=Min{L(2)D02L(1)D01}=Min{12344}=0

Inthisexample,E(0)=L(0),E(1)=L(1),E(2)=L(2),E(4)=L(4),andE(5)=L(5).Asaresult,allnodesbutnode3
areinthecriticalpath.ActivitiesonthecriticalpathincludeA(0,1),C(1,2),F(2,4)andI(4,5)asshowninTable
103.
TABLE103IdentificationofActivitiesontheCriticalPathforaNine
ActivityProject
Duration Earlieststarttime Latestfinishtime Lateststarttime
Dij
Activity
E(i)=ES(i,j)
L(j)=LF(i,j)
LS(i,j)
A(0,1)
B(0,2)
C(1,2)
D(1,3)
E(2,3)
F(2,4)
G(3,4)
H(3,5)
I(4,5)

4
3
8
7
9
12
2
5
6

0*
0
4*
4
12
12*
21
21
24

4*
12
12*
22
22
24*
24
30
30*

0
9
4
15
13
12
22
25
24

*ActivityonacriticalpathsinceE(i)+DiJ=L(j).

Backtotop

10.4ActivityFloatandSchedules
Anumberofdifferentactivityschedulescanbedevelopedfromthecriticalpathschedulingproceduredescribedintheprevious
section.Anearliesttimeschedulewouldbedevelopedbystartingeachactivityassoonaspossible,atES(i,j).Similarly,alatest
timeschedulewoulddelaythestartofeachactivityaslongaspossiblebutstillfinishtheprojectintheminimumpossibletime.
Thislateschedulecanbedevelopedbysettingeachactivity'sstarttimetoLS(i,j).
Activitiesthathavedifferentearlyandlatestarttimes(i.e.,ES(i,j)<LS(i,j))canbescheduledtostartanytimebetweenES(i,j)
andLS(i,j)asshowninFigure106.Theconceptoffloatistousepartorallofthisallowablerangetoscheduleanactivity
withoutdelayingthecompletionoftheproject.Anactivitythathastheearliesttimeforitspredecessorandsuccessornodes
differingbymorethanitsdurationpossessesawindowinwhichitcanbescheduled.Thatis,ifE(i)+Dij<L(j),thensomefloat
isavailableinwhichtoschedulethisactivity.

Figure106IllustrationofActivityFloat

Floatisaveryvaluableconceptsinceitrepresentstheschedulingflexibilityor"maneuveringroom"availabletocomplete
particulartasks.Activitiesonthecriticalpathdonotprovideanyflexibilityforschedulingnorleewayincaseofproblems.For
activitieswithsomefloat,theactualstartingtimemightbechosentobalanceworkloadsovertime,tocorrespondwithmaterial
deliveries,ortoimprovetheproject'scashflow.
Ofcourse,ifoneactivityisallowedtofloatorchangeintheschedule,thentheamountoffloatavailableforotheractivitiesmay
decrease.Threeseparatecategoriesoffloataredefinedincriticalpathscheduling:
1.Freefloatistheamountofdelaywhichcanbeassignedtoanyoneactivitywithoutdelayingsubsequentactivities.The
freefloat,FF(i,j),associatedwithactivity(i,j)is:
(10.9)
2.Independentfloatistheamountofdelaywhichcanbeassignedtoanyoneactivitywithoutdelayingsubsequentactivities
orrestrictingtheschedulingofprecedingactivities.Independentfloat,IF(i,j),foractivity(i,j)iscalculatedas:
(10.10)

3.Totalfloatisthemaximumamountofdelaywhichcanbeassignedtoanyactivitywithoutdelayingtheentireproject.The
totalfloat,TF(i,j),foranyactivity(i,j)iscalculatedas:
(10.11)

Eachofthese"floats"indicatesanamountofflexibilityassociatedwithanactivity.Inallcases,totalfloatequalsorexceedsfree
float,whileindependentfloatisalwayslessthanorequaltofreefloat.Also,anyactivityonacriticalpathhasallthreevaluesof
floatequaltozero.Theconverseofthisstatementisalsotrue,soanyactivitywhichhaszerototalfloatcanberecognizedas
beingonacriticalpath.
ThevariouscategoriesofactivityfloatareillustratedinFigure106inwhichtheactivityisrepresentedbyabarwhichcan
movebackandforthintimedependinguponitsschedulingstart.Threepossiblescheduledstartsareshown,correspondingto
thecasesofstartingeachactivityattheearliesteventtime,E(i),thelatestactivitystarttimeLS(i,j),andatthelatesteventtime
L(i).Thethreecategoriesoffloatcanbefounddirectlyfromthisfigure.Finally,afourthbarisincludedinthefiguretoillustrate
thepossibilitythatanactivitymightstart,betemporarilyhalted,andthenrestart.Inthiscase,thetemporaryhaltwas
sufficientlyshortthatitwaslessthantheindependentfloattimeandthuswouldnotinterferewithotheractivities.Whetheror
notsuchworksplittingispossibleoreconomicaldependsuponthenatureoftheactivity.

AsshowninTable103,activityD(1,3)hasfreeandindependentfloatsof10fortheprojectshowninFigure104.Thus,the
startofthisactivitycouldbescheduledanytimebetweentime4and14aftertheprojectbeganwithoutinterferingwiththe
scheduleofotheractivitiesorwiththeearliestcompletiontimeoftheproject.Asthetotalfloatof11unitsindicates,thestartof
activityDcouldalsobedelayeduntiltime15,butthiswouldrequirethatthescheduleofotheractivitiesberestricted.For
example,startingactivityDattime15wouldrequirethatactivityGwouldbeginassoonasactivityDwascompleted.However,
ifthisschedulewasmaintained,theoverallcompletiondateoftheprojectwouldnotbechanged.
Example103:Criticalpathforafabricationproject
Asanotherexampleofcriticalpathscheduling,considerthesevenactivitiesassociatedwiththefabricationofa
steelcomponentshowninTable104.Figure107showsthenetworkdiagramassociatedwiththeseseven
activities.NotethatanadditionaldummyactivityXhasbeenaddedtoinsurethatthecorrectprecedence
relationshipsaremaintainedforactivityE.Asimpleruletoobserveisthatifanactivityhasmorethanone
immediatepredecessorandanotheractivityhasatleastonebutnotallofthesepredecessoractivityasa
predecessor,adummyactivitywillberequiredtomaintainprecedencerelationships.Thus,inthefigure,activityE
hasactivitiesBandCaspredecessors,whileactivityDhasonlyactivityCasapredecessor.Hence,adummy
activityisrequired.NodenumbershavealsobeenaddedtothisfigureusingtheprocedureoutlinedinTable101.
Notethatthenodenumbersonnodes1and2couldhavebeenexchangedinthisnumberingprocesssinceafter
numberingnode0,eithernode1ornode2couldbenumberednext.
TABLE104PrecedencesandDurationsforaSevenActivity
Project
Activity
Description
Predecessors Duration
A
B
C
D
E
F
G

Preliminarydesign
Evaluationofdesign
Contractnegotiation
Preparationoffabricationplant
Finaldesign
FabricationofProduct
ShipmentofProducttoowner

C
B,C
D,E
F

6
1
8
5
9
12
3

Figure107IllustrationofaSevenActivityProjectNetwork

Theresultsoftheearliestandlatesteventtimealgorithms(appearinginTable101)areshowninTable105.The
minimumcompletiontimefortheprojectis32days.Inthissmallproject,alloftheeventnodesexceptnode1are
onthecriticalpath.Table106showstheearliestandlateststarttimesforthevariousactivitiesincludingthe
differentcategoriesoffloat.ActivitiesC,E,F,GandthedummyactivityXareseentolieonthecriticalpath.
TABLE105EventTimesforaSeven
ActivityProject
Node EarliestTimeE(i) LatestTimeL(j)
0
0
0
1
6
7
2
8
8
3
8
8
4
17
17
5
29
29
6
32
32

TABLE106EarliestStart,LatestStartandActivityFloatsforaSevenActivity
Project
Lateststarttime Freefloat
Activity Earlieststarttime
ES(i,j)
LS(i,j) Independentfloat Totalfloat
A(0,1)
B(1,3)
C(0,2)
D(2,4)
E(3,4)
F(4,5)
G(5,6)
X(2,3)

0
6
0
8
8
17
29
8

1
7
0
12
8
17
29
8

0
1
0
4
0
0
0
0

0
0
0
4
0
0
0
0

1
1
0
4
0
0
0
0

Backtotop

10.5PresentingProjectSchedules
Communicatingtheprojectscheduleisavitalingredientinsuccessfulprojectmanagement.Agoodpresentationwillgreatly
easethemanager'sproblemofunderstandingthemultitudeofactivitiesandtheirinterrelationships.Moreover,numerous
individualsandpartiesareinvolvedinanyproject,andtheyhavetounderstandtheirassignments.Graphicalpresentationsof
projectschedulesareparticularlyusefulsinceitismucheasiertocomprehendagraphicaldisplayofnumerouspiecesof
informationthantosiftthroughalargetableofnumbers.Earlycomputerschedulingsystemswereparticularlypoorinthis
regardsincetheyproducedpagesandpagesofnumberswithoutaidstothemanagerforunderstandingthem.Ashortexample
appearsinTables105and106inpractice,aprojectsummarytablewouldbemuchlonger.Itisextremelytedioustoreada
tableofactivitynumbers,durations,scheduletimes,andfloatsandtherebygainanunderstandingandappreciationofaproject
schedule.Inpractice,producingdiagramsmanuallyhasbeenacommonprescriptiontothelackofautomateddraftingfacilities.
Indeed,ithasbeencommontousecomputerprogramstoperformcriticalpathschedulingandthentoproducebarchartsof
detailedactivityschedulesandresourceassignmentsmanually.Withtheavailabilityofcomputergraphics,thecostandeffortof
producinggraphicalpresentationshasbeensignificantlyreducedandtheproductionofpresentationaidscanbeautomated.
Networkdiagramsforprojectshavealreadybeenintroduced.Thesediagramsprovideapowerfulvisualizationofthe
precedencesandrelationshipsamongthevariousprojectactivities.Theyareabasicmeansofcommunicatingaprojectplan
amongtheparticipatingplannersandprojectmonitors.Projectplanningisoftenconductedbyproducingnetwork
representationsofgreaterandgreaterrefinementuntiltheplanissatisfactory.
Ausefulvariationonprojectnetworkdiagramsistodrawatimescalednetwork.Theactivitydiagramsshownintheprevious
sectionweretopologicalnetworksinthatonlytherelationshipbetweennodesandbrancheswereofinterest.Theactualdiagram
couldbedistortedinanywaydesiredaslongastheconnectionsbetweennodeswerenotchanged.Intimescalednetwork
diagrams,activitiesonthenetworkareplottedonahorizontalaxismeasuringthetimesinceprojectcommencement.Figure10
8givesanexampleofatimescaledactivityonbranchdiagramforthenineactivityprojectinFigure104.Inthistimescaled
diagram,eachnodeisshownatitsearliestpossibletime.Bylookingoverthehorizontalaxis,thetimeatwhichactivitycan
begincanbeobserved.Obviously,thistimescaleddiagramisproducedasadisplayafteractivitiesareinitiallyscheduledbythe
criticalpathmethod.

Figure108IllustrationofaTimeScaledNetworkDiagramwithNineActivities

AnotherusefulgraphicalrepresentationtoolisabarorGanttchartillustratingthescheduledtimeforeachactivity.Thebarchart
listsactivitiesandshowstheirscheduledstart,finishandduration.Anillustrativebarchartforthenineactivityproject
appearinginFigure104isshowninFigure109.Activitiesarelistedintheverticalaxisofthisfigure,whiletimesinceproject
commencementisshownalongthehorizontalaxis.Duringthecourseofmonitoringaproject,usefuladditionstothebasicbar
chartincludeaverticallinetoindicatethecurrenttimeplussmallmarkstoindicatethecurrentstateofworkoneachactivity.In
Figure109,ahypotheticalprojectstateafter4periodsisshown.Thesmall"v"marksoneachactivityrepresentthecurrent
stateofeachactivity.

Figure109AnExampleBarChartforaNineActivityProject

Barchartsareparticularlyhelpfulforcommunicatingthecurrentstateandscheduleofactivitiesonaproject.Assuch,theyhave
foundwideacceptanceasaprojectrepresentationtoolinthefield.Forplanningpurposes,barchartsarenotasusefulsincethey
donotindicatetheprecedencerelationshipsamongactivities.Thus,aplannermustrememberorrecordseparatelythatachange
inoneactivity'sschedulemayrequirechangestosuccessoractivities.Therehavebeenvariousschemesformechanicallylinking
activitybarstorepresentprecedences,butitisnoweasiertousecomputerbasedtoolstorepresentsuchrelationships.
Othergraphicalrepresentationsarealsousefulinprojectmonitoring.Timeandactivitygraphsareextremelyusefulin
portrayingthecurrentstatusofaprojectaswellastheexistenceofactivityfloat.Forexample,Figure1010showstwopossible
schedulesforthenineactivityprojectdescribedinTable91andshowninthepreviousfigures.Thefirstschedulewouldoccur
ifeachactivitywasscheduledatitsearlieststarttime,ES(i,j)consistentwithcompletionoftheprojectintheminimumpossible
time.Withthisschedule,Figure1010showsthepercentofprojectactivitycompletedversustime.Thesecondschedulein
Figure1010isbasedonlatestpossiblestarttimesforeachactivity,LS(i,j).Thehorizontaltimedifferencebetweenthetwo
feasibleschedulesgivesanindicationoftheextentofpossiblefloat.Iftheprojectgoesaccordingtoplan,theactualpercentage
completionatdifferenttimesshouldfallbetweenthesecurves.Inpractice,averticalaxisrepresentingcashexpendituresrather
thanpercentcompletedisoftenusedindevelopingaprojectrepresentationofthistype.Forthispurpose,activitycostestimates
areusedinpreparingatimeversuscompletiongraph.Separate"Scurves"mayalsobepreparedforgroupsofactivitiesonthe
samegraph,suchasseparatecurvesforthedesign,procurement,foundationorparticularsubcontractoractivities.

Figure1010ExampleofPercentageCompletionversusTimeforAlternativeScheduleswithaNineActivityProject

Timeversuscompletioncurvesarealsousefulinprojectmonitoring.Notonlythehistoryoftheprojectcanbeindicated,butthe
futurepossibilitiesforearliestandlateststarttimes.Forexample,Figure1011illustratesaprojectthatisfortypercentcomplete
aftereightdaysforthenineactivityexample.Inthiscase,theprojectiswellaheadoftheoriginalschedulesomeactivitieswere
completedinlessthantheirexpecteddurations.Thepossibleearliestandlateststarttimeschedulesfromthecurrentproject
statusarealsoshownonthefigure.

Figure1011IllustrationofActualPercentageCompletionversusTimeforaNineActivityProjectUnderway

Graphsofresourceuseovertimearealsoofinteresttoprojectplannersandmanagers.Anexampleofresourceuseisshownin
Figure1012fortheresourceoftotalemploymentonthesiteofaproject.Thisgraphispreparedbysummingtheresource
requirementsforeachactivityateachtimeperiodforaparticularprojectschedule.Withlimitedresourcesofsomekind,graphs
ofthistypecanindicatewhenthecompetitionforaresourceistoolargetoaccommodateincasesofthiskind,resource
constrainedschedulingmaybenecessaryasdescribedinSection10.9.Evenwithoutfixedresourceconstraints,aschedulertries
toavoidextremefluctuationsinthedemandforlabororotherresourcessincethesefluctuationstypicallyincurhighcostsfor
training,hiring,transportation,andmanagement.Thus,aplannermightalteraschedulethroughtheuseofavailableactivity
floatssoastolevelorsmoothoutthedemandforresources.ResourcegraphssuchasFigure1012provideaninvaluable
indicationofthepotentialtroublespotsandthesuccessthataschedulerhasinavoidingthem.

Figure1012IllustrationofResourceUseoverTimeforaNineActivityProject

Acommondifficultywithprojectnetworkdiagramsisthattoomuchinformationisavailableforeasypresentationinanetwork.
Inaprojectwith,say,fivehundredactivities,drawingactivitiessothattheycanbeseenwithoutamicroscoperequiresa
considerableexpanseofpaper.Alargeprojectmightrequirethewallspaceinaroomtoincludetheentirediagram.Ona
computerdisplay,atypicalrestrictionisthatlessthantwentyactivitiescanbesuccessfullydisplayedatthesametime.The
problemofdisplayingnumerousactivitiesbecomesparticularlyacutewhenaccessoryinformationsuchasactivityidentifying
numbersorphrases,durationsandresourcesareaddedtothediagram.
Onepracticalsolutiontothisrepresentationproblemistodefinesetsofactivitiesthatcanberepresentedtogetherasasingle
activity.Thatis,fordisplaypurposes,networkdiagramscanbeproducedinwhichone"activity"wouldrepresentanumberof
realsubactivities.Forexample,anactivitysuchas"foundationdesign"mightbeinsertedinsummarydiagrams.Intheactual
projectplan,thisoneactivitycouldbesubdividedintonumeroustaskswiththeirownprecedences,durationsandother
attributes.Thesesubgroupsaresometimestermedfragnetsforfragmentsofthefullnetwork.Theresultofthisorganizationis
thepossibilityofproducingdiagramsthatsummarizetheentireprojectaswellasdetailedrepresentationsofparticularsetsof
activities.Thehierarchyofdiagramscanalsobeintroducedtotheproductionofreportssothatsummaryreportsforgroupsof
activitiescanbeproduced.Thus,detailedrepresentationsofparticularactivitiessuchasplumbingmightbepreparedwithall
otheractivitieseitheromittedorsummarizedinlarger,aggregateactivityrepresentations.TheCSI/MASTERSPECactivity
definitioncodesdescribedinChapter9provideawidelyadoptedexampleofahierarchicalorganizationofthistype.Evenif
summaryreportsanddiagramsareprepared,theactualschedulingwouldusedetailedactivitycharacteristics,ofcourse.
AnexamplefigureofasubnetworkappearsinFigure1013.SummarydisplayswouldincludeonlyasinglenodeAto
representthesetofactivitiesinthesubnetwork.Notethatprecedencerelationshipsshowninthemasternetworkwouldhaveto
beinterpretedwithcaresinceaparticularprecedencemightbeduetoanactivitythatwouldnotcommenceatthestartof
activityonthesubnetwork.

Figure1013IllustrationofaSubNetworkinaSummaryDiagram

Theuseofgraphicalprojectrepresentationsisanimportantandextremelyusefulaidtoplannersandmanagers.Ofcourse,
detailednumericalreportsmayalsoberequiredtocheckthepeculiaritiesofparticularactivities.Butgraphsanddiagrams
provideaninvaluablemeansofrapidlycommunicatingorunderstandingaprojectschedule.Withcomputerbasedstorageof
basicprojectdata,graphicaloutputisreadilyobtainableandshouldbeusedwheneverpossible.
Finally,theschedulingproceduredescribedinSection10.3simplycounteddaysfromtheinitialstartingpoint.Practical
schedulingprogramsincludeacalendarconversiontoprovidecalendardatesforscheduledworkaswellasthenumberofdays
fromtheinitiationoftheproject.Thisconversioncanbeaccomplishedbyestablishingaonetoonecorrespondencebetween
projectdatesandcalendardates.Forexample,projectday2wouldbeMay4iftheprojectbeganattime0onMay2andno
holidaysintervened.Inthiscalendarconversion,weekendsandholidayswouldbeexcludedfromconsiderationforscheduling,
althoughtheplannermightoverrulethisfeature.Also,thenumberofworkshiftsorworkinghoursineachdaycouldbedefined,
toprovideconsistencywiththetimeunitsusedisestimatingactivitydurations.Projectreportsandgraphswouldtypicallyuse
actualcalendardays.
Backtotop

10.6CriticalPathSchedulingforActivityonNodeandwithLeads,Lags,and
Windows
Performingthecriticalpathschedulingalgorithmforactivityonnoderepresentationsisonlyasmallvariationfromtheactivity
onbranchalgorithmpresentedabove.Anexampleoftheactivityonnodediagramforasevenactivitynetworkisshownin
Figure103.Someadditionterminologyisneededtoaccountforthetimedelayatanodeassociatedwiththetaskactivity.
Accordingly,wedefine:ES(i)astheearlieststarttimeforactivity(andnode)i,EF(i)istheearliestfinishtimeforactivity(and
node)i,LS(i)isthelateststartandLF(i)isthelatestfinishtimeforactivity(andnode)i.Table107showstherelevant
calculationsforthenodenumberingalgorithm,theforwardpassandthebackwardpasscalculations.
TABLE107CriticalPathSchedulingAlgorithms(ActivityonNodeRepresentation)
ActivityNumberingAlgorithm
Step1:Givethestartingactivitynumber0.
Step2:Givethenextnumbertoanyunnumberedactivitywhosepredecessoractivities
areeachalreadynumbered.
RepeatStep2untilallactivitiesarenumbered.
ForwardPass
Step1:LetE(0)=0.
Step2:Forj=1,2,3,...,n(wherenisthelastactivity),let
ES(j)=maximum{EF(i)}
wherethemaximumiscomputedoverallactivities(i)thathavejastheirsuccessor.
Step3:EF(j)=ES(j)+Dj
BackwardPass
Step1:LetL(n)equaltherequiredcompletiontimeoftheproject.
Note:L(n)mustequalorexceedE(n).
Step2:Fori=n1,n2,...,0,let

LF(i)=minimum{LS(j)}
wheretheminimumiscomputedoverallactivities(j)thathaveiastheirpredecessor.
Step3:LS(i)=LF(i)Di

FormanualapplicationofthecriticalpathalgorithmshowninTable107,itishelpfultodrawasquareoffourentries,
representingtheES(i),EF(i),LS(i)andLF(i)asshowninFigure1014.Duringtheforwardpass,theboxesforES(i)andEF(i)
arefilledin.Asanexerciseforthereader,thesevenactivitynetworkinFigure103canbescheduled.Resultsshouldbe
identicaltothoseobtainedfortheactivityonbranchcalculations.

Figure1014ES,EF,LSandLFDisplayforHandCalculationofCriticalPathforActivityonNodeRepresentation

Buildingonthecriticalpathschedulingcalculationsdescribedintheprevioussections,someadditionalcapabilitiesareuseful.
Desirableextensionsincludethedefinitionofallowablewindowsforactivitiesandtheintroductionofmorecomplicated
precedencerelationshipsamongactivities.Forexample,aplannermaywishtohaveanactivityofremovingformworkfroma
newbuildingcomponentfollowtheconcretepourbysomepredefinedlagperiodtoallowsetting.Thisdelaywouldrepresenta
requiredgapbetweenthecompletionofaprecedingactivityandthestartofasuccessor.Theschedulingcalculationsto
accommodatethesecomplicationswillbedescribedinthissection.Again,thestandardcriticalpathschedulingassumptionsof
fixedactivitydurationsandunlimitedresourceavailabilitywillbemadehere,althoughtheseassumptionswillberelaxedin
latersections.
Acapabilityofmanyschedulingprogramsistoincorporatetypesofactivityinteractionsinadditiontothestraightforward
predecessorfinishtosuccessorstartconstraintusedinSection10.3.Incorporationofadditionalcategoriesofinteractionsis
oftencalledprecedencediagramming.[2]Forexample,itmaybethecasethatinstallingconcreteformsinafoundationtrench
mightbeginafewhoursafterthestartofthetrenchexcavation.Thiswouldbeanexampleofastarttostartconstraintwitha
lead:thestartofthetrenchexcavationactivitywouldleadthestartoftheconcreteformplacementactivitybyafewhours.
Eightseparatecategoriesofprecedenceconstraintscanbedefined,representinggreaterthan(leads)orlessthan(lags)time
constraintsforeachoffourdifferentinteractivityrelationships.TheserelationshipsaresummarizedinTable108.Typical
precedencerelationshipswouldbe:
Directorfinishtostartleads
Thesuccessoractivitycannotstartuntiltheprecedingactivityiscompletebyatleasttheprescribedleadtime(FS).Thus,
thestartofasuccessoractivitymustexceedthefinishoftheprecedingactivitybyatleastFS.
Starttostartleads
Thesuccessoractivitycannotstartuntilworkontheprecedingactivityhasbeenunderwaybyatleasttheprescribedlead
time(SS).
Finishtofinishleadss
ThesuccessoractivitymusthaveatleastFFperiodsofworkremainingatthecompletionoftheprecedingactivity.
Starttofinishleads
ThesuccessoractivitymusthaveatleastSFperiodsofworkremainingatthestartoftheprecedingactivity.
WhiletheeightprecedencerelationshipsinTable108areallpossible,themostcommonprecedencerelationshipisthe
straightforwarddirectprecedencebetweenthefinishofaprecedingactivityandthestartofthesuccessoractivitywithno
requiredgap(soFS=0).
TABLE108EightPossibleActivityPrecedenceRelationships
Relationship
Explanation
FinishtostartLead LatestFinishofPredecessor EarliestStartofSuccessor+FS
FinishtostartLag

LatestFinishofPredecessor EarliestStartofSuccessor+FS

StarttostartLead

EarliestStartofPredecessor EarliestStartofSuccessor+SS

StarttostartLag

EarliestStartofPredecessor EarliestStartofSuccessor+SS

FinishtofinishLead LatestFinishofPredecessor EarliestFinishofSuccessor+FF

FinishtofinishLag LatestFinishofPredecessor EarliestFinishofSuccessor+FF

StarttofinishLead EarliestStartofPredecessor EarliestFinishofSuccessor+SF

StarttofinishLag

EarliestStartofPredecessor EarliestFinishofSuccessor+SF

Thecomputationswiththeseleadandlagconstraintsaresomewhatmorecomplicatedvariationsonthebasiccalculations
definedinTable101forcriticalpathscheduling.Forexample,astarttostartleadwouldmodifythecalculationoftheearliest
starttimetoconsiderwhetherornotthenecessaryleadconstraintwasmet:
(10.12)

whereSSijrepresentsastarttostartleadbetweenactivity(i,j)andanyoftheactivitiesstartingateventj.
Thepossibilityofinterruptingorsplittingactivitiesintotwoworksegmentscanbeparticularlyimportanttoinsurefeasible
schedulesinthecaseofnumerousleadorlagconstraints.Withactivitysplitting,anactivityisdividedintotwosubactivities
withapossiblegaporidletimebetweenworkonthetwosubactivities.Thecomputationsforschedulingtreateachsubactivity
separatelyafterasplitismade.Splittingisperformedtoreflectavailableschedulingflexibilityortoallowthedevelopmentofa
feasibleschedule.Forexample,splittingmaypermitschedulingtheearlyfinishofasuccessoractivityatadatelaterthanthe
earlieststartofthesuccessorplusitsduration.Ineffect,thesuccessoractivityissplitintotwosegmentswiththelatersegment
scheduledtofinishafteraparticulartime.Mostcommonly,thisoccurswhenaconstraintinvolvingthefinishtimeoftwo
activitiesdeterminestherequiredfinishtimeofthesuccessor.Whenthissituationoccurs,itisadvantageoustosplitthe
successoractivityintotwosothefirstpartofthesuccessoractivitycanstartearlierbutstillfinishinaccordancewiththe
applicablefinishtofinishconstraint.
Finally,thedefinitionofactivitywindowscanbeextremelyuseful.Anactivitywindowdefinesapermissibleperiodinwhicha
particularlyactivitymaybescheduled.Toimposeawindowconstraint,aplannercouldspecifyanearliestpossiblestarttimefor
anactivity(WES)oralatestpossiblecompletiontime(WLF).Latestpossiblestarts(WLS)andearliestpossiblefinishes(WEF)
mightalsobeimposed.Intheextreme,arequiredstarttimemightbeinsuredbysettingtheearliestandlatestwindowstarttimes
equal(WES=WLS).Thesewindowconstraintswouldbeinadditiontothetimeconstraintsimposedbyprecedence
relationshipsamongthevariousprojectactivities.Windowconstraintsareparticularlyusefulinenforcingmilestonecompletion
requirementsonprojectactivities.Forexample,amilestoneactivitymaybedefinedwithnodurationbutalatestpossible
completiontime.Anyactivitiesprecedingthismilestoneactivitycannotbescheduledforcompletionafterthemilestonedate.
Windowconstraintsareactuallyaspecialcaseoftheotherprecedenceconstraintssummarizedabove:windowsareconstraints
inwhichtheprecedecessoractivityistheprojectstart.Thus,anearliestpossiblestarttimewindow(WES)isastarttostartlead.
Onerelatedissueistheselectionofanappropriatenetworkrepresentation.Generally,theactivityonbranchrepresentationwill
leadtoamorecompactdiagramandisalsoconsistentwithotherengineeringnetworkrepresentationsofstructuresorcircuits.
[3]Forexample,thenineactivitiesshowninFigure104resultinanactivityonbranchnetworkwithsixnodesandnine
branches.Incontrast,thecomparableactivityonnodenetworkshowninFigure96haselevennodes(withtheadditionofa
nodeforprojectstartandcompletion)andfifteenbranches.Theactivityonnodediagramismorecomplicatedandmore
difficulttodraw,particularlysincebranchesmustbedrawncrossingoneanother.Despitethislargersize,animportantpractical
reasontoselectactivityonnodediagramsisthatnumeroustypesofprecedencerelationshipsareeasiertorepresentinthese
diagrams.Forexample,differentsymbolsmightbeusedoneachofthebranchesinFigure96torepresentdirectprecedences,
starttostartprecedences,starttofinishprecedences,etc.Alternatively,thebeginningandendpointsoftheprecedencelinks
canindicatethetypeofleadorlagprecedencerelationship.Anotheradvantageofactivityonnoderepresentationsisthatthe
introductionofdummylinksasinFigure101isnotrequired.Eitherrepresentationcanbeusedforthecriticalpathscheduling
computationsdescribedearlier.Intheabsenceofleadandlagprecedencerelationships,itismorecommontoselectthecompact
activityonbranchdiagram,althoughaunifiedmodelforthispurposeisdescribedinChapter11.Ofcourse,onereasontopick
activityonbranchoractivityonnoderepresentationsisthatparticularcomputerschedulingprogramsavailableatasiteare
basedononerepresentationortheother.Sincebothrepresentationsareincommonuse,projectmanagersshouldbefamiliar
witheithernetworkrepresentation.
Manycommerciallyavailablecomputerschedulingprogramsincludethenecessarycomputationalprocedurestoincorporate
windowsandmanyofthevariousprecedencerelationshipsdescribedabove.Indeed,theterm"precedencediagramming"and
thecalculationsassociatedwiththeselagsseemstohavefirstappearedintheuser'smanualforacomputerschedulingprogram.
[4]
Iftheconstructionplansuggeststhatsuchcomplicatedlagsareimportant,thentheseschedulingalgorithmsshouldbeadopted.
Inthenextsection,thevariouscomputationsassociatedwithcriticalpathschedulingwithseveraltypesofleads,lagsand
windowsarepresented.
Backtotop

10.7CalculationsforSchedulingwithLeads,LagsandWindows

Table109containsanalgorithmicdescriptionofthecalculationsrequiredforcriticalpathschedulingwithleads,lagsand
windows.Thisdescriptionassumesanactivityonnodeprojectnetworkrepresentation,sincethisrepresentationismucheasier
tousewithcomplicatedprecedencerelationships.Thepossibleprecedencerelationshipsaccomadatedbytheprocedure
containedinTable109arefinishtostartleads,starttostartleads,finishtofinishlagsandstarttofinishlags.Windowsfor
earlieststartsorlatestfinishesarealsoaccomodated.Incorporatingotherprecedenceandwindowtypesinascheduling
procedureisalsopossibleasdescribedinChapter11.Withanactivityonnoderepresentation,weassumethataninitiationand
aterminationactivityareincludedtomarkthebeginningandendoftheproject.ThesetofproceduresdescribedinTable109
doesnotprovideforautomaticsplittingofactivities.
TABLE109CriticalPathSchedulingAlgorithmswithLeads,LagsandWindows(ActivityonNodeRepresentations)
ActivityNumberingAlgorithm
Step1:Givethestartingactivitynumber0.
Step2:Givethenextnumbertoanyunnumberedactivitywhosepredecessoractivities
areeachalreadynumbered.
RepeatStep2untilallactivitiesarenumbered.
ForwardPassComputations
Step0:Settheearlieststartandtheearliestfinishoftheinitialactivitytozero:
(ES(0)=EF(0)=0).
Repeatthefollowingstepsforeachactivityk=0,1,2,...,m:
Step1:Computetheearlieststarttime(ES(k))ofactivityk:
ES(k)=Maximum{0WES(k)fortheearlieststartwindowtime,
WEF(k)D(k)fortheearliestfinishwindowtime
EF(i)+FS(i,k)foreachprecedingactivitywithaFSconstraint
ES(i)+SS(i,k)foreachprecedingactivitywithaSSconstraint
EF(i)+FF(i,k)D(k)foreachprecedingactivitywithaFFconstraint
ES(i)+SF(i,k)D(k)foreachprecedingactivitywithaSFconstraint.}
Step2:ComputetheearliestfinishtimeEF(k)ofactivityk:
EF(k)=ES(k)+D(k).
BackwardPassComputations
Step0:Setthelatestfinishandlateststartoftheterminalactivitytotheearlystarttime:
LF(m)=LS(m)=ES(m)=EF(m)
Repeatthefollowingstepsforeachactivityinreverseorder,k=m1,m2,...,2,1,0:Step1:Computethelatest
finishtimeforactivityk:
LF(k)=Min{LF(m),WLF(k)forthelatestfinishwindowtime
WLS(k)+D(k)forthelateststartwindowtime
LS(j)FS(k,j)foreachsucceedingactivitywithaFSconstraint
LF(j)FF(k,j)foreachsucceedingactivitywithaFFconstraint
LS(j)SS(k,j)+D(k)foreachsucceedingactivitywithaSSconstraint
LF(j)SF(k,j)+D(k)foreachsucceedingactivitywithaSFconstraint.}
Step2:Computethelateststarttimeforactivityk:
LS(k)=LF(k)D(k)

Thefirststepintheschedulingalgorithmistosortactivitiessuchthatnohighernumberedactivityprecedesalowernumbered
activity.Withnumberedactivities,durationscanbedenotedD(k),wherekisthenumberofanactivity.Otheractivity
informationcanalsobereferencedbytheactivitynumber.Notethatnodeeventsusedinactivityonbranchrepresentationsare
notrequiredinthiscase.
Theforwardpasscalculationscomputeanearlieststarttime(ES(k))andanearliestfinishtime(EF(k))foreachactivityinturn
(Table109).Incomputingtheearlieststarttimeofanactivityk,theearlieststartwindowtime(WES),theearliestfinish
windowtime(WEF),andeachofthevariousprecedencerelationshipsmustbeconsidered.Constraintsonfinishtimesare
includedbyidentifyingminimumfinishtimesandthensubtractingtheactivityduration.Adefaultearlieststarttimeofday0is
alsoinsuredforallactivities.Asecondstepintheprocedureistoidentifyeachactivity'searliestfinishtime(EF(k)).
Thebackwardpasscalculationsproceedinamannerverysimilartothoseoftheforwardpass(Table109).Inthebackward
pass,thelatestfinishandthelateststarttimesforeachactivityarecalculated.Incomputingthelatestfinishtime,thelateststart
timeisidentifiedwhichisconsistentwithprecedenceconstraintsonanactivity'sstartingtime.Thiscomputationrequiresa
minimizationoverapplicablewindowtimesandallsuccessoractivities.Acheckforafeasibleactivityschedulecanalsobe
imposedatthispoint:ifthelatestarttimeislessthantheearlystarttime(LS(k)<ES(k)),thentheactivityscheduleisnot
possible.

Theresultoftheforwardandbackwardpasscalculationsaretheearlieststarttime,thelateststarttime,theearliestfinishtime,
andthelatestfinishtimeforeachactivity.Theactivityfloatiscomputedasthelateststarttimelesstheearlieststarttime.Note
thatwindowconstraintsmaybeinstrumentalinsettingtheamountoffloat,sothatactivitieswithoutanyfloatmayeitherlieon
thecriticalpathorbeconstrainedbyanallowablewindow.
Toconsiderthepossibilityofactivitysplitting,thevariousformulasfortheforwardandbackwardpassesinTable109mustbe
modified.Forexample,inconsideringthepossibilityofactivitysplittingduetostarttostartlead(SS),itisimportanttoensure
thattheprecedingactivityhasbeenunderwayforatleasttherequiredleadperiod.Iftheprecedingactivitywassplitandthefirst
subactivitywasnotunderwayforasufficientlylongperiod,thenthefollowingactivitycannotstartuntilthefirstplusthe
secondsubactivitieshavebeenunderwayforaperiodequaltoSS(i,k).Thus,insettingtheearlieststarttimeforanactivity,the
calculationtakesintoaccountthedurationofthefirstsubactivity(DA(i))forprecedingactivitiesinvolvingastarttostartlead.
Algebraically,thetermintheearlieststarttimecalculationpertainingtostarttostartprecedenceconstraints(ES(i)+SS(i,k))
hastwopartswiththepossibilityofactivitysplitting:
(10.13)
(10.14)

ES(i)+SS(i,k)
EF(i)D(i)+SS(i,k)

forsplitprecedingactivitieswithDA(i)<SS(i,k)

whereDA(i)isthedurationofthefirstsubactivityoftheprecedingactivity.
Thecomputationofearliestfinishtimeinvolvessimilarconsiderations,exceptthatthefinishtofinishandstarttofinishlag
constraintsareinvolved.Inthiscase,amaximizationoverthefollowingtermsisrequired:

(10.15)

EF(k) =Maximum{ES(k)+D(k),
EF(i)+FF(i,k)foreachprecedingactivitywithaFFprecedence,
ES(i)+SF(i,k)foreachprecedingactivitywithaSFprecedenceandwhichisnotsplit,
EF(i)D(i)+SF(i,k)foreachprecedingactivitywithaSFprecedenceandwhichissplit}

Finally,thenecessitytosplitanactivityisalsoconsidered.Iftheearliestpossiblefinishtimeisgreaterthantheearlieststart
timeplustheactivityduration,thentheactivitymustbesplit.
AnotherpossibleextensionoftheschedulingcomputationsinTable109wouldbetoincludeadurationmodificationcapability
duringtheforwardandbackwardpasses.Thiscapabilitywouldpermitalternativeworkcalendarsfordifferentactivitiesorfor
modificationstoreflecteffectsoftimeoftheyearonactivitydurations.Forexample,thedurationofoutsideworkduringwinter
monthswouldbeincreased.Asanotherexample,activitieswithweekendworkpermittedmighthavetheirweekdaydurations
shortenedtoreflectweekendworkaccomplishments.
Example104:Impactsofprecedencerelationshipsandwindows
Toillustratetheimpactsofdifferentprecedencerelationships,consideraprojectconsistingofonlytwoactivitiesin
additiontothestartandfinish.Thestartisnumberedactivity0,thefirstactivityisnumber1,thesecondactivityis
number2,andthefinishisactivity3.Eachactivityisassumedtohaveadurationoffivedays.Withadirectfinish
tostartprecedencerelationshipwithoutalag,thecriticalpathcalculationsreveal:
ES(0)=0
ES(1)=0
EF(1)=ES(1)+D(1)=0+5=5
ES(2)=EF(1)+FS(1,2)=5+0=5
EF(2)=ES(2)+D(2)=5+5=10
ES(3)=EF(2)+FS(2,3)=10+0=10=EF(3)
Sotheearliestprojectcompletiontimeistendays.
Withastarttostartprecedenceconstraintwithatwodaylead,theschedulingcalculationsare:
ES(0)=0
ES(1)=0
EF(1)=ES(1)+D(1)=0+5=5
ES(2)=ES(1)+SS(1,2)=0+2=2
EF(2)=ES(2)+D(2)=2+5=7
ES(3)=EF(2)+FS(2,3)=7+0=7.
Inthiscase,activity2canbegintwodaysafterthestartofactivity1andproceedinparallelwithactivity1.The
resultisthattheprojectcompletiondatedropsfromtendaystosevendays.
Finally,supposethatafinishtofinishprecedencerelationshipexistsbetweenactivity1andactivity2withatwo
daylag.Theschedulingcalculationsare:

ES(0)=0=EF(0)
ES(1)=EF(0)+FS(0,1)=0+0=0
EF(1)=ES(1)+D(1)=0+5=5
ES(2)=EF(1)+FF(1,2)D(2)=5+25=2
EF(2)=ES(2)+D(2)=2+5=7
ES(3)=EF(2)+FS(2,3)=7+0=7=EF(3)
Inthiscase,theearliestfinishforactivity2isondayseventoallowthenecessarytwodaylagfromthecompletion
ofactivity1.Theminimumprojectcompletiontimeisagainsevendays.
Example105:Schedulinginthepresenceofleadsandwindows.
Asasecondexampleoftheschedulingcomputationsinvolvedinthepresenceofleads,lagsandwindows,weshall
performthecalculationsrequiredfortheprojectshowninFigure1015.Startandendactivitiesareincludedinthe
projectdiagram,makingatotalofelevenactivities.Thevariouswindowsanddurationsfortheactivitiesare
summarizedinTable1010andtheprecedencerelationshipsappearinTable1011.Onlyearlieststart(WES)and
latestfinish(WLF)windowconstraintsareincludedinthisexampleproblem.Allfourtypesofprecedence
relationshipsareincludedinthisproject.Notethattwoactivitiesmayhavemorethanonetypeofprecedence
relationshipatthesametimeinthiscase,activities2and5havebothSSandFFprecedences.InFigure1015,
thedifferentprecedencerelationshipsareshownbylinksconnectingtheactivitynodes.Thetypeofprecedence
relationshipisindicatedbythebeginningorendpointofeacharrow.Forexample,starttostartprecedencesgo
fromtheleftportionoftheprecedingactivitytotheleftportionofthefollowingactivity.Applicationoftheactivity
sortingalgorithm(Table109)revealsthattheexistingactivitynumbersareappropriateforthecriticalpath
algorithm.Theseactivitynumberswillbeusedintheforwardandbackwardpasscalculations.

Figure1015ExampleProjectNetworkwithLeadPrecedences
TABLE1010Predecessors,Successors,WindowsandDurationsforanExampleProject
ActivityNumber Predecessors Successors EarliestStartWindow LatestFinishWindow ActivityDuration
0
1
2
3
4
5
6
7
8
9
10

0
0
1
0
2,2
1,3
4,5
4,5
6,7
8,9

1,2,4
3,4,6
5
6
7,8
7,8
9
9
10
10

16
16

16

TABLE1011Precedencesina
ElevenActivityProjectExample

0
2
5
4
3
5
6
2
4
5
0

Predecessor Successor Type Lead

0
0
0
1
1
1
2
2
3
4
4
5
5
6
7
8
9

1
2
4
3
4
6
5
5
6
7
8
7
8
9
9
10
10

FS
FS
FS
SS
SF
FS
SS
FF
FS
SS
FS
FS
SS
FF
FS
FS
FS

0
0
0
1
1
2
2
2
0
2
0
1
3
4
0
0
0

Duringtheforwardpasscalculations(Table109),theearlieststartandearliestfinishtimesarecomputedforeach
activity.Therelevantcalculationsare:
ES(0)=EF(0)=0
ES(1)=Max{0EF(0)+FS(0,1)}=Max{00+0}=0.
EF(1)=ES(1)+D(1)=0+2=2
ES(2)=Max{0EF(0)+FS(0,1)}=Max{00+0}=0.
EF(2)=ES(2)+D(2)=0+5=5
ES(3)=Max{0WES(3)ES(1)+SS(1,3)}=Max{020+1}=2.
EF(3)=ES(3)+D(3)=2+4=6
Notethatinthecalculationoftheearlieststartforactivity3,thestartwasdelayedtobeconsistentwiththeearliest
starttimewindow.
ES(4)=Max{0ES(0)+FS(0,1)ES(1)+SF(1,4)D(4)}=Max{00+00+13}=0.
EF(4)=ES(4)+D(4)=0+3=3
ES(5)=Max{0ES(2)+SS(2,5)EF(2)+FF(2,5)D(5)}=Max{00+25+25}=2
EF(5)=ES(5)+D(5)=2+5=7
ES(6)=Max{0WES(6)EF(1)+FS(1,6)EF(3)+FS(3,6)}=Max{062+26+0}=6
EF(6)=ES(6)+D(6)=6+6=12
ES(7)=Max{0ES(4)+SS(4,7)EF(5)+FS(5,7)}=Max{00+27+1}=8
EF(7)=ES(7)+D(7)=8+2=10
ES(8)=Max{0EF(4)+FS(4,8)ES(5)+SS(5,8)}=Max{03+02+3}=5
EF(8)=ES(8)+D(8)=5+4=9
ES(9)=Max{0EF(7)+FS(7,9)EF(6)+FF(6,9)D(9)}=Max{010+012+45}=11
EF(9)=ES(9)+D(9)=11+5=16
ES(10)=Max{0EF(8)+FS(8,10)EF(9)+FS(9,10)}=Max{09+016+0}=16
EF(10)=ES(10)+D(10)=16
Astheresultofthesecomputations,theearliestprojectcompletiontimeisfoundtobe16days.
Thebackwardpasscomputationsresultinthelatestfinishandlateststarttimesforeachactivity.Thesecalculations
are:
LF(10)=LS(10)=ES(10)=EF(10)=16
LF(9)=Min{WLF(9)LF(10)LS(10)FS(9,10)}=Min{1616160}=16
LS(9)=LF(9)D(9)=165=11
LF(8)=Min{LF(10)LS(10)FS(8,10)}=Min{16160}=16
LS(8)=LF(8)D(8)=164=12
LF(7)=Min{LF(10)LS(9)FS(7,9)}=Min{16110}=11
LS(7)=LF(7)D(7)=112=9
LF(6)=Min{LF(10)WLF(6)LF(9)FF(6,9)}=Min{1616164}=12
LS(6)=LF(6)D(6)=126=6
LF(5)=Min{LF(10)WLF(10)LS(7)FS(5,7)LS(8)SS(5,8)+D(8)}=Min{161691123+4}
=8
LS(5)=LF(5)D(5)=85=3
LF(4)=Min{LF(10)LS(8)FS(4,8)LS(7)SS(4,7)+D(7)}=Min{1612092+2}=9

LS(4)=LF(4)D(4)=93=6
LF(3)=Min{LF(10)LS(6)FS(3,6)}=Min{1660}=6
LS(3)=LF(3)D(3)=64=2
LF(2)=Min{LF(10)LF(5)FF(2,5)LS(5)SS(2,5)+D(5)}=Min{168232+5}=6
LS(2)=LF(2)D(2)=65=1
LF(1)=Min{LF(10)LS(6)FS(1,6)LS(3)SS(1,3)+D(3)Lf(4)SF(1,4)+D(4)}
LS(1)=LF(1)D(1)=22=0
LF(0)=Min{LF(10)LS(1)FS(0,1)LS(2)FS(0,2)LS(4)FS(0,4)}=Min{16001060}=0
LS(0)=LF(0)D(0)=0
TheearliestandlateststarttimesforeachoftheactivitiesaresummarizedinTable1012.Activitieswithoutfloat
are0,1,6,9and10.Theseactivitiesalsoconstitutethecriticalpathintheproject.Notethatactivities6and9are
relatedbyafinishtofinishprecedencewitha4daylag.Decreasingthislagwouldresultinareductioninthe
overallprojectduration.
TABLE1012SummaryofActivity
StartandFinishTimesforanExample
Problem
Activity EarliestStart LatestStart Float
0
1
2
3
4
5
6
7
8
9
10

0
0
0
0
0
2
6
8
5
11
16

0
0
1
2
6
3
6
9
12
11
16

0
0
1
2
6
1
0
1
7
0
0

Backtotop

10.8ResourceOrientedScheduling
Resourceconstrainedschedulingshouldbeappliedwhenevertherearelimitedresourcesavailableforaprojectandthe
competitionfortheseresourcesamongtheprojectactivitiesiskeen.Ineffect,delaysareliabletooccurinsuchcasesas
activitiesmustwaituntilcommonresourcesbecomeavailable.Totheextentthatresourcesarelimitedanddemandforthe
resourceishigh,thiswaitingmaybeconsiderable.Inturn,thecongestionassociatedwiththesewaitsrepresentsincreasedcosts,
poorproductivityand,intheend,projectdelays.Schedulesmadewithoutconsiderationforsuchbottleneckscanbecompletely
unrealistic.
Resourceconstrainedschedulingisofparticularimportanceinmanagingmultipleprojectswithfixedresourcesofstaffor
equipment.Forexample,adesignofficehasanidentifiablestaffwhichmustbeassignedtoparticularprojectsanddesign
activities.Whentheworkloadisheavy,thedesignersmayfallbehindoncompletingtheirassignments.Governmentagencies
areparticularlypronetotheproblemsoffixedstaffinglevels,althoughsomeflexibilityinaccomplishingtasksispossible
throughthemechanismofcontractingworktooutsidefirms.Constructionactivitiesarelesssusceptibletothistypeofproblem
sinceitiseasierandlesscostlytohireadditionalpersonnelforthe(relatively)shortdurationofaconstructionproject.Overtime
ordoubleshiftworkalsoprovidesomeflexibility.
Resourceorientedschedulingalsoisappropriateincasesinwhichuniqueresourcesaretobeused.Forexample,scheduling
excavationoperationswhenoneonlyexcavatorisavailableissimplyaprocessofassigningworktasksorjobsegmentsonaday
bydaybasiswhileinsuringthatappropriateprecedencerelationshipsaremaintained.Evenwithmorethanoneresource,this
manualassignmentprocessmaybequiteadequate.However,aplannershouldbecarefultoinsurethatnecessaryprecedences
aremaintained.
Resourceconstrainedschedulingrepresentsaconsiderablechallengeandsourceoffrustrationtoresearchersinmathematicsand
operationsresearch.Whilealgorithmsforoptimalsolutionoftheresourceconstrainedproblemexist,theyaregenerallytoo
computationallyexpensivetobepracticalforallbutsmallnetworks(oflessthanabout100nodes).[5]Thedifficultyofthe
resourceconstrainedprojectschedulingproblemarisesfromthecombinatorialexplosionofdifferentresourceassignments
whichcanbemadeandthefactthatthedecisionvariablesareintegervaluesrepresentingallornothingassignmentsofa
particularresourcetoaparticularactivity.Incontrast,simplecriticalpathschedulingdealswithcontinuoustimevariables.
Constructionprojectstypicallyinvolvemanyactivities,sooptimalsolutiontechniquesforresourceallocationarenotpractical.
Onepossiblesimplificationoftheresourceorientedschedulingproblemistoignoreprecedencerelationships.Insome
applications,itmaybeimpossibleorunnecessarytoconsiderprecedenceconstraintsamongactivities.Inthesecases,thefocus

ofschedulingisusuallyonefficientutilizationofprojectresources.Toinsureminimumcostanddelay,aprojectmanager
attemptstominimizetheamountoftimethatresourcesareunusedandtominimizethewaitingtimeforscarceresources.This
resourceorientedschedulingisoftenformalizedasaproblemof"jobshop"schedulinginwhichnumeroustasksaretobe
scheduledforcompletionandavarietyofdiscreteresourcesneedtoperformoperationstocompletethetasks.Reflectingthe
originalorientationtowardsmanufacturingapplications,tasksareusuallyreferredtoas"jobs"andresourcestobescheduledare
designated"machines."Intheprovisionofconstructedfacilities,ananalogywouldbeanarchitectural/engineeringdesignoffice
inwhichnumerousdesignrelatedtasksaretobeaccomplishedbyindividualprofessionalsindifferentdepartments.The
schedulingproblemistoinsureefficientuseoftheindividualprofessionals(i.e.theresources)andtocompletespecifictasksin
atimelymanner.
Thesimplestformofresourceorientedschedulingisareservationsystemforparticularresources.Inthiscase,competing
activitiesorusersofaresourceprearrangeuseoftheresourceforaparticulartimeperiod.Sincetheresourceassignmentis
knowninadvance,otherusersoftheresourcecanscheduletheiractivitiesmoreeffectively.Theresultislesswaitingor
"queuing"foraresource.Itisalsopossibletoinaugurateapreferencesystemwithinthereservationprocesssothathighpriority
activitiescanbeaccomadateddirectly.
Inthemoregeneralcaseofmultipleresourcesandspecializedtasks,practicalresourceconstrainedschedulingproceduresrely
onheuristicprocedurestodevelopgoodbutnotnecessarilyoptimalschedules.Whilethisistheoccasionforconsiderable
anguishamongresearchers,theheuristicmethodswilltypicallygivefairlygoodresults.Anexampleheuristicmethodis
providedinthenextsection.Manualmethodsinwhichahumanschedulerrevisesacriticalpathscheduleinlightofresource
constraintscanalsoworkrelativelywell.Giventhatmuchofthedataandthenetworkrepresentationusedinformingaproject
scheduleareuncertain,theresultsofapplyingheuristicproceduresmaybequiteadequateinpractice.
Example106:AReservationSystem[6]
ArecentconstructionprojectforahighrisebuildingcomplexinNewYorkCitywasseverelylimitedinthespace
availableforstagingmaterialsforhaulingupthebuilding.Onthefourbuildingsite,thirtyeightseparatecranesand
elevatorswereavailable,butthenumberofmovementsofmen,materialsandequipmentwasexpectedtokeepthe
equipmentverybusy.Withnumeroussubcontractorsdesiringtheuseofthisequipment,thepotentialfordelaysand
waitinginthelimitedstagingareawasconsiderable.Byimplementingacranereservationsystem,theseproblems
werenearlyentirelyavoided.Thereservationsystemrequiredcontractorstotelephoneoneormoredaysinadvance
toreservetimeonaparticularcrane.Timewereavailableonafirstcome,firstservedbasis(i.e.firstcall,first
choiceofavailableslots).Penaltieswereimposedformakinganunusedreservation.Thereservationsystemwas
alsocomputerizedtopermitrapidmodificationandupdatingofinformationaswellastheprovisionofstandard
reservationschedulestobedistributedtoallparticipants.
Example107:HeuristicResourceAllocation
Supposethataprojectmanagerhaselevenpipesectionsforwhichnecessarysupportstructuresandmaterialsare
availableinaparticularweek.Toworkontheseelevenpipesections,fivecrewsareavailable.Theallocation
problemistoassignthecrewstotheelevenpipesections.Thisallocationwouldconsistofalistofpipesections
allocatedtoeachcrewforworkplusarecommendationontheappropriatesequencetoundertakethework.The
projectmanagermightmakeassignmentstominimizecompletiontime,toinsurecontinuousworkonthepipeline
(sothatonesectiononapipelinerunisnotleftincomplete),toreducetraveltimebetweenpipesections,toavoid
congestionamongthedifferentcrews,andtobalancetheworkloadamongthecrews.Numeroustrialsolutions
couldberapidlygenerated,especiallywiththeaidofanelectronicspreadsheet.Forexample,iftheninesections
hadestimatedworkdurationsforeachofthefirecrewsasshowninTable1013,thentheallocationsshownin
Figure1016wouldresultinaminimumcompletiontime.
TABLE1013EstimatedRequiredTimeforEachWorkTaskina
ResourceAllocationProblem
Section
WorkDuration
A
B
C
D
E
F
G
H
I
J
K

9
9
8
8
7
7
6
6
6
5
5

Figure1016ExampleAllocationofCrewstoWorkTasks

Example108:AlgorithmsforResourceAllocationwithBottleneckResources
Inthepreviousexample,supposethatamathematicalmodelandsolutionwasdesired.Forthispurpose,wedefinea
binary(i.e.0or1valued)decisionvariableforeachpipesectionandcrew,xij,wherexij=1impliesthatsectioni
wasassignedtocrewjandxij=0impliedthatsectioniwasnotassignedtocrewj.Thetimerequiredtocomplete
eachsectionisti.Theoveralltimetocompletetheninesectionsisdenotedz.Inthiscase,theproblemof
minimizingoverallcompletiontimeis:

subjecttotheconstraints:
foreachsectioni
xijis0or1
wheretheconstraintssimplyinsurethateachsectionisassignedtooneandonlyonecrew.Amodificationpermitsa
moreconventionalmathematicalformulation,resultinginageneralizedbottleneckassignmentproblem:
Minimizez
subjecttotheconstraints:
foreachcrewj

foreachsectioni
xijis0or1
Thisproblemcanbesolvedasanintegerprogrammingproblem,althoughatconsiderablecomputationalexpense.
Acommonextensiontothisproblemwouldoccurwithdifferentialproductivitiesforeachcrew,sothatthetimeto
completeanactivity,tij,wouldbedefinedforeachcrew.Anothermodificationtothisproblemwouldsubstitutea
costfactor,cj,forthetimefactor,tj,andattempttominimizeoverallcostsratherthancompletiontime.

Backtotop

10.9SchedulingwithResourceConstraintsandPrecedences
Theprevioussectionoutlinedresourceorientedapproachestotheschedulingproblem.Inthissection,weshallreviewsome
generalapproachestointegratingbothconcernsinscheduling.
Twoproblemsariseindevelopingaresourceconstrainedprojectschedule.First,itisnotnecessarilythecasethatacriticalpath
scheduleisfeasible.Becauseoneormoreresourcesmightbeneededbynumerousactivities,itcaneasilybethecasethatthe
shortestprojectdurationidentifiedbythecriticalpathschedulingcalculationisimpossible.Thedifficultyarisesbecausecritical
pathschedulingassumesthatnoresourceavailabilityproblemsorbottleneckswillarise.Findingafeasibleorpossibleschedule
isthefirstprobleminresourceconstrainedscheduling.Ofcourse,theremaybeanumerouspossiblescheduleswhichconform
withtimeandresourceconstraints.Asasecondproblem,itisalsodesirabletodeterminescheduleswhichhavelowcostsor,
ideally,thelowestcost.
Numerousheuristicmethodshavebeensuggestedforresourceconstrainedscheduling.Manybeginfromcriticalpathschedules
whicharemodifiedinlightoftheresourceconstraints.Othersbeginintheoppositefashionbyintroducingresourceconstraints
andthenimposingprecedenceconstraintsontheactivities.Stillothersbeginwitharankingorclassificationofactivitiesinto
prioritygroupsforspecialattentioninscheduling.[7]Onetypeofheuristicmaybebetterthananotherfordifferenttypesof
problems.Certainly,projectsinwhichonlyanoccasionalresourceconstraintexistsmightbebestscheduledstartingfroma
criticalpathschedule.Attheotherextreme,projectswithnumerousimportantresourceconstraintsmightbebestscheduledby
consideringcriticalresourcesfirst.Amixedapproachwouldbetoproceedsimultaneouslyconsideringprecedenceandresource
constraints.
Asimplemodificationtocriticalpathschedulinghasbeenshowntobeeffectiveforanumberofschedulingproblemsandis
simpletoimplement.Forthisheuristicprocedure,criticalpathschedulingisappliedinitially.Theresultisthefamiliarsetof
possibleearlyandlatestarttimesforeachactivity.Schedulingeachactivitytobeginatitsearliestpossiblestarttimemayresult
inmorethanoneactivityrequiringaparticularresourceatthesametime.Hence,theinitialschedulemaynotbefeasible.The
heuristicproceedsbyidentifyingcasesinwhichactivitiescompeteforaresourceandselectingoneactivitytoproceed.Thestart
timeofotheractivitiesarethenshiftedlaterintime.Asimpleruleforchoosingwhichactivityhaspriorityistoselectthe
activitywiththeearliestCPMlatestarttime(calculatedasLS(i,j)=L(j)Dij)amongthoseactivitieswhicharebothfeasible(in
thatalltheirprecedencerequirementsaresatisfied)andcompetingfortheresource.Thisdecisionruleisappliedfromthestart
oftheprojectuntiltheendforeachtypeofresourceinturn.
Theorderinwhichresourcesareconsideredinthisschedulingprocessmayinfluencetheultimateschedule.Agoodheuristicto
employindecidingtheorderinwhichresourcesaretobeconsideredistoconsidermoreimportantresourcesfirst.More
importantresourcesarethosethathavehighcostsorthatarelikelytorepresentanimportantbottleneckforprojectcompletion.
Onceimportantresourcesarescheduled,otherresourceallocationstendtobemucheasier.Theresultingschedulingprocedureis
describedinTable1014.
ThelatestarttimeheuristicdescribedinTable1014isonlyoneofmanypossibleschedulingrules.Ithastheadvantageof
givingprioritytoactivitieswhichmuststartsoonertofinishtheprojectontime.However,itismyopicinthatitdoesn'tconsider
tradeoffsamongresourcetypesnorthechangesinthelatestarttimethatwillbeoccurringasactivitiesareshiftedlaterintime.
Morecomplicatedrulescanbedevisedtoincorporatebroaderknowledgeoftheprojectschedule.Thesecomplicatedrules
requiregreatercomputationaleffortandmayormaynotresultinschedulingimprovementsintheend.
TABLE1014AResourceOrientedSchedulingProcedure
Step1:
Rankallresourcesfromthemostimportanttotheleastimportant,andnumbertheresourcesi
=1,2,3,...,m.
Step2:
Setthescheduledstarttimeforeachactivitytotheearlieststarttime.
Foreachresourcei=1,2,3,...,minturn:
Step3:
Startattheprojectbeginning,sosett=0.
Step4:
Computethedemandforresourceiattimetbysumminguptherequirementsforresourceifor
allactivitiesscheduledtobeunderwayattimet.
Ifdemandforresourceiintimetisgreaterthantheresourceavailability,thenselecttheactivitywith
thegreatestlatestarttimerequiringresourceiattimet,andshiftitsscheduledstarttimetotimet+1.
RepeatStep4untiltheresourceconstraintattimetforresourceiissatisfied.
Step5:
Repeatstep4foreachprojectperiodinturn,settingt=t+1.

Example109:Resourceconstrainedschedulingwithnineactivities.
Asanexampleofresourceconstrainedscheduling,weshallreexaminethenineactivityprojectdiscussedin
Section10.3.Tobeginwith,supposethatfourworkersandtwopiecesofequipmentsuchasbackhoesareavailable
fortheproject.TherequiredresourcesforeachofthenineprojectactivitiesaresummarizedinTable1015.Graphs
ofresourcerequirementsoverthe30dayprojectdurationareshowninFigure1017.Equipmentavailabilityinthis
scheduleisnotaproblem.However,ontwooccasions,morethanthefouravailableworkersarescheduledfor
work.Thus,theexistingprojectscheduleisinfeasibleandshouldbealtered.
TABLE1015ResourcesRequiredandStartingTimesforaNineActivityProject
Activity WorkersRequired EquipmentRequired EarliestStartTime LatestStartTime Duration
A
B
C
D
E
F
G
H
I

2
2
2
2
2
2
2
2
4

0
1
1
1
1
0
1
1
1

0
0
4
4
12
12
21
21
24

0
9
4
15
13
12
22
25
24

Figure1017ResourcesRequiredoverTimeforNineActivityProject:ScheduleI

4
3
8
7
9
12
2
5
6

Thefirstresourceproblemoccursonday21whenactivityFisunderwayandactivitiesGandHarescheduledto
start.Applyingthelateststarttimeheuristictodecidewhichactivityshouldstart,themanagershouldreschedule
activityHsinceithasalatervalueofLS(i,j),i.e.,day25versusday22asseeninTable1015.Twoworkers
becomeavailableonday23afterthecompletionofactivityG.SinceactivityHistheonlyactivitywhichisfeasible
atthattime,itisscheduledtobegin.Twoworkersalsobecomeavailableonday24atthecompletionofactivityF.
Atthispoint,activityIisavailableforstarting.Ifpossible,itwouldbescheduledtobeginwithonlytwoworkers
untilthecompletionofactivityHonday28.Ifall4workersweredefinitelyrequired,thenactivityIwouldbe
scheduledtobeginonday28.Inthislattercase,theprojectdurationwouldbe34days,representinga4day
increaseduetothelimitednumberofworkersavailable.
Example1010:Additionalresourceconstraints.
Asanotherexample,supposethatonlyonepieceofequipmentwasavailablefortheproject.AsseeninFigure10
17,theoriginalschedulewouldhavetobesignificantlymodifiedinthiscase.Applicationoftheresource
constrainedschedulingheuristicproceedsasfollowsasappliedtotheoriginalprojectschedule:
1.Onday4,activitiesDandCarebothscheduledtobegin.SinceactivityDhasalargervalueoflatestarttime,
itshouldberescheduled.
2.Onday12,activitiesDandEareavailableforstarting.Againbasedonalatervalueoflatestarttime(15
versus13),activityDisdeferred.
3.Onday21,activityEiscompleted.Atthispoint,activityDistheonlyfeasibleactivityanditisscheduledfor
starting.
4.Onday28,theplannercanstarteitheractivityGoractivityH.Basedonthelaterstarttimeheuristic,activity
Gischosentostart.
5.OncompletionofactivityGatday30,activityHisscheduledtobegin.
TheresultingprofileofresourceuseisshowninFigure1018.NotethatactivitiesFandIwerenotconsideredin
applyingtheheuristicsincetheseactivitiesdidnotrequirethespecialequipmentbeingconsidered.Inthefigure,
activityIisscheduledafterthecompletionofactivityHduetotherequirementof4workersforthisactivity.Asa
result,theprojectdurationhasincreasedto41days.Duringmuchofthistime,allfourworkersarenotassignedto
anactivity.Atthispoint,aprudentplannerwouldconsiderwhetherornotitwouldbecosteffectivetoobtainan
additionalpieceofequipmentfortheproject.

Figure1018ResourcesRequiredoverTimeforNineActivityProject:ScheduleII
Backtotop

10.10References

1.Au,T.IntroductiontoSystemsEngineeringDeterministicModels,AddisonWesley,Reading,MA,1973,Chapter8.
2.Baker,K.,AnIntroductiontoSequencingandScheduling,JohnWiley,1974.
3.Jackson,M.J.,ComputersinConstructionPlanningandControl,Allen&Unwin,1986.
4.Moder,J.,C.PhillipsandE.Davis,ProjectManagementwithCPM,PERTandPrecedenceDiagramming,VanNostrand
ReinholdCompany,ThirdEdition,1983.
5.Willis,E.M.,SchedulingConstructionProjects,JohnWiley&Sons,1986.
Backtotop

10.11Problems
1to4.
Constructanactivityonbranchnetworkfromtheprecedencerelationshipsofactivitiesintheprojectgiveninthetable
fortheproblem,Tables1016to1019.

Activity

TABLE1016
A B C D E F G H I J K L M N

Predecessors A A B C,D C,D D H F E,J F G,I G,I L,N

Duration
6 7 1 14 5 8
9
3 5 3 4 12 6 2 7

Activity

TABLE1017
A B CD E F G H I J K L M N

Predecessors A B C D,G A F,J H I F,J H L K,M

Duration

Activity

5 6 3 4 5

8 3

TABLE1018
A B C D E F G

3 2 72

H I J

7 4 3

Predecessors A B C B,D C,E F F E,G,I H,J

Duration

6 12 16 5 3 10 9

5 3 10

TABLE1019
Activity A B C D E F G H I
J K L
M
Predecessors C C B,E A,F B,E B,E B,E D,J G,H I,K,L
Duration

3 6 2 3 8 5

10 6

5to8.
DeterminethecriticalpathandallslacksfortheprojectsinTables1016to1019.
9.SupposethattheprecedencerelationshipsforProblem1inTable1016arealldirectfinishtostartrelationshipswithno
lagsexceptforthefollowing:
BtoE:SSwithalagof2.
DtoH:FFwithalagof3.
FtoL:SSwithalagof2.
GtoN:SSwithalagof1.
GtoM:SSwithalagof2.
Formulateanactivityonnodenetworkrepresentationandrecomputethecriticalpathwiththeseprecedencerelationships.
10.SupposethattheprecedencerelationshipsforProblem2inTable1017arealldirectfinishtostartrelationshipswithno
lagsexceptforthefollowing:
CtoD:SSwithalagof1
DtoE:FFwithalagof3
AtoF:SSwithalagof2
HtoI:FFwithalagof4
LtoM:SSwithalagof1
Formulateanactivityonnodenetworkrepresentationandrecomputethecriticalpathwiththeseprecedencerelationships.

11to12.
FortheprojectsdescribedinTables1020and1021,respectively,suggestaprojectschedulethatwouldcompletethe
projectinminimumtimeandresultinrelativelyconstantorlevelrequirementsforlaboroverthecourseoftheproject.

Activity
Predecessors

TABLE1020
A B C D E F G H

A B B C C D,E F,G H

Duration
3 5 1 1 7 6 4 3 6
WorkersPerDay 9 6 4 10 16 9 5 8 2

Activity
Predecessors

J K

TABLE1021
A B C D E F G H I

4
3

3
7

A A A B B C F,G H,I,L F,G D,J E,K

Duration
5 1 7 2 6 4 3 2 6 4
WorkersPerDay 0 3 0 9 5 4 2 14 10 4

5
1

1
2

4
7

5
3

13.Developaspreadsheettemplatethatlistsactivityname,duration,requiredresources,earliestpossiblestart,latestpossible
start,andscheduledstartinseparatecolumnsforamaximumoftwentyactivities.Bymeansofformulas,alsodevelopthe
requiredresourcesforeachdayoftheproject,basedontheactivities'scheduledstart,expecteddurations,andrequired
resources.Usethespreadsheetgraphicsfacilitytoplottherequiredresourcesovertime.Useyourtemplatetosolve
Problems11and12byalteringscheduledstarttimes.(Hint:Onewaytopreparesuchatemplateistouseacolumnto
representasingledaywitheachcellinthecolumnindicatingresourcesrequiredbyaparticularactivityontheparticular
day).
14.Developanexampleofaprojectnetworkwiththreecriticalpaths.
15.FortheprojectdefinedinTable1020,supposethatyouarelimitedtoamaximumof20workersatanygiventime.
Determineadesirableschedulefortheproject,usingthelatestarttimeheuristicdescribedinSection10.9.
16.FortheprojectdefinedinTable1021,supposethatyouarelimitedtoamaximumof15workersatanygiventime.
Determineadesirableschedulefortheproject,usingthelatestarttimeheuristicdescribedinSection10.9.
17.Theexamplesandproblemspresentedinthischaptergenerallymakeuseofactivitydurationandprojectdurationsas
measuredinworkingdaysfromthebeginningoftheproject.Outlinetheproceduresbywhichtimemeasuredinworking
dayswouldbeconvertedintocalendardayswithsingleordoubleshiftwork.Couldyourprocedurebemodifiedtoallow
somebutnotallactivitiestobeunderwayonweekends?
Backtotop

10.12Footnotes
1.SeeAu,T.,IntroductiontoSystemsEngineering,DeterministicModels,AddisonWesleyPublishingCompany,Reading,MA,
1973,foradetaileddescriptionoflinearprogrammingasaformofmathematicaloptimization.Back
2.SeeK.C.Crandall,"ProjectPlanningwithPrecedenceLead/LagFactors,"ProjectManagementQuarterly,Vol.4,No.3,Sept.
1973,pp.1827,orJ.J.Moder,C.R.Phillips,andE.W.Davis,ProjectManagementwithCPM,PERTandPrecedence
Diagramming,NewYork:VanNostrandReinholdCompany,thirdedition,1983,chapter4.Back
3.SeeC.T.HendricksonandB.N.Janson,"ACommonNetworkFormulationofSeveralCivilEngineeringProblems,"Civil
EngineeringSystems,Vol.1,No.4,1984,pp.195203.Back
4.SeeIBM,ProjectManagementSystem,ApplicationDescriptionManual,(H200210),IBM,1968.Back
5.Avarietyofmathematicalprogrammingtechniqueshavebeenproposedforthisproblem.Forareviewandcomparison,see
J.H.Patterson,"AComparisonofExactApproachesforSolvingtheMultipleConstrainedResourceProjectScheduling

Problem,"ManagementScience,Vol.30,No.7,1984,pp.854867.Back
6.ThisexampleisadaptedfromH.Smallowitz,"ConstructionbyComputer,"CivilEngineering,June,1986,pp.7173.Back
7.Fordiscussionsandcomparisonsofalternativeheuristicalgorithms,seeE.M.Davies,"Anexperimentalinvestigationof
resourceallocationinmultiactivityprojects,"OperationalResearchQuarterlyVol.24,No.11,July1976,pp.11861194J.D.
WiestandF.K.Levy,AManagementGuidetoPERT/CPM,PrenticeHall,NewJersey,1977orS.R.Lawrence,A
ComputationalComparisonofHeuristicSchedulingTechniques,TechnicalReport,GraduateSchoolofIndustrial
Administration,CarnegieMellonUniversity,1985.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter10
(FundamentalScheduling
Procedures)

GoToChapter12
(CostControl,Monitoringand
Accounting)

AdvancedSchedulingTechniques
UseofAdvancedSchedulingTechniques
SchedulingwithUncertainDurations
CalculationsforMonteCarloScheduleSimulation
CrashingandTime/CostTradeoffs
SchedulinginPoorlyStructuredProblems
ImprovingtheSchedulingProcess
References
Problems
Footnotes

11.AdvancedSchedulingTechniques
11.1UseofAdvancedSchedulingTechniques
Constructionprojectschedulingisatopicthathasreceivedextensiveresearchoveranumberofdecades.Thepreviouschapter
describedthefundamentalschedulingtechniqueswidelyusedandsupportedbynumerouscommercialschedulingsystems.A
varietyofspecialtechniqueshavealsobeendevelopedtoaddressspecificcircumstancesorproblems.Withtheavailabilityof
morepowerfulcomputersandsoftware,theuseofadvancedschedulingtechniquesisbecomingeasierandofgreater
relevancetopractice.Inthischapter,wesurveysomeofthetechniquesthatcanbeemployedinthisregard.Thesetechniques
addresssomeimportantpracticalproblems,suchas:
schedulinginthefaceofuncertainestimatesonactivitydurations,
integratedplanningofschedulingandresourceallocation,
schedulinginunstructuredorpoorlyformulatedcircumstances.
Afinalsectioninthechapterdescribessomepossibleimprovementsintheprojectschedulingprocess.InChapter14,we
considerissuesofcomputerbasedimplementationofschedulingprocedures,particularlyinthecontextofintegrating
schedulingwithotherprojectmanagementprocedures.
Backtotop

11.2SchedulingwithUncertainDurations
Section10.3describedtheapplicationofcriticalpathschedulingforthesituationinwhichactivitydurationsarefixedand
known.Unfortunately,activitydurationsareestimatesoftheactualtimerequired,andthereisliabletobeasignificant
amountofuncertaintyassociatedwiththeactualdurations.Duringthepreliminaryplanningstagesforaproject,the
uncertaintyinactivitydurationsisparticularlylargesincethescopeandobstaclestotheprojectarestillundefined.Activities
thatareoutsideofthecontroloftheownerarelikelytobemoreuncertain.Forexample,thetimerequiredtogainregulatory
approvalforprojectsmayvarytremendously.Otherexternaleventssuchasadverseweather,trenchcollapses,orlaborstrikes
makedurationestimatesparticularlyuncertain.
Twosimpleapproachestodealingwiththeuncertaintyinactivitydurationswarrantsomediscussionbeforeintroducingmore
formalschedulingprocedurestodealwithuncertainty.First,theuncertaintyinactivitydurationsmaysimplybeignoredand
schedulingdoneusingtheexpectedormostlikelytimedurationforeachactivity.Sinceonlyonedurationestimateneedstobe
madeforeachactivity,thisapproachreducestherequiredworkinsettinguptheoriginalschedule.Formalmethodsof
introducinguncertaintyintotheschedulingprocessrequiremoreworkandassumptions.Whilethissimpleapproachmightbe
defended,ithastwodrawbacks.First,theuseofexpectedactivitydurationstypicallyresultsinoverlyoptimisticschedulesfor
completionanumericalexampleofthisoptimismappearsbelow.Second,theuseofsingleactivitydurationsoftenproducesa
rigid,inflexiblemindsetonthepartofschedulers.Asfieldmanagersappreciate,activitydurationsvaryconsiderableandcan
beinfluencedbygoodleadershipandcloseattention.Asaresult,fieldmanagersmaylooseconfidenceintherealismofa
schedulebaseduponfixedactivitydurations.Clearly,theuseoffixedactivitydurationsinsettingupaschedulemakesa
continualprocessofmonitoringandupdatingthescheduleinlightofactualexperienceimperative.Otherwise,theproject
scheduleisrapidlyoutdated.
Asecondsimpleapproachtoincorporationuncertaintyalsodeservesmention.Manymanagersrecognizethattheuseof
expecteddurationsmayresultinoverlyoptimisticschedules,sotheyincludeacontingencyallowanceintheirestimateof
activitydurations.Forexample,anactivitywithanexpecteddurationoftwodaysmightbescheduledforaperiodof2.2days,

includingatenpercentcontingency.Systematicapplicationofthiscontingencywouldresultinatenpercentincreaseinthe
expectedtimetocompletetheproject.Whiletheuseofthisruleofthumborheuristiccontingencyfactorcanresultinmore
accurateschedules,itislikelythatformalschedulingmethodsthatincorporateuncertaintymoreformallyareusefulasa
meansofobtaininggreateraccuracyorinunderstandingtheeffectsofactivitydelays.
Themostcommonformalapproachtoincorporateuncertaintyintheschedulingprocessistoapplythecriticalpath
schedulingprocess(asdescribedinSection10.3)andthenanalyzetheresultsfromaprobabilisticperspective.Thisprocessis
usuallyreferredtoasthePERTschedulingorevaluationmethod.[1]Asnotedearlier,thedurationofthecriticalpath
representstheminimumtimerequiredtocompletetheproject.Usingexpectedactivitydurationsandcriticalpathscheduling,
acriticalpathofactivitiescanbeidentified.Thiscriticalpathisthenusedtoanalyzethedurationoftheprojectincorporating
theuncertaintyoftheactivitydurationsalongthecriticalpath.Theexpectedprojectdurationisequaltothesumofthe
expecteddurationsoftheactivitiesalongthecriticalpath.Assumingthatactivitydurationsareindependentrandomvariables,
thevarianceorvariationinthedurationofthiscriticalpathiscalculatedasthesumofthevariancesalongthecriticalpath.
Withthemeanandvarianceoftheidentifiedcriticalpathknown,thedistributionofactivitydurationscanalsobecomputed.
Themeanandvarianceforeachactivitydurationaretypicallycomputedfromestimatesof"optimistic"(ai,j),"mostlikely"
(mi,j),and"pessimistic"(bi,j)activitydurationsusingtheformulas:
(11.1)
and

(10.2)

where

and

arethemeandurationanditsvariance,respectively,ofanactivity(i,j).Threeactivitydurations

estimates(i.e.,optimistic,mostlikely,andpessimisticdurations)arerequiredinthecalculation.Theuseoftheseoptimistic,
mostlikely,andpessimisticestimatesstemsfromthefactthatthesearethoughttobeeasierformanagerstoestimate
subjectively.Theformulasforcalculatingthemeanandvariancearederivedbyassumingthattheactivitydurationsfollowa
probabilisticbetadistributionunderarestrictivecondition.[2]Theprobabilitydensityfunctionofabetadistributionsfora
randomvarablexisgivenby:

(11.3)

wherekisaconstantwhichcanbeexpressedintermsof
and

and

.Severalbetadistributionsfordifferentsetsofvaluesof

areshowninFigure111.Forabetadistributionintheinterval

havingamodalvaluem,themean

isgivenby:

(11.4)

If

=4,thenEq.(11.4)willresultinEq.(11.1).Thus,theuseofEqs.(11.1)and(11.2)imposeanadditionalcondition

onthebetadistribution.Inparticular,therestrictionthat

=(ba)/6isimposed.

Figure111IllustrationofSeveralBetaDistributions

Sinceabsolutelimitsontheoptimisticandpessimisticactivitydurationsareextremelydifficulttoestimatefromhistorical
data,acommonpracticeistousetheninetyfifthpercentileofactivitydurationsforthesepoints.Thus,theoptimistictime
wouldbesuchthatthereisonlyaoneintwenty(fivepercent)chancethattheactualdurationwouldbelessthantheestimated
optimistictime.Similarly,thepessimistictimeischosensothatthereisonlyafivepercentchanceofexceedingthisduration.
Thus,thereisaninetypercentchanceofhavingtheactualdurationofanactivityfallbetweentheoptimisticandpessimistic
durationtimeestimates.Withtheuseofninetyfifthpercentilevaluesfortheoptimisticandpessimisticactivityduration,the
calculationoftheexpecteddurationaccordingtoEq.(11.1)isunchangedbuttheformulaforcalculatingtheactivityvariance
becomes:

(11.5)

ThedifferencebetweenEqs.(11.2)and(11.5)comesonlyinthevalueofthedivisor,with36usedforabsolutelimitsand10
usedforninetyfivepercentilelimits.Thisdifferencemightbeexpectedsincethedifferencebetweenbi,jandai,jwouldbe
largerforabsolutelimitsthanfortheninetyfifthpercentilelimits.
WhilethePERTmethodhasbeenmadewidelyavailable,itsuffersfromthreemajorproblems.First,theprocedurefocuses
uponasinglecriticalpath,whenmanypathsmightbecomecriticalduetorandomfluctuations.Forexample,supposethatthe
criticalpathwithlongestexpectedtimehappenedtobecompletedearly.Unfortunately,thisdoesnotnecessarilymeanthatthe
projectiscompletedearlysinceanotherpathorsequenceofactivitiesmighttakelonger.Similarly,alongerthanexpected
durationforanactivitynotonthecriticalpathmightresultinthatactivitysuddenlybecomingcritical.Asaresultofthefocus
ononlyasinglepath,thePERTmethodtypicallyunderestimatestheactualprojectduration.
AsasecondproblemwiththePERTprocedure,itisincorrecttoassumethatmostconstructionactivitydurationsare
independentrandomvariables.Inpractice,durationsarecorrelatedwithoneanother.Forexample,ifproblemsare
encounteredinthedeliveryofconcreteforaproject,thisproblemislikelytoinfluencetheexpecteddurationofnumerous
activitiesinvolvingconcretepoursonaproject.Positivecorrelationsofthistypebetweenactivitydurationsimplythatthe
PERTmethodunderestimatesthevarianceofthecriticalpathandtherebyproducesoveroptimisticexpectationsofthe
probabilityofmeetingaparticularprojectcompletiondeadline.
Finally,thePERTmethodrequiresthreedurationestimatesforeachactivityratherthanthesingleestimatedevelopedfor
criticalpathscheduling.Thus,thedifficultyandlaborofestimatingactivitycharacteristicsismultipliedthreefold.
AsanalternativetothePERTprocedure,astraightforwardmethodofobtaininginformationaboutthedistributionofproject
completiontimes(aswellasotherscheduleinformation)isthroughtheuseofMonteCarlosimulation.Thistechnique

calculatessetsofartificial(butrealistic)activitydurationtimesandthenappliesadeterministicschedulingproceduretoeach
setofdurations.Numerouscalculationsarerequiredinthisprocesssincesimulatedactivitydurationsmustbecalculatedand
theschedulingprocedureappliedmanytimes.Forrealisticprojectnetworks,40to1,000separatesetsofactivitydurations
mightbeusedinasingleschedulingsimulation.ThecalculationsassociatedwithMonteCarlosimulationaredescribedinthe
followingsection.
AnumberofdifferentindicatorsoftheprojectschedulecanbeestimatedfromtheresultsofaMonteCarlosimulation:
Estimatesoftheexpectedtimeandvarianceoftheprojectcompletion.
Anestimateofthedistributionofcompletiontimes,sothattheprobabilityofmeetingaparticularcompletiondatecan
beestimated.
Theprobabilitythataparticularactivitywilllieonthecriticalpath.Thisisofinterestsincethelongestorcriticalpath
throughthenetworkmaychangeasactivitydurationschange.
ThedisadvantageofMonteCarlosimulationresultsfromtheadditionalinformationaboutactivitydurationsthatisrequired
andthecomputationaleffortinvolvedinnumerousschedulingapplicationsforeachsetofsimulateddurations.Foreach
activity,thedistributionofpossibledurationsaswellastheparametersofthisdistributionmustbespecified.Forexample,
durationsmightbeassumedorestimatedtobeuniformlydistributedbetweenaloweranduppervalue.Inaddition,
correlationsbetweenactivitydurationsshouldbespecified.Forexample,iftwoactivitiesinvolveassemblingformsin
differentlocationsandatdifferenttimesforaproject,thenthetimerequiredforeachactivityislikelytobecloselyrelated.If
theformsposesomeproblems,thenassemblingthemonbothoccasionsmighttakelongerthanexpected.Thisisanexample
ofapositivecorrelationinactivitytimes.Inapplication,suchcorrelationsarecommonlyignored,leadingtoerrorsinresults.
Asafinalproblemanddiscouragement,easytousesoftwaresystemsforMonteCarlosimulationofprojectschedulesarenot
generallyavailable.Thisisparticularlythecasewhencorrelationsbetweenactivitydurationsaredesired.
Anotherapproachtothesimulationofdifferentactivitydurationsistodevelopspecificscenariosofeventsanddeterminethe
effectontheoverallprojectschedule.Thisisatypeof"whatif"problemsolvinginwhichamanagersimulateseventsthat
mightoccurandseestheresult.Forexample,theeffectsofdifferentweatherpatternsonactivitydurationscouldbeestimated
andtheresultingschedulesforthedifferentweatherpatternscompared.Onemethodofobtaininginformationabouttherange
ofpossibleschedulesistoapplytheschedulingprocedureusingalloptimistic,allmostlikely,andthenallpessimisticactivity
durations.Theresultisthreeprojectschedulesrepresentingarangeofpossibleoutcomes.Thisprocessof"whatif"analysisis
similartothatundertakenduringtheprocessofconstructionplanningorduringanalysisofprojectcrashing.
Example111:Schedulingactivitieswithuncertaintimedurations.
SupposethatthenineactivityexampleprojectshowninTable102andFigure104ofChapter10wasthoughtto
haveveryuncertainactivitytimedurations.Asaresult,projectschedulingconsideringthisuncertaintyisdesired.
Allthreemethods(PERT,MonteCarlosimulation,and"Whatif"simulation)willbeapplied.
Table111showstheestimatedoptimistic,mostlikelyandpessimisticdurationsforthenineactivities.From
theseestimates,themean,varianceandstandarddeviationarecalculated.Inthiscalculation,ninetyfifth
percentileestimatesofoptimisticandpessimisticdurationtimesareassumed,sothatEquation(11.5)isapplied.
ThecriticalpathforthisprojectignoringuncertaintyinactivitydurationsconsistsofactivitiesA,C,FandIas
foundinTable103(Section10.3).ApplyingthePERTanalysisproceduresuggeststhatthedurationofthe
projectwouldbeapproximatelynormallydistributed.Thesumofthemeansforthecriticalactivitiesis4.0+8.0
+12.0+6.0=30.0days,andthesumofthevariancesis0.4+1.6+1.6+1.6=5.2leadingtoastandard
deviationof2.3days.
Withanormallydistributedprojectduration,theprobabilityofmeetingaprojectdeadlineisequaltothe
probabilitythatthestandardnormaldistributionislessthanorequalto(PD D)| DwherePDistheproject
deadline, Distheexpecteddurationand Disthestandarddeviationofprojectduration.Forexample,the
probabilityofprojectcompletionwithin35daysis:

wherezisthestandardnormaldistributiontabulatedvalueofthecumulativestandarddistributionappearsin
TableB.1ofAppendixB.
MonteCarlosimulationresultsprovideslightlydifferentestimatesoftheprojectdurationcharacteristics.
Assumingthatactivitydurationsareindependentandapproximatelynormallydistributedrandomvariableswith

themeanandvariancesshowninTable111,asimulationcanbeperformedbyobtainingsimulatedduration
realizationforeachofthenineactivitiesandapplyingcriticalpathschedulingtotheresultingnetwork.Applying
thisprocedure500times,theaverageprojectdurationisfoundtobe30.9dayswithastandarddeviationof2.5
days.ThePERTresultislessthanthisestimateby0.9daysorthreepercent.Also,thecriticalpathconsideredin
thePERTprocedure(consistingofactivitiesA,C,FandI)isfoundtobethecriticalpathinthesimulated
networkslessthanhalfthetime.
TABLE111ActivityDurationEstimatesforaNineActivityProject
Activity OptimisticDuration MostLikelyDuration PessimisticDuration Mean Variance
A
B
C
D
E
F
G
H
I

3
2
6
5
6
10
2
4
4

4
3
8
7
9
12
2
5
6

5
5
10
8
14
14
4
8
8

4.0
3.2
8.0
6.8
9.3
12.0
2.3
5.3
6.0

0.4
0.9
1.6
0.9
6.4
1.6
0.4
1.6
1.6

Iftherearecorrelationsamongtheactivitydurations,thensignificantlydifferentresultscanbeobtained.For
example,supposethatactivitiesC,E,GandHareallpositivelycorrelatedrandomvariableswithacorrelationof
0.5foreachpairofvariables.ApplyingMonteCarlosimulationusing500activitynetworksimulationsresultsin
anaverageprojectdurationof36.5daysandastandarddeviationof4.9days.Thisestimatedaveragedurationis
6.5daysor20percentlongerthanthePERTestimateortheestimateobtainedignoringuncertaintyindurations.
Ifcorrelationslikethisexist,thesemethodscanseriouslyunderestimatetheactualprojectduration.
Finally,theprojectdurationsobtainedbyassumingalloptimisticandallpessimisticactivitydurationsare23and
41daysrespectively.Other"whatif"simulationsmightbeconductedforcasesinwhichpeculiarsoil
characteristicsmightmakeexcavationdifficultthesesoilpeculiaritiesmightberesponsibleforthecorrelations
ofexcavationactivitydurationsdescribedabove.
ResultsfromthedifferentmethodsaresummarizedinTable112.Notethatpositivecorrelationsamongsome
activitydurationsresultsinrelativelylargeincreasesintheexpectedprojectdurationandvariability.
TABLE112ProjectDurationResultsfromVariousTechniquesandAssumptions
foranExample
StandardDeviation
ProcedureandAssumptions ProjectDuration(days) ofProjectDuration(days)
CriticalPathMethod
PERTMethod
MonteCarloSimulation
NoDurationCorrelations
PositiveDurationCorrelations
"Whatif"Simulations
Optimistic
MostLikely
Pessimistic

30.0
30.0

NA
2.3

30.9
36.5

2.5
4.9

23.0
30.0
41.0

NA
NA
NA

Backtotop

11.3CalculationsforMonteCarloScheduleSimulation
Inthissection,weoutlinetheproceduresrequiredtoperformMonteCarlosimulationforthepurposeofscheduleanalysis.
Theseprocedurespresumethatthevariousstepsinvolvedinforminganetworkplanandestimatingthecharacteristicsofthe
probabilitydistributionsforthevariousactivitieshavebeencompleted.Givenaplanandtheactivitydurationdistributions,
theheartoftheMonteCarlosimulationprocedureisthederivationofarealizationorsyntheticoutcomeoftherelevant
activitydurations.Oncetheserealizationsaregenerated,standardschedulingtechniquescanbeapplied.Weshallpresentthe
formulasassociatedwiththegenerationofnormallydistributedactivitydurations,andthencommentontherequirementsfor
otherdistributionsinanexample.

Togeneratenormallydistributedrealizationsofactivitydurations,wecanuseatwostepprocedure.First,wegenerate
uniformlydistributedrandomvariables,uiintheintervalfromzerotoone.Numeroustechniquescanbeusedforthispurpose.
Forexample,ageneralformulaforrandomnumbergenerationcanbeoftheform:
(11.6)
where =3.14159265andui1wasthepreviouslygeneratedrandomnumberorapreselectedbeginningorseednumber.
Forexample,aseedofu0=0.215inEq.(11.6)resultsinu1=0.0820,andbyapplyingthisvalueofu1,theresultisu2=
0.1029.Thisformulaisaspecialcaseofthemixedcongruentialmethodofrandomnumbergeneration.WhileEquation(11.6)
willresultinaseriesofnumbersthathavetheappearanceandthenecessarystatisticalpropertiesoftruerandomnumbers,we
shouldnotethattheseareactually"pseudo"randomnumberssincethesequenceofnumberswillrepeatgivenalongenough
time.
Withamethodofgeneratinguniformlydistributedrandomnumbers,wecangeneratenormallydistributedrandomnumbers
usingtwouniformlydistributedrealizationswiththeequations:[3]
(11.7)
with

wherexkisthenormalrealization,

xisthemeanofx,

xisthestandarddeviationofx,andu1andu2arethetwo

uniformlydistributedrandomvariablerealizations.Forthecaseinwhichthemeanofanactivityis2.5daysandthestandard
deviationofthedurationis1.5days,acorrespondingrealizationofthedurationiss=2.2365,t=0.6465andxk=2.525days,
usingthetwouniformrandomnumbersgeneratedfromaseedof0.215above.
Correlatedrandomnumberrealizationsmaybegeneratedmakinguseofconditionaldistributions.Forexample,supposethat
thedurationofanactivitydisnormallydistributedandcorrelatedwithasecondnormallydistributedrandomvariablexwhich
maybeanotheractivitydurationoraseparatefactorsuchasaweathereffect.Givenarealizationxkofx,theconditional
distributionofdisstillnormal,butitisafunctionofthevaluexk.Inparticular,theconditionalmean( 'd|x=xk)and
standarddeviation(

'd|x=xk)ofanormallydistributedvariablegivenarealizationofthesecondvariableis:

(11.8)

where

dxisthecorrelationcoefficientbetweendandx.Oncexkisknown,theconditionalmeanandstandarddeviationcan

becalculatedfromEq.(11.8)andthenarealizationofdobtainedbyapplyingEquation(11.7).
Correlationcoefficientsindicatetheextenttowhichtworandomvariableswilltendtovarytogether.Positivecorrelation
coefficientsindicateonerandomvariablewilltendtoexceeditsmeanwhentheotherrandomvariabledoesthesame.Froma
setofnhistoricalobservationsoftworandomvariables,xandy,thecorrelationcoefficientcanbeestimatedas:

(11.9)

Thevalueof

xycanrangefromonetominusone,withvaluesnearoneindicatingapositive,nearlinearrelationship

betweenthetworandomvariables.
Itisalsopossibletodevelopformulasfortheconditionaldistributionofarandomvariablecorrelatedwithnumerousother
variablesthisistermedamultivariatedistribution.[4]Randomnumbergenerationsfromothertypesofdistributionsarealso
possible.[5]Onceasetofrandomvariabledistributionsisobtained,thentheprocessofapplyingaschedulingalgorithmis
requiredasdescribedinprevioussections.
Example112:AThreeActivityProjectExample
SupposethatwewishtoapplyaMonteCarlosimulationproceduretoasimpleprojectinvolvingthreeactivities
inseries.Asaresult,thecriticalpathfortheprojectincludesallthreeactivities.Weassumethatthedurationsof
theactivitiesarenormallydistributedwiththefollowingparameters:
Activity
A
B
C

Mean(Days)
2.5
5.6
2.4

StandardDeviation(Days)
1.5
2.4
2.0

Tosimulatethescheduleeffects,wegeneratethedurationrealizationsshowninTable113andcalculatethe
projectdurationforeachsetofthreeactivitydurationrealizations.
Forthetwelvesetsofrealizationsshowninthetable,themeanandstandarddeviationoftheprojectdurationcan
beestimatedtobe10.49daysand4.06daysrespectively.Inthissimplecase,wecanalsoobtainananalytic
solutionforthisduration,sinceitisonlythesumofthreeindependentnormallydistributedvariables.Theactual
projectdurationhasameanof10.5days,andastandarddeviationof
days.Withonlyalimitednumberofsimulations,themeanobtainedfromsimulationsisclosetotheactualmean,
whiletheestimatedstandarddeviationfromthesimulationdifferssignificantlyfromtheactualvalue.Thislatter
differencecanbeattributedtothenatureofthesetofrealizationsusedinthesimulationsusingalargernumber
ofsimulateddurationswouldresultinamoreaccurateestimateofthestandarddeviation.
TABLE113DurationRealizationsforaMonteCarloSchedule
Simulation
SimulationNumber ActivityA ActivityB ActivityC ProjectDuration
1
2
3
4
5
6
7
8
9
10
11
12

1.53
2.67
3.36
0.39
2.50
2.77
3.83
3.73
1.06
1.17
1.68
0.37

6.94
1.04
9.51
4.83
2.17
9.66
6.86
5.56
15.78
7.65
2.17
10.22
5.82
1.74
10.06
8.71
4.03
15.51
2.05
1.10
6.96
10.57
3.24
17.53
3.68
2.47
7.22
0.86
1.37
3.40
9.47
0.13
11.27
6.66
1.70
8.72
EstimatedMeanProjectDuration=10.49
EstimatedStandardDeviationofProjectDuration=4.06
Note:Alldurationsindays.

Example113:GenerationofRealizationsfromTriangularDistributions
TosimplifycalculationsforMonteCarlosimulationofschedules,theuseofatriangulardistributionis
advantageouscomparedtothenormalorthebetadistributions.Triangulardistributionsalsohavetheadvantage
relativetothenormaldistributionthatnegativedurationscannotbeestimated.AsillustratedinFigure112,the
triangulardistributioncanbeskewedtotherightorleftandhasfinitelimitslikethebetadistribution.Ifaisthe
lowerlimit,btheupperlimitandmthemostlikelyvalue,thenthemeanandstandarddeviationofatriangular
distributionare:

(11.10)

(11.11)

Thecumulativeprobabilityfunctionforthetriangulardistributionis:

(11.12)

whereF(x)istheprobabilitythattherandomvariableislessthanorequaltothevalueofx.

Figure112IllustrationofTwoTriangularActivityDurationDistributions

Generatingarandomvariablefromthisdistributioncanbeaccomplishedwithasingleuniformrandomvariable
realizationusingtheinversionmethod.Inthismethod,arealizationofthecumulativeprobabilityfunction,F(x)is
generatedandthecorrespondingvalueofxiscalculated.Sincethecumulativeprobabilityfunctionvariesfrom
zerotoone,thedensityfunctionrealizationcanbeobtainedfromtheuniformvaluerandomnumbergenerator,
Equation(11.6).ThecalculationofthecorrespondingvalueofxisobtainedfrominvertingEquation(11.12):

(11.13)

Forexample,ifa=3.2,m=4.5andb=6.0,then

x=4.8and

x=2.7.Withauniformrealizationofu=

0.215,thenfor(ma)/(ba) 0.215,xwillliebetweenaandmandisfoundtohaveavalueof4.1fromEquation
(11.13).
Backtotop

11.4CrashingandTime/CostTradeoffs
Theprevioussectionsdiscussedthedurationofactivitiesaseitherfixedorrandomnumberswithknowncharacteristics.
However,activitydurationscanoftenvarydependinguponthetypeandamountofresourcesthatareapplied.Assigningmore
workerstoaparticularactivitywillnormallyresultinashorterduration.[6]Greaterspeedmayresultinhighercostsand
lowerquality,however.Inthissection,weshallconsidertheimpactsoftime,costandqualitytradeoffsinactivitydurations.
Inthisprocess,weshalldiscusstheprocedureofprojectcrashingasdescribedbelow.
AsimplerepresentationofthepossiblerelationshipbetweenthedurationofanactivityanditsdirectcostsappearsinFigure
113.Consideringonlythisactivityinisolationandwithoutreferencetotheprojectcompletiondeadline,amanagerwould
undoubtedlychooseadurationwhichimpliesminimumdirectcost,representedbyDijandCijinthefigure.Unfortunately,if
eachactivitywasscheduledforthedurationthatresultedintheminimumdirectcostinthisway,thetimetocompletethe
entireprojectmightbetoolongandsubstantialpenaltiesassociatedwiththelateprojectstartupmightbeincurred.Thisisa
smallexampleofsuboptimization,inwhichasmallcomponentofaprojectisoptimizedorimprovedtothedetrimentofthe
entireprojectperformance.Avoidingthisproblemofsuboptimizationisafundamentalconcernofprojectmanagers.

Figure113IllustrationofaLinearTime/CostTradeoffforanActivity

Attheotherextreme,amanagermightchoosetocompletetheactivityintheminimumpossibletime,Dcij,butatahighercost
Ccij.Thisminimumcompletiontimeiscommonlycalledtheactivitycrashtime.Thelinearrelationshipshowninthefigure
betweenthesetwopointsimpliesthatanyintermediatedurationcouldalsobechosen.Itispossiblethatsomeintermediate
pointmayrepresenttheidealoroptimaltradeoffbetweentimeandcostforthisactivity.
Whatisthereasonforanincreaseindirectcostastheactivitydurationisreduced?Asimplecasearisesintheuseofovertime
work.Byschedulingweekendoreveningwork,thecompletiontimeforanactivityasmeasuredincalendardayswillbe
reduced.However,premiumwagesmustbepaidforsuchovertimework,sothecostwillincrease.Also,overtimeworkis
morepronetoaccidentsandqualityproblemsthatmustbecorrected,soindirectcostsmayalsoincrease.Moregenerally,we
mightnotexpectalinearrelationshipbetweendurationanddirectcost,butsomeconvexfunctionsuchasthenonlinearcurve
orthestepfunctionshowninFigure114.Alinearfunctionmaybeagoodapproximationtotheactualcurve,however,and
resultsinconsiderableanalyticalsimplicity.[7]

Figure114IllustrationofNonlinearTime/CostTradeoffsforanActivity

Withalinearrelationshipbetweencostandduration,thecriticalpathtime/costtradeoffproblemcanbedefinedasalinear
programmingoptimizationproblem.Inparticular,letRijrepresenttherateofchangeofcostasdurationisdecreased,
illustratedbytheabsolutevalueoftheslopeofthelineinFigure113.Then,thedirectcostofcompletinganactivityis:
(11.14)
wherethelowercasecijanddijrepresentthescheduleddurationandresultingcostoftheactivityij.Theactualdurationofan
activitymustfallbetweentheminimumcosttime(Dij)andthecrashtime(Dcij).Also,precedenceconstraintsmustbe
imposedasdescribedearlierforeachactivity.Finally,therequiredcompletiontimefortheprojector,alternatively,thecosts
associatedwithdifferentcompletiontimesmustbedefined.Thus,theentireschedulingproblemistominimizetotalcost
(equaltothesumofthecijvaluesforallactivities)subjecttoconstraintsarisingfrom(1)thedesiredprojectduration,PD,(2)
theminimumandmaximumactivitydurationpossibilities,and(3)constraintsassociatedwiththeprecedenceorcompletion
timesofactivities.Algebraically,thisis:
(11.15)
subjecttotheconstraints:

wherethenotationisdefinedaboveandthedecisionvariablesaretheactivitydurationsdijandeventtimesx(k).The
appropriateschedulesfordifferentprojectdurationscanbefoundbyrepeatedlysolvingthisproblemfordifferentproject
durationsPD.Theentireproblemcanbesolvedbylinearprogrammingormoreefficientalgorithmswhichtakeadvantageof
thespecialnetworkformoftheproblemconstraints.
Onesolutiontothetimecosttradeoffproblemisofparticularinterestanddeservesmentionhere.Theminimumtimeto
completeaprojectiscalledtheprojectcrashtime.Thisminimumcompletiontimecanbefoundbyapplyingcriticalpath
schedulingwithallactivitydurationssettotheirminimumvalues(Dcij).Thisminimumcompletiontimefortheprojectcan
thenbeusedinthetimecostschedulingproblemdescribedabovetodeterminetheminimumprojectcrashcost.Notethatthe

projectcrashcostisnotfoundbysettingeachactivitytoitscrashdurationandsumminguptheresultingcoststhissolutionis
calledtheallcrashcost.Sincetherearesomeactivitiesnotonthecriticalpaththatcanbeassignedlongerdurationwithout
delayingtheproject,itisadvantageoustochangetheallcrashscheduleandtherebyreducecosts.
Heuristicapproachesarealsopossibletothetime/costtradeoffproblem.Inparticular,asimpleapproachistofirstapply
criticalpathschedulingwithallactivitydurationsassumedtobeatminimumcost(Dij).Next,theplannercanexamine
activitiesonthecriticalpathandreducethescheduleddurationofactivitieswhichhavethelowestresultingincreaseincosts.
Inessence,theplannerdevelopsalistofactivitiesonthecriticalpathrankedinaccordancewiththeunitchangeincostfora
reductionintheactivityduration.Theheuristicsolutionproceedsbyshorteningactivitiesintheorderoftheirlowestimpact
oncosts.Asthedurationofactivitiesontheshortestpathareshortened,theprojectdurationisalsoreduced.Eventually,
anotherpathbecomescritical,andanewlistofactivitiesonthecriticalpathmustbeprepared.Bymanualorautomatic
adjustmentsofthiskind,goodbutnotnecessarilyoptimalschedulescanbeidentified.Optimalorbestschedulescanonlybe
assuredbyexaminingchangesincombinationsofactivitiesaswellaschangestosingleactivities.However,byalternating
betweenadjustmentsinparticularactivitydurations(andtheircosts)andacriticalpathschedulingprocedure,aplannercan
fairlyrapidlydeviseashorterscheduletomeetaparticularprojectdeadlineor,intheworstcase,findthatthedeadlineis
impossibleofaccomplishment.
Thistypeofheuristicapproachtotimecosttradeoffsisessentialwhenthetimecosttradeoffsforeachactivityarenotknown
inadvanceorinthecaseofresourceconstraintsontheproject.Inthesecases,heuristicexplorationsmaybeusefulto
determineifgreatereffortshouldbespentonestimatingtimecosttradeoffsorifadditionalresourcesshouldberetainedfor
theproject.Inmanycases,thebasictime/costtradeoffmightnotbeasmoothcurveasshowninFigure114,butonlyaseries
ofparticularresourceandschedulecombinationswhichproduceparticulardurations.Forexample,aplannermighthavethe
optionofassigningeitheroneortwocrewstoaparticularactivityinthiscase,thereareonlytwopossibledurationsof
interest.
Example114:Time/CostTradeoffs
Theconstructionofapermanenttransitwayonanexpresswaymedianillustratesthepossibilitiesfortime/cost
tradeoffsinconstructionwork.[8]Onesectionof10milesoftransitwaywasbuiltin1985and1986toreplace
anexistingcontraflowlanesystem(inwhichonelaneintheexpresswaywasreversedeachdaytoprovide
additionalcapacityinthepeakflowdirection).Threeengineers'estimatesforworktimewereprepared:
975calendarday,basedon750workingdaysat5days/weekand8hours/dayofworkplus30daysforbad
weather,weekendsandholidays.
702calendardays,basedon540workingdaysat6days/weekand10hours/dayofwork.
360calendardays,basedon7days/weekand24hours/dayofwork.
Thesavingsfromearlycompletionduetooperatingsavingsinthecontraflowlaneandcontractadministration
costswereestimatedtobe$5,000perday.
Inacceptingbidsforthisconstructionwork,theownerrequiredbothadollaramountandacompletiondate.The
bidder'scompletiondatewasrequiredtofallbetween360and540days.Inevaluatingcontractbids,a$5,000
creditwasallowedforeachdaylessthan540daysthatabidderspecifiedforcompletion.Intheend,the
successfulbiddercompletedtheprojectin270days,receivingabonusof5,000*(540270)=$450,000inthe
$8,200,000contract.However,thecontractorexperiencedfifteentothirtypercenthighercoststomaintainthe
continuousworkschedule.
Example115:Timecosttradeoffsandprojectcrashing
Asanexampleoftime/costtradeoffsandprojectcrashing,supposethatweneededtoreducetheproject
completiontimeforasevenactivityproductdeliveryprojectfirstanalyzedinSection10.3asshowninTable10
4andFigure107.Table114givesinformationpertainingtopossiblereductionsintimewhichmightbe
accomplishedforthevariousactivities.Usingtheminimumcostdurations(asshownincolumn2ofTable114),
thecriticalpathincludesactivitiesC,E,F,GplusadummyactivityX.Theprojectdurationis32daysinthiscase,
andtheprojectcostis$70,000.
TABLE114ActivityDurationsandCostsforaSevenActivityProject
Changein
Activity MinimumCost NormalDuration CrashCost CrashDuration CostperDay
A
8
6
14
4
3
B
4
1
4
1

C
8
8
24
4
4
D
10
5
24
3
7
E
10
9
18
5
2
F
20
12
36
6
2.7
G
10
3
18
2
8

Examiningtheunitchangeincost,Rijshownincolumn6ofTable114,thelowestrateofchangeoccursfor
activityE.Accordingly,agoodheuristicstrategymightbetobeginbycrashingthisactivity.Theresultisthatthe
durationofactivityEgoesfrom9daysto5daysandthetotalprojectcostincreasesby$8,000.Aftermakingthis
change,theprojectdurationdropsto28daysandtwocriticalpathsexist:(1)activitiesC,X,E,FandG,and(2)
activitiesC,D,F,andG.
Examiningtheunitchangesincostagain,activityFhasthelowestvalueofRijj.Crashingthisactivityresultsin
anadditionaltimesavingsof6daysintheprojectduration,anincreaseinprojectcostof$16,000,butnochange
inthecriticalpaths.TheactivityonthecriticalpathwiththenextlowestunitchangeincostisactivityC.
Crashingthisactivitytoitsminimumcompletiontimewouldreduceitsdurationby4daysatacostincreaseof
$16,000.However,thisreductiondoesnotresultinareductioninthedurationoftheprojectby4days.After
activityCisreducedto7days,thenthealternatesequenceofactivitiesAandBlieonthecriticalpathandfurther
reductionsinthedurationofactivityCalonedonotresultinprojecttimesavings.Accordingly,ourheuristic
correctionsmightbelimitedtoreducingactivityCbyonly1day,therebyincreasingcostsby$4,000and
reducingtheprojectdurationby1day.
Atthispoint,ourchoicesforreducingtheprojectdurationarefairlylimited.Wecaneitherreducethedurationof
activityGor,alternatively,reduceactivityCandeitheractivityAoractivityBbyanidenticalamount.Inspection
ofTable114andFigure104suggestthatreducingactivityAandactivityCisthebestalternative.Accordingly,
wecanshortenactivityAtoitscrashduration(from6daysto4days)andshortenthedurationofactivityC(from
7daysto5days)atanadditionalcostof$6,000+$8,000=$14,000.Theresultisareductionintheproject
durationof2days.
OurlastoptionforreducingtheprojectdurationistocrashactivityGfrom3daysto2daysatanincreaseincost
of$8,000.Nofurtherreductionsarepossibleinthistimesinceeachactivityalongacriticalpath(comprisedof
activitiesA,B,E,FandG)areatminimumdurations.Atthispoint,theprojectdurationis18daysandthe
projectcostis$120,000.,representingafiftypercentreductioninprojectdurationandaseventypercentincrease
incost.Notethatnotalltheactivitieshavebeencrashed.ActivityChasbeenreducedindurationto5days
(ratherthanits4daycrashduration),whileactivityDhasnotbeenchangedatall.Ifallactivitieshadbeen
crashed,thetotalprojectcostwouldhavebeen$138,000,representingauselessexpenditureof$18,000.The
changeinprojectcostwithdifferentprojectdurationsisshowngraphicallyinFigure115.

Figure115ProjectCostVersusTimeforaSevenActivityProject

Example118:MathematicalFormulationofTimeCostTradeoffs
Thesameresultsobtainedinthepreviousexamplecouldbeobtainedusingaformaloptimizationprogramand
thedataappearinginTables104and114.Inthiscase,theheuristicapproachusedabovehasobtainedthe
optimalsolutionateachstage.UsingEq.(11.15),thelinearprogrammingproblemformulationwouldbe:

Minimizez
=[8+3(6dA)]+[4]+[8+4(8dC)]+[10+7(5dD)]
+[10+2(9dE)]+[20+2.7(9dF)]+[10+2(3dG)]
subjecttotheconstraints
x(6)=PDx(0)+dA x(2)
x(0)+dC x(1)
x(1) x(3)
x(2)+dB x(4)
x(1)+dD x(4)
x(2)+dE x(4)
x(4)+dF x(5)
x(5)+dG x(6)
x(0)=0
4 dA 6
1 dB 1
4 dC 8
3 dD 5
5 dE 9
6 dF 12
2 dG 3
whichcanbesolvedfordifferentvaluesofprojectdurationPDusingalinearprogrammingalgorithmora
networkflowalgorithm.Notethatevenwithonlysevenactivities,theresultinglinearprogrammingproblemis
fairlylarge.
Backtotop

11.5SchedulinginPoorlyStructuredProblems
Thepreviousdiscussionofactivityschedulingsuggestedthatthegeneralstructureoftheconstructionplanwasknownin
advance.Withpreviouslydefinedactivities,relationshipsamongactivities,andrequiredresources,theschedulingproblem
couldberepresentedasamathematicaloptimizationproblem.Eveninthecaseinwhichdurationsareuncertain,weassumed
thattheunderlyingprobabilitydistributionofdurationsisknownandappliedanalyticaltechniquestoinvestigateschedules.
Whilethesevariousschedulingtechniqueshavebeenexceedinglyuseful,theydonotcovertherangeofschedulingproblems
encounteredinpractice.Inparticular,therearemanycasesinwhichcostsanddurationsdependuponotheractivitiesdueto
congestiononthesite.Incontrast,theschedulingtechniquesdiscussedpreviouslyassumethatdurationsofactivitiesare
generallyindependentofeachother.Asecondproblemstemsfromthecomplexityofconstructiontechnologies.Inthecourse
ofresourceallocations,numerousadditionalconstraintsorobjectivesmayexistthataredifficulttorepresentanalytically.For
example,differentworkersmayhavespecializedinonetypeofactivityoranother.Withgreaterexperience,thework
efficiencyforparticularcrewsmaysubstantiallyincrease.Unfortunately,representingsucheffectsintheschedulingprocess
canbeverydifficult.Anothercaseofcomplexityoccurswhenactivitydurationsandschedulesarenegotiatedamongthe
differentpartiesinaprojectsothereisnosingleoverallplanner.
Apracticalapproachtothesetypesofconcernsistoinsurethatallschedulesarereviewedandmodifiedbyexperienced
projectmanagersbeforeimplementation.Thismanualreviewpermitstheincorporationofglobalconstraintsorconsideration
ofpeculiaritiesofworkersandequipment.Indeed,interactiveschedulerevisiontoaccomadateresourceconstraintsisoften
superiortoanycomputerbasedheuristic.Withimprovedgraphicrepresentationsandinformationavailability,manmachine
interactionislikelytoimproveasaschedulingprocedure.
Moregenerally,thesolutionproceduresforschedulinginthesemorecomplicatedsituationscannotbereducedto
mathematicalalgorithms.Thebestsolutionapproachislikelytobea"generateandtest"cycleforalternativeplansand
schedules.Inthisprocess,apossiblescheduleishypothesizedorgenerated.Thisscheduleistestedforfeasibilitywithrespect
torelevantconstraints(suchasavailableresourcesortimehorizons)anddesireabilitywithrespecttodifferentobjectives.
Ideally,theprocessofevaluatinganalternativewillsuggestdirectionsforimprovementsoridentifyparticulartroublespots.
Theseresultsarethenusedinthegenerationofanewtestalternative.Thisprocesscontinuesuntilasatisfactoryplanis
obtained.

Twoimportantproblemsmustbeborneinmindinapplyinga"generateandtest"strategy.First,thenumberofpossibleplans
andschedulesisenormous,soconsiderableinsighttotheproblemmustbeusedingeneratingreasonablealternatives.
Secondly,evaluatingalternativesalsomayinvolveconsiderableeffortandjudgment.Asaresult,thenumberofactualcycles
ofalternativetestingthatcanbeaccomadatedislimited.Onehopeforcomputertechnologyinthisregardisthatthe
burdensomecalculationsassociatedwiththistypeofplanningmaybeassumedbythecomputer,therebyreducingthecostand
requiredtimefortheplanningeffort.SomemechanismsalongtheselinesaredescribedinChapter15.
Example119:ManmachineInteractiveScheduling
Aninteractivesystemforschedulingwithresourceconstraintsmighthavethefollowingcharacteristics:[9]
graphicdisplaysofbarcharts,resourceuseovertime,activitynetworksandothergraphicimagesavailable
indifferentwindowsofascreensimultaneously,
descriptionsofparticularactivitiesincludingallocatedresourcesandchosentechnologiesavailablein
windowsasdesiredbyauser,
athreedimensionalanimationoftheconstructionprocessthatcanbestoppedtoshowtheprogressof
constructiononthefacilityatanytime,
easytousemethodsforchangingstarttimesandallocatedresources,and
utilitiestorunrelevantschedulingalgorithmssuchasthecriticalpathmethodatanytime.
Figure116showsanexampleofascreenforthissystem.InFigure116,abarchartappearsinonewindow,a
descriptionofanactivityinanotherwindow,andagraphoftheuseofaparticularresourceovertimeappearsina
thirdwindow.Thesedifferent"windows"appearassectionsonacomputerscreendisplayingdifferenttypesof
information.Withthesecapabilities,aprojectmanagercancallupdifferentpicturesoftheconstructionplanand
makechangestoaccomadateobjectivesorconstraintsthatarenotformallyrepresented.Withrapidresponseto
suchchanges,theeffectscanbeimmediatelyevaluated.

Figure116ExampleofaBarChartandOtherWindowsforInteractiveScheduling
Backtotop

11.6ImprovingtheSchedulingProcess

Despiteconsiderableattentionbyresearchersandpractitioners,theprocessofconstructionplanningandschedulingstill
presentsproblemsandopportunitiesforimprovement.Theimportanceofschedulingininsuringtheeffectivecoordinationof
workandtheattainmentofprojectdeadlinesisindisputable.Forlargeprojectswithmanypartiesinvolved,theuseofformal
schedulesisindispensable.
Thenetworkmodelforrepresentingprojectactivitieshasbeenprovidedasanimportantconceptualandcomputational
frameworkforplanningandscheduling.Networksnotonlycommunicatethebasicprecedencerelationshipsbetween
activities,theyalsoformthebasisformostschedulingcomputations.
Asapracticalmatter,mostprojectschedulingisperformedwiththecriticalpathschedulingmethod,supplementedby
heuristicproceduresusedinprojectcrashanalysisorresourceconstrainedscheduling.Manycommercialsoftwareprograms
areavailabletoperformthesetasks.Probabilisticschedulingortheuseofoptimizationsoftwaretoperformtime/costtrade
offsisrathermoreinfrequentlyapplied,buttherearesoftwareprogramsavailabletoperformthesetasksifdesired.
Ratherthanconcentratinguponmoreelaboratesolutionalgorithms,themostimportantinnovationsinconstructionscheduling
arelikelytoappearintheareasofdatastorage,easeofuse,datarepresentation,communicationanddiagnosticor
interpretationaids.Integrationofschedulinginformationwithaccountinganddesigninformationthroughthemeansof
databasesystemsisonebeneficialinnovationmanyschedulingsystemsdonotprovidesuchintegrationofinformation.The
techniquesdiscussedinChapter14areparticularlyusefulinthisregard.
Withregardtoeaseofuse,theintroductionofinteractiveschedulingsystems,graphicaloutputdevicesandautomateddata
acquisitionshouldproduceaverydifferentenvironmentthanhasexisted.Inthepast,schedulingwasperformedasabatch
operationwithoutputcontainedinlengthytablesofnumbers.Updatingofworkprogressandrevisingactivitydurationwasa
timeconsumingmanualtask.Itisnosurprisethatmanagersviewedschedulingasextremelyburdensomeinthisenvironment.
Thelowercostsassociatedwithcomputersystemsaswellasimprovedsoftwaremake"userfriendly"environmentsareal
possibilityforfieldoperationsonlargeprojects.
Finally,informationrepresentationisanareawhichcanresultinsubstantialimprovements.Whilethenetworkmodelof
projectactivitiesisanextremelyusefuldevicetorepresentaproject,manyaspectsofprojectplansandactivityinter
relationshipscannotorhavenotbeenrepresentedinnetworkmodels.Forexample,thesimilarityofprocessesamongdifferent
activitiesisusuallyunrecordedintheformalprojectrepresentation.Asaresult,updatingaprojectnetworkinresponsetonew
informationaboutaprocesssuchasconcretepourscanbetedious.Whatisneededisamuchmoreflexibleandcomplete
representationofprojectinformation.SomeavenuesforchangealongtheselinesarediscussedinChapter15.
Backtotop

11.7References
1.Bratley,Paul,BennettL.FoxandLinusE.Schrage,AGuidetoSimulation,SpringerVerlag,1973.
2.Elmaghraby,S.E.,ActivityNetworks:ProjectPlanningandControlbyNetworkModels,JohnWiley,NewYork,1977.
3.Jackson,M.J.,ComputersinConstructionPlanningandControl,Allen&Unwin,London,1986.
4.Moder,J.,C.PhillipsandE.Davis,ProjectManagementwithCPM,PERTandPrecedenceDiagramming,Third
Edition,VanNostrandReinholdCompany,1983.
Backtotop

11.8Problems
1.FortheprojectdefinedinProblem1fromChapter10,supposethattheearly,mostlikelyandlatetimeschedulesare
desired.AssumethattheactivitydurationsareapproximatelynormallydistributedwithmeansasgiveninTable1016
andthefollowingstandarddeviations:A:4B:10C:1D:15E:6F:12G:9H:2I:4J:5K:1L:12M:2N:1
O:5.(a)Findtheearly,mostlikelyandlatetimeschedules,and(b)estimatetheprobabilitythattheprojectrequires
25%moretimethantheexpectedduration.
2.FortheprojectdefinedinProblem2fromChapter10,supposethattheearly,mostlikelyandlatetimeschedulesare
desired.AssumethattheactivitydurationsareapproximatelynormallydistributedwithmeansasgiveninTable1017
andthefollowingstandarddeviations:A:2,B:2,C:1,D:0,E:0,F:2G:0,H:0,I:0,J:3K:0,L:3M:2N:1.(a)
Findtheearly,mostlikelyandlatetimeschedules,and(b)estimatetheprobabilitythattheprojectrequires25%more
timethantheexpectedduration.
3to6
ThetimecosttradeoffdatacorrespondingtoeachoftheProblems1to4(inChapter10),respectivelyaregiveninthe
tablefortheproblem(Tables115to118).Determinetheallcrashandtheprojectcrashdurationsandcostbasedon
theearlytimeschedulefortheproject.Also,suggestacombinationofactivitydurationswhichwillleadtoaproject

completiontimeequaltothreedayslongerthantheprojectcrashtimebutwouldresultinthe(approximately)
maximumsavings.
Activity
ShortestPossible
CompletionTime

TABLE115
E F G

10

NormalCompletion
TimeCost
150 250 80 400 220 300 260 120 200 180 220 500 100 120 500
ChangeinCostPerDay
EarlierCompletion
20 30 Infinity 15 20 25 10 35 20 Infinity 25 15 30 Infinity 10

Activity
ShortestPossible
CompletionTime

TABLE116
D E F G

NormalCompletion
TimeCost
400 450 200 300 350 550 250 180 150 480 120 500 280 220
CrashCompletion
TimeCost
460 510 250 350 430 640 300 250 150 520 150 560 320 260

Activity

TABLE117
A B C D E F

G H I

ShortestPossible
CompletionTime 4 8 11 4 1 9 6 2 3 2 7 3
NormalCompletion
TimeCost
70 150 200 60 40 120 100 50 70 60 120 70
CrashCompletion
TimeCost
90 210 250 80 60 140 130 70 90 80 150 100

Activity
ShortestPossible
CompletionTime
NormalCompletion
TimeCost

TABLE118
C
D E

50

150

90

F G H

K L M

125 300 240 80 270

120

600 300 80 140

ChangeinCostPerDay
EarlierCompletion Infinity 50 Infinity 40 30 20 15 30 Infinity 40 50 40 40
7to10
DevelopaprojectcompletiontimeversuscosttradeoffcurvefortheprojectsinProblems3to6.(Note:alinear
programmingcomputerprogramormorespecializedprogramscanreducethecalculatingworkinvolvedinthese
problems!)
11.SupposethattheprojectdescribedinProblem5fromChapter10proceedsnormallyonanearliesttimeschedulewith
allactivitiesscheduledfortheirnormalcompletiontime.However,supposethatactivityGrequires20daysratherthan
theexpected5.Whatmightaprojectmanagerdotoinsurecompletionoftheprojectbytheoriginallyplanned
completiontime?
12.FortheprojectdefinedinProblem1fromChapter10,supposethataMonteCarlosimulationwithtenrepetitionsis
desired.Supposefurtherthattheactivitydurationshaveatriangulardistributionwiththefollowinglowerandupper
bounds:A:4,8B:4,9,C:0.5,2D:10,20E:4,7F:7,10G:8,12H:2,4I:4,7J:2,4K:2,6L:10,15M:2,9N:
1,4O:4,11.
(a)Calculatethevalueofmforeachactivitygiventheupperandlowerboundsandtheexpecteddurationshownin
Table1016.
(b)Generateasetofrealizationsforeachactivityandcalculatetheresultingprojectduration.
(c)Repeatpart(b)fivetimesandestimatethemeanandstandarddeviationoftheprojectduration.

13.Supposethattwovariablesbothhavetriangulardistributionsandarecorrelated.Theresultingmultivariableprobability
densityfunctionhasatriangularshape.Developtheformulafortheconditionaldistributionofonevariablegiventhe
correspondingrealizationoftheothervariable.
Backtotop

11.9Footnotes
1.SeeD.G.Malcolm,J.H.Rosenbloom,C.E.Clark,andW.Fazar,"ApplicationsofaTechniqueforRandDProgram
Evaluation,"OperationsResearch,Vol.7,No.5,1959,pp.646669.Back
2.SeeM.W.Sasieni,"ANoteonPERTTimes,"ManagementScience,Vol.32,No.12,p1986,p.16521653,andT.K.
LittlefieldandP.H.Randolph,"AnAnswertoSasieni'sQuestiononPertTimes,"ManagementScience,Vol.33,No.10,1987,
pp.13571359.ForageneraldiscussionoftheBetadistribution,seeN.L.JohnsonandS.Kotz,ContinuousUnivariate
Distributions2,JohnWiley&Sons,1970,Chapter24.Back
3.SeeT.Au,R.M.Shane,andL.A.Hoel,FundamentalsofSystemsEngineeringProbabilisticModels,AddisonWesley
PublishingCompany,1972.Back
4.SeeN.L.JohnsonandS.Kotz,DistributionsinStatistics:ContinuousMultivariateDistributions,JohnWiley&Sons,New
York,1973.Back
5.See,forexample,P.Bratley,B.L.FoxandL.E.Schrage,AGuidetoSimulation,SpringerVerlag,NewYork,1983.Back
6.Thereareexceptionstothisrule,though.Moreworkersmayalsomeanadditionaltrainingburdensandmoreproblemsof
communicationandmanagement.Someactivitiescannotbeeasilybrokenintotasksfornumerousindividualssomeaspects
ofcomputerprogrammingprovidenotableexamples.Indeed,softwareprogrammingcanbesoperversethatexamplesexistof
additionalworkersresultinginslowerprojectcompletion.SeeF.P.Brooks,jr.,TheMythicalManMonth,AddisonWesley,
Reading,MA1975.Back
7.Foradiscussionofsolutionproceduresandanalogiesofthegeneralfunctiontime/costtradeoffproblem,seeC.
HendricksonandB.N.Janson,"ACommonNetworkFlowFormulationforSeveralCivilEngineeringProblems,"Civil
EngineeringSystems,Vol.1,No.4,1984,pp.195203.Back
8.ThisexamplewasabstractedfromworkperformedinHoustonandreportedinU.Officer,"UsingAcceleratedContracts
withIncentiveProvisionsforTransitwayConstructioninHouston,"PaperPresentedattheJanuary1986Transportation
ResearchBoardAnnualConference,Washington,D.C.Back
9.ThisdescriptionisbasedonaninteractiveschedulingsystemdevelopedatCarnegieMellonUniversityanddescribedinC.
Hendrickson,C.ZozayaGorostiza,D.Rehak,E.BaraccoMillerandP.Lim,"AnExpertSystemforConstructionPlanning,"
ASCEJournalofComputing,Vol.1,No.4,1987,pp.253269.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter11
(Advanced
Scheduling
Techniques)

GoToChapter13
(QualityControlandSafety
DuringConstruction)

CostControl,MonitoringandAccounting
TheCostControlProblem
TheProjectBudget
ForecastingforActivityCostControl
FinancialAccountingSystemsandCost
Accounts
ControlofProjectCashFlows
ScheduleControl
ScheduleandBudgetUpdates
RelatingCostandScheduleInformation
References
Problems
Footnotes

12.CostControl,MonitoringandAccounting
12.1TheCostControlProblem
Duringtheexecutionofaproject,proceduresforprojectcontrolandrecordkeepingbecomeindispensabletools
tomanagersandotherparticipantsintheconstructionprocess.Thesetoolsservethedualpurposeofrecording
thefinancialtransactionsthatoccuraswellasgivingmanagersanindicationoftheprogressandproblems
associatedwithaproject.Theproblemsofprojectcontrolareaptlysummedupinanolddefinitionofaproject
as"anycollectionofvaguelyrelatedactivitiesthatareninetypercentcomplete,overbudgetandlate."[1]The
taskofprojectcontrolsystemsistogiveafairindicationoftheexistenceandtheextentofsuchproblems.
Inthischapter,weconsidertheproblemsassociatedwithresourceutilization,accounting,monitoringand
controlduringaproject.Inthisdiscussion,weemphasizetheprojectmanagementusesofaccounting
information.Interpretationofprojectaccountsisgenerallynotstraightforwarduntilaprojectiscompleted,and
thenitistoolatetoinfluenceprojectmanagement.Evenaftercompletionofaproject,theaccountingresults
maybeconfusing.Hence,managersneedtoknowhowtointerpretaccountinginformationforthepurposeof
projectmanagement.Intheprocessofconsideringmanagementproblems,however,weshalldiscusssomeofthe
commonaccountingsystemsandconventions,althoughourpurposeisnottoprovideacomprehensivesurveyof
accountingprocedures.
Thelimitedobjectiveofprojectcontroldeservesemphasis.Projectcontrolproceduresareprimarilyintendedto
identifydeviationsfromtheprojectplanratherthantosuggestpossibleareasforcostsavings.Thischaracteristic
reflectstheadvancedstageatwhichprojectcontrolbecomesimportant.Thetimeatwhichmajorcostsavings
canbeachievedisduringplanninganddesignfortheproject.Duringtheactualconstruction,changesarelikely
todelaytheprojectandleadtoinordinatecostincreases.Asaresult,thefocusofprojectcontrolisonfulfilling
theoriginaldesignplansorindicatingdeviationsfromtheseplans,ratherthanonsearchingforsignificant
improvementsandcostsavings.Itisonlywhenarescueoperationisrequiredthatmajorchangeswillnormally
occurintheconstructionplan.
Finally,theissuesassociatedwithintegrationofinformationwillrequiresomediscussion.Projectmanagement
activitiesandfunctionalconcernsareintimatelylinked,yetthetechniquesusedinmanyinstancesdonot
facilitatecomprehensiveorintegratedconsiderationofprojectactivities.Forexample,scheduleinformationand
costaccountsareusuallykeptseparately.Asaresult,projectmanagersthemselvesmustsynthesizea
comprehensiveviewfromthedifferentreportsontheprojectplustheirownfieldobservations.Inparticular,
managersareoftenforcedtoinferthecostimpactsofschedulechanges,ratherthanbeingprovidedwithaidsfor
thisprocess.Communicationorintegrationofvarioustypesofinformationcanserveanumberofuseful
purposes,althoughitdoesrequirespecialattentionintheestablishmentofprojectcontrolprocedures.

Backtotop

12.2TheProjectBudget
Forcostcontrolonaproject,theconstructionplanandtheassociatedcashflowestimatescanprovidethe
baselinereferenceforsubsequentprojectmonitoringandcontrol.Forschedules,progressonindividualactivities
andtheachievementofmilestonecompletionscanbecomparedwiththeprojectscheduletomonitorthe
progressofactivities.Contractandjobspecificationsprovidethecriteriabywhichtoassessandassurethe
requiredqualityofconstruction.Thefinalordetailedcostestimateprovidesabaselinefortheassessmentof
financialperformanceduringtheproject.Totheextentthatcostsarewithinthedetailedcostestimate,thenthe
projectisthoughttobeunderfinancialcontrol.Overrunsinparticularcostcategoriessignalthepossibilityof
problemsandgiveanindicationofexactlywhatproblemsarebeingencountered.Expenseorientedconstruction
planningandcontrolfocusesuponthecategoriesincludedinthefinalcostestimation.Thisfocusisparticular
relevantforprojectswithfewactivitiesandconsiderablerepetitionsuchasgradingandpavingroadways.
Forcontrolandmonitoringpurposes,theoriginaldetailedcostestimateistypicallyconvertedtoaproject
budget,andtheprojectbudgetisusedsubsequentlyasaguideformanagement.Specificitemsinthedetailed
costestimatebecomejobcostelements.Expensesincurredduringthecourseofaprojectarerecordedinspecific
jobcostaccountstobecomparedwiththeoriginalcostestimatesineachcategory.Thus,individualjobcost
accountsgenerallyrepresentthebasicunitforcostcontrol.Alternatively,jobcostaccountsmaybe
disaggregatedordividedintoworkelementswhicharerelatedbothtoparticularscheduledactivitiesandto
particularcostaccounts.WorkelementdivisionswillbedescribedinSection12.8.
Inadditiontocostamounts,informationonmaterialquantitiesandlaborinputswithineachjobaccountisalso
typicallyretainedintheprojectbudget.Withthisinformation,actualmaterialsusageandlaboremployedcanbe
comparedtotheexpectedrequirements.Asaresult,costoverrunsorsavingsonparticularitemscanbe
identifiedasduetochangesinunitprices,laborproductivityorintheamountofmaterialconsumed.
Thenumberofcostaccountsassociatedwithaparticularprojectcanvaryconsiderably.Forconstructors,onthe
orderoffourhundredseparatecostaccountsmightbeusedonasmallproject.[2]Theseaccountsrecordallthe
transactionsassociatedwithaproject.Thus,separateaccountsmightexistfordifferenttypesofmaterials,
equipmentuse,payroll,projectoffice,etc.Bothphysicalandnonphysicalresourcesarerepresented,including
overheaditemssuchascomputeruseorinterestcharges.Table121summarizesatypicalsetofcostaccounts
thatmightbeusedinbuildingconstruction.[3]Notethatthissetofaccountsisorganizedhierarchically,with
sevenmajordivisions(accounts201to207)andnumeroussubdivisionsundereachdivision.Thishierarchical
structurefacilitatesaggregationofcostsintopredefinedcategoriesforexample,costsassociatedwiththe
superstructure(account204)wouldbethesumoftheunderlyingsubdivisions(ie.204.1,204.2,etc.)orfiner
levelsofdetail(204.61,204.62,etc.).ThesubdivisionaccountsinTable121couldbefurtherdividedinto
personnel,materialandotherresourcecostsforthepurposeoffinancialaccounting,asdescribedinSection12.4.
TABLE121IllustrativeSetofProjectCostAccounts
ClearingandPreparingSite
Substructure

201
202
202.1
202.2
202.3

ExcavationandShoring
Piling
ConcreteMasonry
202.31
202.32
202.33

203
204

MixingandPlacing
Formwork
Reinforcing
OutsideUtilities(water,gas,sewer,etc.)
Superstructure

204.1
204.2
204.3

MasonryConstruction
StructuralSteel
WoodFraming,Partitions,etc.

204.4
204.5
204.6

ExteriorFinishes(brickwork,terracotta,cutstone,etc.)
Roofing,Drains,Gutters,Flashing,etc.
InteriorFinishandTrim
204.61
204.62
204.63
204.64
204.65
204.66
204.67
204.68
204.69

204.7

ServiceWork
204.71
204.72
204.73
204.74
204.72

205
206
207

FinishFlooring,Stairs,Doors,Trim
Glass,Windows,Glazing
Marble,Tile,Terrazzo
LathingandPlastering
SoundproofingandInsulation
FinishHardware
PaintingandDecorating
Waterproofing
SprinklersandFireProtection

ElectricalWork
HeatingandVentilating
PlumbingandSewage
AirConditioning
FireAlarm,Telephone,Security,Miscellaneous
Paving,Curbs,Walks
InstalledEquipment(elevators,revolvingdoors,mailchutes,etc.)
Fencing

Indevelopingorimplementingasystemofcostaccounts,anappropriatenumberingorcodingsystemis
essentialtofacilitatecommunicationofinformationandproperaggregationofcostinformation.Particularcost
accountsareusedtoindicatetheexpendituresassociatedwithspecificprojectsandtoindicatetheexpenditures
onparticularitemsthroughoutanorganization.Theseareexamplesofdifferentperspectivesonthesame
information,inwhichthesameinformationmaybesummarizedindifferentwaysforspecificpurposes.Thus,
morethanoneaggregationofthecostinformationandmorethanoneapplicationprogramcanuseaparticular
costaccount.Separateidentifiersofthetypeofcostaccountandthespecificprojectmustbeprovidedforproject
costaccountsorforfinancialtransactions.Asaresult,astandardsetofcostcodessuchasthe
MASTERFORMATcodesdescribedinChapter9maybeadoptedtoidentifycostaccountsalongwithproject
identifiersandextensionstoindicateorganizationorjobspecificneeds.Similarlytheuseofdatabasesor,ata
minimum,intercommunicatingapplicationsprogramsfacilitateaccesstocostinformation,asdescribedin
Chapter14.
Convertingafinalcostestimateintoaprojectbudgetcompatiblewithanorganization'scostaccountsisnot
alwaysastraightforwardtask.AsdescribedinChapter5,costestimatesaregenerallydisaggregatedinto
appropriatefunctionalorresourcebasedprojectcategories.Forexample,laborandmaterialquantitiesmightbe
includedforeachofseveralphysicalcomponentsofaproject.Forcostaccountingpurposes,laborandmaterial
quantitiesareaggregatedbytypenomatterforwhichphysicalcomponenttheyareemployed.Forexample,
particulartypesofworkersormaterialsmightbeusedonnumerousdifferentphysicalcomponentsofafacility.
Moreover,thecategoriesofcostaccountsestablishedwithinanorganizationmaybearlittleresemblancetothe
quantitiesincludedinafinalcostestimate.Thisisparticularlytruewhenfinalcostestimatesarepreparedin
accordancewithanexternalreportingrequirementratherthaninviewoftheexistingcostaccountswithinan
organization.
Oneparticularprobleminformingaprojectbudgetintermsofcostaccountsisthetreatmentofcontingency
amounts.Theseallowancesareincludedinprojectcostestimatestoaccommodateunforeseeneventsandthe
resultingcosts.However,inadvanceofprojectcompletion,thesourceofcontingencyexpensesisnotknown.
Realistically,abudgetaccountingitemforcontingencyallowanceshouldbeestablishedwheneveracontingency
amountwasincludedinthefinalcostestimate.

Asecondprobleminformingaprojectbudgetisthetreatmentofinflation.Typically,finalcostestimatesare
formedintermsofrealdollarsandanitemreflectinginflationcostsisaddedonasapercentageorlumpsum.
Thisinflationallowancewouldthenbeallocatedtoindividualcostitemsinrelationtotheactualexpected
inflationovertheperiodforwhichcostswillbeincurred.
Example121:ProjectBudgetforaDesignOffice
AnexampleofasmallprojectbudgetisshowninTable122.Thisbudgetmightbeusedbyadesign
firmforaspecificdesignproject.Whilethisbudgetmightrepresentalltheworkforthisfirmonthe
project,numerousotherorganizationswouldbeinvolvedwiththeirownbudgets.InTable122,a
summarybudgetisshownaswellasadetailedlistingofcostsforindividualsintheEngineering
Division.Forthepurposeofconsistencywithcostaccountsandmanagerialcontrol,laborcostsare
aggregatedintothreegroups:theengineering,architecturalandenvironmentaldivisions.The
detailedbudgetshowninTable122appliesonlytotheengineeringdivisionlaborotherdetailed
budgetsamountsforcategoriessuchassuppliesandtheotherworkdivisionswouldalsobe
prepared.Notethatthesalarycostsassociatedwithindividualsareaggregatedtoobtainthetotal
laborcostsintheengineeringgroupfortheproject.Toperformthisaggregation,somemeansof
identifyingindividualswithinorganizationalgroupsisrequired.Accompanyingabudgetofthis
nature,someestimateoftheactualmanhoursoflaborrequiredbyprojecttaskwouldalsobe
prepared.Finally,thisbudgetmightbeusedforinternalpurposesalone.Insubmittingfinancialbills
andreportstotheclient,overheadandcontingencyamountsmightbecombinedwiththedirect
laborcoststoestablishanaggregatebillingrateperhour.Inthiscase,theoverhead,contingencyand
profitwouldrepresentallocatedcostsbasedonthedirectlaborcosts.
TABLE122ExampleofaSmallProject
BudgetforaDesignFirm
Personnel
Architectural
Division
Engineering
Environmental
Division
Total
OtherDirect
Expenses
Travel
Supplies
Communication
Computer
Services
Total

BudgetSummary
$67,251.00
45,372.00
28,235.00
$140,858.00
2,400.00
1,500.00
600.00
1,200.00
$5,700.00

Overhead
$175,869.60
Contingencyand
Profit
Total

$95,700.00
$418,127.60
Engineering
PersonnelDetail

SeniorEngineer
AssociateEngineer
Engineer
Technician

$11,562.00
21,365.00
12,654.00

Total

$45,372.00

Example122:ProjectBudgetforaConstructor
Table123illustratesasummarybudgetforaconstructor.Thisbudgetisdevelopedfromaproject
toconstructawharf.Aswiththeexampledesignofficebudgetabove,costsaredividedintodirect
andindirectexpenses.Withindirectcosts,expensesaredividedintomaterial,subcontract,
temporaryworkandmachinerycosts.Thisbudgetindicatesaggregateamountsforthevarious
categories.Costdetailsassociatedwithparticularcostaccountswouldsupplementandsupportthe
aggregatebudgetshowninTable123.Aprofitandacontingencyamountmightbeaddedtothe
basicbudgetof$1,715,147showninTable123forcompleteness.
TABLE123AnExampleofaProjectBudgetforaWharfProject(AmountsinThousandsof
Dollars)
MaterialCost SubcontractWork TemporaryWork MachineryCost TotalCost
SteelPiling
$292,172
$129,178
$16,389
$0 $437,739
Tierod
88,233
29,254
0
0
117,487
AnchorWall
130,281
60,873
0
0
191,154
Backfill
242,230
27,919
0
0
300,149
Coping
42,880
22,307
13,171
0
78,358
Dredging
0
111,650
0
0
111,650
Fender
48,996
10,344
0
1,750
61,090
Other
5,000
32,250
0
0 37,250
Subtotal
$849,800
$423,775
$29,560
$1,750 $1,304,885
Summary
Totalofdirectcost
$1,304,885
IndirectCost
CommonTemporaryWork
19,320
CommonMachinery
80,934
Transportation
15,550
OfficeOperatingCosts
294,458
TotalofIndirectCost
410,262.
TotalProjectCost
$1,715,147

Backtotop

12.3ForecastingforActivityCostControl
Forthepurposeofprojectmanagementandcontrol,itisnotsufficienttoconsideronlythepastrecordofcosts
andrevenuesincurredinaproject.Goodmanagersshouldfocusuponfuturerevenues,futurecostsandtechnical
problems.Forthispurpose,traditionalfinancialaccountingschemesarenotadequatetoreflectthedynamic
natureofaproject.Accountstypicallyfocusonrecordingroutinecostsandpastexpendituresassociatedwith
activities.[4]Generally,pastexpendituresrepresentsunkcoststhatcannotbealteredinthefutureandmayor
maynotberelevantinthefuture.Forexample,afterthecompletionofsomeactivity,itmaybediscoveredthat
somequalityflawrenderstheworkuseless.Unfortunately,theresourcesexpendedontheflawedconstruction
willgenerallybesunkandcannotberecoveredforreconstruction(althoughitmaybepossibletochangethe
burdenofwhopaysfortheseresourcesbyfinancialwithholdingorchargesownerswilltypicallyattemptto
haveconstructorsordesignerspayforchangesduetoqualityflaws).Sincefinancialaccountsarehistoricalin
nature,somemeansofforecastingorprojectingthefuturecourseofaprojectisessentialformanagement
control.Inthissection,somemethodsforcostcontrolandsimpleforecastsaredescribed.
AnexampleofforecastingusedtoassesstheprojectstatusisshowninTable124.Inthisexample,costsare
reportedinfivecategories,representingthesumofallthevariouscostaccountsassociatedwitheachcategory:

BudgetedCost
Thebudgetedcostisderivedfromthedetailedcostestimatepreparedatthestartoftheproject.Examples
ofprojectbudgetswerepresentedinSection12.2.Thefactorsofcostwouldbereferencedbycostaccount
andbyaprosedescription.
Estimatedtotalcost
Theestimatedorforecasttotalcostineachcategoryisthecurrentbestestimateofcostsbasedonprogress
andanychangessincethebudgetwasformed.Estimatedtotalcostsarethesumofcosttodate,
commitmentsandexposure.Methodsforestimatingtotalcostsaredescribedbelow.
CostCommittedandCostExposure!!Estimatedcosttocompletionineachcategoryindividedintofirm
commitmentsandestimatedadditionalcostorexposure.Commitmentsmayrepresentmaterialordersor
subcontractsforwhichfirmdollaramountshavebeencommitted.
CosttoDate
Theactualcostincurredtodateisrecordedincolumn6andcanbederivedfromthefinancialrecord
keepingaccounts.
Overor(Under)
AfinalcolumninTable124indicatestheamountoverorunderthebudgetforeachcategory.This
columnisanindicatoroftheextentofvariancefromtheprojectbudgetitemswithunusuallylarge
overrunswouldrepresentaparticularmanagerialconcern.Notethatvarianceisusedintheterminologyof
projectcontroltoindicateadifferencebetweenbudgetedandactualexpenditures.Thetermisdefinedand
usedquitedifferentlyinstatisticsormathematicalanalysis.InTable124,laborcostsarerunninghigher
thanexpected,whereassubcontractsarelessthanexpected.
Thecurrentstatusoftheprojectisaforecastbudgetoverrunof$5,950.with23percentofthebudgetedproject
costsincurredtodate.

Factor
Labor
Material
Subcontracts
Equipment
Other
Total

Budgeted
Cost
$99,406
88,499
198,458
37,543
72,693
496,509

TABLE124IllustrationofaJobStatusReport
EstimatedTotal
Cost
Cost
Cost
Committed
Exposure
$102,342
$49,596

88,499
42,506
45,993
196,323
83,352
97,832
37,543
23,623

81,432
49,356

506,139
248,433
143,825

CostTo
Date
$52,746

15,139
13,920
32,076
113,881

Overor
(Under)
$2,936
0
(2,135)
0
8,739
5,950

Forprojectcontrol,managerswouldfocusparticularattentiononitemsindicatingsubstantialdeviationfrom
budgetedamounts.Inparticular,thecostoverrunsinthelaborandinthe"otherexpensecategorywouldbe
worthyofattentionbyaprojectmanagerinTable124.Anextstepwouldbetolookingreaterdetailatthe
variouscomponentsofthesecategories.Overrunsincostmightbeduetolowerthanexpectedproductivity,
higherthanexpectedwagerates,higherthanexpectedmaterialcosts,orotherfactors.Evenfurther,low
productivitymightbecausedbyinadequatetraining,lackofrequiredresourcessuchasequipmentortools,or
inordinateamountsofreworktocorrectqualityproblems.Reviewofajobstatusreportisonlythefirststepin
projectcontrol.
ThejobstatusreportillustratedinTable124employsexplicitestimatesofultimatecostineachcategoryof
expense.Theseestimatesareusedtoidentifytheactualprogressandstatusofaexpensecategory.Estimates
mightbemadefromsimplelinearextrapolationsoftheproductivityorcostoftheworktodateoneachproject
item.Algebraically,alinearestimationformulaisgenerallyoneoftwoforms.Usingalinearextrapolationof
costs,theforecasttotalcost,Cf,is:
(12.1)
whereCtisthecostincurredtotimetandptistheproportionoftheactivitycompletedattimet.Forexample,an
activitywhichis50percentcompletewithacostof$40,000wouldbeestimatedtohaveatotalcostof

$40,000/0.5=$80,000.Moreelaboratemethodsofforecastingcostswoulddisaggregatecostsintodifferent
categories,withthetotalcostthesumoftheforecastcostsineachcategory.
Alternatively,theuseofmeasuredunitcostamountscanbeusedforforecastingtotalcost.Thebasicformulafor
forecastingcostfromunitcostsis:
(12.2)
whereCfistheforecasttotalcost,Wisthetotalunitsofwork,andctistheaveragecostperunitofwork
experienceduptotimet.Iftheaverageunitcostis$50perunitofworkonaparticularactivityand1,600units
ofworkexist,thentheexpectedcostis(1,600)(50)=$80,000forcompletion.
TheunitcostinEquation(12.2)maybereplacedwiththehourlyproductivityandtheunitcostperhour(orother
appropriatetimeperiod),resultingintheequation:
(12.3)
wherethecostperworkunit(ct)isreplacedbythetimeperunit,ht,dividedbythecostperunitoftime,ut.
Moreelaborateforecastingsystemsmightrecognizepeculiarproblemsassociatedwithworkonparticularitems
andmodifythesesimpleproportionalcostestimates.Forexample,ifproductivityisimprovingasworkersand
managersbecomemorefamiliarwiththeprojectactivities,theestimateoftotalcostsforanitemmightbe
reviseddownward.Inthiscase,theestimatingequationwouldbecome:
(12.4)
whereforecasttotalcost,Cf,isthesumofcostincurredtodate,Ct,andthecostresultingfromtheremaining
work(WWt)multipliedbytheexpectedcostperunittimeperiodfortheremainderoftheactivity,ct.
Asanumericalexample,supposethattheaverageunitcosthasbeen$50perunitofwork,butthemostrecent
figureduringaprojectis$45perunitofwork.Iftheprojectmanagerwasassuredthattheimprovedproductivity
couldbemaintainedfortheremainderoftheproject(consistingof800unitsofworkoutofatotalof1600units
ofwork),thecostestimatewouldbe(50)(800)+(45)(800)=$76,000forcompletionoftheactivity.Notethat
thisforecastusestheactualaverageproductivityachievedonthefirst800unitsandusesaforecastof
productivityfortheremainingwork.Historicalchangesinproductivitymightalsobeusedtorepresentthistype
ofnonlinearchangesinworkproductivityonparticularactivitiesovertime.
Inadditiontochangesinproductivities,othercomponentsoftheestimatingformulacanbeadjustedormore
detailedestimatessubstituted.Forexample,thechangeinunitpricesduetonewlaborcontractsormaterial
supplier'spricesmightbereflectedinestimatingfutureexpenditures.Inessence,thesameproblemsencountered
inpreparingthedetailedcostestimatearefacedintheprocessofpreparingexposureestimates,althoughthe
numberandextentofuncertaintiesintheprojectenvironmentdeclineasworkprogresses.Theonlyexceptionto
thisruleisthedangerofqualityproblemsincompletedworkwhichwouldrequirereconstruction.
Eachoftheestimatingmethodsdescribedaboverequirecurrentinformationonthestateofwork
accomplishmentforparticularactivities.Thereareseveralpossiblemethodstodevelopsuchestimates,including
[5]:
UnitsofWorkCompleted
Foreasilymeasuredquantitiestheactualproportionofcompletedworkamountscanbemeasured.For
example,thelinearfeetofpipinginstalledcanbecomparedtotherequiredamountofpipingtoestimate
thepercentageofpipingworkcompleted.
IncrementalMilestones
Particularactivitiescanbesubdividedor"decomposed"intoaseriesofmilestones,andthemilestones
canbeusedtoindicatethepercentageofworkcompletebasedonhistoricalaverages.Forexample,the
workeffortinvolvedwithinstallationofstandardpipingmightbedividedintofourmilestones:
Spoolinplace:20%ofworkand20%ofcumulativework.

Endswelded:40%ofworkand60%ofcumulativework.
HangarsandTrimComplete:30%ofworkand90%ofcumulativework.
HydrotestedandComplete:10%ofworkand100%ofcumulativework.
Thus,apipesectionforwhichtheendshavebeenweldedwouldbereportedas60%complete.
Opinion
Subjectivejudgmentsofthepercentagecompletecanbepreparedbyinspectors,supervisorsorproject
managersthemselves.Clearly,thisestimatedtechniquecanbebiasedbyoptimism,pessimismor
inaccurateobservations.Knowledgeableestimatersandadequatefieldobservationsarerequiredtoobtain
sufficientaccuracywiththismethod.
CostRatio
Thecostincurredtodatecanalsobeusedtoestimatetheworkprogress.Forexample,ifanactivitywas
budgetedtocost$20,000andthecostincurredataparticulardatewas$10,000,thentheestimated
percentagecompleteunderthecostratiomethodwouldbe10,000/20,000=0.5orfiftypercent.This
methodprovidesnoindependentinformationontheactualpercentagecompleteoranypossibleerrorsin
theactivitybudget:thecostforecastwillalwaysbethebudgetedamount.Consequently,managersmust
usetheestimatedcoststocompleteanactivityderivedfromthecostratiomethodwithextremecaution.
Systematicapplicationofthesedifferentestimatingmethodstothevariousprojectactivitiesenablescalculation
ofthepercentagecompleteortheproductivityestimatesusedinpreparingjobstatusreports.
Insomecases,automateddataacquisitionforworkaccomplishmentsmightbeinstituted.Forexample,
transpondersmightbemovedtothenewworklimitsaftereachday'sactivityandthenewlocations
automaticallycomputedandcomparedwithprojectplans.Thesemeasurementsofactualprogressshouldbe
storedinacentraldatabaseandthenprocessedforupdatingtheprojectschedule.Theuseofdatabase
managementsystemsinthisfashionisdescribedinChapter14.
Example123:EstimatedTotalCosttoCompleteanActivity
Supposethatwewishtoestimatethetotalcosttocompletepipingconstructionactivitiesona
project.Thepipingconstructioninvolves1,000linearfeetofpipingwhichhasbeendividedinto50
sectionsformanagementconvenience.Atthistime,400linearfeetofpipinghasbeeninstalledata
costof$40,000and500manhoursoflabor.Theoriginalbudgetestimatewas$90,000witha
productivityofonefootpermanhour,aunitcostof$60permanhourandatotalmaterialcostof$
30,000.Firmcommitmentsofmaterialdeliveryforthe$30,000estimatedcosthavebeenreceived.
Thefirsttaskistoestimatetheproportionofworkcompleted.Twoestimatesarereadilyavailable.
First,400linearfeetofpipeisinplaceoutofatotalof1000linearfeet,sotheproportionofwork
completedis400/1000=0.4or40%.Thisisthe"unitsofworkcompleted"estimationmethod.
Second,thecostratiomethodwouldestimatetheworkcompleteasthecosttodatedividedbythe
costestimateor$40,000/$90,000=0.44or44%.Third,the"incrementalmilestones"methodwould
beappliedbyexaminingeachpipesectionandestimatingapercentagecompleteandthen
aggregatingtodeterminethetotalpercentagecomplete.Forexample,supposethefollowing
quantitiesofpipingfellintofourcategoriesofcompleteness:
complete(100%)
hangarsandtrimcomplete(90%)
endswelded(60%)
spoolinplace(20%)

380ft
20ft
5ft
0ft

Thenusingtheincrementalmilestonesshownabove,theestimateofcompletedworkwouldbe380
+(20)(0.9)+(5)(0.6)+0=401ftandtheproportioncompletewouldbe401ft/1,000ft=0.401or
40%afterrounding.
Onceanestimateofworkcompletedisavailable,thentheestimatedcosttocompletetheactivity
canbecalculated.First,asimplelinearextrapolationofcostresultsinanestimateof$40,000/0.4=
$100,000.forthepipingconstructionusingthe40%estimateofworkcompleted.Thisestimate
projectsacostoverrunof100,00090,000=$10,000.

Second,alinearextrapolationofproductivityresultsinanestimateof(1000ft.)(500hrs/400ft.)
($60/hr)+30,000=$105,000.forcompletionofthepipingconstruction.Thisestimatesuggestsa
varianceof105,00090,000=$15,000abovetheactivityestimate.Inmakingthisestimate,labor
andmaterialcostsenteredseparately,whereasthetwowereimplicitlycombinedinthesimplelinear
costforecastabove.Thesourceofthevariancecanalsobeidentifiedinthiscalculation:compared
totheoriginalestimate,thelaborproductivityis1.25hoursperfootor25%higherthantheoriginal
estimate.
Example124:EstimatedTotalCostforCompletion
Theforecastingproceduresdescribedaboveassumedlinearextrapolationsoffuturecosts,based
eitheronthecompleteexperienceontheactivityortherecentexperience.Foractivitieswithgood
historicalrecords,itcanbethecasethatatypicallynonlinearprofileofcostexpendituresand
completionproportionscanbeestimated.Figure121illustratesonepossiblenonlinear
relationshipsderivedfromexperienceinsomeparticularactivity.Theprogressonanewjobcanbe
comparedtothishistoricalrecord.Forexample,pointAinFigure121suggestsahigher
expenditurethanisnormalforthecompletionproportion.Thispointrepresents40%ofwork
completedwithanexpenditureof60%ofthebudget.Sincethehistoricalrecordsuggestsonly50%
ofthebudgetshouldbeexpendedattimeof40%completion,a6050=10%overrunincostis
expectedevenifworkefficiencycanbeincreasedtohistoricalaverages.Ifcomparablecost
overrunscontinuetoaccumulate,thenthecosttocompletewillbeevenhigher.

Figure121IllustrationofProportionCompletionversusExpenditureforanActivity
Backtotop

12.4FinancialAccountingSystemsandCostAccounts
Thecostaccountsdescribedintheprevioussectionsprovideonlyoneofthevariouscomponentsinafinancial
accountingsystem.Beforefurtherdiscussingtheuseofcostaccountsinprojectcontrol,therelationshipof
projectandfinancialaccountingdeservesmention.Accountinginformationisgenerallyusedforthreedistinct
purposes:
Internalreportingtoprojectmanagersfordaytodayplanning,monitoringandcontrol.

Internalreportingtomanagersforaidingstrategicplanning.
Externalreportingtoowners,government,regulatorsandotheroutsideparties.
Externalreportsareconstrainedtoparticularformsandproceduresbycontractualreportingrequirementsorby
generallyacceptedaccountingpractices.Preparationofsuchexternalreportsisreferredtoasfinancial
accounting.Incontrast,costormanagerialaccountingisintendedtoaidinternalmanagersintheir
responsibilitiesofplanning,monitoringandcontrol.
Projectcostsarealwaysincludedinthesystemoffinancialaccountsassociatedwithanorganization.Atthe
heartofthissystem,allexpensetransactionsarerecordedinageneralledger.Thegeneralledgerofaccounts
formsthebasisformanagementreportsonparticularprojectsaswellasthefinancialaccountsforanentire
organization.Othercomponentsofafinancialaccountingsysteminclude:
Theaccountspayablejournalisintendedtoproviderecordsofbillsreceivedfromvendors,material
suppliers,subcontractorsandotheroutsideparties.Invoicesofchargesarerecordedinthissystemasare
checksissuedinpayment.ChargestoindividualcostaccountsarerelayedorpostedtotheGeneralLedger.
Accountsreceivablejournalsprovidetheoppositefunctiontothatofaccountspayable.Inthisjournal,
billingstoclientsarerecordedaswellasreceipts.Revenuesreceivedarerelayedtothegeneralledger.
Jobcostledgerssummarizethechargesassociatedwithparticularprojects,arrangedinthevariouscost
accountsusedfortheprojectbudget.
Inventoryrecordsaremaintainedtoidentifytheamountofmaterialsavailableatanytime.
Intraditionalbookkeepingsystems,daytodaytransactionsarefirstrecordedinjournals.Withdoubleentry
bookkeeping,eachtransactionisrecordedasbothadebitandacredittoparticularaccountsintheledger.For
example,paymentofasupplier'sbillrepresentsadebitorincreasetoaprojectcostaccountandacreditor
reductiontothecompany'scashaccount.Periodically,thetransactioninformationissummarizedandtransferred
toledgeraccounts.Thisprocessiscalledposting,andmaybedoneinstantaneouslyordailyincomputerized
systems.
Inreviewingaccountinginformation,theconceptsofflowsandstocksshouldbekeptinmind.Dailytransactions
typicallyreflectflowsofdollaramountsenteringorleavingtheorganization.Similarly,useorreceiptof
particularmaterialsrepresentflowsfromortoinventory.Anaccountbalancerepresentsthestockorcumulative
amountoffundsresultingfromthesedailyflows.Informationonbothflowsandstocksareneededtogivean
accurateviewofanorganization'sstate.Inaddition,forecastsoffuturechangesareneededforeffective
management.
Informationfromthegeneralledgerisassembledfortheorganization'sfinancialreports,includingbalance
sheetsandincomestatementsforeachperiod.Thesereportsarethebasicproductsofthefinancialaccounting
processandareoftenusedtoassesstheperformanceofanorganization.Table125showsatypicalincome
statementforasmallconstructionfirm,indicatinganetprofitof$330,000aftertaxes.Thisstatement
summarizestheflowsoftransactionswithinayear.Table126showsthecomparablebalancesheet,indicateda
netincreaseinretainedearningsequaltothenetprofit.Thebalancesheetreflectstheeffectsofincomeflows
duringtheyearontheoverallworthoftheorganization.
TABLE125IllustrationofanAccounting
StatementofIncome
IncomeStatement
fortheyearendedDecember31,19xx
Grossprojectrevenues
$7,200,000
Directprojectcostsoncontracts
5,500,000
Depreciationofequipment
200,000
Estimating
150,000
Administrativeandotherexpenses 650,000
Subtotalofcostandexpenses
6,500,000
OperatingIncome
InterestExpense,net
Incomebeforetaxes
Incometax

700,000
150,000
550,000
220,000

Netincomeaftertax
Cashdividends
Retainedearnings,currentyear
Retentionatbeginningofyear
Retainedearningsatendofyear

330,000
100,000
230,000
650,000
$880,000.

TABLE126IllustrationofanAccountingBalanceSheet
BalanceSheet
December31,19xx
Assets
Amount
Cash
$150,000
PaymentsReceivable
750,000
Workinprogress,notclaimed
700,000
Workinprogress,retention
200,000
Equipmentatcostlessaccumulateddepreciation 1,400,000
Totalassets
$3,200,000
LiabilitiesandEquity
Liabilities
Accountspayable
Otheritemspayable(taxes,wages,etc.)
Longtermdebts
Subtotal
Shareholders'funds
40,000sharesofcommonstock
(Includingpaidincapital)
RetainedEarnings
Subtotal
TotalLiabilitiesandEquity

$950,000
50,000
500,000
1,500,000
820,000
880,000
1,700,000
$3,200,000

Inthecontextofprivateconstructionfirms,particularproblemsariseinthetreatmentofuncompletedcontracts
infinancialreports.Underthe"completedcontract"method,incomeisonlyreportedforcompletedprojects.
Workonprojectsunderwayisonlyreportedonthebalancesheet,representinganassetifcontractbillings
exceedcostsoraliabilityifcostsexceedbillings.Whenaprojectiscompleted,thetotalnetprofit(orloss)is
reportedinthefinalperiodasincome.Underthe"percentageofcompletion"method,actualcostsarereported
ontheincomestatementplusaproportionofallprojectrevenues(orbillings)equaltotheproportionofwork
completedduringtheperiod.Theproportionofworkcompletediscomputedastheratioofcostsincurredtodate
andthetotalestimatedcostoftheproject.Thus,iftwentypercentofaprojectwascompletedinaparticular
periodatadirectcostof$180,000andonaprojectwithexpectedrevenuesof$1,000,000,thenthecontract
revenuesearnedwouldbecalculatedas$1,000,000(0.2)=$200,000.Thisfigurerepresentsaprofitand
contributiontooverheadof$200,000$180,000=$20,000fortheperiod.Notethatbillingsandactualreceipts
mightbeinexcessorlessthanthecalculatedrevenuesof$200,000.Onthebalancesheetofanorganization
usingthepercentageofcompletionmethod,anassetisusuallyreportedtoreflectbillingsandtheestimatedor
calculatedearningsinexcessofactualbillings.
Asanotherexampleofthedifferenceinthe"percentageofcompletion"andthe"completedcontract"methods,
considerathreeyearprojecttoconstructaplantwiththefollowingcashflowforacontractor:
Year ContractExpenses PaymentsReceived
1
2
3
Total

$700,000
180,000
320,000
$1,200,000

$900,000
250,000
150,000
$1,300,000

Thesupervisingarchitectdeterminesthat60%ofthefacilityiscompleteinyear1and75%inyear2.Underthe
"percentageofcompletion"method,thenetincomeinyear1is$780,000(60%of$1,300,000)lessthe$700,000
inexpensesor$80,000.Underthe"completedcontract"method,theentireprofitof$100,000wouldbereported
inyear3.
The"percentageofcompletion"methodofreportingperiodearningshastheadvantageofrepresentingthe
actualestimatedearningsineachperiod.Asaresult,theincomestreamandresultingprofitsarelesssusceptible
toprecipitateswingsonthecompletionofaprojectascanoccurwiththe"completedcontractmethod"of
calculatingincome.However,the"percentageofcompletion"hasthedisadvantageofrelyinguponestimates
whichcanbemanipulatedtoobscuretheactualpositionofacompanyorwhicharedifficulttoreproduceby
outsideobservers.Therearealsosubtletiessuchasthedeferralofallcalculatedincomefromaprojectuntila
minimumthresholdoftheprojectiscompleted.Asaresult,interpretationoftheincomestatementandbalance
sheetofaprivateorganizationisnotalwaysstraightforward.Finally,therearetaxdisadvantagesfromusingthe
"percentageofcompletion"methodsincecorporatetaxesonexpectedprofitsmaybecomedueduringthe
projectratherthanbeingdeferreduntiltheprojectcompletion.Asanexampleoftaximplicationsofthetwo
reportingmethods,astudyoffortysevenconstructionfirmsconductedbytheGeneralAccountingOfficefound
that$280millionintaxesweredeferredfrom1980to1984throughuseofthe"completedcontract"method.[6]
Itshouldbeapparentthatthe"percentageofcompletion"accountingprovidesonlyaroughestimateofthe
actualprofitorstatusofaproject.Also,the"completedcontract"methodofaccountingisentirelyretrospective
andprovidesnoguidanceformanagement.Thisisonlyoneexampleofthetypesofallocationsthatare
introducedtocorrespondtogenerallyacceptedaccountingpractices,yetmaynotfurtherthecauseofgood
projectmanagement.Anothercommonexampleistheuseofequipmentdepreciationschedulestoallocate
equipmentpurchasecosts.Allocationsofcostsorrevenuestoparticularperiodswithinaprojectmaycause
severechangesinparticularindicators,buthavenorealmeaningforgoodmanagementorprofitovertheentire
courseofaproject.AsJohnsonandKaplanargue:[7]
Today'smanagementaccountinginformation,drivenbytheproceduresandcycleofthe
organization'sfinancialreportingsystem,istoolate,tooaggregatedandtoodistortedtoberelevant
formanagers'planningandcontroldecisions....
Managementaccountingreportsareoflittlehelptooperatingmanagersastheyattempttoreduce
costsandimproveproductivity.Frequently,thereportsdecreaseproductivitybecausetheyrequire
operatingmanagerstospendtimeattemptingtounderstandandexplainreportedvariancesthathave
littletodowiththeeconomicandtechnologicalrealityoftheiroperations...
Themanagagementaccountingsystemalsofailstoprovideaccurateproductcosts.Costare
distributedtoproductsbysimplisticandarbitrarymeasures,usuallydirectlaborbased,thatdonot
representthedemandsmadebyeachproductonthefirm'sresources.
Asaresult,complementaryprocedurestothoseusedintraditionalfinancialaccountingarerequiredto
accomplisheffectiveprojectcontrol,asdescribedintheprecedingandfollowingsections.Whilefinancial
statementsprovideconsistentandessentialinformationontheconditionofanentireorganization,theyneed
considerableinterpretationandsupplementationtobeusefulforprojectmanagement.
Example125:Calculatingnetprofit
Asanexampleofthecalculationofnetprofit,supposethatacompanybegansixjobsinayear,
completingthreejobsandhavingthreejobsstillunderwayattheendoftheyear.Detailsofthesix
jobsareshowninTable127.Whatwouldbethecompany'snetprofitunder,first,the"percentage
ofcompletion"and,second,the"completedcontractmethod"accountingconventions?
TABLE127ExampleofFinancialRecordsofProjects
NetProfitonCompletedContracts(Amountsinthousandsofdollars)
Job1
Job2
Job3
TotalNetProfitonCompletedJobs
StatusofJobsUnderway

$1,436
356
738
$1,054
Job4

Job5

Job6

OriginalContractPrice
ContractChanges(ChangeOrders,etc.)
TotalCosttoDate
PaymentsReceivedorDuetoDate
EstimatedCosttoComplete

$4,200
400
3,600
3,520
500

$3,800
600
1,710
1,830
2,300

$5,630
300
620
340
5,000

AsshowninTable127,anetprofitof$1,054,000wasearnedonthethreecompletedjobs.Under
the"completedcontract"method,thistotalwouldbetotalprofit.Underthepercentageof
completionmethod,theyear'sexpectedprofitontheprojectsunderwaywouldbeaddedtothis
amount.Forjob4,theexpectedprofitsarecalculatedasfollows:
Currentcontractprice =Originalcontractprice+ContractChanges
=4,200+400+4,600
Creditordebittodate =TotalcoststodatePaymentsreceivedorduetodate
=3,6003,520=80
Contractvalueof =CurrentcontractpricePaymentsreceivedordue
uncompletedwork =4,6003,520=1,080
Creditordebittocome =ContractvalueofuncompletedworkEstimatedCost
toComplete
=1,080500=580
Estimatedfinalgrossprofit =Creditordebittodate+Creditordebittocome
=80.+580.=500
Estimatedtotalprojectcosts =ContractpriceGrossprofit
=4,600500=4,100
EstimatedProfittodate =EstimatedfinalgrossprofitxProportionofwork
complete
=500.(3600/4100))=439
Similarcalculationsfortheotherjobsunderwayindicateestimatedprofitstodateof$166,000for
Job5and$32,000forJob6.Asaresult,thenetprofitusingthe"percentageofcompletion"
methodwouldbe$1,627,000fortheyear.Notethatthisfigurewouldbealteredintheeventof
multiyearprojectsinwhichnetprofitsonprojectscompletedorunderwayinthisyearwereclaimed
inearlierperiods.
Backtotop

12.5ControlofProjectCashFlows
Section12.3describedthedevelopmentofinformationforthecontrolofprojectcostswithrespecttothevarious
functionalactivitiesappearingintheprojectbudget.Projectmanagersalsoareinvolvedwithassessmentofthe
overallstatusoftheproject,includingthestatusofactivities,financing,paymentsandreceipts.Thesevarious
itemscomprisetheprojectandfinancingcashflowsdescribedinearlierchapters.Thesecomponentsinclude
costsincurred(asdescribedabove),billingsandreceiptsforbillingstoowners(forcontractors),payable
amountstosuppliersandcontractors,financingplancashflows(forbondsorotherfinancialinstruments),etc.
Asanexampleofcashflowcontrol,considerthereportshowninTable128.Inthiscase,costsarenotdivided
intofunctionalcategoriesasinTable124,suchaslabor,material,orequipment.Table128representsa
summaryoftheprojectstatusasviewedfromdifferentcomponentsoftheaccountingsystem.Thus,the
aggregationofdifferentkindsofcostexposureorcostcommitmentshowninTable120hasnotbeenperformed.
TheelementsinTable128include:
Costs
Thisisasummaryofchargesasreflectedbythejobcostaccounts,includingexpendituresandestimated
costs.Thisrowprovidesanaggregatesummaryofthedetailedactivitycostinformationdescribedinthe
previoussection.Forthisexample,thetotalcostsasofJuly2(7/02)were$8,754,516,andtheoriginal

costestimatewas$65,863,092,sotheapproximatepercentagecompletewas8,754,516/65,863,092or
13.292%.However,theprojectmanagernowprojectsacostof$66,545,263fortheproject,representing
anincreaseof$682,171overtheoriginalestimate.Thisnewestimatewouldreflecttheactualpercentage
ofworkcompletedaswellasothereffectssuchaschangesinunitpricesforlaborormaterials.Needless
tosay,thisincreaseinexpectedcostsisnotawelcomechangetotheprojectmanager.
Billings
Thisrowsummarizesthestateofcashflowswithrespecttotheownerofthefacilitythisrowwouldnot
beincludedforreportstoowners.Thecontractamountwas$67,511,602,andatotalof$9,276,621or
13.741%ofthecontracthasbeenbilled.Theamountofallowablebillingisspecifiedunderthetermsof
thecontractbetweenanownerandanengineering,architect,orconstructor.Inthiscase,totalbillingshave
exceededtheestimatedprojectcompletionproportion.Thefinalcolumnincludesthecurrentlyprojected
netearningsof$966,339.Thisfigureiscalculatedasthecontractamountlessprojectedcosts:67,511,602
66,545,263=$966,339.Notethatthisprofitfiguredoesnotreflectthetimevalueofmoneyor
discounting.
Payables
ThePayablesrowsummarizestheamountowedbythecontractortomaterialsuppliers,labororsub
contractors.Atthetimeofthisreport,$6,719,103hadbeenpaidtosubcontractors,materialsuppliers,and
others.Invoicesof$1,300,089haveaccumulatedbuthavenotyetbeenpaid.Aretentionof$391,671has
beenimposedonsubcontractors,and$343,653indirectlaborexpenseshavebeenoccurred.Thetotalof
payablesisequaltothetotalprojectexpensesshowninthefirstrowofcosts.
Receivables
Thisrowsummarizesthecashflowofreceiptsfromtheowner.Notethattheactualreceiptsfromthe
ownermaydifferfromtheamountsbilledduetodelayedpaymentsorretainageonthepartoftheowner.
Thenetbilledequalsthegrossbilledlessretentionbytheowner.Inthiscase,grossbilledis$9,276,621
(asshowninthebillingsrow),thenetbilledis$8,761,673andtheretentionis$514,948.Unfortunately,
only$7,209,344hasbeenreceivedfromtheowner,sotheopenreceivableamountisa(substantial!)
$2,067,277duefromtheowner.
CashPosition
Thisrowsummarizesthecashpositionoftheprojectasifallexpensesandreceiptsfortheprojectwere
combinedinasingleaccount.Theactualexpenditureshavebeen$7,062,756(calculatedasthetotalcosts
of$8,754,516lesssubcontractorretentionsof$391,671andunpaidbillsof$1,300,089)and$7,209,344
hasbeenreceivedfromtheowner.Asaresult,anetcashbalanceof$146,588existswhichcanbeusedin
aninterestearningbankaccountortofinancedeficitsonotherprojects.
EachoftherowsshowninTable128wouldbederivedfromdifferentsetsoffinancialaccounts.Additional
reportscouldbepreparedonthefinancingcashflowsforbondsorinterestchargesinanoverdraftaccount.
TABLE128AnExampleofaCashFlowStatusReport
Costs
Charges Estimated %Complete Projected Change
7/02
8,754,516 65,863,092
13.292 66,545,263 682,171
Billings
Contract GrossBill %Billed
Profit
7/01
67,511,602 9,276,621
13.741
966,339
Payables
7/01
Receivable
7/02

Paid
Open
6,719,103 1,300,089
NetBill Received
8,761,673 7,209,344

Retention
391,671
Retention
514,948

CashPosition

Paid
Received
7,062,756 7,209,344

Position
146,588

Labor
Total
343,653 8,754,516
Open
2,067,277

TheoverallstatusoftheprojectrequiressynthesizingthedifferentpiecesofinformationsummarizedinTable
128.Eachofthedifferentaccountingsystemscontributingtothistableprovidesadifferentviewofthestatusof
theproject.Inthisexample,thebudgetinformationindicatesthatcostsarehigherthanexpected,whichcouldbe
troubling.However,aprofitisstillexpectedfortheproject.Asubstantialamountofmoneyisduefromthe
owner,andthiscouldturnouttobeaproblemiftheownercontinuestolaginpayment.Finally,thepositivecash
positionfortheprojectishighlydesirablesincefinancingchargescanbeavoided.

Thejobstatusreportsillustratedinthisandtheprevioussectionsprovideaprimarytoolforprojectcostcontrol.
Differentreportswithvaryingamountsofdetailanditemreportswouldbepreparedfordifferentindividuals
involvedinaproject.Reportstouppermanagementwouldbesummaries,reportstoparticularstaffindividuals
wouldemphasizetheirresponsibilities(eg.purchasing,payroll,etc.),anddetailedreportswouldbeprovidedto
theindividualprojectmanagers.CoupledwithschedulingreportsdescribedinChapter10,thesereportsprovide
asnapshotviewofhowaprojectisdoing.Ofcourse,thesescheduleandcostreportswouldhavetobetempered
bytheactualaccomplishmentsandproblemsoccurringinthefield.Forexample,ifworkalreadycompletedisof
substandardquality,thesereportswouldnotrevealsuchaproblem.Eventhoughthereportsindicatedaproject
ontimeandonbudget,thepossibilityofreworkorinadequatefacilityperformanceduetoqualityproblems
wouldquicklyreversethatrosysituation.
Backtotop

12.6ScheduleControl
Inadditiontocostcontrol,projectmanagersmustalsogiveconsiderableattentiontomonitoringschedules.
Constructiontypicallyinvolvesadeadlineforworkcompletion,socontractualagreementswillforceattentionto
schedules.Moregenerally,delaysinconstructionrepresentadditionalcostsduetolatefacilityoccupancyor
otherfactors.Justascostsincurredarecomparedtobudgetedcosts,actualactivitydurationsmaybecompared
toexpecteddurations.Inthisprocess,forecastingthetimetocompleteparticularactivitiesmayberequired.
Themethodsusedforforecastingcompletiontimesofactivitiesaredirectlyanalogoustothoseusedforcost
forecasting.Forexample,atypicalestimatingformulamightbe:
(12.5)
whereDfistheforecastduration,Wistheamountofwork,andhtistheobservedproductivitytotimet.Aswith
costcontrol,itisimportanttodeviseefficientandcosteffectivemethodsforgatheringinformationonactual
projectaccomplishments.Generally,observationsofworkcompletedaremadebyinspectorsandproject
managersandthenworkcompletedisestimatedasdescribedinSection12.3.Onceestimatesofworkcomplete
andtimeexpendedonparticularactivitiesisavailable,deviationsfromtheoriginaldurationestimatecanbe
estimated.Thecalculationsformakingdurationestimatesarequitesimilartothoseusedinmakingcost
estimatesinSection12.3.
Forexample,Figure122showstheoriginallyscheduledprojectprogressversustheactualprogressonaproject.
Thisfigureisconstructedbysummingupthepercentageofeachactivitywhichiscompleteatdifferentpointsin
timethissummationcanbeweightedbythemagnitudeofeffortassociatedwitheachactivity.InFigure122,
theprojectwasaheadoftheoriginalscheduleforaperiodincludingpointA,butisnowlateatpointBbyan
amountequaltothehorizontaldistancebetweentheplannedprogressandtheactualprogressobservedtodate.

Figure122IllustrationofPlannedversusActualProgressoverTimeonaProject

Scheduleadherenceandthecurrentstatusofaprojectcanalsoberepresentedongeometricmodelsofafacility.
Forexample,ananimationoftheconstructionsequencecanbeshownonacomputerscreen,withdifferent
colorsorothercodingschemeindicatingthetypeofactivityunderwayoneachcomponentofthefacility.
Deviationsfromtheplannedschedulecanalsobeportrayedbycolorcoding.Theresultisamechanismtoboth
indicateworkinprogressandscheduleadherencespecifictoindividualcomponentsinthefacility.
Inevaluatingscheduleprogress,itisimportanttobearinmindthatsomeactivitiespossessfloatorscheduling
leeway,whereasdelaysinactivitiesonthecriticalpathwillcauseprojectdelays.Inparticular,thedelayin
plannedprogressattimetmaybesoakedupinactivities'float(therebycausingnooveralldelayintheproject
completion)ormaycauseaprojectdelay.Asaresultofthisambiguity,itispreferabletoupdatetheproject
scheduletodeviseanaccurateprotrayalofthescheduleadherence.Afterapplyingaschedulingalgorithm,anew
projectschedulecanbeobtained.Forcashflowplanningpurposes,agraphorreportsimilartothatshownin
Figure123canbeconstructedtocompareactualexpenditurestoplannedexpendituresatanytime.Thisprocess
ofreschedulingtoindicatethescheduleadherenceisonlyoneofmanyinstancesinwhichscheduleandbudget
updatingmaybeappropriate,asdiscussedinthenextsection.

Figure123IllustrationofPlannedversusActualExpendituresonaProject
Backtotop

12.7ScheduleandBudgetUpdates
Schedulingandprojectplanningisanactivitythatcontinuesthroughoutthelifetimeofaproject.Aschangesor
discrepanciesbetweentheplanandtherealizationoccur,theprojectscheduleandcostestimatesshouldbe
modifiedandnewschedulesdevised.Toooften,thescheduleisdevisedoncebyaplannerinthecentraloffice,
andthenrevisionsormodificationsaredoneincompletelyoronlysporadically.Theresultisthelackofeffective
projectmonitoringandthepossibilityofeventualchaosontheprojectsite.
On"fasttrack"projects,initialconstructionactivitiesarebegunevenbeforethefacilitydesignisfinalized.In
thiscase,specialattentionmustbeplacedonthecoordinatedschedulingofdesignandconstructionactivities.
Eveninprojectsforwhichthedesignisfinalizedbeforeconstructionbegins,changeordersrepresenting
changesinthe"final"designareoftenissuedtoincorporatechangesdesiredbytheowner.
Periodicupdatingoffutureactivitydurationsandbudgetsisespeciallyimportanttoavoidexcessiveoptimismin
projectsexperiencingproblems.Ifonetypeofactivityexperiencesdelaysonaproject,thenrelatedactivitiesare
alsolikelytobedelayedunlessmanagerialchangesaremade.Constructionprojectsnormallyinvolvenumerous
activitieswhicharecloselyrelatedduetotheuseofsimilarmaterials,equipment,workersorsitecharacteristics.
Expectedcostchangesshouldalsobepropagatedthoughoutaprojectplan.Inessence,durationandcost
estimatesforfutureactivitiesshouldberevisedinlightoftheactualexperienceonthejob.Withoutthis
updating,projectschedulesslipmoreandmoreastimeprogresses.Toperformthistypeofupdating,project
managersneedaccesstooriginalestimatesandestimatingassumptions.
Unfortunately,mostprojectcostcontrolandschedulingsystemsdonotprovidemanyaidsforsuchupdating.
Whatisrequiredisameansofidentifyingdiscrepancies,diagnosingthecause,forecastingtheeffect,and
propagatingthiseffecttoallrelatedactivities.Whilethesestepscanbeundertakenmanually,computersaidsto
supportinteractiveupdatingorevenautomaticupdatingwouldbehelpful.[8]
Beyondthedirectupdatingofactivitydurationsandcostestimates,projectmanagersshouldhavemechanisms
availableforevaluatinganytypeofschedulechange.Updatingactivitydurationestimations,changingscheduled
starttimes,modifyingtheestimatesofresourcesrequiredforeachactivity,andevenchangingtheproject
networklogic(byinsertingnewactivitiesorotherchanges)shouldallbeeasilyaccomplished.Ineffect,

schedulingaidsshouldbedirectlyavailabletoprojectmanagers.[9]Fortunately,localcomputersarecommonly
availableonsiteforthispurpose.
Example126:ScheduleUpdatesinaSmallProject
Asanexampleofthetypeofchangesthatmightberequired,considerthenineactivityproject
describedinSection10.3andappearinginFigure124.Also,supposethattheprojectisfourdays
underway,withthecurrentactivityscheduleandprogressasshowninFigure125.Afewproblems
orchangesthatmightbeencounteredincludethefollowing:
1.Anundergroundwaterlinethatwaspreviouslyunknownwasrupturedduringthefifthdayof
theproject.Anextradaywasrequiredtoreplacetherupturedsection,andanotherdaywillbe
requiredforcleanup.Whatistheimpactontheprojectduration?
Toanalyzethischangewiththecriticalpathschedulingprocedure,themanagerhasthe
optionsof(1)changingtheexpecteddurationofactivityC,GeneralExcavation,tothe
newexpecteddurationof10daysor(2)splittingactivityCintotwotasks
(correspondingtotheworkdonepriortothewaterlinebreakandthattobedoneafter)
andaddinganewactivityrepresentingrepairandcleanupfromthewaterlinebreak.
Thesecondapproachhastheadvantagethatanydelaystootheractivities(suchas
activitiesDandE)couldalsobeindicatedbyprecedenceconstraints.
Assumingthatnootheractivitiesareaffected,themanagerdecidestoincreasethe
expecteddurationofactivityCto10days.SinceactivityCisonthecriticalpath,the
projectdurationalsoincreasesby2days.Applyingthecriticalpathscheduling
procedurewouldconfirmthischangeandalsogiveanewsetofearliestandlatest
startingtimesforthevariousactivities.
2.After8daysontheproject,theownerasksthatanewdrainbeinstalledinadditiontothe
sewerlinescheduledforactivityG.Theprojectmanagerdeterminesthatanewactivitycould
beaddedtoinstallthedraininparallelwithActivityGandrequiring2days.Whatisthe
effectontheschedule?
Insertinganewactivityintheprojectnetworkbetweennodes3and4violatesthe
activityonbranchconventionthatonlyoneactivitycanbedefinedbetweenanytwo
nodes.Hence,anewnodeandadummyactivitymustbeinsertedinadditiontothe
draininstallationactivity.Asaresult,thenodesmustberenumberedandthecritical
pathscheduledevelopedagain.Performingtheseoperationsrevealsthatnochangein
theprojectdurationwouldoccurandthenewactivityhasatotalfloatof1day.
Toavoidthelaborassociatedwithmodifyingthenetworkandrenumberingnodes,
supposethattheprojectmanagersimplyredefinedactivityGasinstallationofsewer
anddrainlinesrequiring4days.Inthiscase,activityGwouldappearonthecritical
pathandtheprojectdurationwouldincrease.Addinganadditionalcrewsothatthetwo
installationscouldproceedinparallelmightreducethedurationofactivityGbackto2
daysandtherebyavoidtheincreaseintheprojectduration.
3.Atday12oftheproject,theexcavatedtrenchescollapseduringActivityE.Anadditional5
dayswillberequiredforthisactivity.Whatistheeffectontheprojectschedule?What
changesshouldbemadetoinsuremeetingthecompletiondeadline?
ActivityEhasatotalfloatofonly1day.Withthechangeinthisactivity'sduration,it
willlieonthecriticalpathandtheprojectdurationwillincrease.
Analysisofpossibletimesavingsinsubsequentactivitiesisnowrequired,usingthe
proceduresdescribedinSection10.9.

Figure124ANineActivityExampleProject

Figure125CurrentScheduleforanExampleProjectPresentedasaBarChart

Ascanbeimagined,itisnotatalluncommontoencounterchangesduringthecourseofaproject
thatrequiremodificationofdurations,changesinthenetworklogicofprecedencerelationships,or
additionsanddeletionsofactivities.Consequently,theschedulingprocessshouldbereadily
availableastheprojectisunderway.
Backtotop

12.8RelatingCostandScheduleInformation
Theprevioussectionsfocusedupontheidentificationofthebudgetaryandschedulestatusofprojects.Actual
projectsinvolveacomplexinterrelationshipbetweentimeandcost.Asprojectsproceed,delaysinfluencecosts
andbudgetaryproblemsmayinturnrequireadjustmentstoactivityschedules.Tradeoffsbetweentimeandcosts
werediscussedinSection10.9inthecontextofprojectplanninginwhichadditionalresourcesappliedtoa
projectactivitymightresultinashorterdurationbuthighercosts.Unanticipatedeventsmightresultinincreases
inbothtimeandcosttocompleteanactivity.Forexample,excavationproblemsmayeasilyleadtomuchlower
thananticipatedproductivityonactivitiesrequiringdigging.
Whileprojectmanagersimplicitlyrecognizetheinterplaybetweentimeandcostonprojects,itisraretofind
effectiveprojectcontrolsystemswhichincludebothelements.Usually,projectcostsandschedulesarerecorded
andreportedbyseparateapplicationprograms.Projectmanagersmustthenperformthetedioustaskofrelating
thetwosetsofinformation.
Thedifficultyofintegratingscheduleandcostinformationstemsprimarilyfromthelevelofdetailrequiredfor
effectiveintegration.Usually,asingleprojectactivitywillinvolvenumerouscostaccountcategories.For
example,anactivityforthepreparationofafoundationwouldinvolvelaborers,cementworkers,concreteforms,
concrete,reinforcement,transportationofmaterialsandotherresources.Evenamoredisaggregatedactivity
definitionsuchaserectionoffoundationformswouldinvolvenumerousresourcessuchasforms,nails,
carpenters,laborers,andmaterialtransportation.Again,differentcostaccountswouldnormallybeusedtorecord
thesevariousresources.Similarly,numerousactivitiesmightinvolveexpensesassociatedwithparticularcost
accounts.Forexample,aparticularmaterialsuchasstandardpipingmightbeusedinnumerousdifferent
scheduleactivities.Tointegratecostandscheduleinformation,thedisaggregatedchargesforspecificactivities
andspecificcostaccountsmustbethebasisofanalysis.
Astraightforwardmeansofrelatingtimeandcostinformationistodefineindividualworkelementsrepresenting
theresourcesinaparticularcostcategoryassociatedwithaparticularprojectactivity.Workelementswould
representanelementinatwodimensionalmatrixofactivitiesandcostaccountsasillustratedinFigure126.A
numberingoridentifyingsystemforworkelementswouldincludeboththerelevantcostaccountandthe
associatedactivity.Insomecases,itmightalsobedesirabletoidentifyworkelementsbytheresponsible
organizationorindividual.Inthiscase,athreedimensionalrepresentationofworkelementsisrequired,withthe
thirddimensioncorrespondingtoresponsibleindividuals.[10]Moregenerally,moderncomputerizeddatabases
canaccomadateaflexiblestructureofdatarepresentationtosupportaggregationwithrespecttonumerous
differentperspectivesthistypeofsystemwillbediscussedinChapter14.
Withthisorganizationofinformation,anumberofmanagementreportsorviewscouldbegenerated.In
particular,thecostsassociatedwithspecificactivitiescouldbeobtainedasthesumoftheworkelements
appearinginanyrowinFigure126.Thesecostscouldbeusedtoevaluatealternatetechnologiestoaccomplish
particularactivitiesortoderivetheexpectedprojectcashflowovertimeastheschedulechanges.Froma
managementperspective,problemsdevelopingfromparticularactivitiescouldberapidlyidentifiedsincecosts
wouldbeaccumulatedatsuchadisaggregatedlevel.Asaresult,projectcontrolbecomesatoncemoreprecise
anddetailed.

Figure126IllustrationofaCostAccountandProjectActivityMatrix

Unfortunately,thedevelopmentandmaintenanceofaworkelementdatabasecanrepresentalargedata
collectionandorganizationeffort.Asnotedearlier,fourhundredseparatecostaccountsandfourhundred
activitieswouldnotbeunusualforaconstructionproject.Theresultwouldbeupto400x400=160,000separate
workelements.Ofcourse,notallactivitiesinvolveeachcostaccount.However,evenadensityoftwopercent
(sothateachactivitywouldhaveeightcostaccountsandeachaccountwouldhaveeightassociatedactivitieson
theaverage)wouldinvolvenearlythirteenthousandworkelements.Initiallypreparingthisdatabaserepresentsa
considerableburden,butitisalsothecasethatprojectbookkeepersmustrecordprojecteventswithineachof
thesevariousworkelements.Implementationsofthe"workelement"projectcontrolsystemshavetypically
fonderedontheburdenofdatacollection,storageandbookkeeping.
Untildatacollectionisbetterautomated,theuseofworkelementstocontrolactivitiesinlargeprojectsislikely
tobedifficulttoimplement.However,certainsegmentsofprojectactivitiescanprofittremendouslyfromthis
typeoforganization.Inparticular,materialrequirementscanbetrackedinthisfashion.Materialsinvolveonlya
subsetofallcostaccountsandprojectactivities,sotheburdenofdatacollectionandcontrolismuchsmaller
thanforanentiresystem.Moreover,thebenefitsfromintegrationofscheduleandcostinformationare
particularlynoticeableinmaterialscontrolsincedeliveryschedulesaredirectlyaffectedandbulkorderdiscounts
mightbeidentified.Consequently,materialscontrolsystemscanreasonablyencompassa"workelement"
accountingsystem.
Intheabsenceofaworkelementaccountingsystem,costsassociatedwithparticularactivitiesareusually
estimatedbysummingexpensesinallcostaccountsdirectlyrelatedtoanactivityplusaproportionofexpenses
incostaccountsusedjointlybytwoormoreactivities.Thebasisofcostallocationwouldtypicallybethelevel
ofeffortorresourcerequiredbythedifferentactivities.Forexample,costsassociatedwithsupervisionmightbe
allocatedtodifferentconcretingactivitiesonthebasisoftheamountofwork(measuredincubicyardsof
concrete)inthedifferentactivities.Withtheseallocations,costestimatesforparticularworkactivitiescanbe
obtained.
Backtotop

12.9References
1.AmericanSocietyofCivilEngineers,"ConstructionCostControl,"ASCEManualsandReportsof
EngineeringPracticeNo.65,Rev.Ed.,1985.
2.Coombs,W.E.andW.J.Palmer,ConstructionAccountingandFinancialManagement,McGrawHill,New
York,1977.
3.Halpin,D.W.,FinancialandCostConceptsforConstructionManagement,JohnWiley&Sons,New
York,1985.
4.Johnson,H.ThomasandRobertS.Kaplan,RelevanceLost,TheRiseandFallofManagement
Accounting,HarvardBusinessSchoolPress,Boston,MA1987.
5.Mueller,F.W.IntegratedCostandScheduleControlforConstructionProjects,VanNostrandReinhold
Company,NewYork,1986.
6.Tersine,R.J.,PrinciplesofInventoryandMaterialsManagement,NorthHolland,1982.
Backtotop

12.10Problems
1.Supposethattheexpectedexpenditureoffundsinaparticularcategorywasexpectedtobehaveina
piecewiselinearfashionoverthecourseoftheproject.Inparticular,thefollowingpointshavebeen
establishedfromhistoricalrecordsforthepercentageofcompletionversustheexpectedexpenditure(asa
percentageofthebudget):
PercentageofCompletion ExpectedExpenditure
0%
20%
40%

0%
10%
25%

60%
80%
100%

55%
90%
100%

a.Graphtherelationshipbetweenpercentagecompleteandexpectedexpenditure.
b.Developaformulaorsetofformulasforforecastingtheultimateexpenditureonthis
activitygiventhepercentageofcompletion.Assumethatanyoverorunderexpenditurewill
continuetogrowproportionatelyduringthecourseoftheproject.
c.Usingyourformula,whatistheexpectedexpenditureasapercentageoftheactivitybudget
if:
i.15%offundshavebeenexpendedand15%oftheactivityiscomplete.
ii.30%offundshavebeenexpendedand30%oftheactivityiscomplete.
iii.80%offundshavebeenexpendedand80%oftheactivityiscomplete.
2.RepeatProblem1parts(b)and(c)assumingthatanyoverorunderexpenditurewillnotcontinuetogrow
duringthecourseoftheproject.
3.Supposethatyouhavebeenaskedtotakeoverasprojectmanageronasmallprojectinvolvinginstallation
of5,000linearfeet(LF)ofmetalductworkinabuilding.Thejobwasoriginallyestimatedtotaketen
weeks,andyouareassumingyourdutiesafterthreeweeksontheproject.Theoriginalestimateassumed
thateachlinearfootofductworkwouldcost$10,representing$6inlaborcostsand$4inmaterialcost.
Theexpectedproductionratewas500linearfeetofductworkperweek.Appearingbelowisthedata
concerningthisprojectavailablefromyourfirm'sjobcontrolinformationsystem:
WeeklyUnitCosts($/Lf)
Week
1
2
3

Labor
12.00
8.57
6.67

Materials
4.00
4.00
4.00

Total
16.00
12.57
10.67

QuantityPlaced(Lf)
Week
250
350
450

TotalCost

ToDate
250
600
1,050

Week
4,000
4,400
4,800

ToDate
4,000
8,400
13,200

a.Basedonanextrapolationusingtheaverageproductivityandcostforallthreeweeks,
forecastthecompletiontime,costandvariancefromoriginalestimates.
b.Supposethatyouassumethattheproductivityachievedinweek3wouldcontinueforthe
remainderoftheproject.Howwouldthisaffectyourforecastsin(a)?Preparenewforecasts
basedonthisassumption.
4.Whatcriticismscouldyoumakeofthejobstatusreportinthepreviousproblemfromtheviewpointof
goodprojectmanagement?
5.Supposethatthefollowingestimatewasmadeforexcavationof120,000cubicyardsonasite:
Resource
Machines
Labor
Trucks
Total

Quantity
1,200hours
6,000hours
2,400hours

Cost
$60,000
150,000
75,000
$285,000

After95,000cubicyardsofexcavationwascompleted,thefollowingexpenditureshadbeenrecorded:
Resource

Quantity
1,063hours

Cost
$47,835

Machines
Labor
Trucks
Total

7,138hours
1,500hours

142,527
46,875
$237,237

a.Calculateestimatedandexperiencedproductivity(cubicyardsperhour)andunitcost(cost
percubicyard)foreachresource.
b.Basedonstraightlineextrapolation,doyouseeanyproblemwiththisactivity?Ifso,can
yousuggestareasonfortheproblembasedonyourfindingsin(a)?
6.Supposethefollowingcostsandunitsofworkcompletedwererecordedonanactivity:
Monthly
Numberof
Month Expenditure WorkUnitsCompleted
1
2
3
4
5
6

$1,200
$1,250
$1,260
$1,280
$1,290
$1,280

30
32
38
42
42
42

Answerthefollowingquestions:
a.Foreachmonth,determinethecumulativecost,thecumulativeworkcompleted,the
averagecumulativecostperunitofwork,andthemonthlycostperunitofwork.
b.Foreachmonth,prepareaforecastoftheeventualcosttocompletetheactivitybasedon
theproportionofworkcompleted.
c.Foreachmonth,prepareaforecastoftheeventualcosttocompletetheactivitybasedon
theaverageproductivityexperiencedontheactivity.
d.Foreachmonth,prepareaforecastoftheeventualcosttocompletetheactivitybasedon
theproductivityexperiencedinthepreviousmonth.
e.Whichforecastingmethod(b,cord)ispreferableforthisactivity?Why?
7.RepeatProblem6forthefollowingexpenditurepattern:
Monthly
Numberof
Month Expenditure WorkUnitsCompleted
1
2
3
4
5
6

$1,200
$1,250
$1,260
$1,280
$1,290
$1,300

30
35
45
48
52
54

8.Whyisitdifficulttointegrateschedulingandcostaccountinginformationinprojectrecords?
9.Prepareascheduleprogressreportonplannedversusactualexpenditureonaproject(similartothatin
Figure125)fortheprojectdescribedinExample126.
10.Supposethatthefollowingtenactivitieswereagreeduponinacontractbetweenanownerandan
engineer.
OriginalWorkPlanInformation
Activity Duration(months) Predecessors EstimatedCost($thousands)

A
2
B
5
C
5
D
2
E
3
F
8
G
4
H
4
I
11
J
2
OriginalContractInformation

B
C
B

E,F
E,F
B
E,F

7
9
8
4
1
7
6
5
10
7

TotalDirectCost
Overhead
TotalDirectandOverhead
Profit
TotalContractAmount
FirstYearCashFlow
Expenditures
Receipts

$64
64
128
12.8
$140.8
$56,000
$60,800

Themarkupontheactivities'costsincluded100%overheadandaprofitof10%onallcosts(including
overhead).Thisjobwassuspendedforoneyearaftercompletionofthefirstfouractivities,andtheowner
paidatotalof$60,800totheengineer.Nowtheownerwishestorecommencethejob.However,general
inflationhasincreasedcostsbytenpercentintheinterveningyear.Theengineer'sdiscountrateis15
percentperyear(incurrentyeardollars).Forsimplicity,youmayassumethatallcashtransactionsoccur
attheendoftheyearinmakingdiscountingcalculationsinansweringthefollowingquestions:
a.Howlongwillberemainingsixactivitiesrequire?
b.Supposethattheowneragreestomakealumpsumpaymentoftheremainingoriginal
contractatthecompletionoftheproject.Wouldtheengineerstillmakeaprofitonthejob?If
so,howmuch?
c.Giventhattheengineerwouldreceivealumpsumpaymentattheendoftheproject,what
amountshouldherequestinordertoearnhisdesiredtenpercentprofitonallcosts?
d.Whatisthenetfuturevalueoftheentireprojectattheend,assumingthatthelumpsum
paymentyoucalculatedin(c)isobtained?
11.BasedonyourknowledgeofcodingsystemssuchasMASTERFORMATandestimatingtechniques,
outlinetheproceduresthatmightbeimplementedtoaccomplish:
a.automatedupdatingofdurationandcostestimatesofactivitiesinlightofexperienceon
earlier,similaractivities.
b.interactivecomputerbasedaidstohelpaprojectmanagertoaccomplishthesametask.
Backtotop

12.11Footnotes
1.CitedinZoll,PeterF.,"DatabaseStructuresforProjectManagement,"ProceedingsoftheSeventhConference
onElectronicComputation,ASCE,1979.Back
2.ThomasGibbreportsamediannumberof400costaccountsforatwomilliondollarprojectsinasampleof
30contractorsin1975.SeeT.W.Gibb,Jr.,"BuildingConstructioninSoutheasternUnitedStates,"Schoolof
CivilEngineering,GeorgiaInstituteofTechnology,1975,reportedinD.W.Halpin,FinancialandCostConcepts
forConstructionManagement,JohnWileyandSons,1985.Back
3.ThisillustrativesetofaccountswasadaptedfromanASCEManualofPractice:ConstructionCostControl,
TaskCommitteeonRevisionofConstructionCostControlManual,ASCE,NewYork,1985.Back

4.Forafullerexpositionofthispoint,seeW.H.LucasandT.L.Morrison,"ManagementAccountingfor
ConstructionContracts,"ManagementAccounting,1981,pp.5965.Back
5.Foradescriptionofthesemethodsandexamplesasusedbyasampleofconstructioncompanies,seeL.S.
Riggs,CostandScheduleControlinIndustrialConstruction,ReporttoTheConstructionIndustryInstitute,Dec.
1986.Back
6.AsreportedintheWallStreetJournal,Feb.19,1986,pg.A1,c.4.Back
7.H.T.JohnsonandR.S.Kaplan,RelevanceLost,TheRiseandFallofManagementAccounting,Harvard
BusinessSchoolPress,pg.1,1987.Back
8.OneexperimentalprogramdirectedatthisproblemisaknowledgebasedexpertsystemdescribedinR.E.
LevittandJ.C.Kunz,"UsingKnowledgeofConstructionandProjectManagementforAutomatedSchedule
Updating,"ProjectManagementJournal,Vol.16,1985,pp.5776.Back
9.Foranexampleofaprototypeinteractiveprojectmanagementenvironmentthatincludesgraphicaldisplays
andschedulingalgorithms,seeR.Kromer,"InteractiveActivityNetworkAnalysisUsingaPersonalComputer,"
UnpublishedMSThesis,DepartmentofCivilEngineering,CarnegieMellonUniversity,Pittsburgh,PA,1984.
Back
10.AthreedimensionalworkelementdefinitionwasproposedbyJ.M.Neil,"ASystemforIntegratedProject
Management,"ProceedingsoftheConferenceonCurrentPracticeinCostEstimatingandCostControl,ASCE,
Austin,Texas,138146,April1983.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter12
(CostControl,
Monitoringand
Accounting)

GoToChapter14
(OrganizationandUse
ofProjectInformation)

QualityControlandSafetyDuring
Construction
QualityandSafetyConcernsinConstruction
OrganizingforQualityandSafety
WorkandMaterialSpecifications
TotalQualityControl
QualityControlbyStatisticalMethods
StatisticalQualityControlwithSamplingby
Attributes
StatisticalQualityControlwithSamplingby
Variables
Safety
References
Problems
Footnotes

13.QualityControlandSafetyDuring
Construction
13.1QualityandSafetyConcernsinConstruction
Qualitycontrolandsafetyrepresentincreasinglyimportantconcernsforprojectmanagers.Defectsorfailures
inconstructedfacilitiescanresultinverylargecosts.Evenwithminordefects,reconstructionmaybe
requiredandfacilityoperationsimpaired.Increasedcostsanddelaysaretheresult.Intheworstcase,failures
maycausepersonalinjuriesorfatalities.Accidentsduringtheconstructionprocesscansimilarlyresultin
personalinjuriesandlargecosts.Indirectcostsofinsurance,inspectionandregulationareincreasingrapidly
duetotheseincreaseddirectcosts.Goodprojectmanagerstrytoensurethatthejobisdonerightthefirst
timeandthatnomajoraccidentsoccurontheproject.
Aswithcostcontrol,themostimportantdecisionsregardingthequalityofacompletedfacilityaremade
duringthedesignandplanningstagesratherthanduringconstruction.Itisduringthesepreliminarystages
thatcomponentconfigurations,materialspecificationsandfunctionalperformancearedecided.Quality
controlduringconstructionconsistslargelyofinsuringconformancetotheseoriginaldesignandplanning
decisions.
Whileconformancetoexistingdesigndecisionsistheprimaryfocusofqualitycontrol,thereareexceptions
tothisrule.First,unforeseencircumstances,incorrectdesigndecisionsorchangesdesiredbyanownerinthe
facilityfunctionmayrequirereevaluationofdesigndecisionsduringthecourseofconstruction.Whilethese
changesmaybemotivatedbytheconcernforquality,theyrepresentoccasionsforredesignwithallthe
attendantobjectivesandconstraints.Asasecondcase,somedesignsrelyuponinformedandappropriate
decisionmakingduringtheconstructionprocessitself.Forexample,sometunnelingmethodsmakedecisions
abouttheamountofshoringrequiredatdifferentlocationsbaseduponobservationofsoilconditionsduring
thetunnelingprocess.Sincesuchdecisionsarebasedonbetterinformationconcerningactualsiteconditions,
thefacilitydesignmaybemorecosteffectiveasaresult.Anyspecialcaseofredesignduringconstruction
requiresthevariousconsiderationsdiscussedinChapter3.
Withtheattentiontoconformanceasthemeasureofqualityduringtheconstructionprocess,thespecification
ofqualityrequirementsinthedesignandcontractdocumentationbecomesextremelyimportant.Quality

requirementsshouldbeclearandverifiable,sothatallpartiesintheprojectcanunderstandtherequirements
forconformance.Muchofthediscussioninthischapterrelatestothedevelopmentandtheimplicationsof
differentqualityrequirementsforconstructionaswellastheissuesassociatedwithinsuringconformance.
Safetyduringtheconstructionprojectisalsoinfluencedinlargepartbydecisionsmadeduringtheplanning
anddesignprocess.Somedesignsorconstructionplansareinherentlydifficultanddangeroustoimplement,
whereasother,comparableplansmayconsiderablyreducethepossibilityofaccidents.Forexample,clear
separationoftrafficfromconstructionzonesduringroadwayrehabilitationcangreatlyreducethepossibility
ofaccidentalcollisions.Beyondthesedesigndecisions,safetylargelydependsuponeducation,vigilanceand
cooperationduringtheconstructionprocess.Workersshouldbeconstantlyalerttothepossibilitiesof
accidentsandavoidtakenunnecessaryrisks.
Backtotop

13.2OrganizingforQualityandSafety
Avarietyofdifferentorganizationsarepossibleforqualityandsafetycontrolduringconstruction.One
commonmodelistohaveagroupresponsibleforqualityassuranceandanothergroupprimarilyresponsible
forsafetywithinanorganization.Inlargeorganizations,departmentsdedicatedtoqualityassuranceandto
safetymightassignspecificindividualstoassumeresponsibilityforthesefunctionsonparticularprojects.
Forsmallerprojects,theprojectmanageroranassistantmightassumetheseandotherresponsibilities.In
eithercase,insuringsafeandqualityconstructionisaconcernoftheprojectmanagerinoverallchargeofthe
projectinadditiontotheconcernsofpersonnel,cost,timeandothermanagementissues.
Inspectorsandqualityassurancepersonnelwillbeinvolvedinaprojecttorepresentavarietyofdifferent
organizations.Eachofthepartiesdirectlyconcernedwiththeprojectmayhavetheirownqualityandsafety
inspectors,includingtheowner,theengineer/architect,andthevariousconstructorfirms.Theseinspectors
maybecontractorsfromspecializedqualityassuranceorganizations.Inadditiontoonsiteinspections,
samplesofmaterialswillcommonlybetestedbyspecializedlaboratoriestoinsurecompliance.Inspectorsto
insurecompliancewithregulatoryrequirementswillalsobeinvolved.Commonexamplesareinspectorsfor
thelocalgovernment'sbuildingdepartment,forenvironmentalagencies,andforoccupationalhealthand
safetyagencies.
TheUSOccupationalSafetyandHealthAdministration(OSHA)routinelyconductssitevisitsofworkplaces
inconjunctionwithapprovedstateinspectionagencies.OSHAinspectorsarerequiredbylawtoissue
citationsforallstandardviolationsobserved.Safetystandardsprescribeavarietyofmechanicalsafeguards
andproceduresforexample,laddersafetyiscoveredbyover140regulations.Incasesofextremenon
compliancewithstandards,OSHAinspectorscanstopworkonaproject.However,onlyasmallfractionof
constructionsitesarevisitedbyOSHAinspectorsandmostconstructionsiteaccidentsarenotcausedby
violationsofexistingstandards.Asaresult,safetyislargelytheresponsibilityofthemanagersonsiterather
thanthatofpublicinspectors.
Whilethemultitudeofparticipantsinvolvedintheconstructionprocessrequiretheservicesofinspectors,it
cannotbeemphasizedtoostronglythatinspectorsareonlyaformalcheckonqualitycontrol.Qualitycontrol
shouldbeaprimaryobjectiveforallthemembersofaprojectteam.Managersshouldtakeresponsibilityfor
maintainingandimprovingqualitycontrol.Employeeparticipationinqualitycontrolshouldbesoughtand
rewarded,includingtheintroductionofnewideas.Mostimportantofall,qualityimprovementcanserveasa
catalystforimprovedproductivity.Bysuggestingnewworkmethods,byavoidingrework,andbyavoiding
longtermproblems,goodqualitycontrolcanpayforitself.Ownersshouldpromotegoodqualitycontroland
seekoutcontractorswhomaintainsuchstandards.
Inadditiontothevariousorganizationalbodiesinvolvedinqualitycontrol,issuesofqualitycontrolarisein
virtuallyallthefunctionalareasofconstructionactivities.Forexample,insuringaccurateanduseful
informationisanimportantpartofmaintainingqualityperformance.Otheraspectsofqualitycontrolinclude
documentcontrol(includingchangesduringtheconstructionprocess),procurement,fieldinspectionand
testing,andfinalcheckoutofthefacility.
Backtotop

13.3WorkandMaterialSpecifications
Specificationsofworkqualityareanimportantfeatureoffacilitydesigns.Specificationsofrequiredquality
andcomponentsrepresentpartofthenecessarydocumentationtodescribeafacility.Typically,this
documentationincludesanyspecialprovisionsofthefacilitydesignaswellasreferencestogenerally
acceptedspecificationstobeusedduringconstruction.
Generalspecificationsofworkqualityareavailableinnumerousfieldsandareissuedinpublicationsof
organizationssuchastheAmericanSocietyforTestingandMaterials(ASTM),theAmericanNational
StandardsInstitute(ANSI),ortheConstructionSpecificationsInstitute(CSI).Distinctspecificationsare
formalizedforparticulartypesofconstructionactivities,suchasweldingstandardsissuedbytheAmerican
WeldingSociety,orforparticularfacilitytypes,suchastheStandardSpecificationsforHighwayBridges
issuedbytheAmericanAssociationofStateHighwayandTransportationOfficials.Thesegeneral
specificationsmustbemodifiedtoreflectlocalconditions,policies,availablematerials,localregulationsand
otherspecialcircumstances.
Constructionspecificationsnormallyconsistofaseriesofinstructionsorprohibitionsforspecificoperations.
Forexample,thefollowingpassageillustratesatypicalspecification,inthiscaseforexcavationfor
structures:
Conformtoelevationsanddimensionsshownonplanwithinatoleranceofplusorminus0.10
foot,andextendingasufficientdistancefromfootingsandfoundationstopermitplacingand
removalofconcreteformwork,installationofservices,otherconstruction,andforinspection.In
excavatingforfootingsandfoundations,takecarenottodisturbbottomofexcavation.Excavate
byhandtofinalgradejustbeforeconcretereinforcementisplaced.Trimbottomstorequired
linesandgradestoleavesolidbasetoreceiveconcrete.
Thissetofspecificationsrequiresjudgmentinapplicationsincesomeitemsarenotpreciselyspecified.For
example,excavationmustextenda"sufficient"distancetopermitinspectionandotheractivities.Obviously,
theterm"sufficient"inthiscasemaybesubjecttovaryinginterpretations.Incontrast,aspecificationthat
tolerancesarewithinplusorminusatenthofafootissubjecttodirectmeasurement.However,specific
requirementsofthefacilityorcharacteristicsofthesitemaymakethestandardtoleranceofatenthofafoot
inappropriate.Writingspecificationstypicallyrequiresatradeoffbetweenassumingreasonablebehavioron
thepartofallthepartiesconcernedininterpretingwordssuchas"sufficient"versustheeffortandpossible
inaccuracyinprespecifyingalloperations.
Inrecentyears,performancespecificationshavebeendevelopedformanyconstructionoperations.Rather
thanspecifyingtherequiredconstructionprocess,thesespecificationsrefertotherequiredperformanceor
qualityofthefinishedfacility.Theexactmethodbywhichthisperformanceisobtainedislefttothe
constructioncontractor.Forexample,traditionalspecificationsforasphaltpavementspecifiedthe
compositionoftheasphaltmaterial,theasphalttemperatureduringpaving,andcompactingprocedures.In
contrast,aperformancespecificationforasphaltwoulddetailthedesiredperformanceofthepavementwith
respecttoimpermeability,strength,etc.Howthedesiredperformancelevelwasattainedwouldbeuptothe
pavingcontractor.Insomecases,thepaymentforasphaltpavingmightincreasewithbetterqualityofasphalt
beyondsomeminimumlevelofperformance.
Example131:ConcretePavementStrength
Concretepavementsofsuperiorstrengthresultincostsavingsbydelayingthetimeatwhich
repairsorreconstructionisrequired.Incontrast,concreteoflowerqualitywillnecessitatemore
frequentoverlaysorotherrepairprocedures.Contractprovisionswithadjustmentstotheamount
ofacontractor'scompensationbasedonpavementqualityhavebecomeincreasinglycommonin
recognitionofthecostsavingsassociatedwithhigherqualityconstruction.Evenifapavement
doesnotmeetthe"ultimate"designstandard,itisstillworthusingthelowerqualitypavement
andresurfacinglaterratherthancompletelyrejectingthepavement.Basedontheselifecycle
costconsiderations,atypicalpayschedulemightbe:[1]
LoadRatio

PayFactor

<0.50
0.500.69
0.700.89
0.901.09
1.101.29
1.301.49
>1.50

Reject
0.90
0.95
1.00
1.05
1.10
1.12

Inthistable,theLoadRatioistheratiooftheactualpavementstrengthtothedesireddesign
strengthandthePayFactorisafractionbywhichthetotalpavementcontractamountis
multipliedtoobtaintheappropriatecompensationtothecontractor.Forexample,ifacontractor
achievesconcretestrengthtwentypercentgreaterthanthedesignspecification,thentheload
ratiois1.20andtheappropriatepayfactoris1.05,sothecontractorreceivesafivepercent
bonus.Loadfactorsarecomputedaftertestsontheconcreteactuallyusedinapavement.Note
thata90%payfactorexistsinthiscasewithevenpavementqualityonly50%ofthatoriginally
desired.Thishighpayfactorevenwithweakconcretestrengthmightexistsincemuchofthe
costofpavementsareincurredinpreparingthepavementfoundation.Concretestrengthsofless
then50%arecauseforcompleterejectioninthiscase,however.
Backtotop

13.4TotalQualityControl
Qualitycontrolinconstructiontypicallyinvolvesinsuringcompliancewithminimumstandardsofmaterial
andworkmanshipinordertoinsuretheperformanceofthefacilityaccordingtothedesign.Theseminimum
standardsarecontainedinthespecificationsdescribedintheprevioussection.Forthepurposeofinsuring
compliance,randomsamplesandstatisticalmethodsarecommonlyusedasthebasisforacceptingor
rejectingworkcompletedandbatchesofmaterials.Rejectionofabatchisbasedonnonconformanceor
violationoftherelevantdesignspecifications.Proceduresforthisqualitycontrolpracticearedescribedinthe
followingsections.
Animplicitassumptioninthesetraditionalqualitycontrolpracticesisthenotionofanacceptablequality
levelwhichisaallowablefractionofdefectiveitems.Materialsobtainedfromsuppliersorworkperformed
byanorganizationisinspectedandpassedasacceptableiftheestimateddefectivepercentageiswithinthe
acceptablequalitylevel.Problemswithmaterialsorgoodsarecorrectedafterdeliveryoftheproduct.
Incontrasttothistraditionalapproachofqualitycontrolisthegoaloftotalqualitycontrol.Inthissystem,no
defectiveitemsareallowedanywhereintheconstructionprocess.Whilethezerodefectsgoalcanneverbe
permanentlyobtained,itprovidesagoalsothatanorganizationisneversatisfiedwithitsqualitycontrol
programevenifdefectsarereducedbysubstantialamountsyearafteryear.Thisconceptandapproachto
qualitycontrolwasfirstdevelopedinmanufacturingfirmsinJapanandEurope,buthassincespreadtomany
constructioncompanies.ThebestknownformalcertificationforqualityimprovementistheInternational
OrganizationforStandardization'sISO9000standard.ISO9000emphasizesgooddocumentation,quality
goalsandaseriesofcyclesofplanning,implementationandreview.
Totalqualitycontrolisacommitmenttoqualityexpressedinallpartsofanorganizationandtypically
involvesmanyelements.Designreviewstoinsuresafeandeffectiveconstructionproceduresareamajor
element.Otherelementsincludeextensivetrainingforpersonnel,shiftingtheresponsibilityfordetecting
defectsfromqualitycontrolinspectorstoworkers,andcontinuallymaintainingequipment.Worker
involvementinimprovedqualitycontrolisoftenformalizedinqualitycirclesinwhichgroupsofworkers
meetregularlytomakesuggestionsforqualityimprovement.Materialsuppliersarealsorequiredtoinsure
zerodefectsindeliveredgoods.Initally,allmaterialsfromasupplierareinspectedandbatchesofgoodswith
anydefectiveitemsarereturned.Supplierswithgoodrecordscanbecertifiedandnotsubjecttocomplete
inspectionsubsequently.

Thetraditionalmicroeconomicviewofqualitycontrolisthatthereisan"optimum"proportionofdefective
items.Tryingtoachievegreaterqualitythanthisoptimumwouldsubstantiallyincreasecostsofinspection
andreduceworkerproductivity.However,manycompanieshavefoundthatcommitmenttototalquality
controlhassubstantialeconomicbenefitsthathadbeenunappreciatedintraditionalapproaches.Expenses
associatedwithinventory,rework,scrapandwarrantieswerereduced.Workerenthusiasmandcommitment
improved.Customersoftenappreciatedhigherqualityworkandwouldpayapremiumforgoodquality.Asa
result,improvedqualitycontrolbecameacompetitiveadvantage.
Ofcourse,totalqualitycontrolisdifficulttoapply,particularinconstruction.Theuniquenatureofeach
facility,thevariabilityintheworkforce,themultitudeofsubcontractorsandthecostofmakingnecessary
investmentsineducationandproceduresmakeprogramsoftotalqualitycontrolinconstructiondifficult.
Nevertheless,acommitmenttoimprovedqualityevenwithoutendorsingthegoalofzerodefectscanpayreal
dividendstoorganizations.
Example132:ExperiencewithQualityCircles
Qualitycirclesrepresentagroupoffivetofifteenworkerswhomeetonafrequentbasisto
identify,discussandsolveproductivityandqualityproblems.Acircleleaderactsasliason
betweentheworkersinthegroupandupperlevelsofmanagement.Appearingbelowaresome
examplesofreportedqualitycircleaccomplishmentsinconstruction:[2]
1.OnahighwayprojectunderconstructionbyTaiseiCorporation,itwasfoundthattheloss
rateofreadymixedconcretewastoohigh.Aqualitycirclecomposedofcementmasons
foundoutthatthemostimportantreasonforthiswasduetoaninaccuratechecking
method.Byapplyingthecircle'srecommendations,thelossratewasreducedby11.4%.
2.InabuildingprojectbyShimizuConstructionCompany,maycasesoffaultyreinforced
concreteworkwerereported.Theironworkersqualitycircleexaminedtheirwork
thoroughlyandsoonthefaultyworkmanshipdisappeared.A10%increaseinproductivity
wasalsoachieved.
Backtotop

13.5QualityControlbyStatisticalMethods
Anidealqualitycontrolprogrammighttestallmaterialsandworkonaparticularfacility.Forexample,non
destructivetechniquessuchasxrayinspectionofweldscanbeusedthroughoutafacility.Anonsite
inspectorcanwitnesstheappropriatenessandadequacyofconstructionmethodsatalltimes.Evenbetter,
individualcraftsmencanperformcontinuinginspectionofmaterialsandtheirownwork.Exhaustiveor
100%testingofallmaterialsandworkbyinspectorscanbeexceedinglyexpensive,however.Inmany
instances,testingrequiresthedestructionofamaterialsample,soexhaustivetestingisnotevenpossible.As
aresult,smallsamplesareusedtoestablishthebasisofacceptingorrejectingaparticularworkitemor
shipmentofmaterials.Statisticalmethodsareusedtointerprettheresultsoftestonasmallsampletoreacha
conclusionconcerningtheacceptabilityofanentirelotorbatchofmaterialsorworkproducts.
Theuseofstatisticsisessentialininterpretingtheresultsoftestingonasmallsample.Withoutadequate
interpretation,smallsampletestingresultscanbequitemisleading.Asanexample,supposethatthereareten
defectivepiecesofmaterialinalotofonehundred.Intakingasampleoffivepieces,theinspectormightnot
findanydefectivepiecesormighthaveallsamplepiecesdefective.Drawingadirectinferencethatnoneor
allpiecesinthepopulationaredefectiveonthebasisofthesesampleswouldbeincorrect.Duetothis
randomnatureofthesampleselectionprocess,testingresultscanvarysubstantially.Itisonlywithstatistical
methodsthatissuessuchasthechanceofdifferentlevelsofdefectiveitemsinthefulllotcanbefully
analyzedfromasmallsampletest.
Therearetwotypesofstatisticalsamplingwhicharecommonlyusedforthepurposeofqualitycontrolin
batchesofworkormaterials:
1.Theacceptanceorrejectionofalotisbasedonthenumberofdefective(bad)ornondefective(good)
itemsinthesample.Thisisreferredtoassamplingbyattributes.

2.Insteadofusingdefectiveandnondefectiveclassificationsforanitem,aquantitativequalitymeasure
orthevalueofameasuredvariableisusedasaqualityindicator.Thistestingprocedureisreferredto
assamplingbyvariables.
Whateversamplingplanisusedintesting,itisalwaysassumedthatthesamplesarerepresentativeofthe
entirepopulationunderconsideration.Samplesareexpectedtobechosenrandomlysothateachmemberof
thepopulationisequallylikelytobechosen.Convenientsamplingplanssuchassamplingeverytwentieth
piece,choosingasampleeverytwohours,orpickingthetoppieceonadeliverytruckmaybeadequateto
insurearandomsampleifpiecesarerandomlymixedinastackorinuse.However,someconvenient
samplingplanscanbeinappropriate.Forexample,checkingonlyeasilyaccessiblejointsinabuilding
componentisinappropriatesincejointsthatarehardtoreachmaybemorelikelytohaveerectionor
fabricationproblems.
Anotherassumptionimplicitinstatisticalqualitycontrolproceduresisthatthequalityofmaterialsorworkis
expectedtovaryfromonepiecetoanother.Thisiscertainlytrueinthefieldofconstruction.Whilea
designermayassumethatallconcreteisexactlythesameinabuilding,thevariationsinmaterialproperties,
manufacturing,handling,pouring,andtemperatureduringsettinginsurethatconcreteisactually
heterogeneousinquality.Reducingsuchvariationstoaminimumisoneaspectofqualityconstruction.
Insuringthatthematerialsactuallyplacedachievesomeminimumqualitylevelwithrespecttoaverage
propertiesorfractionofdefectivesisthetaskofqualitycontrol.
Backtotop

13.6StatisticalQualityControlwithSamplingbyAttributes
Samplingbyattributesisawidelyappliedqualitycontrolmethod.Theprocedureisintendedtodetermine
whetherornotaparticulargroupofmaterialsorworkproductsisacceptable.Intheliteratureofstatistical
qualitycontrol,agroupofmaterialsorworkitemstobetestediscalledalotorbatch.Anassumptioninthe
procedureisthateachiteminabatchcanbetestedandclassifiedaseitheracceptableordeficientbasedupon
mutuallyacceptabletestingproceduresandacceptancecriteria.Eachlotistestedtodetermineifitsatisfiesa
minimumacceptablequalitylevel(AQL)expressedasthemaximumpercentageofdefectiveitemsinalotor
process.
Initsbasicform,samplingbyattributesisappliedbytestingapredefinednumberofsampleitemsfroma
lot.Ifthenumberofdefectiveitemsisgreaterthanatriggerlevel,thenthelotisrejectedasbeinglikelytobe
ofunacceptablequality.Otherwise,thelotisaccepted.Developingthistypeofsamplingplanrequires
considerationofprobability,statisticsandacceptablerisklevelsonthepartofthesupplierandconsumerof
thelot.Refinementstothisbasicapplicationprocedurearealsopossible.Forexample,ifthenumberof
defectivesisgreaterthansomepredefinednumber,thenadditionalsamplingmaybestartedratherthan
immediaterejectionofthelot.Inmanycases,thetriggerlevelisasingledefectiveiteminthesample.Inthe
remainderofthissection,themathematicalbasisforinterpretingthistypeofsamplingplanisdeveloped.
Moreformally,alotisdefinedasacceptableifitcontainsafractionp1orlessdefectiveitems.Similarly,alot
isdefinedasunacceptableifitcontainsafractionp2ormoredefectiveunits.Generally,theacceptance
fractionislessthanorequaltotherejectionfraction,p1 p2,andthetwofractionsareoftenequalsothat
thereisnoambiguousrangeoflotacceptabilitybetweenp1andp2.Givenasamplesizeandatriggerlevel
forlotrejectionoracceptance,wewouldliketodeterminetheprobabilitiesthatacceptablelotsmightbe
incorrectlyrejected(termedproducer'srisk)orthatdeficientlotsmightbeincorrectlyaccepted(termed
consumer'srisk).
ConsideralotoffinitenumberN,inwhichmitemsaredefective(bad)andtheremaining(Nm)itemsare
nondefective(good).Ifarandomsampleofnitemsistakenfromthislot,thenwecandeterminethe
probabilityofhavingdifferentnumbersofdefectiveitemsinthesample.Withapredefinedacceptable
numberofdefectiveitems,wecanthendeveloptheprobabilityofacceptingalotasafunctionofthesample
size,theallowablenumberofdefectiveitems,andtheactualfractionofdefectiveitems.Thisderivation
appearsbelow.

ThenumberofdifferentsamplesofsizenthatcanbeselectedfromafinitepopulationNistermeda
mathematicalcombinationandiscomputedas:

(13.1)

whereafactorial,n!isn*(n1)*(n2)...(1)andzerofactorial(0!)isonebyconvention.Thenumberof
possiblesampleswithexactlyxdefectivesisthecombinationassociatedwithobtainingxdefectivesfromm
possibledefectiveitemsandnxgooditemsfromNmgooditems:

(13.2)

Giventhesepossiblenumbersofsamples,theprobabilityofhavingexactlyxdefectiveitemsinthesampleis
givenbytheratioasthehypergeometricseries:

(13.3)

Withthisfunction,wecancalculatetheprobabilityofobtainingdifferentnumbersofdefectivesinasample
ofagivensize.
Supposethattheactualfractionofdefectivesinthelotispandtheactualfractionofnondefectivesisq,then
pplusqisone,resultinginm=Np,andNm=Nq.Then,afunctiong(p)representingtheprobabilityof
havingrorlessdefectiveitemsinasampleofsizenisobtainedbysubstitutingmandNintoEq.(13.3)and
summingovertheacceptabledefectivenumberofitems:

(13.4)

Ifthenumberofitemsinthelot,N,islargeincomparisonwiththesamplesizen,thenthefunctiong(p)can
beapproximatedbythebinomialdistribution:

(13.5)
or

(13.6)

Thefunctiong(p)indicatestheprobabilityofacceptingalot,giventhesamplesizenandthenumberof
allowabledefectiveitemsinthesampler.Thefunctiong(p)canberepresentedgraphicalforeach
combinationofsamplesizenandnumberofallowabledefectiveitemsr,asshowninFigure131.Each
curveisreferredtoastheoperatingcharacteristiccurve(OCcurve)inthisgraph.Forthespecialcaseofa
singlesample(n=1),thefunctiong(p)canbesimplified:

(13.7)

sothattheprobabilityofacceptingalotisequaltothefractionofacceptableitemsinthelot.Forexample,
thereisaprobabilityof0.5thatthelotmaybeacceptedfromasinglesampletesteveniffiftypercentofthe
lotisdefective.

Figure131ExampleOperatingCharacteristicCurvesIndicatingProbabilityofLotAcceptance

Foranycombinationofnandr,wecanreadoffthevalueofg(p)foragivenpfromthecorrespondingOC
curve.Forexample,n=15isspecifiedinFigure131.Then,forvariousvaluesofr,wefind:
r=0
r=0
r=1
r=1

p=24%
p=4%
p=24%
p=4%

g(p)
g(p)
g(p)
g(p)

2%
54%
10%
88%

Theproducer'sandconsumer'sriskcanberelatedtovariouspointsonanoperatingcharacteristiccurve.
Producer'sriskisthechancethatotherwiseacceptablelotsfailthesamplingplan(ie.havemorethanthe
allowablenumberofdefectiveitemsinthesample)solelyduetorandomfluctuationsintheselectionofthe
sample.Incontrast,consumer'sriskisthechancethatanunacceptablelotisacceptable(ie.haslessthanthe
allowablenumberofdefectiveitemsinthesample)duetoabetterthanaveragequalityinthesample.For
example,supposethatasamplesizeof15ischosenwithatriggerlevelforrejectionofoneitem.Withafour
percentacceptablelevelandagreaterthanfourpercentdefectivefraction,theconsumer'sriskisatmost
eightyeightpercent.Incontrast,withafourpercentacceptablelevelandafourpercentdefectivefraction,
theproducer'sriskisatmost10.88=0.12ortwelvepercent.
Inspecifyingthesamplingplanimplicitintheoperatingcharacteristiccurve,thesupplierandconsumerof
materialsorworkmustagreeonthelevelsofriskacceptabletothemselves.Ifthelotisofacceptablequality,
thesupplierwouldliketominimizethechanceorriskthatalotisrejectedsolelyonthebasisofalowerthan
averagequalitysample.Similarly,theconsumerwouldliketominimizetheriskofacceptingunderthe
samplingplanadeficientlot.Inaddition,bothpartiespresumablywouldliketominimizethecostsand
delaysassociatedwithtesting.Devisinganacceptablesamplingplanrequirestradeofftheobjectivesofrisk
minimizationamongthepartiesinvolvedandthecostoftesting.
Example133:Acceptanceprobabilitycalculation
Supposethatthesamplesizeisfive(n=5)fromalotofonehundreditems(N=100).Thelotof
materialsistoberejectedifanyofthefivesamplesisdefective(r=0).Inthiscase,the
probabilityofacceptanceasafunctionoftheactualnumberofdefectiveitemscanbecomputed
bynotingthatforr=0,onlyoneterm(x=0)needbeconsideredinEq.(13.4).Thus,forN=
100andn=5:

Foratwopercentdefectivefraction(p=0.02),theresultingacceptancevalueis:

UsingthebinomialapproximationinEq.(13.5),thecomparablecalculationwouldbe:

whichisadifferenceof0.0019,or0.21percentfromtheactualvalueof0.9020foundabove.
Iftheacceptabledefectiveproportionwastwopercent(sop1=p2=0.02),thenthechanceofan
incorrectrejection(orproducer'srisk)is1g(0.02)=10.9=0.1ortenpercent.Notethata
prudentproducershouldinsurebetterthanminimumqualityproductstoreducetheprobability

orchanceofrejectionunderthissamplingplan.Iftheactualproportionofdefectiveswasone
percent,thentheproducer'sriskwouldbeonlyfivepercentwiththissamplingplan.
Example134:DesigningaSamplingPlan
Supposethatanowner(orproduct"consumer"intheterminologyofqualitycontrol)wishesto
havezerodefectiveitemsinafacilitywith5,000itemsofaparticularkind.Whatwouldbethe
differentamountsofconsumer'sriskfordifferentsamplingplans?
Withanacceptablequalitylevelofnodefectiveitems(sop1=0),theallowabledefectiveitems
inthesampleiszero(sor=0)inthesamplingplan.Usingthebinomialapproximation,the
probabilityofacceptingthe5,000itemsasafunctionofthefractionofactualdefectiveitems
andthesamplesizeis:

Toinsureaninetypercentchanceofrejectingalotwithanactualpercentagedefectiveofone
percent(p=0.01),therequiredsamplesizewouldbecalculatedas:

Then,

Ascanbeseen,largesamplesizesarerequiredtoinsurerelativelylargeprobabilitiesofzero
defectiveitems.
Backtotop

13.7StatisticalQualityControlwithSamplingbyVariables
Asdescribedintheprevioussection,samplingbyattributesisbasedonaclassificationofitemsasgoodor
defective.Manyworkandmaterialattributespossesscontinuousproperties,suchasstrength,densityor
length.Withthesamplingbyattributesprocedure,aparticularlevelofavariablequantitymustbedefinedas
acceptablequality.Moregenerally,twoitemsclassifiedasgoodmighthavequitedifferentstrengthsorother
attributes.Intuitively,itseemsreasonablethatsome"credit"shouldbeprovidedforexceptionallygooditems
inasample.Samplingbyvariableswasdevelopedforapplicationtocontinuouslymeasurablequantitiesof
thistype.Theprocedureusesmeasuredvaluesofanattributeinasampletodeterminetheoverall
acceptabilityofabatchorlot.Samplingbyvariableshastheadvantageofusingmoreinformationfromtests
sinceitisbasedonactualmeasuredvaluesratherthanasimpleclassification.Asaresult,acceptance
samplingbyvariablescanbemoreefficientthansamplingbyattributesinthesensethatfewersamplesare
requiredtoobtainadesiredlevelofqualitycontrol.
Inapplyingsamplingbyvariables,anacceptablelotqualitycanbedefinedwithrespecttoanupperlimitU,a
lowerlimitL,orboth.Withtheseboundaryconditions,anacceptablequalitylevelcanbedefinedasa
maximumallowablefractionofdefectiveitems,M.InFigure132,theprobabilitydistributionofitem
attributexisillustrated.WithanupperlimitU,thefractionofdefectiveitemsisequaltotheareaunderthe
distributionfunctiontotherightofU(sothatx U).Thisfractionofdefectiveitemswouldbecomparedto
theallowablefractionMtodeterminetheacceptabilityofalot.Withbothalowerandanupperlimiton
acceptablequality,thefractiondefectivewouldbethefractionofitemsgreaterthantheupperlimitorless

thanthelowerlimit.Alternatively,thelimitscouldbeimposedupontheacceptableaveragelevelofthe
variable

Figure132VariableProbabilityDistributionsandAcceptanceRegions

Insamplingbyvariables,thefractionofdefectiveitemsisestimatedbyusingmeasuredvaluesfromasample
ofitems.Aswithsamplingbyattributes,theprocedureassumesarandomsampleofagivesizeisobtained
fromalotorbatch.Intheapplicationofsamplingbyvariablesplans,themeasuredcharacteristicisvirtually
alwaysassumedtobenormallydistributedasillustratedinFigure132.Thenormaldistributionislikelyto
beareasonablygoodassumptionformanymeasuredcharacteristicssuchasmaterialdensityordegreeofsoil
compaction.TheCentralLimitTheoremprovidesageneralsupportfortheassumption:ifthesourceof
variationsisalargenumberofsmallandindependentrandomeffects,thentheresultingdistributionofvalues
willapproximatethenormaldistribution.Ifthedistributionofmeasuredvaluesisnotlikelytobe
approximatelynormal,thensamplingbyattributesshouldbeadopted.Deviationsfromnormaldistributions
mayappearasskewedornonsymmetricdistributions,orasdistributionswithfixedupperandlowerlimits.
Thefractionofdefectiveitemsinasampleorthechancethatthepopulationaveragehasdifferentvaluesis
estimatedfromtwostatisticsobtainedfromthesample:thesamplemeanandstandarddeviation.
Mathematically,letnbethenumberofitemsinthesampleandxi,i=1,2,3,...,n,bethemeasuredvaluesof
thevariablecharacteristicx.Thenanestimateoftheoverallpopulationmean isthesamplemean :

(13.8)

Anestimateofthepopulationstandarddeviationiss,thesquarerootofthesamplevariancestatistic:

(13.9)

Basedonthesetwoestimatedparametersandthedesiredlimits,thevariousfractionsofinterestforthe
populationcanbecalculated.
Theprobabilitythattheaveragevalueofapopulationisgreaterthanaparticularlowerlimitiscalculated
fromtheteststatistic:

(13.10)

whichistdistributedwithn1degreesoffreedom.Ifthepopulationstandarddeviationisknowninadvance,
thenthisknownvalueissubstitutedfortheestimatesandtheresultingteststatisticwouldbenormally
distributed.Thetdistributionissimilarinappearancetoastandardnormaldistribution,althoughthespread
orvariabilityinthefunctiondecreasesasthedegreesoffreedomparameterincreases.Asthenumberof
degreesoffreedombecomesverylarge,thetdistributioncoincideswiththenormaldistribution.
Withanupperlimit,thecalculationsaresimilar,andtheprobabilitythattheaveragevalueofapopulationis
lessthanaparticularupperlimitcanbecalculatedfromtheteststatistic:

(13.11)

Withbothupperandlowerlimits,thesumoftheprobabilitiesofbeingabovetheupperlimitorbelowthe
lowerlimitcanbecalculated.
Thecalculationstoestimatethefractionofitemsaboveanupperlimitorbelowalowerlimitareverysimilar
tothoseforthepopulationaverage.Theonlydifferenceisthatthesquarerootofthenumberofsamplesdoes
notappearintheteststatisticformulas:

(13.12)

and

(13.13)

wheretAListheteststatisticforallitemswithalowerlimitandtAUistheteststatisticforallitemswitha
upperlimit.Forexample,theteststatisticforitemsaboveanupperlimitof5.5with =4.0,s=3.0,andn=
5istAU=(8.54.0)/3.0=1.5withn1=4degreesoffreedom.

Insteadofusingsamplingplansthatspecifyanallowablefractionofdefectiveitems,itsavescomputationsto
simplywritespecificationsintermsoftheallowableteststatisticvaluesthemselves.Thisprocedureis
equivalenttorequiringthatthesampleaveragebeatleastaprespecifiednumberofstandarddeviations
awayfromanupperorlowerlimit.Forexample,with =4.0,U=8.5,s=3.0andn=41,thesamplemean
isonlyabout(8.54.0)/3.0=1.5standarddeviationsawayfromtheupperlimit.
Tosummarize,theapplicationofsamplingbyvariablesrequiresthespecificationofasamplesize,the
relevantupperorlimits,andeither(1)theallowablefractionofitemsfallingoutsidethedesignatedlimitsor
(2)theallowableprobabilitythatthepopulationaveragefallsoutsidethedesignatedlimit.Randomsamples
aredrawnfromapredefinedpopulationandtestedtoobtainedmeasuredvaluesofavariableattribute.From
thesemeasurements,thesamplemean,standarddeviation,andqualitycontrolteststatisticarecalculated.
Finally,theteststatisticiscomparedtotheallowabletriggerlevelandthelotiseitheracceptedorrejected.It
isalsopossibletoapplysequentialsamplinginthisprocedure,sothatabatchmaybesubjectedtoadditional
samplingandtestingtofurtherrefinetheteststatisticvalues.
Withsamplingbyvariables,itisnotablethataproducerofmaterialorworkcanadopttwogeneralstrategies
formeetingtherequiredspecifications.First,aproducermayinsurethattheaveragequalitylevelisquite
high,evenifthevariabilityamongitemsishigh.ThisstrategyisillustratedinFigure133asa"highquality
average"strategy.Second,aproducermaymeetadesiredqualitytargetbyreducingthevariabilitywithin
eachbatch.InFigure133,thisislabeledthe"lowvariability"strategy.Ineithercase,aproducershould
maintainhighstandardstoavoidrejectionofabatch.

Figure133TestingforDefectiveComponentStrengths

Example135:Testingfordefectivecomponentstrengths
Supposethataninspectortakeseightstrengthmeasurementswiththefollowingresults:
4.3,4.8,4.6,4.7,4.4,4.6,4.7,4.6

Inthiscase,thesamplemeanandstandarddeviationcanbecalculatedusingEquations(13.8)
and(13.9):
=1/8(4.3+4.8+4.6+4.7+4.4+4.6+4.7+4.6)=4.59
s2=[1/(81)][(4.34.59)2+(4.84.59)2+(4.64.59)2+(4.74.59)2+(4.4
4.59)2+(4.64.59)2+(4.74.59)2+(4.64.59)2]=0.16
ThepercentageofitemsbelowalowerqualitylimitofL=4.3isestimatedfromtheteststatistic
tALinEquation(13.12):

Backtotop

13.8Safety
Constructionisarelativelyhazardousundertaking.AsTable131illustrates,therearesignificantlymore
injuriesandlostworkdaysduetoinjuriesorillnessesinconstructionthaninvirtuallyanyotherindustry.
Theseworkrelatedinjuriesandillnessesareexceedinglycostly.TheConstructionIndustryCost
EffectivenessProjectestimatedthataccidentscost$8.9billionornearlysevenpercentofthe$137billion(in
1979dollars)spentannuallyforindustrial,utilityandcommercialconstructionintheUnitedStates.[3]
Includedinthistotalaredirectcosts(medicalcosts,premiumsforworkers'compensationbenefits,liability
andpropertylosses)aswellasindirectcosts(reducedworkerproductivity,delaysinprojects,administrative
time,anddamagetoequipmentandthefacility).Incontrasttomostindustrialaccidents,innocentbystanders
mayalsobeinjuriedbyconstructionaccidents.Severalcranecollapsesfromhighrisebuildingsunder
constructionhaveresultedinfatalitiestopasserbys.Prudentprojectmanagersandownerswouldliketo
reduceaccidents,injuriesandillnessesasmuchaspossible.
TABLE131NonfatalOccupationalInjuryandIllnessIncidenceRates
Industry
1996
Agriculture,forestry,fishing
Mining
Construction
Manufacturing
Trade,Transportationandutilities
Financialactivities
Professionalandbusinessservices

2006

8.7
5.4
9.9
10.6
8.7
2.4
6.0

6
3.5
5.9
6
5
1.5
1.2

Note:Datarepresenttotalnumberofcasesper100fulltimeemployees
Source:U.S.BureauofLaborStatistics,OccupationalinjuriesandIllnessesintheUnitedStatesby
Industry,annual

Aswithalltheothercostsofconstruction,itisamistakeforownerstoignoreasignificantcategoryofcosts
suchasinjuryandillnesses.Whilecontractorsmaypayinsurancepremiumsdirectly,thesecostsarereflected
inbidpricesorcontractamounts.Delayscausedbyinjuriesandillnessescanpresentsignificantopportunity
coststoowners.Inthelongrun,theownersofconstructedfacilitiesmustpayallthecostsofconstruction.
Forthecaseofinjuriesandillnesses,thisgeneralprinciplemightbeslightlyqualifiedsincesignificantcosts
arebornebyworkersthemselvesorsocietyatlarge.However,courtjudgementsandinsurancepayments
compensateforindividuallossesandareultimatelybornebytheowners.
Thecausesofinjuriesinconstructionarenumerous.Table132liststhereportedcausesofaccidentsinthe
USconstructionindustryin1997and2004.Asimilarcatalogueofcauseswouldexistforothercountries.

Thelargestsinglecategoryforbothinjuriesandfatalitiesareindividualfalls.Handlinggoodsand
transportationarealsoasignificantcauseofinjuries.Fromamanagementperspective,however,these
reportedcausesdonotreallyprovideausefulprescriptionforsafetypolicies.Anindividualfallmaybe
causedbyaseriesofcoincidences:arailingmightnotbesecure,aworkermightbeinattentive,thefooting
maybeslippery,etc.Removinganyoneofthesecompoundcausesmightservetopreventanyparticular
accident.However,itisclearthatconditionssuchasunsecuredrailingswillnormallyincreasetheriskof
accidents.Table133providesamoredetailedlistofcausesoffatalitiesforconstructionsitesalone,but
againeachfatalitymayhavemultiplecauses.
TABLE132FatalOccupationalInjuriesin
Construction,1997and2004
Year
1997 2004
Totalfatalities
1,107
Falls
376
Transportationincidents
288
Contactwithobjects&equipment
199
Exposuretoharmfulsubstancesand
188
environments
Source:BureauofLaborStatistics

1,234
445
287
267
170

TABLE133FatalityCausesinConstruction,1996/1997
and2006/2007
Year
96/97 06/07
Totalaccidents
287
Fallsfromaheight
88
Struckbyamovingvehicle
43
Struckbymoving/fallingobject
57
Trappedbysomethingoverturning/collapsing 16
Drowning/asphyxiation
9

241
45
30
40
19
16

Source:BureauofLaborStatistics

Variousmeasuresareavailabletoimprovejobsitesafetyinconstruction.Severalofthemostimportantoccur
beforeconstructionisundertaken.Theseincludedesign,choiceoftechnologyandeducation.Byaltering
facilitydesigns,particularstructurescanbesaferormorehazardoustoconstruct.Forexample,parapetscan
bedesignedtoappropriateheightsforconstructionworkersafety,ratherthantheminimumheightrequired
bybuildingcodes.
Choiceoftechnologycanalsobecriticalindeterminingthesafetyofajobsite.Safeguardsbuiltinto
machinerycannotifyoperatorsofproblemsorpreventinjuries.Forexample,simpleswitchescanprevent
equipmentfrombeingoperatingwhenprotectiveshieldsarenotinplace.Withtheavailabilityofonboard
electronics(includingcomputerchips)andsensors,thepossibilitiesforsophisticatedmachinecontrollersand
monitorshasgreatlyexpandedforconstructionequipmentandtools.Materialsandworkprocesschoicesalso
influencethesafetyofconstruction.Forexample,substitutionofalternativematerialsforasbestoscanreduce
oreliminatetheprospectsoflongtermillnessessuchasasbestiosis.
Educatingworkersandmanagersinproperproceduresandhazardscanhaveadirectimpactonjobsitesafety.
Therealizationofthelargecostsinvolvedinconstructioninjuriesandillnessesprovidesaconsiderable
motivationforawarenessandeducation.Regularsafetyinspectionsandsafetymeetingshavebecome
standardpracticesonmostjobsites.
Prequalificationofcontractorsandsubcontractorswithregardtosafetyisanotherimportantavenuefor
safetyimprovement.Ifcontractorsareonlyinvitiedtobidorenternegotiationsiftheyhaveanacceptable

recordofsafety(aswellasqualityperformance),thenadirectincentiveisprovidedtoinsureadequatesafety
onthepartofcontractors.
Duringtheconstructionprocessitself,themostimportantsafetyrelatedmeasuresaretoinsurevigilanceand
cooperationonthepartofmanagers,inspectorsandworkers.Vigilanceinvolvesconsideringtherisksof
differentworkingpractices.Inalsoinvolvesmaintainingtemporaryphysicalsafeguardssuchasbarricades,
braces,guylines,railings,toeboardsandthelike.Setsofstandardpracticesarealsoimportant,suchas:[4]
requiringhardhatsonsite.
requiringeyeprotectiononsite.
requiringhearingprotectionnearloudequipment.
insuringsafetyshoesforworkers.
providingfirstaidsuppliesandtrainedpersonnelonsite
Whileeliminatingaccidentsandworkrelatedillnessesisaworthwhilegoal,itwillneverbeattained.
Constructionhasanumberofcharacteristicsmakingitinherentlyhazardous.Largeforcesareinvolvedin
manyoperations.Thejobsiteiscontinuallychangingasconstructionproceeds.Workersdonothavefixed
worksitesandmustmovearoundastructureunderconstruction.Thetenureofaworkeronasiteisshort,so
theworker'sfamiliarityandtheemployeremployeerelationshiparelesssettledthaninmanufacturing
settings.Despitethesepeculiaritiesandasaresultofexactlythesespecialproblems,improvingworksite
safetyisaveryimportantprojectmanagementconcern.
Example136:Trenchcollapse[5]
Toreplace1,200feetofasewerline,atrenchofbetween12.5and18feetdeepwasrequired
downthecenterofafourlanestreet.Thecontractorchosetobeginexcavationofthetrenchfrom
theshallowerend,requiringa12.5deeptrench.Initially,thecontractorusedaninefoothigh,
fourfootwidesteeltrenchboxforsoilsupport.Atrenchboxisarigidsteelframeconsistingof
twowallssupportedbyweldedstrutswithopensidesandends.Thismethodhadtheadvantage
thattrafficcouldbemaintainedinatleasttwolanesduringthereconstructionwork.
Intheshallowpartsofthetrench,thetrenchboxseemedtoadequatelysupporttheexcavation.
However,asthetrenchgotdeeper,moresoilwasunsupportedbelowthetrenchbox.Intermittent
soilcollapsesinthetrenchbegantooccur.Eventually,anoldparallelsixinchwatermain
collapsed,therebysaturatingthesoilandleadingtomassivesoilcollapseatthebottomofthe
trench.Replacementofthewatermainwasaddedtotheinitialcontract.Atthispoint,the
contractorbeganslopingthesidesofthetrench,therebyrequiringtheclosureoftheentirestreet.
Theinitialuseofthetrenchboxwasconvenient,butitwasclearlyinadequateandunsafe.
Workersinthetrenchwereincontinuingdangerofaccidentsstemmingfromsoilcollapse.
Disruptiontosurroundingfacilitiessuchastheparallelwatermainwashighlylikely.Adoption
ofatongueandgrooveverticalsheetingsystemoverthefullheightofthetrenchor,
alternatively,theslopingexcavationeventuallyadoptedareclearlypreferable.
Backtotop

13.9References
1.Ang,A.H.S.andW.H.Tang,ProbabilityConceptsinEngineeringPlanningandDesign:VolumeI
BasicPrinciples,JohnWileyandSons,Inc.,NewYork,1975.
2.Au,T.,R.M.Shane,andL.A.Hoel,FundamentalsofSystemsEngineering:ProbabilisticModels,
AddisonWesleyPublishingCo.,ReadingMA,1972
3.Bowker,A.H.andLiebermann,G.J.,EngineeringStatistics,PrenticeHall,1972.
4.Fox,A.J.andCornell,H.A.,(eds),QualityintheConstructedProject,AmericanSocietyofCivil
Engineers,NewYork,1984.
5.InternationalOrganizationforStandardization,"SamplingProceduresandChartsforInspectionby
VariablesforPercentDefective,ISO39511981(E)",StatisticalMethods,ISOStandardHandbook3,
InternationalOrganizationforStandardization,Paris,France,1981.

6.Skibniewski,M.andHendrickson,C.,MethodstoImprovetheSafetyPerformanceoftheU.S.
ConstructionIndustry,TechnicalReport,DepartmentofCivilEngineering,CarnegieMellon
University,1983.
7.UnitedStatesDepartmentofDefense,SamplingProceduresandTablesforInspectionbyVariables,
(MilitaryStandard414),WashingtonD.C.:U.S.GovernmentPrintingOffice,1957.
8.UnitedStatesDepartmentofDefense,SamplingProceduresandTablesforInspectionbyAttributes,
(MilitaryStandard105D),WashingtonD.C.:U.S.GovernmentPrintingOffice,1963.
Backtotop

13.10Problems
1.Considerthefollowingspecification.Wouldyouconsiderittobeaprocessorperformance
specification?Why?
"Waterusedinmixingorcuringshallbereasonablycleanandfreeofoil,salt,acid,alkali,
sugar,vegetable,orothersubstanceinjurioustothefinishedproduct...Waterknowntobe
potablequalitymaybeusedwithouttest.Wherethesourceofwaterisrelativelyshallow,
theintakeshallbesoenclosedastoexcludesilt,mud,grass,orotherforeignmaterials."
[6]
2.Supposethatasamplingplancallsforasampleofsizen=50.Tobeacceptable,onlythreeorfewer
samplescanbedefective.Estimatetheprobabilityofacceptingthelotiftheaveragedefective
percentageis(a)15%,(b)5%or(c)2%.Donotuseanapproximationinthiscalculation.
3.RepeatProblem2usingthebinomialapproximation.
4.Supposethataprojectmanagertestedthestrengthofonetileoutofabatchof3,000tobeusedona
building.Thisonesamplemeasurementwascomparedwiththedesignspecificationand,inthiscase,
thesampledtile'sstrengthexceededthatofthespecification.Onthisbasis,theprojectmanager
acceptedthetileshipment.Ifthesampledtilewasdefective(withastrengthlessthanthe
specification),theprojectmanagerwouldhaverejectedthelot.
a.Whatistheprobabilitythatninetypercentofthetilesaresubstandard,eventhoughthe
projectmanager'ssamplegaveasatisfactoryresult?
b.Sketchouttheoperatingcharacteristiccurveforthissamplingplanasafunctionofthe
actualfractionofdefectivetiles.
5.RepeatProblem4forsamplesizesof(a)5,(b)10and(c)20.
6.Supposethatasamplingbyattributesplanisspecifiedinwhichtensamplesaretakenatrandomfrom
alargelot(N=100)andatmostonesampleitemisallowedtobedefectiveforthelottobeacceptable.
a.Iftheactualpercentagedefectiveisfivepercent,whatistheprobabilityoflot
acceptance?(Note:youmayuserelevantapproximationsinthiscalculation.)
b.Whatistheconsumer'sriskifanacceptablequalitylevelisfifteenpercentdefective
andtheactualfractiondefectiveisfivepercent?
c.Whatistheproducer'sriskwiththissamplingplanandaneightpercentdefective
percentage?
7.Theyieldstressofarandomsampleof25piecesofsteelwasmeasured,yieldingameanof52,800psi.
andanestimatedstandarddeviationofs=4,600psi.
a.Whatistheprobabilitythatthepopulationmeanislessthan50,000psi?
b.Whatistheestimatedfractionofpieceswithyieldstrengthlessthan50,000psi?
c.Isthissamplingproceduresamplingbyattributesorsamplingbyvariable?

8.Supposethatacontractspecifiesasamplingbyattributesplaninwhichtensamplesaretakenat
randomfromalargelot(N=100)andatmostonesampleisallowedtobedefectiveforthelottobe
acceptable.
a.Iftheactualpercentagedefectiveisfivepercent,whatistheprobabilityoflot
acceptance?(Note:youmayuserelevantapproximationsinthiscalculation).
b.Whatistheconsumer'sriskifanacceptablequalitylevelisfifteenpercentdefective
andtheactualfractiondefectiveis0.05?
c.Whatistheproducer'sriskwiththissamplingplananda8%defectivepercentage?
9.Inarandomsampleof40blockschosenfromaproductionline,themeanlengthwas10.63inchesand
theestimatedstandarddeviationwas0.4inch.Betweenwhatlengthscanitbesaidthat98%ofblock
lengthswilllie?
Backtotop

13.11Footnotes
1.ThisillustrativepayfactorscheduleisadaptedfromR.M.Weed,"DevelopmentofMulticharacteristic
AcceptanceProceduresforRigidPavement,"TransportationResearchRecord885,1982,pp.2536.Back
2.B.A.Gilly,A.Touran,andT.Asai,"QualityControlCirclesinConstruction,"ASCEJournalof
ConstructionEngineeringandManagement,Vol.113,No.3,1987,pg432.Back
3.SeeImprovingConstructionSafetyPerformance,ReportA3,TheBusinessRoundtable,NewYork,NY,
January1982.Back
4.Hinze,JimmieW.,ConstructionSafety,,PrenticeHall,1997.Back
5.ThisexamplewasadaptedfromE.Elinski,ExternalImpactsofReconstructionandRehabilitation
ProjectswithImplicationsforProjectManagement,UnpublishedMSThesis,DepartmentofCivil
Engineering,CarnegieMellonUniversity,1985.Back
6.AmericanAssociationofStateHighwayandTransportationOfficials,GuideSpecificationsforHighway
Construction,Washington,D.C.,Section714.01,pg.244.Back
PreviousChapter | TableofContents | NextChapter

GoUptoTableofContents
GoToChapter13
GoToChapter14
(QualityControlandSafetyDuringConstruction) (OrganizationandUseofProjectInformation)
OrganizationandUseofProjectInformation
TypesofProjectInformation
AccuracyandUseofInformation
ComputerizedOrganizationandUseofInformation
OrganizingInformationinDatabases
RelationalModelofDatabases
OtherConceptualModelsofDatabases
CentralizedDatabaseManagementSystems
DatabasesandApplicationsPrograms
InformationTransferandFlow
References
Problems
Footnotes

14.OrganizationandUseofProjectInformation
14.1TypesofProjectInformation
Constructionprojectsinevitablygenerateenormousandcomplexsetsofinformation.Effectivelymanagingthisbulkofinformationtoinsureitsavailabilityand
accuracyisanimportantmanagerialtask.Poorormissinginformationcanreadilyleadtoprojectdelays,uneconomicaldecisions,oreventhecompletefailureofthe
desiredfacility.Pitytheownerandprojectmanagerwhosuddenlydiscoverontheexpecteddeliverydatethatimportantfacilitycomponentshavenotyetbeen
fabricatedandcannotbedeliveredforsixmonths!Withbetterinformation,theproblemcouldhavebeenidentifiedearlier,sothatalternativesuppliersmighthave
beenlocatedorschedulesarranged.Bothprojectdesignandcontrolarecruciallydependentuponaccurateandtimelyinformation,aswellastheabilitytousethis
informationeffectively.Atthesametime,toomuchunorganizedinformationpresentedtomanagerscanresultinconfusionandparalysisofdecisionmaking.
Asaprojectproceeds,thetypesandextentoftheinformationusedbythevariousorganizationsinvolvedwillchange.Alistingofthemostimportantinformation
setswouldinclude:
cashflowandprocurementaccountsforeachorganization,
intermediateanalysisresultsduringplanninganddesign,
designdocuments,includingdrawingsandspecifications,
constructionschedulesandcostestimates,
qualitycontrolandassurancerecords,
chronologicalfilesofprojectcorrespondenceandmemorandum,
constructionfieldactivityandinspectionlogs,
legalcontractsandregulatorydocuments.
Someofthesesetsofinformationevolveastheprojectproceeds.Thefinancialaccountsofpaymentsovertheentirecourseoftheprojectisanexampleofoverall
growth.Thepassageoftimeresultsinsteadyadditionsintheseaccounts,whereastheadditionofanewactorsuchasacontractorleadstoasuddenjumpinthe
numberofaccounts.Someinformationsetsareimportantatonestageoftheprocessbutmaythenbeignored.Commonexamplesincludeplanningorstructural
analysisdatabaseswhicharenotordinarilyusedduringconstructionoroperation.However,itmaybenecessaryatlaterstagesintheprojecttoredoanalysesto
considerdesiredchanges.Inthiscase,archivalinformationstorageandretrievalbecomeimportant.Evenafterthecompletionofconstruction,anhistoricalrecord
maybeimportantforuseduringoperation,toassessresponsibilitiesincaseoffacilityfailuresorforplanningsimilarprojectselsewhere.
Thecontrolandflowofinformationisalsoimportantforcollaborativeworkenvironments,wheremanyprofessionalsareworkingondifferentaspectsofaproject
andsharinginformation.Collaborativeworkenvironmentsprovidefacilitiesforsharingdatafiles,tracingdecisions,andcommunicationviaelectronicmailorvideo
conferencing.Thedatastoresinthesecollaborativeworkenvironmentsmaybecomeverylarge.
Basedonseveralconstructionprojects,MagedAbdelsayedofTardif,Murray&Assoc(Quebec,Canada)estimatedthefollowingaveragefiguresforatypicalproject
ofUS$10million:
Numberofparticipants(companies):420(includingallsuppliersandsubsubcontractors)
Numberofparticipants(individuals):850
Numberofdifferenttypesofdocumentsgenerated:50
Numberofpagesofdocuments:56,000
Numberofbankersboxestoholdprojectdocuments:25
Numberof4drawersfilingcabinets:6
Numberof20inchdiameter,20yearold,50feethigh,treesusedtogeneratethisvolumeofpaper:6
EquivalentnumberofMegaBytesofelectronicdatatoholdthisvolumeofpaper(scanned):3,000MB
Equivalentnumberofcompactdiscs(CDs):6
Whiletheremaybesubstantialcostsduetoinaccurateormissinginformation,therearealsosignificantcostsassociatedwiththegeneration,storage,transfer,
retrievalandothermanipulationofinformation.Inadditiontothecostsofclericalworkandprovidingaidssuchascomputers,theorganizationandreviewof
informationcommandaninordinateamountoftheattentionofprojectmanagers,whichmaybethescarcestresourceonanyconstructionproject.Itisuseful,
therefore,tounderstandthescopeandalternativesfororganizingprojectinformation.
Backtotop

14.2AccuracyandUseofInformation
Numeroussourcesoferrorareexpectedforprojectinformation.Whilenumericalvaluesareoftenreportedtothenearestcentorvaluesofequivalentprecision,itis
rarethattheactualvaluesaresoaccuratelyknown.Livingwithsomeuncertaintyisaninescapablesituation,andaprudentmanagershouldhaveanunderstandingof
theuncertaintyindifferenttypesofinformationandthepossibilityofdrawingmisleadingconclusions.
Wehavealreadydiscussedtheuncertaintyinherentinmakingforecastsofprojectcostsanddurationssometimeinthefuture.Forecastuncertaintyalsoexistsinthe
shortterm.Forexample,considerestimatesofworkcompleted.Everyprojectmanagerisfamiliarwithsituationsinwhichthefinalfewbitsofworkforatasktake
aninordinateamountoftime.Unforeseenproblems,inadequatequalityonalreadycompletedwork,lackofattention,accidents,orpostponingthemostdifficult
workproblemstotheendcanallcontributetomakingthefinalportionofanactivityactuallyrequirefarmoretimeandeffortthanexpected.Thenetresultisthat
estimatesoftheactualproportionofworkcompletedareofteninaccurate.

Someinaccuracyinreportsandestimatescanarisefromconsciouschoicesmadebyworkers,foremenormanagers.Ifthevalueofinsuringaccuracyisthoughttobe
lowornonexistent,thenarationalworkerwillnotexpendeffortortimetogatherortoreportinformationaccurately.Manyprojectschedulingsystemsflounderon
exactlythistypeofnonreportingormisreporting.Theoriginalschedulecanquicklybecomeextremelymisleadingwithoutaccurateupdating!Onlyifallparties
concernedhavespecificmandatesorincentivestoreportaccuratelywillthedatabereliable.
Anothersourceofinaccuracycomesfromtranscriptionerrorsofvarioussorts.Typographicalerrors,incorrectmeasurementsfromreadingequipment,orother
recordingandcalculationerrorsmaycreepintothesetsofinformationwhichareusedinprojectmanagement.Despiteintensiveeffortstocheckandeliminatesuch
errors,theircompleteeradicationisvirtuallyimpossible.
Onemethodofindicatingtherelativeaccuracyofnumericaldataistoreportrangesorexpecteddeviationsofanestimateormeasurement.Forexample,a
measurementmightbereportedas198ft.+2ft.Therearetwocommoninterpretationsofthesedeviations.First,arange(suchas+2)mightbechosensothatthe
actualvalueiscertaintobewithintheindicatedrange.Inthecaseabove,theactuallengthwouldbesomewherebetween196and200feetwiththisconvention.
Alternatively,thisdeviationmightindicatethetypicalrangeoftheestimateormeasurement.Inthiscase,theexampleabovemightimplythatthereis,say,atwo
thirdschancethattheactuallengthisbetween196and200.
Whentheabsoluterangeofaquantityisverylargeorunknown,theuseofastatisticalstandarddeviationasameasureofuncertaintymaybeuseful.Ifaquantityis
measuredntimesresultingisasetofvaluesxi(i=1,2,...,n),thentheaverageormeanvaluethentheaverageormeanvalueisgivenby:

(14.1)

Thestandarddeviation

canbeestimatedasthesquarerootsofthesamplevariances2,i.e.

,where:

(14.2)

Thestandarddeviation isadirectindicatorofthespreadorvariabilityinameasurement,inthesameunitsasthemeasurementitself.Highervaluesofthe
standarddeviationindicategreaterandgreateruncertaintyabouttheexactvalueofthemeasurement.Forthecommonlyencounterednormaldistributionofarandom
variable,theaveragevalueplusorminusonestandarddeviation, + ,willincludeabouttwothirdsofxtheactualoccurrences.Arelatedmeasureofrandom
variabilityisthecoefficientofvariation,definedastheratioofthestandarddeviationtothemean:
(14.3)
Thus,acoefficientofvariationindicatesthevariabilityasaproportionoftheexpectedvalue.Acoefficientofvariationequaltoone(c=1)representssubstantial
uncertainty,whereasavaluesuchasc=0.1ortenpercentindicatesmuchsmallervariability.
Moregenerally,eveninformationwhichisgatheredandreportedcorrectlymaybeinterpretedincorrectly.Whiletheactualinformationmightbecorrectwithinthe
termsofthedatagatheringandrecordingsystem,itmaybequitemisleadingformanagerialpurposes.Afewexamplescanillustratetheproblemswhichmayarisein
naivelyinterpretingrecordedinformationwithoutinvolvinganyconceptualunderstandingofhowtheinformationisactuallygathered,storedandrecordedorhow
workontheprojectactuallyproceeds.
Example141:SourcesofDelayandCostAccounts
Itiscommoninconstructionactivityinformationtomakedetailedrecordsofcostsincurredandworkprogress.Itislesscommontokeepdetailed
recordsofdelaysandtheircauses,eventhoughthesedelaysmaybetheactualcauseofincreasedcostsandlowerproductivity.[1]Payingexclusive
attentiontocostaccountsinsuchsituationsmaybemisleading.Forexample,supposethattheaccountsforequipmentandmaterialinventoriesshow
costsavingsrelativetooriginalestimates,whereasthecostsassociatedwithparticularconstructionactivitiesshowhigherthanestimatedexpenditures.
Inthissituation,itisnotnecessarilythecasethattheinventoryfunctionisperformingwell,whereasthefieldworkersarethecauseofcostoverrun
problems.Itmaybethatconstructionactivitiesaredelayedbylackofequipmentormaterials,thuscausingcostincreases.Keepingalargerinventoryof
materialsandequipmentmightincreasetheinventoryaccounttotals,butleadtoloweroverallcostsontheproject.Betteryet,morecloselymatching
demandsandsuppliesmightreducedelaycostswithoutconcurrentinventorycostincreases.Thus,simplyexaminingcostaccountinformationmaynot
leadtoacorrectdiagnosisofaproblemortothecorrectmanagerialresponses.
Example142:InterestCharges
Financialorinterestchargesareusuallyaccumulatedinaseparateaccountforprojects,whiletheaccountsassociatedwithparticularactivitiesrepresent
actualexpenditures.Forexample,planningactivitiesmightcost$10,000forasmallprojectduringthefirstyearofatwoyearproject.Sincedollar
expenditureshaveatimevalue,this$10,000costinyear1isnotequivalentinvaluetoa$10,000costinyear2.Inparticular,financingtheearly
$10,000involvespaymentofinterestor,similarly,thelossofinvestmentopportunities.Iftheborrowingratewas10%,thenfinancingthefirstyear
$10,000expenditurewouldrequire$10,000x0.10=$1,000andthevalueoftheexpenditurebytheendofthesecondyearoftheprojectwouldbe
$11,000.Thus,someportionoftheoverallinterestchargesrepresentsacostassociatedwithplanningactivities.Recognizingthetruevalueof
expendituresmadeatdifferentperiodsoftimeisanimportantelementindevisingrationalplanningandmanagementstrategies.
Backtotop

14.3ComputerizedOrganizationandUseofInformation
Numerousformalmethodsandpossibleorganizationsexistfortheinformationrequiredforprojectmanagement.Beforediscussingthedetailsofcomputationsand
informationrepresentation,itwillbeusefultodescribearecordkeepingimplementation,includingsomeofthepracticalconcernsindesignandimplementation.In
thissection,weshalldescribeacomputerbasedsystemtoprovideconstructionyardandwarehousemanagementinformationfromthepointofviewofthesystem
users.[2]Intheprocess,theusefulnessofcomputerizeddatabasescanbeillustrated.
Ayardorwarehouseisusedbymostconstructionfirmstostoreequipmentandtoprovideaninventoryofmaterialsandpartsneededforprojects.Largefirmsmay
haveseveralwarehousesatdifferentlocationssoastoreducetransittimebetweenprojectsitesandmaterialssupplies.Inaddition,local"yards"or"equipment
sheds"arecommonlyprovidedonthejobsite.Examplesofequipmentinayardwouldbedrills,saws,officetrailers,graders,backhoes,concretepumpsandcranes.
Materialitemsmightincludenails,plywood,wiremesh,forminglumber,etc.
Intypicalconstructionwarehouses,writtenrecordsarekeptbywarehouseclerkstorecordtransferorreturnofequipmenttojobsites,dispatchofmaterialtojobs,
andmaintenancehistoriesofparticularpiecesofequipment.Inturn,theserecordsareusedasthebasisforbillingprojectsfortheuseofequipmentandmaterials.
Forexample,adailychargewouldbemadetoaprojectforusingaconcretepump.Duringthecourseofamonth,theconcretepumpmightspendseveraldaysat

differentjobsites,soeachprojectwouldbechargedforitsuse.Therecordkeepingsystemisalsousedtomonitormaterialsandequipmentmovementsbetweensites
sothatequipmentcanbelocated.
Onecommonmechanismtoorganizerecordkeepingistofilloutcardsrecordingthetransferofitemstoorfromajobsite.Table141illustratesonepossible
transferrecord.Inthiscase,sevenitemswererequestedfortheCarnegieMellonjobsite(projectnumber831557).Thesesevenitemswouldbeloadedonadelivery
truck,alongwithacopyofthetransferrecord.ShowninTable141isacodenumberidentifyingeachitem(0609.02,0609.03,etc.),thequantityofeachitem
requested,anitemdescriptionandaunitprice.Forequipmentitems,anequipmentnumberidentifyingtheindividualpieceofequipmentusedisalsorecorded,such
asgrinderNo.4517inTable141aunitpriceisnotspecifiedforequipmentbutadailyrentalchargemightbeimposed.
TABLE141IllustrationofaConstructionWarehouseTransferRecord
TRANSFERSHEETNUMBER100311
DeliverTo:CarnegieMellon
ReceivedFrom:PittsburghWarehouse
ITEMNO.
0609.02
0609.03
0188.21
0996.01
0607.03
0172.00
0181.53

EQ.NO.

4517

Preparer:Vicki

QTY
200
200
1
3
4
1
1

Job.No.831557
JobNo.99PITT

DESCRIPTION
HiltiPinsNK27
HiltiPinsNK27
Kiel,Boxof12
Paint,Spray
Plywood,4x8x1/4"
Grinder
GrindingWheel,6"Cup

UNITPRICE
$0.36
0.36
6.53
5.57
11.62
14.97

Date:x/xx/xx

Transfersheetsarenumbered(suchasNo.100311inTable141),datedandtheprepareridentifiedtofacilitatecontroloftherecordkeepingprocess.Duringthe
courseofamonth,numeroustransferrecordsofthistypeareaccumulated.Attheendofamonth,eachofthetransferrecordsisexaminedtocompilethevarious
itemsorequipmentusedataprojectandtheappropriatecharges.Constructingthesebillswouldbeatediousmanualtask.Equipmentmovementswouldhavetobe
trackedindividually,daysateachsitecounted,andthedailychargeaccumulatedforeachproject.Forexample,Table141recordsthetransferofgrinderNo.4517to
ajobsite.Thisprojectwouldbechargedadailyrentalrateuntilthegrinderwasreturned.Hundredsorthousandsofindividualitemtransferswouldhavetobe
examined,andtheprocessofpreparingbillscouldeasilyrequireaweekortwoofeffort.
Inadditiontogeneratingbillinginformation,avarietyofreportswouldbeusefulintheprocessofmanagingacompany'sequipmentandindividualprojects.Records
ofthehistoryofuseofparticularpiecesofequipmentareusefulforplanningmaintenanceanddecidingonthesaleorscrappingofequipment.Reportsonthe
cumulativeamountofmaterialsandequipmentdeliveredtoajobsitewouldbeofobviousbenefittoprojectmanagers.Compositereportsontheamount,location,
anduseofpiecesofequipmentofparticulartypesarealsousefulinmakingdecisionsaboutthepurchaseofnewequipment,inventorycontrol,orforproject
planning.Unfortunately,producingeachofthesereportsrequiresmanuallysiftingthroughalargenumberoftransfercards.Alternatively,recordkeepingforthese
specificprojectscouldhavetoproceedbykeepingmultiplerecordsofthesameinformation.Forexample,equipmenttransfersmightberecordedon(1)afilefora
particularpieceofequipmentand(2)afileforaparticularproject,inadditiontothebasictransferformillustratedinTable141.Evenwiththeseredundantrecords,
producingthevariousdesiredreportswouldbetimeconsuming.
Organizingthisinventoryinformationinacomputerprogramisapracticalanddesirableinnovation.Inadditiontospeedingupbilling(andtherebyreducing
borrowingcosts),applicationprogramscanreadilyprovidevariousreportsorviewsofthebasicinventoryinformationdescribedabove.Informationcanbeentered
directlytothecomputerprogramasneeded.Forexample,thetransferrecordshowninTable141isbaseduponaninputscreentoacomputerprogramwhich,in
turn,hadbeendesignedtoduplicatethemanualformusedpriortocomputerization.Useofthecomputeralsoallowssomeinteractiveaidsinpreparingthetransfer
form.Thistypeofaidfollowsasimplerule:"Don'tmaketheuserprovideinformationthatthesystemalreadyknows."[3]InusingtheformshowninTable141,a
clerkneedonlyenterthecodeandquantityforanitemtheverbaldescriptionandunitcostoftheitemthenappearautomatically.Acopyofthetransferformcanbe
printedlocally,whilethedataisstoredinthecomputerforsubsequentprocessing.Asaresult,preparingtransferformsandrecordkeepingarerapidlyandeffectively
performed.
Moredramatically,thecomputerizedinformationallowswarehousepersonnelbothtoaskquestionsaboutequipmentmanagementandtoreadilygeneratethe
requisitedataforansweringsuchquestions.Therecordsoftransferscanbereadilyprocessedbycomputerprogramstodevelopbillsandotherreports.Forexample,
proposalstopurchasenewpiecesofequipmentcanberapidlyandcriticallyreviewedaftersummarizingtheactualusageofexistingequipment.Ultimately,good
organizationofinformationwilltypicallyleadtothedesiretostorenewtypesofdataandtoprovidenewviewsofthisinformationasstandardmanagerialtools.
Ofcourse,implementinganinformationsystemsuchasthewarehouseinventorydatabaserequiresconsiderablecaretoinsurethattheresultingprogramiscapable
ofaccomplishingthedesiredtask.Inthewarehouseinventorysystem,avarietyofdetailsarerequiredtomakethecomputerizedsystemanacceptablealternativetoa
longstandingmanualrecordkeepingprocedure.Copingwiththesedetailsmakesabigdifferenceinthesystem'susefulness.Forexample,changestothestatusof
equipmentaregenerallymadebyrecordingtransfersasillustratedinTable141.However,afewstatuschangesarenotaccomplishedbyphysicalmovement.One
exampleisachargeforairconditioninginfieldtrailers:eventhoughtheairconditionersmaybeleftinthefield,theconstructionprojectshouldnotbechargedfor
theairconditionerafterithasbeenturnedoffduringthecoldweathermonths.Aspecialstatuschangereportmayberequiredforsuchdetails.Otherdetailsofrecord
keepingrequiresimilarspecialcontrols.
Evenwithacapableprogram,simplicityofdesignforusersisacriticalfactoraffectingthesuccessfulimplementationofasystem.Inthewarehouseinventory
systemdescribedabove,inputformsandinitialreportsweredesignedtoduplicatetheexistingmanual,paperbasedrecords.Asaresult,warehouseclerkscould
readilyunderstandwhatinformationwasrequiredanditsultimateuse.AgoodruletofollowisthePrincipleofLeastAstonishment:makecommunicationswith
usersasconsistentandpredictableaspossibleindesigningprograms.
Finally,flexibilityofsystemsforchangesisanimportantdesignandimplementationconcern.Newreportsorviewsofthedataisacommonrequirementasthe
systemisused.Forexample,theintroductionofanewaccountingsystemwouldrequirechangesinthecommunicationsprocedurefromthewarehouseinventory
systemtorecordchangesandothercostitems.
Insum,computerizingthewarehouseinventorysystemcouldsaveconsiderablelabor,speedupbilling,andfacilitatebettermanagementcontrol.Againstthese
advantagesmustbeplacedthecostofintroducingcomputerhardwareandsoftwareinthewarehouse.
Backtotop

14.4OrganizingInformationinDatabases
Giventhebulkofinformationassociatedwithconstructionprojects,formalorganizationoftheinformationisessentialsoastoavoidchaos.Virtuallyallmajorfirms
inthearenaofprojectmanagementhavecomputerbasedorganizationofcostaccountsandotherdata.Withtheadventofmicrocomputerdatabasemanagers,itis
possibletodevelopformal,computerizeddatabasesforevensmallorganizationsandprojects.Inthissection,wewilldiscussthecharacteristicsofsuchformal
databases.Equivalentorganizationofinformationformanualmanipulationispossiblebuttedious.Computerbasedinformationsystemsalsohavethesignificant

advantageofrapidretrievalforimmediateuseand,inmostinstances,loweroverallcosts.Forexample,computerizedspecificationswritingsystemshaveresultedin
welldocumentedsavings.Thesesystemshaverecordsofcommonspecificationphrasesorparagraphswhichcanbetailoredtospecificprojectapplications.[4]
Formally,adatabaseisacollectionofstoredoperationalinformationusedbythemanagementandapplicationsystemsofsomeparticularenterprise.[5]Thisstored
informationhasexplicitassociationsorrelationshipsdependinguponthecontentanddefinitionofthestoreddata,andtheseassociationsmaythemselvesbe
consideredtobepartofthedatabase.Figure141illustratessomeofthetypicalelementsofadatabase.Theinternalmodelistheactuallocationandrepresentation
ofthestoreddata.Atsomelevelofdetail,itconsistsofthestringsof"bits"whicharestoredinacomputer'smemory,onthetracksofarecordingdisk,onatape,or
onsomeotherstoragedevice.

Figure141IllustrationofaDatabaseManagementSystemArchitecture

AmanagerneednotbeconcernedwiththedetailsofdatastoragesincethisinternalrepresentationandmanipulationisregulatedbytheDatabaseManagerProgram
(DBM).TheDBMisthesoftwareprogramthatdirectsthestorage,maintenance,manipulationandretrievalofdata.Usersretrieveorstoredatabyissuingspecific
requeststotheDBM.TheobjectiveofintroducingaDBMistofreetheuserfromthedetailofexactlyhowdataarestoredandmanipulated.Atthesametime,many
differentuserswithawidevarietyofneedscanusethesamedatabasebycallingontheDBM.UsuallytheDBMwillbeavailabletoauserbymeansofaspecial
querylanguage.Forexample,amanagermightaskaDBMtoreportonallprojecttaskswhicharescheduledtobeunderwayonaparticulardate.Thedesirable
propertiesofaDBMincludetheabilitytoprovidetheuserwithreadyaccesstothestoreddataandtomaintaintheintegrityandsecurityofthedata.Numerous
commercialDBMexistwhichprovidethesecapabilitiesandcanbereadilyadoptedtoprojectmanagementapplications.
Whiletheactualstorageoftheinformationinadatabasewilldependupontheparticularmachineandstoragemediaemployed,aConceptualDataModelexists
whichprovidestheuserwithanideaorabstractrepresentationofthedataorganization.(Moreformally,theoverallconfigurationoftheinformationinthedatabase
iscalledtheconceptualschema.)Forexample,apieceofdatamightbeviewedasaparticularvaluewithinarecordofadatafile.Inthisconceptualmodel,adatafile
foranapplicationsystemconsistsofaseriesofrecordswithpredefinedvariableswithineachrecord.Arecordissimplyasequenceofvariablevalues,whichmay
betextcharactersornumerals.Thisdatafilemodelisoneoftheearliestandmostimportantdataorganizationstructures.Butotherviewsofdataorganizationexist
andcanbeexceedinglyuseful.Thenextsectiondescribesonesuchgeneralmodel,calledtherelationalmodel.
ContinuingwiththeelementsinFigure141,thedatadictionarycontainsthedefinitionsoftheinformationinthedatabase.Insomesystems,datadictionariesare
limitedtodescriptionsoftheitemsinthedatabase.Moregeneralsystemsemploythedatadictionaryastheinformationsourceforanythingdealingwiththedatabase
systems.Itdocumentsthedesignofthedatabase:whatdataarestored,howthedataisrelated,whataretheallowablevaluesfordataitems,etc.Thedatadictionary
mayalsocontainuserauthorizationsspecifyingwhomayhaveaccesstoparticularpiecesofinformation.Anotherimportantelementofthedatadictionaryisa
specificationofallowablerangesforpiecesofdatabyprohibitingtheinputoferroneousdata,theaccuracyofthedatabaseimproves.
Externalmodelsarethemeansbywhichtheusersviewthedatabase.Ofalltheinformationinthedatabase,oneparticularuser'sviewmaybejustasubsetofthe
total.Aparticularviewmayalsorequirespecifictranslationormanipulationoftheinformationinthedatabase.Forexample,theexternalmodelforapaycheck
writingprogrammightconsistsolelyofalistofemployeenamesandsalarytotals,eveniftheunderlyingdatabasewouldincludeemployeehoursandhourlypay
rates.Asfarasthatprogramisconcerned,nootherdataexistsinthedatabase.TheDBMprovidesameansoftranslatingparticularexternalmodelsorviewsintothe
overalldatamodel.Differentuserscanviewthedatainquitedistinctfashions,yetthedataitselfcanbecentrallystoredandneednotbecopiedseparatelyforeach
user.Externalmodelsprovidetheformatbywhichanyspecificinformationneededisretrieved.Database"users"canbehumanoperatorsorotherapplication
programssuchasthepaycheckwritingprogrammentionedabove.
Finally,theDatabaseAdministratorisanindividualorgroupchargedwiththemaintenanceanddesignofthedatabase,includingapprovingaccesstothestored
information.Theassignmentofthedatabaseadministratorshouldnotbetakenlightly.Especiallyinlargeorganizationswithmanyusers,thedatabaseadministrator
isvitaltothesuccessofthedatabasesystem.Forsmallprojects,thedatabaseadministratormightbeanassistantprojectmanageroreventheprojectmanager.
Backtotop

14.5RelationalModelofDatabases
Asanexampleofhowdatacanbeorganizedconceptually,weshalldescribetherelationaldatamodel.Inthisconceptualmodel,thedatainthedatabaseisviewedas
beingorganizedintoaseriesofrelationsortablesofdatawhichareassociatedinwaysdefinedinthedatadictionary.Arelationconsistsofrowsofdatawith
columnscontainingparticularattributes.Theterm"relational"derivesfromthemathematicaltheoryofrelationswhichprovidesatheoreticalframeworkforthistype

ofdatamodel.Here,theterms"relation"anddata"table"willbeusedinterchangeably.Table142definesonepossiblerelationtorecordunitcostdataassociated
withparticularactivities.Includedinthedatabasewouldbeonerow(ortuple)foreachofthevariousitemsinvolvedinconstructionorotherprojectactivities.The
unitcostinformationassociatedwitheachitemisthenstoredintheformoftherelationdefinedinTable142.
TABLE142IllustrationofaRelationDescription:UnitPriceInformationAttributes
AttributeName
AttributeDescription
AttributeType
Key
ITEM_CODE
DESCRIPTION
WORK_UNIT

ItemCodeNumber
ItemDescription
StandardUnitof
WorkfortheItem
CREW_CODE
StandardCrewCodeforActivity
OUTPUT
AverageProductivityofCrew
TIME_UNIT
StandardUnitofOUTPUT
MATL_UNIT_COST MaterialUnitCost
DATEMCOS
DateofMATL_UNIT_COST
INSTCOST
InstallationUnitCost
DATEICOS
DateofINSTCOST

PredefinedCode
Text
Text
(restrictedtoallowableunits)
PredefinedCode
Numerical
Text
Numerical
DateText
Numerical
DateText

Yes
No
No
No
No
No
No
No
No
No

UsingTable142,atypicalunitcostentryforanactivityinconstructionmightbe:
ITEM_CODE:04.266025
DESCRIPTION:commonbrickmasonry,12"thickwall,19.0bricksperS.F.
WORK_UNIT:1000bricks
CREW_CODE:04.23
OUTPUT:1.9
TIME_UNIT:Shift
MATL_UNIT_COST:124
DATEMCOS:June0979
INSTCOST:257
DATEICOS:August2379
Thisentrysummarizestheunitcostsassociatedwithconstructionof12"thickbrickmasonrywalls,asindicatedbytheitemDESCRIPTION.TheITEM_CODEisa
numericalcodeidentifyingaparticularactivity.Thiscodemightidentifygeneralcategoriesaswellinthiscase,04.2referstogeneralmasonrywork.ITEM_CODE
mightbebasedontheMASTERFORMATorothercodingscheme.TheCREW_CODEentryidentifiesthestandardcrewwhichwouldbeinvolvedintheactivity.
TheactualcompositionofthestandardcrewwouldbefoundinaCREWRELATIONundertheentry04.23,whichisthethirdstandardcrewinvolvedinmasonry
work(04.2).Thisabilitytopointtootherrelationsreducestheredundancyorduplicationofinformationinthedatabase.Inthiscase,standardcrewnumber04.23
mightbeusedfornumerousmasonryconstructiontasks,butthedefinitionofthiscrewneedonlyappearonce.
WORK_UNIT,OUTPUTandTIME_UNITsummarizetheexpectedoutputforthistaskwithastandardcrewanddefinethestandardunitofmeasurementforthe
item.Inthiscase,costsaregivenperthousandbrickspershift.Finally,material(MATL_UNIT_COST)andinstallation(INSTCOSTS)costsarerecordedalongwith
thedate(DATEMCOSandDATEICOS)atwhichthepriceswereavailableandenteredinthedatabase.Thedateofentryisusefultoinsurethatanyinflationincosts
canbeconsideredduringuseofthedata.
Thedatarecordedineachrowcouldbeobtainedbysurveyduringbidpreparations,frompastprojectexperienceorfromcommercialservices.Forexample,thedata
recordedintheTable142relationcouldbeobtainedasnationwideaveragesfromcommercialsources.
Anadvantageoftherelationaldatabasemodelisthatthenumberofattributesandrowsineachrelationcanbeexpandedasdesired.Forexample,amanagermight
wishtodividematerialcosts(MATL_UNIT_COST)intoattributesforspecificmaterialssuchascement,aggregateandotheringredientsofconcreteintheunitcost
relationdefinedinTable142.Asadditionalitemsaredefinedorneeded,theirassociateddatacanbeenteredinthedatabaseasanotherrow(ortuple)intheunitcost
relation.Also,newrelationscanbedefinedastheneedarises.Hence,therelationalmodelofdatabaseorganizationcanbequiteflexibleinapplication.Inpractice,
thisisacrucialadvantage.Applicationsystemscanbeexpectedtochangeradicallyovertime,andaflexiblesystemishighlydesirable.
Witharelationaldatabase,itisstraightforwardtoissuequeriesforparticulardataitemsortocombinedatafromdifferentrelations.Forexample,amanagermight
wishtoproduceareportofthecrewcompositionneededonasitetoaccomplishagivenlistoftasks.Assemblingthisreportwouldrequireaccessingtheunitprice
informationtofindthestandardcrewandthencombininginformationabouttheconstructionactivityoritem(eg.quantitydesired)withcrewinformation.However,
toeffectivelyaccomplishthistypeofmanipulationrequiresthedefinitionofa"key"ineachrelation.
InTable142,theITEMCODEprovidesauniqueidentifierorkeyforeachrow.NootherrowshouldhavethesameITEMCODEinanyonerelation.Havinga
uniquekeyreducestheredundancyofdata,sinceonlyonerowisincludedinthedatabaseforeachactivity.Italsoavoidserror.Forexample,supposeonequeried
thedatabasetofindthematerialcostenteredonaparticulardate.Thisresponsemightbemisleadingsincemorethanonematerialcostcouldhavebeenenteredon
thesamedate.Similarly,iftherearemultiplerowswiththesameITEMCODEvalue,thenaquerymightgiveerroneousresponsesifoneoftherowswasoutofdate.
Finally,eachrowhasonlyasingleentryforeachattribute.[6]
Theabilitytocombineorseparaterelationsintonewarrangementspermitsthedefinitionofalternativeviewsorexternalmodelsoftheinformation.Sincethereare
usuallyanumberofdifferentusersofdatabases,thiscanbeveryuseful.Forexample,thepayrolldivisionofanorganizationwouldnormallydesireaquitedifferent
organizationofinformationaboutemployeesthanwouldaprojectmanager.Byexplicitlydefiningthetypeandorganizationofinformationaparticularusergroupor
applicationrequires,aspecificvieworsubsetoftheentiredatabasecanbeconstructed.ThisorganizationisillustratedinFig.141withtheDATADICTIONARY
servingasatranslatorbetweentheexternaldatamodelsandthedatabasemanagementsystem.
Behindtheoperationsassociatedwithqueryingandmanipulatingrelationsisanexplicitalgebraictheory.Thisalgebradefinesthevariousoperationsthatcanbe
performedonrelations,suchasunion(consistingofallrowsbelongingtooneortheotheroftworelations),intersection(consistingofallrowsbelongingtobothof
tworelations),minus(consistingofallrowsbelongingtoonerelationandnotanother),orprojection(consistingofasubsetoftheattributesfromarelation).The
algebraicunderpinningsofrelationaldatabasespermitsrigorousdefinitionsandconfidencethatoperationswillbeaccomplishedinthedesiredfashion.[7]
Example143:ASubcontractorRelation
Asanillustrationoftheprecedingdiscussion,considertheproblemofdevelopingadatabaseofpossiblesubcontractorsforconstructionprojects.This
databasemightbedesiredbythecostestimationdepartmentofageneralcontractortoidentifysubcontractorstoasktobidonpartsofaproject.
Appropriatesubcontractorsappearinginthedatabasecouldbecontactedtopreparebidsforspecificprojects.Table143liststhevariousattributes
whichmightberequiredforsuchalistandanexampleentry,includingthesubcontractor'sname,contactperson,address,size(large,mediumorsmall),
andcapabilities.
TABLE143SubcontractorRelationExample
Attribute
Example

NAME
CONTACT
PHONE
STREET
CITY
STATE
ZIPCODE
SIZE
CONCRETE
ELECTRICAL
MASONRY
etc.

XYZElectricalCo.
BettyXYZ
(412)xxxxxxx
xxxMulberrySt.
Pittsburgh
PA
152xx
large
no
yes
no

Tousethisrelation,acostestimatormightbeinterestedinidentifyinglarge,electricalsubcontractorsinthedatabase.AquerytypedintotheDBMsuch
as:
SELECTfromSUBCONTRACTORS
whereSIZE=LargeandELECTRICAL=Yes
wouldresultintheselectionofalllargesubcontractorsperformingelectricalworkinthesubcontractor'srelation.Morespecifically,theestimatormight
wanttofindsubcontractorsinaparticularstate:
SELECTfromSUBCONTRACTORS
whereSIZE=LargeandELECTRICAL=YesandSTATE=VI.
Inadditiontoprovidingalistofthedesiredsubcontractors'namesandaddresses,autilityapplicationprogramcouldalsobewrittenwhichwouldprint
mailinglabelsfortheselectedfirms.
Otherportionsofthegeneralcontractingfirmmightalsowishtousethislist.Forexample,theaccountingdepartmentmightusethisrelationtorecord
theaddressesofsubcontractorsforpaymentofinvoices,therebyavoidingthenecessitytomaintainduplicatefiles.Inthiscase,theaccountingcode
numberassociatedwitheachsubcontractormightbeenteredasanadditionalattributeintherelation,andtheaccountingdepartmentcouldfindaddresses
directly.
Example144:HistoricalBridgeWorkRelation
Asanothersimpleexampleofadatatable,considertherelationshowninTable140whichmightrecordhistoricalexperiencewithdifferenttypesof
bridgesaccumulatedbyaparticularagency.TheactualinstancesorrowsofdatainTable144arehypothetical.Theattributesofthisrelationare:
PROJECTNUMBERa6digitcodeidentifyingtheparticularproject.
TYPEOFBRIDGEatextfielddescribingthebridgetype.(Forretrievalpurposes,anumericalcodemightalsobeusedtodescribebridgetype
toavoidanydifferencesinterminologytodescribesimilarbridges).
LOCATIONThelocationoftheproject.
CROSSINGWhatthebridgecrossesover,eg.ariver.
SITECONDITIONSAbriefdescriptionofthesitepeculiarities.
ERECTIONTIMETimerequiredtoerectabridge,inmonths.
SPANSpanofthebridgeinfeet.
DATEYearofbridgecompletion.
ACTUALESTIMATEDCOSTSDifferenceofactualfromestimatedcosts.
Theseattributescouldbeusedtoansweravarietyofquestionsconcerningconstructionexperienceusefulduringpreliminaryplanning.
ProjectNumber
169137
170145
197108

TypeofBridge
SteelPlateGirder
ConcreteArch
SteelTruss

Location
Altoona
Pittsburgh
Allentown

TABLE144ExampleofBridgeWorkRelation
Crossing
SiteConditions
ErectionTime(Months) Span(ft.) EstimatedlessActualCost
Railroad 200'ValleyLimestone
5
240
$50,000
River
250'HighSandyLoam
7
278
27,500
Highway 135'DeepPileFoundation
8
256
35,000

Asanexample,supposethatabridgeistobebuiltwithaspanof250feet,locatedinPittsburghPA,andcrossingariverwithlimestonesubstrata.In
initialorpreliminaryplanning,adesignermightquerythedatabasefourseparatetimesasfollows:
SELECTfromBRIDGEWORKwhereSPAN>200andSPAN<300andwhereCROSSING="river"
SELECTfromBRIDGEWORKwhereSPAN>200andSPAN<300andwhereSITECONDITIONS="Limestone"
SELECTfromBRIDGEWORKwhereTYPEOFBRIDGE="SteelPlateGirder"andLOCATION="PA"
SELECTfromBRIDGEWORKwhereSPAN<300andSPAN>200andESTIMATEDLESSACTUALCOST<100,000.
EachSELECToperationwouldyieldthebridgeexamplesinthedatabasewhichcorrespondstothedesiredselectioncriteria.Inpractice,aninput/output
interpreterprogramshouldbeavailabletotranslatetheseinquiriestoandfromtheDBMandanappropriateproblemorientedlanguage.
Thefourqueriesmayrepresentsubsequentthoughtsofadesignerfacedwiththeseproblemconditions.Heorshemayfirstask,"Whatexperiencehave
wehadwithbridgesofthisspanoverrivers?""Whatexperiencehavewehadwithbridgesofthisspanwiththesesiteconditions?Whatisour
experiencewithsteelgirderbridgesinPennsylvania?Forbridgesofthisspan,howmanyandwhichwereerectedwithoutasizablecostoverrun?We
couldposemanymorequestionsofthisgeneraltypeusingonlythesmalldatatableshowninTable144.
Backtotop

14.6OtherConceptualModelsofDatabases
Whiletherelationalmodeloffersaconsiderableamountofflexibilityandpreservesconsiderableefficiency,thereareseveralalternativemodelsfororganizing
databases,includingnetworkandhierarchicalmodels.Thehierarchicalmodelisatreestructureinwhichinformationisorganizedasbranchesandnodesfroma
particularbase.[8]Asanexample,Figure142illustratesahierarchicalstructureforrentedequipmentcosts.Inthiscase,eachpieceofequipmentbelongstoa
particularsupplierandhasacostwhichmightvarybythedurationofuse.Tofindthecostofaparticularpieceofequipmentfromaparticularsupplier,aquery
wouldfirstfindthesupplier,thenthepieceofequipmentandthentherelevantprice.

Thehierarchicalmodelhasthecharacteristicthateachitemhasasinglepredecessorandavariablenumberofsubordinatedataitems.Thisstructureisnaturalfor
manyapplications,suchastheequipmentcostinformationdescribedabove.However,itmightbenecessarytoconstructsimilarhierarchiesforeachprojecttorecord
theequipmentusedorforeachpieceofequipmenttorecordpossiblesuppliers.Otherwise,generatingtheselistsofassignmentsfromthedatabaseillustratedin
Figure142wouldbedifficult.Forexample,findingtheleastexpensivesupplierofacranemightinvolvesearchingeverysupplierandeveryequipmentnodeinthe
databasetofindallcraneprices.

Figure142HierarchicalDataOrganization

Thenetworkmodelordatabaseorganizationretainstheorganizationofinformationonbranchesandnodes,butdoesnotrequireatreeofstructuresuchastheonein
Figure142.[9]Thisgivesgreaterflexibilitybutdoesnotnecessarilyprovideeaseofaccesstoalldataitems.Forexample,Figure143showsaportionofanetwork
modeldatabaseforabuilding.Thestructuralmembershowninthefigureisrelatedtofouradjoiningmembers,dataonthejointsdesignedforeachend,anassembly
relatedtoaroom,andanaggregationforsimilarmemberstorecordmemberspecifications.

Figure143ExampleofaNetworkDataModel

Whiletheearly,largedatabaseswerebasedonthehierarchicalornetworkorganizations,therelationalmodelisnowpreferredinmanyapplicationsduetoits
flexibilityandconceptualsimplicity.RelationaldatabasesformthekernelforlargesystemssuchasORACLEorSAP.However,databasesdistributedamong
numerousserversmayhaveanetworkstructure(asinFigure143),withfullrelationaldatabasescontainedatoneormorenodes.Similarly,"datawarehouse"
organizationsmaycontainseveraldifferenttypesofdatabasesandinformationfiles.Forthesedatawarehouses,morecomplicatedsearchapproachesareessential,
suchasautomaticindexingofmultimediafilessuchasphotographs.
Morerecently,somenewformsoforganizeddatabaseshaveappeared,spurredinpartbyworkinartificialintelligence.Forexample,Figure144illustratesaframe
datastructureusedtorepresentabuildingdesignelement.Thisframedescribesthelocation,type,cost,material,scheduledworktime,etc.foraparticularconcrete
footing.Aframeisageneralpurposedatarepresentationschemeinwhichinformationisarrangedinslotswithinanamedframe.Slotsmaycontainlists,values,text,

proceduralstatements(suchascalculationrules),pointersorotherentities.Framescanbeinterconnectedsothatinformationmaybeinheritedbetweenslots.Figure
145illustratesasetofinterconnectedframesusedtodescribeabuildingdesignandconstructionplan.[10]Objectorienteddatarepresentationissimilarinthat
veryflexiblelocalarrangementsofdataarepermitted.Whilethesetypesofdatastorageorganizationsareactiveareasofresearch,commercialdatabasesystems
basedontheseorganizationsarenotyetavailable.

Figure144IllustrationofDataStoredinaFrame

Figure145IllustrationofaFrameBasedDataStorageHierarchy
Backtotop

14.7CentralizedDatabaseManagementSystems

Whicheverconceptualmodelordatabasemanagementsystemisadopted,theuseofacentraldatabasemanagementsystemhasanumberofadvantagesandsome
costscomparedtothecommonlyemployedspecialpurposedatafiles.Adatafileconsistsofasetofrecordsarrangedanddefinedforasingleapplicationsystem.
Relationalinformationbetweenitemsinarecordorbetweenrecordsisnotexplicitlydescribedoravailabletootherapplicationsystems.Forexample,afileof
projectactivitydurationsandscheduledtimesmightbeassembledandmanipulatedbyaprojectschedulingsystem.Thisdatafilewouldnotnecessarilybeavailable
totheaccountingsystemortocorporateplanners.
AcentralizedDBMhasseveraladvantagesoversuchstandalonesystems:[11]
Reducedredundancygoodplanningcanallowduplicateorsimilardatastoredindifferentfilesfordifferentapplicationstobecombinedandstoredonly
once.
ImprovedavailabilityinformationmaybemadeavailabletoanyapplicationprogramthroughtheuseoftheDBM
Reducedinconsistencyifthesamedataisstoredinmorethanoneplace,thenupdatinginoneplaceandnoteverywherecanleadtoinconsistenciesinthe
database.
Enforceddatasecurityauthorizationtouseinformationcanbecentralized.
Forthepurposeofprojectmanagement,theissueofimprovedavailabilityisparticularlyimportant.Mostapplicationprogramscreateandownparticulardatafilesin
thesensethatinformationisdifficulttoobtaindirectlyforotherapplications.Commonproblemsinattemptingtotransferdatabetweensuchspecialpurposefilesare
missingdataitems,unusableformats,andunknownformats.
Asanexample,supposethatthePurchasingDepartmentkeepsrecordsofequipmentrentalcostsoneachprojectunderway.Thisdataisarrangedsothatpaymentof
invoicescanbehandledexpeditiouslyandprojectaccountsareproperlydebited.Therecordsarearrangedbyindividualsuppliersforthispurpose.Theserecords
mightnotbeparticularlyusefulforthepurposeofpreparingcostestimatessince:
Somesuppliersmightnotexistinthehistoricalrecord.
Findingthelowestcostsupplierforparticularpiecesofequipmentwouldbeexceedinglytedioussinceeveryrecordwouldhavetobereadtofindthedesired
pieceofequipmentandthecost.
Nodirectwayofabstractingtheequipmentcodesandpricesmightexist.
Analternativearrangementmightbetoseparatelyrecordequipmentrentalcostsin(1)thePurchasingDepartmentRecords,(2)theCostEstimatingDivision,and(3)
theCompanywarehouse.Whilethesemultipledatabasesmighteachbedesignedfortheindividualuse,theyrepresentconsiderableredundancyandcouldeasily
resultininconsistenciesaspriceschangeovertime.WithacentralDBM,desiredviewsforeachofthesethreeuserscouldbedevelopedfromasingledatabaseof
equipmentcosts.
Amanagerneednotconcludefromthisdiscussionthatinitiatingaformaldatabasewillbeapanacea.Lifeisneversosimple.Installingandmaintainingdatabasesis
acostlyandtimeconsumingendeavor.Asingledatabaseisparticularlyvulnerabletoequipmentfailure.Moreover,acentraldatabasesystemmaybesoexpensive
andcumbersomethatitbecomesineffectivewewilldiscusssomepossibilitiesfortransferringinformationbetweendatabasesinalatersection.Butlackofgood
informationandmanualinformationmanagementcanalsobeexpensive.
Onemightalsocontrasttheoperationofaformal,computerizeddatabasewiththatofamanualfilingsystem.Fortheequipmentsupplierexamplecitedabove,an
experiencedpurchasingclerkmightbeabletoimmediatelyfindthelowestcostsupplierofaparticularpieceofequipment.Makingthisidentificationmightwell
occurinspiteoftheformalorganizationoftherecordsbysupplierorganization.Theexperiencedclerkwillhavehis(orher)ownsubjective,conceptualmodelofthe
availableinformation.Thissubjectivemodelcanberemarkablypowerful.Unfortunately,themassofinformationrequired,thecontinuingintroductionofnew
employees,andtheneedforconsistencyonlargeprojectsmakesuchmanualsystemslesseffectiveandreliable.
Backtotop

14.8DatabasesandApplicationsPrograms
Theusefulnessofadatabaseorganizationisparticularlyevidentinintegrateddesignormanagementenvironments.Inthesesystems,numerousapplications
programsshareacommonstoreofinformation.Dataisdrawnfromthecentraldatabaseasneededbyindividualprograms.Informationrequestsaretypically
performedbyincludingpredefinedfunctioncallstothedatabasemanagementsystemwithinanapplicationprogram.Resultsfromoneprogramarestoredinthe
databaseandcanbeusedbysubsequentprogramswithoutspecializedtranslationroutines.Additionally,auserinterfaceusuallyexistsbywhichaprojectmanager
candirectlymakequeriestothedatabase.Figure146illustratestheroleofanintegrateddatabaseinthisregardasthecentraldatastore.

Figure146IllustrationofanIntegratedApplicationsSystem

Anarchitecturalsystemfordesigncanprovideanexampleofanintegratedsystem.[12]First,adatabasecanservetheroleofstoringalibraryofinformationon
standardarchitecturalfeaturesandcomponentproperties.Thesestandardcomponentscanbecalledfromthedatabaselibraryandintroducedintoanewdesign.The
databasecanalsostorethedescriptionofanewdesign,suchasthenumber,typeandlocationofindividualbuildingcomponents.Thedesignitselfcanbecomposed
usinganinteractivegraphicsprogram.Thisprogramwouldhavethecapabilitytostoreanewormodifieddesigninthedatabase.Agraphicsprogramtypicallyhas
thecapabilitytocomposenumerous,twoorthreedimensionalviewsofadesign,tointroduceshading(torepresentshadowsandprovidegreaterrealismtoa
perspective),andtoallowediting(includingmoving,replicating,orsizingindividualcomponents).Onceadesigniscompletedanditsdescriptionstoredina
database,numerousanalysisprogramscanbeapplied,suchas:
structuralanalysis,
daylightcontourprogramstoproduceplotsofavailabledaylightineachroom,
aheatlosscomputationprogram

area,volumeandmaterialsquantitiescalculations.
Productioninformationcanalsobeobtainedfromtheintegratedsystem,suchas:
dimensionedplans,sectionsandelevations,
componentspecifications,
constructiondetailspecifications,
electricallayout,
systemisometricdrawings,
billsofquantitiesandmaterials.
Theadvantageofanintegratedsystemofthissortisthateachprogramneedonlybedesignedtocommunicatewithasingledatabase.Accomplishingappropriate
transformationsofdatabetweeneachpairofprogramswouldbemuchmoredifficult.Moreover,asnewapplicationsarerequired,theycanbeaddedintoan
integratedsystemwithoutextensivemodificationstoexistingprograms.Forexample,alibraryofspecificationslanguageoraprogramforjointdesignmightbe
includedinthedesignsystemdescribedabove.Similarly,aconstructionplanningandcostestimatingsystemmightalsobeadded.
Theuseofintegratedsystemswithopenaccesstoadatabaseisnotcommonforconstructionactivitiesatthecurrenttime.Typically,commercialsystemshavea
closedarchitecturewithsimpledatafilesora"captive,"inaccessibledatabasemanagementsystem.However,thebenefitsofanopenarchitecturewithanaccessible
databaseareconsiderableasnewprogramsandrequirementsbecomeavailableovertime.
Example145:AnIntegratedSystemDesign
Asanexample,Figure147illustratesthecomputeraidedengineering(CAE)systemenvisionedfortheknowledgeandinformationintensive
constructionindustryofthefuture.[13]Inthissystem,comprehensiveengineeringand"business"databasessupportdifferentfunctionsthroughoutthe
lifetimeofaproject.Theconstructionphaseitselfincludesoverlappingdesignandconstructionfunctions.Duringthisconstructionphase,computer
aideddesign(CAD)andcomputeraidedmanufacturing(CAM)aidsareavailabletotheprojectmanager.Databasesrecordingthe"asbuilt"geometry
andspecificationsofafacilityaswellasthesubsequenthistorycanbeparticularlyusefulduringtheuseandmaintenancelifecyclephaseofthefacility.
Aschangesorrepairsareneeded,plansforthefacilitycanbeaccessedfromthedatabase.

Figure147ComputerAidedEngineeringintheConstructionIndustry
(ReprintedwithpermissionfromfromY.OhaskiandM.Mukimo,"ComputerAidedEngineering
intheConstructionIndustry,"EngineeringwithComputers,Vol.1,no.2,1985.
Backtotop

14.9InformationTransferandFlow
Theprevioussectionsoutlinedthecharacteristicsofacomputerizeddatabase.Inanoverabundanceofoptimismorenthusiasm,itmightbetemptingtoconcludethat
allinformationpertainingtoaprojectmightbestoredinasingledatabase.Thishasneverbeenachievedandisbothunlikelytooccurandundesirableinitself.
Amongthedifficultiesofsuchexcessivecentralizationare:
Existenceofmultiplefirmsoragenciesinvolvedinanyproject.Eachorganizationmustretainitsownrecordsofactivities,whetherornotother
informationiscentralized.Geographicdispersionofworkevenwithinthesamefirmcanalsobeadvantageous.Withdesignofficesaroundtheglobe,fasttrack
projectscanhaveworkunderwaybydifferentoffices24hoursaday.
Advantagesofdistributedprocessing.Currentcomputertechnologysuggeststhatusinganumberofcomputersatthevariouspointsthatworkisperformed
ismorecosteffectivethanusingasingle,centralizedmainframecomputer.Personalcomputersnotonlyhavecostandaccessadvantages,theyalsoprovidea
degreeofdesiredredundancyandincreasedreliability.
Dynamicchangesininformationneeds.Asaprojectevolves,thelevelofdetailandthetypesofinformationrequiredwillvarygreatly.
Databasediseconomiesofscale.Asanydatabasegetslarger,itbecomeslessandlessefficienttofinddesiredinformation.

Incompatibleuserperspectives.Definingasingledataorganizationinvolvestradeoffsbetweendifferentgroupsofusersandapplicationsystems.Agood
organizationforonegroupmaybepoorforanother.
Inadditiontotheseproblems,therewillalwaysbeasetofuntidyinformationwhichcannotbeeasilydefinedorformalizedtotheextentnecessaryforstorageina
database.
Whileasingledatabasemaybeundesirable,itisalsoapparentthatitisdesirabletostructureindependentapplicationsystemsordatabasessothatmeasurement
informationneedonlybemanuallyrecordedonceandcommunicationbetweenthedatabasemightexist.Considerthefollowingexamplesillustratingthedesirability
ofcommunicationbetweenindependentapplicationsystemsordatabases.Whilesomeprogresshasoccurred,thelevelofintegrationandexistingmechanismsfor
informationflowinprojectmanagementisfairlyprimitive.Byandlarge,informationflowreliesprimarilyontalking,writtentextsofreportsandspecificationsand
drawings.
Example146:TimeCards
Timecardinformationoflaborisusedtodeterminetheamountwhichemployeesaretobepaidandtoproviderecordsofworkperformedbyactivity.In
manyfirms,thesystemofpayrollaccountsandthedatabaseofprojectmanagementaccounts(i.e.,expenditurebyactivity)aremaintained
independently.Asaresult,theinformationavailablefromtimecardsisoftenrecordedtwiceinmutuallyincompatibleformats.Thisrepetitionincreases
costsandthepossibilityoftranscriptionerrors.Theuseofapreprocessorsystemtocheckforerrorsandinconsistenciesandtoformattheinformation
fromeachcardforthevarioussystemsinvolvedislikelytobeasignificantimprovement(Figure148).Alternatively,acommunicationsfacility
betweentwodatabasesofpayrollandprojectmanagementaccountsmightbedeveloped.

Figure148ApplicationofanInputPreprocessor

Example147:FinalCostEstimation,SchedulingandMonitoring
Manyfirmsmaintainessentiallyindependentsystemsforfinalcostestimationandprojectactivityschedulingandmonitoring.Asaresult,thedetailed
breakdownoftheprojectintospecificjobrelatedactivitiesmustbecompletelyredoneforschedulingandmonitoring.Byprovidingameansofrolling
overortransferringthefinalcostestimate,someofthisexpensiveandtimeconsumingplanningeffortcouldbeavoided.
Example148:DesignRepresentation
Inmanyareasofengineeringdesign,theuseofcomputeranalysistoolsappliedtofacilitymodelshasbecomeprevalentandremarkablyeffective.
However,thesecomputerbasedfacilitymodelsareoftenseparatelydevelopedorencodedbyeachfirminvolvedinthedesignprocess.Thus,the
architect,structuralengineer,mechanicalengineer,steelfabricator,constructionmanagerandothersmightallhaveseparatecomputerbased
representationsofafacility.Communicationbymeansofreproducedfacilityplansandprosespecificationsistraditionalamongthesegroups.While
transferofthisinformationinaformsuitablefordirectcomputerprocessingisdifficult,itoffersobviousadvantagesinavoidingrepetitionofwork,
delaysandtranscriptionerrors.AdefactostandardfortransferofgeometricinformationemergedwiththedominanceoftheAUTOCADdesignsystem
intheA/E/Cindustry.InformationtransferwasaccomplishedbycopyingAUTOCADfilesfromusertouser,includingusesonconstructionsitesto
visualizethedesign.Moreflexibleandextensivestandardsfordesigninformationtransferalsoexist,suchastheIndustryFoundationClasses(IFC)
standarddevelopedbytheInternationalAllianceforInteroperability(Seehttp://www.iaiinternational.org/iai_international/)andthe"FullyIntegrated
andAutomatedProjectProcesses"developedbyFIATECH(seehttp://www.fiatech.org/)
Backtotop

14.10References
1.Au,T.,C.HendricksonandA.Pasquale,"IntroductionofaRelationalDatabaseWithinaCostEstimatingSystem,"TransportationResearchRecord1050,pp.
5762,1986.
2.Bosserman,B.E.andM.E.Ford,"DevelopmentofComputerizedSpecifications,"ASCEJournalofConstructionEngineeringandManagement,Vol.110,No.
CO3,1984,pp.375384.
3.Date,C.J.,AnIntroductiontoDatabaseSystems,3rdEd.,AddisonWesley,1981.
4.Kim,W.,"RelationalDatabaseSystems,"ACMComputingSurveys,Vol.11,No.3,1979,pp.185211.
5.Mitchell,WilliamJ.,ComputerAidedArchitecturalDesign,VanNostrandReinholdCo.,NewYork,1977.
6.Vieceli,A.M.,"CommunicationandCodingofComputerizedConstructionProjectInformation,"UnpublishedMSThesis,DepartmentofCivilEngineering,
CarnegieMellonUniversity,Pittsburgh,PA,1984.
7.Wilkinson,R.W.,"ComputerizedSpecificationsonaSmallProject,"ASCEJournalofConstructionEngineeringandManagement,Vol.110,No.CO3,1984,
PP.337345.
8.Latimer,DewittandChrisHendrickson,DigitalArchivalofConstructionProjectInformation,ProceedingsoftheInternationalSymposiumonAutomation
andRoboticsforConstruction,2002."
Backtotop

14.11Problems
1.Supposewewishtodevelopadatabaseconsistingofcontractornames,addressesandparticularspecialtiesasinTable143.
Suggesttwohierarchicalorganizationsofthisdata.
Suggestanalternativerelationalorganizationforthisdata.
Whichorganizationwouldyourecommendforimplementationofadatabase?
2.SuggestfourreportswhichcouldbeobtainedfromthewarehouseinventorysystemdescribedinSection14.3anddescribewhateachreportmightbeusedfor
andbywhom.
3.Supposethatageneralcontractorwishedtokeepahistoricaldatabaseoftheresultsofbidcompetitions.Suggest(a)theinformationthatmightbestored,and
(b)apossibleorganizationofthisinformation.
4.ForyoursuggesteddatabasefromProblem3,implementaprototypesystemonaspreadsheetsoftwareprogram.
5.Describearelationaldatabasethatwouldbeusefulinstoringthebeginning,endingandallintermediatestagesforblockworldrobotmovementsasdescribed
inProblem6inChapter9.
6.Describearelationaldatabasethatwouldbeappropriateformaintainingactivityschedulinginformationduringprojectmonitoring.Beexplicitaboutwhat
relationswouldbedefined,theattributesineachrelation,andallowablerangesofvalues.
Backtotop

14.12Footnotes
1.SeeD.F.Rogge,"DelayReportingWithinCostAccountingSystem,"ASCEJournalofConstructionEngineeringandManagement,Vol.110,No.2,1984,pp.
289292.Back
2.ThesystemisbasedlooselyuponasuccessfulconstructionyardmanagementsystemoriginallyforMellonStuartCompany,Pittsburgh,PA.in1983.Theauthors
areindebtedtoA.Pasqualeforprovidingtheinformationandoperatingexperienceofthesystem.Back
3.AttributedtoR.LemonsinJ.Bentley"ProgrammingPearls,"CommunicationsoftheACM,Vol.28,No.9,1985,pp.896899.Back
4.SeeWilkinson,R.W."ComputerizedSpecificationsonaSmallProject,"ASCEJournalofConstructionEngineeringandManagement,Vol.110,No.CO3,1984,
pp.337345.Back
5.SeeC.J.Date,AnIntroductiontoDatabaseSystems,3rded.,AddisonWesleyPublishingCompany,Reading,MA,1981.Back
6.Thisisoneexampleofanormalizationinrelationaldatabases.Formoreformaldiscussionsofthenormalizationsofrelationaldatabasesandtheexplicitalgebra
whichcanbeusedonsuchrelations,seeDateopcit.Back
7.Foradiscussionofrelationalalgebra,seeE.F.Codd,"RelationalCompletenessofDataBaseSublanguages,"CourantComputerScienceSymposiaSeries,Vol.6,
PrenticeHall,l972.Back
8.SeeD.C.TrichritzisandF.H.Lochovsky,"HierarchicalDataBaseManagement,"ACMComputingSurveysVol.8,No.1,1976,pp.105123.Back
9.Foramoreextensivecomparison,seeA.S.Michaels,B.Mittman,andC.R.Carlson,"AComparisonofRelationalandCODASYLApproachestoDataBase
Management,"ACMComputingSurveys,Vol.8,No.1,1976,pp.125157.Back
10.Thisorganizationisusedforthecentraldatastoreinanintegratedbuildingdesignenvironment.SeeFenves,S.,U.Flemming,C.Hendrickson,M.Maher,andG.
Schmitt,"AnIntegratedSoftwareEnvironmentforBuildingDesignandConstruction,"Proc.oftheFifthASCEConferenceonComputinginCivilEngineering,
1987Back
11.Foradiscussion,seeD.R.RehakandL.A.Lopez,ComputerAidedEngineeringProblemsandProspects,CivilEngr.SystemsLab.,Univ.ofIllinois,Urbana,IL,
1981.Back
12.SeeW.J.Mitchell,ComputerAidedArchitecturalDesign,VanNostrandReinholdCo.,NewYork,1977.Back
13.ThisfigurewasadaptedfromY.OhsakiandM.Mikumo,"ComputeraidedEngineeringintheConstructionIndustry,"EngineeringwithComputers,vol.1,no.2,
1985,pp.87102.Back
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