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MANAGEMENT

Notes by
PROF. DR. LIAQAT ALI QURESHI
UET TAXILA

PROJECT

A project is a sequence of unique,


complex, and connected activities having
one goal or purpose and that must be
completed by a specific time, within
budget, and according to specification.

PROJECT
1- SEQUENCE OF ACTIVITIES

An activity is a defined piece of work.

A project comprises a number of activities that


must be completed in some specified order.

The sequencing is based on technical or best


practice requirements, not on management
privileges() .

It is better to think in terms of inputs and outputs.

The output of one activity or a number of activities


become the input to another activity or activities.

PROJECT

2- UNIQUE ACTIVITIES

It means that the project has never happened before and


will never happen again under the same conditions.

Something will always be different each time whenever


the activities that comprise the project are repeated.

Usually, this variation from time to time will be random in


nature e.g., a part is delayed, someone is sick, a power
failure occurs, and so on.

These are random events that we know will happen - but


when, how, and with what impact on the schedule, we
are not exactly sure.

It is these random variations that give rise to the


challenge for the project manager.

PROJECT
3- COMPLEX ACTIVITIES

The activities that comprise the project


are relatively complex. That is, they are
not simple, repetitive acts.
Rather they are new, and require special
skill
levels,
creative
input,
and
judgement to be done effectively.

PROJECT
4- CONNECTED ACTIVITIES

There is some order to the sequence in which the


activities that make up the project must be completed.
Connectedness follows from the fact that the output from
one activity is input to another.
Unconnected tasks do not form a project.
One example is the painting of interior rooms of a house.
Except for rather unusual situations, the rooms can be
painted in any order. So, painting the house is a collection
of tasks, not a project. We can take it as one activity of
another project.

PROJECT
5- ONE GOAL

Projects must have a single goal as compared to a


program, which can have many goals. Programs are
therefore a collection of projects that may have to be
completed in a specific order for the program to be
completed.

There will be situations where a project may be divided


into several subprojects, which are each projects in their
own right.

This may happen in very large or complex projects for


better management control.

The subprojects may be defined at the department,


division or geographic levels.

PROJECT
6- SPECIFIED TIME
Projects have a specified completion
date. This may be self-imposed by
management or externally specified (as
by the client).

PROJECT
7- WITHIN BUDGET
Projects also have resource limits
(people, money, machines, etc). While
these may be adjusted up or down by
management, they are considered fixed
resources by the project manager.
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PROJECT
8- ACCORDING TO SPECIFICATIONS

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These may be self-imposed or client-specified and are


fixed as far as the project manager is concerned.
There are any a number of factors that will cause the
specifications to change. For example, the client may not
have
defined
requirements
completely or
the
requirements may have changed (as happens in long
projects).
To expect the specifications to remain fixed through the
project is unrealistic.

DISTINCTION BETWEEN PROJECT AND PROGRAM

A program is different from a project.


Programs are larger in scope and
comprise multiple projects. For example,
a construction company contracts a
program to build an industrial zone which
comprise of construction of several
individual projects.
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PROJECT MANAGEMENT

Project management is a method and a


set of techniques based on the accepted
principles of management used for
planning, estimating, and controlling work
activities to reach a desired end result on
time within budget and according to
specifications.
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PHASES OF PROJECT MANAGEMENT


1- DEFINNG
One of the first tasks of managers is to define the work to be
done in their area of responsibility.
The following five questions are to be answered by any good
definition of a project:
1- What is the problem or opportunity being addressed ?
2- What is the goal of the project ?
3- What objects are necessary in order to accomplish the
goal ?
4- How will we determine if the project has been successful ?
5- Are there any assumptions, risks, or obstacles that
may
affect success ?

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PHASES OF PROJECT MANAGEMENT

14

The defining phase sets the scope of the project.


It will be basis for decisions as to whether a
particular function or feature is within the scope
of the project.
For a variety of reasons, the scope of the project
changes. We call these changes scope creep.
The project manager must respond to scope
creep by documenting the alternatives and
consequences of each that will result from the
change of scope.
A god project manager will have a formal change
management process in place.

PHASES OF PROJECT MANAGEMENT


2- PLANNING

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It is fact that project plan is indispensable. Not only is it a roadmap


to how the work will be done, but it is also a tool for decision
making.
A complete plan will clearly state that what is to be done, why it is
being done, who will do it, when it will be done, what resources will
be needed, and what criteria must be met in order for the project to
be declared complete and successful.
Planning reduces uncertainty. While we would never expect the
project work to occur exactly as planned, having planned the work
allows us to consider the likely outcome and to put the necessary
corrective actions in place.
Planning improves efficiency. The mere act of planning gives us a
better understanding of the goals and objectives of the project.

PHASES OF PROJECT MANAGEMENT


3- EXECUTING

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Executing the project plan involves a number of steps.


In addition to organizing people, it includes the
identification of the specific resources (manpower,
materials, and money etc) for carrying out the work
defined in the plan.
It also involves scheduling workers to activities, and
scheduling activities to start and end dates.
The final specification of the project schedule brings
together all of the variables associated with the
project.

PHASES OF PROJECT MANAGEMENT


4- CONTROLLING

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As part of the planning process, an initial schedule is


built.
No matter how attentive the team is to creating the plan,
the project work will not go according to plan. Schedule
will slip. That is the reality of the project management.
In any case, the project manager must have a system in
place to constantly monitor the project progress or lack
thereof.
This monitoring system will not only summarize
completed work measured against the plan, but will also
look ahead to forewarn of potential problems.

PHASES OF PROJECT MANAGEMENT


5- CLOSING

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The closing phase is very important but it tends to be the part that is
most often neglected by the management. There is always the
pressure to get on with the next project.
There are several questions that should be answered as part of any
closing:
1- Did the project do what the client said it would do ?
2- Did the project do what the project manager said it would do ?
3- Did the project team complete the project according to plan ?
4- What information was collected that will help with latter projects?
5- How well did the project management methodology work and how
well did the project team follow it ?
6- Closing therefore evaluates what was done and provides historical
information for latter projects.

PROJECT PARAMETERS
Scope,

Cost, Time, and Resources define a


system of four constraints that operate on
every project.
They are an interdependent set in the sense
that as one changes, it may cause us to
change others also so that equilibrium can be
restored to the system.
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COST

20

Throughout the project management life cycle, cost is a major


consideration.
The first consideration occurs at an early and informal stage in
the life of a project. The requesting client may simply offer a
cost figure about equal to what he had in mind for the project or
on the other hand, different bidders submit their cost offers to
do this job in their tenders.
In more formal situations, the project manager will prepare a
proposal for the work to be done. That proposal will include a
good estimate of the total cost of the project.
In case of tendering, the clients decision will be based on
better estimates of cost and time.

TIME
To

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a certain extent cost and time are trade-off


with one another.
The time can be reduced but cost will
increase as a result.
Time is an interesting resource. It can not be
inventoried. It is consumed whether we use it
or not.
For the project manager, the objective is to
use the time allotted to the project in the
most effective and productive ways possible.

RESOURCES

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Resources are means to complete activities.


Examples are labour, equipment, physical facilities,
funds, etc.
These are capital assets and that have limited
availabilities can be scheduled or can be leased from
an outside party.
Some are fixed; others are variable only in long term.
In any case, they are central to the scheduling of
project activities and the orderly completion of the
project.

THE SCOPE TRIANGLE

COST

TIME
SCOPE
AND
QUALITY
RESOURCES

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THE SCOPE TRIANGLE

24

Projects are dynamic systems and they must be kept in


equilibrium.
Above figure gives us a simple graphic which explains the
dynamics of the situation.
The scope and quality of the project are represented by the
geographic area inside the triangle, shown in the figure.
Bounding this area are time, cost, and resources.
Time is the window of the area within which the project must be
completed.
Cost is the budget available to complete the project.
Resources are any consumables used on the project. People,
equipment availability, facilities, and so on, are examples.

THE SCOPE TRIANGLE

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The project plan will have identified the time, cost, and
resources needed to deliver the scope and quality.
In other words, the project is in equilibrium at the completion
of the project-planning session and approval of the
commitment of resources and funds to the project.
That will not last too longer however. Changes may come
across at any stage.
The scope triangle offers a number of insights into changes
that can occur in the life of the project.
For example, before any project work has been done, the
triangle represents a system in balance. The sides are long
enough to encompass the area generated by the scope and
quality statements.

THE SCOPE TRIANGLE

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Not long after work commences, something is sure to change.


Perhaps the client asks to add a feature not included during
planning session, or due to certain reasons, the project is to be
handed over at an early date, or a key team member leaves the
company or expires and will be very difficult to replace. Any one
of these changes throws the system out of balance.
Referring to the triangle, note that the project manager controls
resource utilization and work schedules. Supervision controls
cost and resource level. The client controls scope, quality and
delivery dates.
This suggests a hierarchy for the project manager, who is
looking for solutions to accommodate changes.

CAUSES OF PROJECT FAILURE


There may be several causes of project failures. Knowing who the
enemy is gives us a competitive advantage. Projects that haveactually
failed, generally display several of the following characteristics:

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The clients conditions of satisfaction have not been negotiated.


The project no longer has a high priority.
No one seems to be in charge.
The schedule is too optimistic.
The project plan is not used to manage the project.
Sufficient resources have not been committed.
Project status is not monitored against the plan.
No formal communications plan is in place.
The project has lost sight of its original goals.
There is no change management process in place.

PROJECT MANAGER:
COMPETENCIES AND SKILLS

visible
SKILLS

COMPETENCIES
Hidden

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PROJECT MANAGER:
COMPETENCIES AND SKILLS

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There are two levels of characteristics that determine


success or failure as a project manager. These are skills
and competencies.
At the visible level are the skills that can be observed and
can be acquired through training. This is the easy part.
At the hidden level, there are competencies. We can see
them in practice but we can not measure them in the
sense of determining whether a particular person has
them and, if so, to what degree. They are traits that are
more difficult to develop through training. Some of them
may in fact be hereditary.

PROJECT MANAGER COMPETENCIES


(a) Business Achievement competencies
Business awareness.
Business partner orientation.
Commitment to quality

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(b) Problem Solving Competencies


Initiative.
Information gathering.
Analytic thinking
Conceptual thinking

PROJECT MANAGER COMPETENCIES

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(c) Influence competencies


Interpersonal awareness.
Organizational awareness.
Anticipation of impact.
Resourceful use of influence.
(d) People Management Competencies
Motivating others.
Communication skills.
Developing others.
Monitoring and Controlling.
(e) Self-Management Competencies
Self-confidence.
Stress management.
Concern for Credibility
Flexibility.

CHALLENGES FOR PROJECT MANAGER

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SCOPE CREEP
Changes occur for several reasons and those have
no relation with the ability or skill of the requestor
or the provider.
Market conditions are very dynamic.
Competition may demand a new version of their
product to be announced and introduced in the
market. So that market may be occupied.
The job of the project manager is to find out that
how it can be accomplished.

CHALLENGES FOR PROJECT MANAGER


HOPE CREEP

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This one is a major problem for the project manager.


There will be several activity managers within the project. These
are team members who manage different pieces of work.
They do not give the project manager any bad news, so they are
prone to tell him that their work is proceeding according to
schedule, when in fact it is not.
It is their hope that they will catch up by the next report period,
so they mislead him into thinking that they are on schedule.
Project manager should check the accuracy of their status
report.
However, in any case, they hope that they will catch up by
completing some work ahead of schedule to make up the
slippage.

CHALLENGES FOR PROJECT MANAGER


EFFORT CREEP
Everyone

works on a project that always


seems to be only 95% complete, no
matter, how much effort seems to be
expended to complete it.
Every
weeks status report records
progress but the amount remaining
doesnt seem to decrease proportionately.
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CHALLENGES FOR PROJECT MANAGER


FEATURE CREEP
This is the same as scope creep except it is
initiated by the provider (contractor /manufacturer)
not by the customer (client).
It occurs most frequently in systems development
projects.
Here, the programmer or analyst decides to include
a little extra because it will add sizzle to steak.
The customer did not asked for it, but they got it
anyway.

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CHALLENGES FOR PROJECT MANAGER


(FEATURE CREEP)

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However, it may create some inconvenience.


First, since the feature was not in the system requirements
documents, it is also not in the acceptance test procedure, the
systems documentation, the user documentation, and the user
training program.
What will happen, if something goes wrong with the new
option ? How will some other programmer know what to do?
what will happen, when the user discovers the option and asks
for some modification of it ?
So, it is recommended that a formal change request must be
filed and if approved, the project plan and all related activities
will be approximately modified.

PROJECT RISK VERSUS PROJECT VALUE

37

Two dimensions impact the project planning and


execution. These are Project Value and Project Risk.
By Project Value, we mean the value, the senior
management will place on the project you are proposing.
As project value changes, the priority that management is
willing to place on the project also changes.
The other dimension is risk. As risk increases, project
value will also have to increase, if management is to
approve your project for funding and support.
Now, we will look how these two dimensions interact with
one another. Figure below presents Risk/value project grid.

PROJECT RISK VERSUS PROJECT VALUE

PROJECT VALUE
Low
High
Low
1

PROJECT
RISK
High

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PROJECT RISK VERSUS PROJECT VALUE


1- Project value low Risk low

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Projects that fall into this category are the" nice to


have and not difficult to do projects.
They involve technologies that are stable and well
understood.
The project itself is not high on managements list of
importance to the business.
Such projects often deal with internal improvements to
existing systems rather than new developments.
In times of the budget constraints, these will often be
the first to go.
These are not the kind of projects that can make you a
hero but they sure can contribute to your downfall.

PROJECT RISK VERSUS PROJECT VALUE


2- Project value high Risk low

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These projects have great business values, as


perceived by senior managers.
Management will be paying close attention to
their progress.
The risk of failure is low because you are
working with established technology.
Project Managers will like to get these
assignments.

PROJECT RISK VERSUS PROJECT VALUE

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3- Project value low Risk high


These are not types of projects you want to have in
your portfolio.
They are high-risk and you will not have much
management support, if you run into difficulties.
In such cases, however, it is important to be very
careful in the planning stage.
High risk projects require much closer attention
than do low-risk projects and if project value is also
very high, then senior managements attention is
also more visible.

PROJECT RISK VERSUS PROJECT VALUE


4- Project value high Risk high

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These projects will become more prevalent as organization


look for any opportunity to establish competitive advantage
over their competition.
Strategic advantage often comes with the price of creative
and innovative use of newer technologies.
Being the first to market with a product or service using the
latest technologies, has the advantages that accrue to early
adopter.
For the project manager, the risk of project failure is much
higher than in other cases.
With the risk, comes the award too. There is a definite hero
strategy here for the stouthearted.

THE S-CURVE

S-curve

is time versus progress curve of


the project.
S-curve is another tool for helping us with
a conceptual understanding of the project.
There

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may be 3 possibilities.

1- Standard S-curve

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Standard S-curve
The

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S-curve models progress as well as


other quantities of interest against time.
Early in the life of a project, the team is
forming and learning to work together.
Once the team has stabilized, it can begin
to work more effectively and the curve
begins to accelerate rapidly.
Toward the end of the project, work activity
slows as the final touches are put on a
successful project.

2- Aggressive S-curve

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Aggressive S-curve

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In aggressive S-curve, the project plan is too


aggressive and the team is eager to get started.
Too much work is scheduled too earlier in the project
before the team has even formed or begun to function
as a team.
The danger here is that mistakes will occur, rework
will be required, and the progress slows below the
pace of the normal curve.
The only exception is the case, when the team has
been together for some time, worked on projects
together, and knows each others strengths and
weaknesses. In this case, one might seen aggressive
curve that sustains a high rate of progress over the
life of the project.

3- The curve to Avoid

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The curve to Avoid


Figure

shows a project in which little work


is accomplished early and the team puts
on a full-court press, as the deliverable
dates approach.

Too

often the project team cant get there


from here. Obviously, this is the curve to
avoid.

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SCIENTIFIC METHODS IN CONSTRUCTION


MANAGEMENT

This involves the use of modern technology, plan and


scientific methods of exercising control on all the
activities of the construction project. Main features of
this are:

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Proper planning designs and site investigation.


Use of scientific and mathematical instruments for
quality.
Training of skilled and supervisory staff for specific
jobs.
Use of CPM, PERT and bar charts for ensuring timely
execution of different elements

SCIENTIFIC METHODS IN CONSTRUCTION


MANAGEMENT

51

Use of work diaries for recording day-to-day progress and


output.
Use of logbooks to record consumption and output of plant,
equipment, machinery and vehicles.
Introduction of usage rates for purpose of debiting the
project in respect of the usage/hire charges of plants,
equipment and machinery.
Cost control study to check the performance of the project
as a whole.
Monthly expenditure return to check the position of
expenditure with reference to budgets allotment and
administrative approval.
Arranging periodical audit of the expenditure incurred headwise (store, machines, labor, supervising etc.)

CONSTRUCTION CATEGORIES

52

The field of construction is diversified as the uses


and forms of the many types of structures it
produces.
However, construction is divided in to four main
categories, although there is some overlap among
these divisions and certain projects dont fit nearly
in to any one of them.
The
four
main
divisions
i.e.,
Housing,
Nonresidential,
Engineering,
and
Industrial
constructions are described in the following
paragraphs.

CONSTRUCTION CATEGORIES
(a) HOUSING CONSTRUCTION

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Housing construction includes the buildings of single


family homes; multiunit town houses; low rise garden type
apartments; and high rise apartments.
The owner, architects, or the builders do design of this
construction type themselves.
This category of construction is dominated by small
building firms and normally accounts for about 30 to 35
percent of new construction during a typical year.
Historically, housing construction has been characterized
by instability of market demand and is strongly influenced
by governmental regulations and national monetary policy.
A large proportion of housing construction is privately
financed.

CONSTRUCTION CATEGORIES
(b) NON RESIDENTIAL CONSTRUCTION

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Non residential construction includes buildings


in the commonly understood sense, other than
housing, that are erected for educational, light
industrial,
commercial,
social,
religious,
governmental, and recreational purposes.
Prime contractors or construction managers
who subcontract substantial portions of the
work to specialty firms generally accomplish
the construction of this kind.

CONSTRUCTION CATEGORIES

55

(c) ENGINEERING CONSTRUCTION


Engineering construction is a very broad category
covering structures that are designed and planned by
engineers.
This category includes those structures whose design is
concerned more with functional considerations than
aesthetics and which involves field materials such as
earth, rock, steel, asphalt, concrete, timber and piping.
Most engineering construction projects are publicly
financed and account for approximately 20-25 percent of
the new construction market.
Engineering construction is commonly divided into three
sub groups: highway and airfield, heavy, and utility
construction.

CONSTRUCTION CATEGORIES
Highway and airfield construction covers clearing,
excavation, fill, aggregate production, sub base and
base, paving, drainage structures, bridges, traffic signs,
lighting systems, and other such items commonly
associated with this type of work.
Heavy construction includes sewage and water treatment
plants, dams, levees, pipe and pole lines, ports and
harbor structures, and railroads.
Utility construction involves mostly municipal work such as
sanitary and storm drains, street paving, waterlines,
electrical and telephone distribution facilities, drainage
structures, and pumping stations.

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CONSTRUCTION CATEGORIES
(d) INDUSTRIAL CONSTRUCTION

57

Industrial construction includes the erection of


projects that are associated with the manufacture
or production of a commercial product or service.

Such structures are highly technical in nature and


are frequently built by large, specialized
contracting firms that do both the design and field
construction.

CONSTRUCTION PLANNING

58

In general terms planning may be defined as


deciding in advance:
What is to be done?
How to be done?
When to be done?
By whom to be done?
Planning is the most important function of
management. No business enterprise can
achieve its objectives of increasing production
or reducing cost and improving the quality
without planning.

CONSTRUCTION PLANNING

59

Planning has been defined as the technique of


foreseeing ahead long series of operation so that
each step in the operation may be taken at the right
time in right degree and at right place.
According to Prof. Niles Planning is the
conscious process of selecting and developing the
best course of action to accomplish an object.
It is important to note that plan alone cannot
guarantee the success of an enterprise, action is
required to operate the enterprise on proper lines.

PLANNING STAGES

60

The process of planning can be divided into the


following three phases:
(a) PRE-TENDER PLANNING
(b) PRE-CONTRACT PLANNING
(c) CONTRACT PLANNING

To a certain extent each phase contains similar


activities, the difference being in the amount of
detail and accuracy required at each stage.

(a) PRE-TENDER PLANNING

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The time available for pre-tender planning may vary


between six and eight weeks, depending upon the type of
project.
While the contractor knows that he may not win the tender,
resources in terms of time and personnel must nonetheless
be made available to ensure that a competitive tender is
submitted.
The contractor depends upon a certain number of tenders
being successful in order to stay in business.
During this phase the contractor will decide on the
construction strategy and produce a pre-tender report.
To achieve this the planning teams just study the contract
documents and visit the site.

PRE-TENDER PLANNING (-ctd-)


The

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study of the contract documents


should highlight any discrepancies in the
document, any onerous or unusual
clauses in the contract, any special or
unusual construction details, and any
unusual item in the specification or Bill of
Quantities.
The visit to the site should reveal the
following details:

PRE-TENDER PLANNING (-ctd-)

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The exact location of the site


The access to the site
Details of services
Geography of the area
Local knowledge about the site
Local availability of labor
Local availability of material and plant
Local weather conditions
Whether any other construction work is commencing or
completing in the area
Condition and closeness of surrounding buildings.

PRE-TENDER PLANNING (-ctd-)


The

knowledge acquired from the desk


study of the contract documents and from
the site locality investigation is combined
with the method statement and used to
produce a pre-tender report.
This pre-tender report helps the contractor
to establish the risks involved in the
project. Adjustments can also be made to
the project cost and time estimates and so
allow a competitive tender to be submitted.
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PRE-TENDER PLANNING (-ctd-)

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CHECKLIST OF PRE-TENDER DOCUMENTS


Tender summary
Correspondence file
Site inspection report
Method statements
Outline construction program
Outline organization structure
Subcontractor lists
Suppliers quotations
Cost breakdown
List of site layout requirements
Health and safety plan.

(b) PRE-CONTRACT PLANNING

66

If the contractor is successful in obtaining the work the


process of pre-contract planning can commence.
During this second phase the initial method statements and
outline program are analyzed in detail with a view to
converting them into a working document which can be used
for monitoring and control purposes.
It is at this stage that the timing of activities is set, together
with a reappraisal of the sequencing of activities that was put
forward at pre-tender stage.
The mechanics for the awarding of contracts to the suppliers
and subcontractors is put in place, with the contractor seeking
to obtain better terms and conditions now that the works are
certain.

PRE-CONTRACT PLANNING (-ctd-)

67

A detailed site layout is prepared to show the


arrangement of site accommodation, material storage
and plant in a manner, which will enable the work to be
carried out effectively and efficiently.
The site organization structure should now be
formalized, naming the key site personnel and showing
the lines of reporting between people and groups
Site services such as water, electricity and telephone can
now be confirmed with the relevant bodies and
connection dates identified.
Materials that have long delivery periods may need firm
ordering at this stage even though the contract
commencement date may be some time away.

PRE-CONTRACT PLANNING (-ctd-)


Checklist of Pre-Contract Planning Documents

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Correspondence file
Subcontractors file
Suppliers file
Method statements
Site layout plan
Organization structure
Master construction program
Labor resource schedule
Material schedule
Plant Schedule
Health and safety plan.

(c) CONTRACT PLANNING

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This phase of the planning process takes place during the


construction period and involves planning processes that are
essentially short term.
The site manager must now break down the master program
into monthly and weekly sub-programs. Increasing amounts
of detail are now required to ensure that activities take place
at the correct time and in the correct sequence.
Up will be made of the method statements and programs to
allocate specific tasks to the labor force on a weekly or daily
basis. The site manager will issue daily allocation sheets that
will list the tasks to be undertaken.
An important aspect of the contract-planning phase is the
exercise of monitoring and control activities to ensure that
the project is running smoothly.

CONSTRUCTION METHODS
A

contractor must have a thorough


knowledge of construction methods in
order to plan and organize properly.
Only by knowing how the materials and
parts of a building are put together the
contractor can effectively sequence the
various
activities
involved
in
construction.
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CONTRACTUAL RESTRICTIONS
Restrictions

in the contract may affect the


planned
sequence
of
activities,
particularly if the project is to be
completed in phases, or if only certain
parts of the site are available at any one
time.
These contractual restrictions must be
allowed for in the planning.
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METHOD STATEMENT

72

During the pre-tender and pre-contract planning


phases the contractor will have produced a
method statement for the works. Because the
method statement is central to the planning
process it is described here as a special item:

A method statement is a comprehensive


description of the contractors approach to
carrying out the construction work.

METHOD STATEMENT

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A method statement usually includes the following


items:
The location of the site
The nature of the site
The contractors expertise for the type of work
The contractors intended time scales for the works
The intended order of the works
The amount and type of labor required
The amount and type of plant required
An assessment of the output for the various
activities

METHOD STATEMENT

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The layout and format of method statements can vary


from company to company. Some companies prefer to
list all the elements in a report format, while others like
to fill in a readymade form or Performa.
Whatever layout is used, the contractor must ensure that
all the activities or operations associated with the project
are included in the method statement.
The planner must use a systematic analysis of all
activities in order to produce the program of works.
The early method statement, at the pre-tender phase, will
include alternative methods for carrying out the activities
so as to allow choice. The later method statement, during
the pre contract stage, will have a more detailed analysis.

METHOD STATEMENT

75

The headings included in a typical method statement


comprise the following:
1- OPERATION
This represents a particular operation such as excavation
works, external walls or roof works. The operation or activity
usually consists of a single trade or parcel of work.
2- METHOD
This entails a detailed written description of the contractors
approach to the operation, how the stages of the operation
will be carried out and in what order.
3- QUANTITY
The amount of materials to be used in connection with the
operation will be included: for example, the quantity of bricks
required for the external walls or the amount of material
excavated from trenches during excavation work.

METHOD STATEMENT

76

4- PLANT
The type of plant and equipment to be used for the operation will be
listed here. Careful consideration will be given to the size, capacity
and usefulness of the plant for the operation.
5- LABOUR
The amount of labor required would be listed and the particular
trades identified for example, blacksmiths, plumbers, carpenter,
electrician and general laborer. This will help the production of the
labor schedules and histograms used later on in the planning
process.
6- SAFETY FEATURES
If specialist equipment or temporary works are needed they can be
noted here. The inclusion of this heading in the method statement will
focus the contractors mind on the safety aspect of each operation.
Even small items of safety equipment should be included, such as
personal protective equipment, as well as more specialist items like
breathing apparatus or temporary works that give protection to the
operatives.

METHOD STATEMENT

77

7- OUTPUT
An estimate of the rate of output, that is, the time
taken to carry out the activity, should be included
here. This estimate will help the estimator to build up
the tender figure as well as help the planner to carry
out detailed programming later on.
8- COMMENTS
Here the contractor will include any comments that
are pertinent to the operation. Comments may identify
which operations are subcontracted or if certain
materials or plant need to be ordered early owing to
their specialist nature. These comments will be of
particular use to the planner and site manager later on
in the contract.

DEPRECIATION

78

Depreciation is the time based decrease in


value of physical properties of different
assets like machinery, plant, house, etc.
The determination of its magnitude in
advance, is not easy.
In fact, the actual amount of depreciation
can never be determined until the asset is
retired from service.

TYPES OF DEPRECIATION
1- Physical depreciation:
The everyday wear and tear of operation
gradually lessens the physical ability of an asset
to perform its intended function.
A good maintenance program retards the rate of
decline but seldom maintains the precision
expected from a new machine.

In addition to normal wear, accidental physical


damage can impair ability.
Wear and tear is an obvious cost of output.

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TYPES OF DEPRECIATION
2- Functional depreciation:
Demands made on an asset may increase
beyond its capacity to produce.
A central heating plant unable to meet the
increased heat demands of a new building
extension, no longer serves its intended
function.
On the other extreme, the demand for services
may cease to exist, such as with a machine that
produces a product no longer in demand.

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TYPES OF DEPRECIATION
3- Technological depreciation:
Newly developed means of accomplishing a

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function may make the present means


uneconomical.
Steam locomotives lost value rapidly as railroads
turned to diesel power.
Current product styling, new materials, improved
safety, and better quality at lower cost from new
developments make old designs obsolete.

TYPES OF DEPRECIATION
4- Sudden failure
This refers to sudden or catastrophic loss in
value due to technological characteristics
inherent in the asset. However, this does include
loss due to accident or misuse.
Light bulbs burn out as a natural consequence of
use and with little loss in operating efficiency up
to the point of failure.
Generally this category of asset includes items
used in large numbers with a relatively small
cast per item.

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TYPES OF DEPRECIATION
5- Depletion:

Consumption of an exhaustible natural resource to produce products or


services is termed depletion.
Removal of oil, timber, rock, or minerals from a site decreases the value of the
source.
This decrease is compensated by a proportionate reduction in earnings
derived from the resource.
Theoretically, the depletion charge per unit of the resource removed is:
Adjusted basis of resource
Depletion rate (Rs./unit)

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Remaining units of resource

Where the adjusted basis is generally the first cost minus the capital recovered
from depreciation charges.

TYPES OF DEPRECIATION

84

6- Monetary depreciation:
A change in price levels is a subtle but troublesome cause of
decreases in the value of owned assets.
Customary, accounting practices relate depreciation to the
original price of an asset, not to its replacement.
If prices rise during the life of an asset, as in the case of high
inflation rates during the early 1980s, then a comparable
replacement becomes more expensive.
This means that the capital recovered will be insufficient to
provide an adequate substitute for the worn out asset.
It also suggests that the selling price of the product being
produced by the asset does not accurately reflect the cost of
production.

VALUE

85

Because depreciation is defined as decrease in


value, the best definition of value is the present
worth of all the future profits that are to be received
through ownership of a particular property.
This undoubtedly, excellent definition, is difficult to
apply in actual practice, inasmuch as we can
seldom determine profits far in advance.
Several other measures of value are commonly
used, some of which are approximations of the
foregoing definition:

VALUE

86

1 - Market value
This is what will be paid by a willing buyer to a willing seller
for a property, where each has equal advantage and is under
no compulsion to buy or sell. In most matters relating to
depreciation, it is market value that is used. For new
properties, the cost in the open market is used as the original
value.
2 - Use value
This is what the property is worth to the owner as an
operating unit.
3 - Fair value
This usually is determined by a disinterested party in order to
establish a price that is fair to both seller and buyer.

VALUE
4- Book value
Book value is the worth of a property as shown on the
accounting records of a company. It is ordinarily taken to
mean the original cost of the property less the amount that
have been charged as depreciation expense.
5 - Salvage or resale value
It is the price that can be obtained from the sale of the
property second-hand. Salvage value implies that the
property has further utility.

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6- Scrap value
Scrap value ordinarily is considered to be the amount that
the property would bring if sold for junk. The utility of the
article is assumed to be zero.

Purposes of Depreciation

To

provide for the recovery of capital that


has been invested in physical property.

To

enable the cost of depreciation to be


charged to the cost of producing products
or services that result from the use of the
property.

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BASIC DEPRECIATION METHODS


1 - The Straight Line Method
The straight line method of computing depreciation assumes that the loss in value
is directly proportional to the age of the structure. This straight line relationship
gives rise to the name of the method. Thus with this formula if :
L = Useful life of the structure in years,
C = The original cost,
d = The annual cost of depreciation,
Cn = The book value at the end of n years,
CL = The value at the end of the life of the structure, the scrap value (including gain or
loss due to removal), and
Dn = Depreciation up to age n years;
d =

C CL / L

Dn = n (C CL)

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Cn
-

= C - n (C CL) / L

BASIC DEPRECIATION METHODS


2 - Declining Balance Method

90

In this method, sometimes called the constant


percentage method or the Matheson formula, it is
assumed that the annual cost of depreciation is a fixed
percentage of the salvage value at the beginning of the
year.
The ratio of the depreciation in any one year to the book
value at the beginning of that year is constant throughout
the life of the asset and is designated by K.

BASIC DEPRECIATION METHODS

Depreciation during the Ist year:


d1 = C x k
Depreciation during the nth year:
dn = (Cn 1)k
Salvage value at age n years:
CL = C(1 k)L
Book value at age n years: Cn = C(1 k)n = C(CL / C) n / L

Rate of depreciation:

k =1

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Cn
C

= 1 -

CL
C

BASIC DEPRECIATION METHODS

92

The declining balance procedure, like the straight line


method, is simple to apply. However, it has two weaknesses:
1- The annual cost of depreciation is different each
year and, from an engineering economy viewpoint, this is
inconvenient.
2- With this formula an asset can never depreciate to
zero value. This is not a serious difficulty, and in
actual
practice computation of the theoretical
depreciation rate
k, seldom
is made. Instead, a
reasonable value is
assumed.
A so-called Double Declining Balance Method also is used. In
this procedure the depreciation rate k is computed as 2/L,
with any prospective final salvage value being disregarded.

BASIC DEPRECIATION METHODS

93

3 - The Sum-of-the-Years - Digits Method


In order to obtain the depreciation charge in any
year of life by the sum-of-the-years-digits method
(commonly designated as SYD), the digits
corresponding to the number of each year of life
are listed in reverse order.
The sum of these digits then is determined.
The depreciation factor for any year is the reverse
digit for that year divided by the sum of the digits.
For example, for a property having a life of 5 years:

BASIC DEPRECIATION METHODS


YEAR

No. of the year in


reverse order (digits)

Depreciation Factor

5/15

4/15

3/15

2/15

1/15

Sum of the digits = 15

94

BASIC DEPRECIATION METHODS

95

The depreciation for any year is the product of the


SYD depreciation factor for that year and the
depreciable value, C CL.
The general expression for the annual cost of
depreciation for any year n, when the total life is L,
is
Depreciation factor = 2 (L n + 1) / L (L + 1)
dn = ( C - CL ) x [2 (L n + 1) / L (L + 1)]
Cn = C - [ 2( C - CL ) / L ] n + [(C CL) / L(L+1) ] n (n+1)

BASIC DEPRECIATION METHODS


4 - The Sinking Fund Formula
The Sinking Fund Formula assumes that a sinking
fund is established in which funds will accumulate
for replacement purposes.
The total depreciation that has taken place up to
any given time is assumed to be equal to the
accumulated value of the sinking fund at that time.
In this manner the invested capital is preserved.
With this formula, if the estimated life, scrap value,
and interest rate on the sinking fund are known, a
uniform yearly deposit can be computed. This
deposit is the annual cost of depreciation.

96

BASIC DEPRECIATION METHODS

d1 = (C CL) (A/F, i %, L),

where
(A/F, i %, L) = i / [( 1 + i )L - 1]

Dn = (C CL) (A/F, i %, L) / (A/F, i %, n) ,

where

(A/F, i %, n) = i / [( 1 + i )n - 1]

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Cn = C - Dn

dn = Dn - Dn-1

BASIC DEPRECIATION METHODS


5 - The Service Output Method

Some companies attempt to compute the depreciation of


equipment on the basis of its output.
When equipment is purchased, an estimate is made of the
amount of service it will render during its economic life.
Depreciation for any period is then charged on the basis of
the service that has been rendered during that period.
Depreciation per unit of production
=(C CL) / (estimated lifetime production in units)

98

BASIC DEPRECIATION METHODS

99

The service output method, has the advantages of


making the unit cost of depreciation constant and
giving low depreciation expense during periods of
low production.
It is difficult to apply may be understood by
realization that not only the economic life, but also
the total amount of service that the equipment will
render during this period, is difficult to estimate.
The
so-called
Machine-hour
Method
of
depreciation is a modification of this procedure.

COMPARISON OF FOUR BASIC DEPRECIATION METHODS

100