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Unformatted text preview: MIT OpenCourseWare 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: Project Organization II Project Spring 2009 Based on Lectures Given by Dr. Nathaniel Based Osgood in 2005 Osgood Fred Moavenzadeh Civil and Environmental Engineering Massachusetts Institute of Technology Project Organization Project I. Project Delivery Systems (most common) Design / Build Design Others Others Summary Summary II. Payment Schemes General points General Lumpsum Lumpsum Cost plus fixed fee/% price Cost Unit price Unit Guaranteed maximum price Guaranteed III. Award Methods General points General Negotiation Negotiation Bidding Bidding Part I Part Project Delivery Project Design-Build Design Owner Construction Function Sub contractor D/B Entity Sub contractor Contractual Relationship Communicational Relationship Internal Relationship Design Function Sub contractor How To: Design / Build How Owner Owner Develops early design (to communicate needs) Develops Hires a design/build firm that will complete both Hires design and construction This firm can be a design/build firm but also This a joint-venture firm for this specific project DB company may hire subcontractors DB Work solicited via RFP (honorarium, phased) Work Can be good for complex projects – but need Can phased design to shield parties from risk Back to the Future… Back Dominant method early in US history Dominant Recent drivers Recent Time pressure (desire to fast track) Time Shortcomings of tightly defined architect role Shortcomings Constructability issues Constructability Limited A/E oversight of construction Limited Downsizing of US corporations (outsourcing design) Downsizing Desire for single source of responsibility Desire Advantages DB Advantages Allows Fast Tracking Allows May be good for some complex projects May Close coordination within team Close Institutional knowledge build up Institutional Single source of accountability Single Owner need not mediate or be exposed to Owner designer/contractor conflicts Easier incorporation of changes caused by Easier field conditions Disadvantages DB Disadvantages Lack of fiduciary relationship with designer Lack Risk of DB sacrificing design quality to protect profit Risk design Owner must assume responsibility for quality assurance Owner Pricing not possible at the beginning Pricing Demands sophisticated owner (construction, Demands quality, oversight of submittals, negotiation,…) Must stay on top of design so don’t get surprise Must Can be bad for many complicated projects Can Very important for owner to be closely involved to Very specify important and complex aspects of design Package: Can’t pick or get rid of individual team Package: members (e.g. individual subcontractors) Design-Build Disadvantages II Design Need to make sure design goals stay foremost Need Often contractor’s interests within DB dominate Often Fewer checks and balances Fewer Problems may be hidden until late (no A/E watch) Problems May take direction that owner does not really want May Design-build firm can give high quote for changes Design Responsible for everything! Responsible If fast tracked, changes can lead to If Rework Rework Iteration Iteration Delays Delays Public Use Challenges Public Regulatory hurdles Regulatory Federal use allowed Federal Federal Acquisition Reform Act of 1996 allowed Federal Many states still do not allow Many Special permission may be granted for formal request Special Major opposition from Major Architectural lobby Architectural Unions Unions Bridge Designer/Engineer Bridge Serves as bridge between Serves Owner Owner Design-build team Design Performs preliminary design before DB team hired Performs E.g. up to 30% design E.g. Monitors development of design and construction Monitors Fiduciary with owner Fiduciary DB Selection Considerations DB Timing tension for when to recruit DB firm Timing Earlier recruitment: Earlier Hard to judge – like beauty contest Hard judge Later recruit: Less benefit from DB Later E.g. Lower ability to fast-track E.g. Limit creativity (closer to GC) Limit Often have segmented pricing (cost-plus design, fixed Often plus price or GMP construction) price More comprehensive selection process typical More Design/Price/Schedule/Team Design/Price/Schedule/Team Design competitions undertaken Design Example Design-Build: I15 Example Originally slated as DBB, but made DB to fast-track Originally Hard deadline due to 2002 SLC Olympic Games Hard $1.3B joint venture (Kiewit lead company) $1.3B US DOT as owner agency US Bidded project (with rights to use unsuccessful) Bidded Unsuccessful bidders became subcontractors Unsuccessful Reputation foremost Reputation 200 Subcontractors 200 Few reviews Few Finished 5 months ahead of schedule Finished Modified CM Design/Build: Modified Design Subcontracted (CM Serves as Design/Builder and Subcontractors Design) Owner CM Design/Builder Sub-Contractor Sub-Contractor Sub-Contractor Architect/Engineer Sub-Contractor [Howell et al., 1998] CM Oversight Design/Build CM (CM Provides Agency Oversight on Owner’s Behalf) Owner CM Design/Build Contractor Sub-Contractor Sub-Contractor Sub-Contractor Sub-Contractor [Howell et al., 1998] Other Delivery Methods Other Turnkey (Like DB but Contractor Financed) Turnkey Very common in residential housing Very Gives owner time to raise money during construct. Gives Design-Build-Operate-Transfer (BOT) Design Long-term financing (vs. DBO) Long Can compete on size, transfer time, etc. Can Have different guarantees needed to entice Have Multiple Primes Multiple Phase construct.,hand-pick team,sophisticated owner Phase pick team,sophisticated Owner/Agent (owner does part of design) Owner/Agent Type of Relationships Among Participants Participants OwnerA/E OwnerContr. A/EContr. DBB K K PCM K CMR K K _ C _ D/B K* OwnerCM _ CMA/E _ CMContr. _ K C C K _ C _ K _ _ I K: Contractual Relationship C: Communication Relationship I: Internal Relationship *: Contractual Relationship between the Owner and the D/B Team Image by MIT OpenCourseWare. Management Construction Design Build Approach Type of contracts Traditional Advantages of the 3 Most Common Delivery Methods Common Advantages Legal and contractual precedent X Cost determined before contract commitment X Fast-tracked construction allowed X Minimum owner involvement X Cost benefit from competition X X X X Negotiation with quality contractor for unique expertise X X Allow adjustment to new conditions without changing agreement X X Single firm control of design/construct process X Adapted from Gould and Joyce, 2002 Management Construction Design Build Type of contracts Approach Traditional Disadvantages of the 3 Most Common Delivery Methods Common Disadvantages Design does not benefit from construction expertise X Design construction time is the longest X Adversarial relationship owner/designer vs contractor X Contract agreement affected by changes X ~x ~x Few checks and balances X Cost control occurs late in project X Contract amount may be complicated by continual contractor negotiations X Contract agreement affected by unforeseen conditions X ~x ~x Modified from Gould and Joyce, 2002 Issues with Bids Issues Low bidders can be unreliable Low Prequalify aggressively! Prequalify To allow for fast-tracking may bid early (30%) To Don’t try to force delivery from low bid Don Growing Frequency: innovative bidding method Growing Pressure for lowest bid can create Pressure Cutting corners Cutting Low-quality personnel Low Bad feelings Bad Part II Part Payment Schedule Payment Payment Schemes Payment Extremes Extremes Payment method: Product Type: Award method Reimbursable Service Solicit based on Reputation and agree via Negotiation Fixed Price Commodity Bidding Key Idea Here: Risk Sharing Key Different parties have ability to manage or Different tolerate different types of risk Owner (or big contractor) often better: Geotechnical Owner risk, weather risk Contractor better: Risk of slow teams, equipment Contractor quality, procurement, quality of supervision Divide risks within an agreement to Divide Save money on contract price Save Provide incentive to contractors to finish early, in Provide budget, good quality Fundamental Ideas Fundamental Contractors are often highly risk averse Contractors Recall risk premiums: Contractor willing to “pay” owner Recall (charge less for contract) if owner takes on risk – if have to For risks that contractor can’t control, may be willing to For can control, pay a risk premium to owner to take over Contractor here will lower costs if owner assumes certain risk Contractor (essentially, paying the owner a risk premium) For risks that contractors can control, cheaper for a For can contractor to manage risk than to pay a risk premium manage Fundamental Ideas II Fundamental Structure contract so that Structure Risks contractor can better handle are imposed on Risks contractor (i.e. contractor will lose $ if don’t control) To be competitive, will have to manage these To manage Risks owner can better handle are kept by owner Risks “’’Risk can be better handled by A vs. B” here “ means that the risk premium that would be charged by the A for taking on this risk is smaller than would be charged by B Fundamental Balance Fundamental Impose high enough risk incentive to get contractor do Impose high job efficiently – within the specifications of the contract E.g. Incentive to finish on time, incentive to stay within E.g. budget E.g. better team assignment, equipment provision, mgmt E.g. Impose low enough risk to have reasonably low bid Impose low Impose according to contractor ability to tolerate Impose Derivative Results of Risks I: Accountability/Monitoring Accountability/Monitoring Consider parties A and B in an agreement Consider A is contractor; B is owner is The greater the risk on party A The The more incentive on party A to manage this risk The The less incentive on party B to manage this risk The More incentive on A to monitor the relevant factors More so B can’t claim the risk is responsible for a problem More incentive on B to make sure that A’s means of More risk management falls within the agreement management E.g. that not “cutting corners” or otherwise cheating to E.g. shield from risk Derivative Results of Risks II: Impact on Construction Timing Impact Both parties must agree on cost to move forward Both In general, more risk on one party, less that party is In willing to move forward More risk on contractor, the longer will delay construct. More Given uncertainty, contractor will charge more up front Given Owner doesn’t want to pay a huge amount up front Owner As uncertainty is lessened in design, prices converge As Owner can expedite – by paying higher price (risk Owner premium) to contractor or by shouldering risk Remember; delay can have major costs – but so can Remember; wrangling over change orders! Note on Change Orders Note Changes contract (cost/schedule/scope/etc.) Changes Can lead to costs beyond contract specification Can Anticipated costs incorporated in “contingency” Anticipated Often 1-3% on top of agreed upon price Often Often only paid for additional direct costs Often Big problem if disruption in work Big Source of very large risk Source Contractual Risk ontractual Ris Allocation Allocation RISK SHARING METER Modified from Kerzner, 2000 0% Lump-Sum (Fixed Price) Fixed-Price w/ Economic Price Adjustments Fixed-Price Incentive Cost-Plus Incentive Cost-Plus Award Fee Cost-Plus Fixed Fee OWNER’S RISK CONTRACTOR’S RISK 100 % Cost-Sharing 0% RISK Allocation Cost-Plus Percentage 100 % Cost Versus Price for Lump Sum Cost b{ $10,500 a }c $10,000 } $10,300 $9,500 Final Price (Price is fixed at $10,300) Final Cost a = If final cost is $9,500, contractor profit is $800 (8.42%) b = If final cost is $10,000, (as expected), contractor profit is $300 (3%) c = If final cost is $10,000, contractor loss is $200 (-1.9%) Image by MIT OpenCourseWare. Macomber, 1989 Lump Sum (“Fixed Price”) Lump Contractor required to achieve the project at Contractor the negotiated contract value All risk of cost, schedule fall on contractor All The owner knows the actual cost of the The project before it begins Minimizes risk for the owner if the project is Minimizes well estimated, contractual documents accurate and project clearly defined High incentive for contractor to finish High Early (so can move on to other jobs) Early Low cost (so can make a profit) Low Lump Sum Lump Required for many public projects Required Good for some well-defined projects Good Good price competition in commodity metric Good Bad for ill-defined projects Bad Adversarial relationship over responsibility and Adversarial payment for of changes High contractor risk means typically start late High Very different from typical meaning of “Fixed fee”! Very Ways to Save Money: Effect on Owners Effect Helps: Efficiency within construction Helps: Best teams Best Appropriate equipment Appropriate Careful management Careful Quality workmanship (to avoid risk of rework) Quality Hurts: Cutting corners, distortion, charge orders Hurts: orders Substitution of materials Substitution Distortion of quantities used Distortion Distortion of progress Distortion Cost Versus Price for Cost Plus Cost (Price = cost plus 5%) $11,025 } c b $10,000 }a } $10,500 $9,975 $9,500 Final Price $10,500 Final Cost a = If final cost is $9,500, contractor profit is $475 (5%) b = If final cost is $10,000, contractor profit is $500 (5%) c = If final cost is $10,500, contractor loss is $525 (5%) Image by MIT OpenCourseWare. Macomber, 1989 Cost Plus Fixed % Cost Owner is paying the actual cost plus a fixed Owner percentage Contractor agrees to do his best efforts to Contractor achieve the work Contractor shoulders very little risk Contractor Typically select contractors based on reputation Typically and comfort (service rather than commodity) Cost Plus + Fixed %: Advantages Cost Maximum flexibility to the Owner Maximum No fighting over change orders – contractor gets No paid for any extra work required Permits to collaborate at the early stages of Permits the project Minimal negotiation time Minimal Minimal fear of commitment by contractor Minimal Only have to pay for what actually costs Only If manage closely, can save money vs. fixed-price If save vs. Cost Plus + Fixed %: Disadvantages Cost Owner shoulders all risk Owner Little incentive to reduce costs and overtime salaries Little can even increase costs Cost unknown until contract completes Cost Owner needs to oversee construction closely Owner Speed up slow crews Speed Identify management problems Identify Contractors have incentive to grow scope, price Contractors Terrible with turnkey delivery type! Terrible Applicability Applicability Requires sophisticated owner to manage Requires Uses if the pricing could not be performed in Uses any other way and if it is urgent Emergencies (civil, military) Emergencies Ill-defined, risky scope Ill defined, e.g. historic building renovation with unknown cond. e.g. Unknown technologies Unknown Either scope or construction method unknown Either Confidential projects (limit public knowledge) Confidential Cost Plus Fixed Fee (“Fixed Fee”) Cost Cost may vary but the fee remains firm Cost The fee is independent of the duration of the The project Like Cost + fixed % except some shared risk Like Less time risk: High incentive to finish early Less Less risk of contractor growing size of project Less Unit Price Contract Unit Agreement on the price charged per unit Agreement per between the contractor and the owner Interesting example of risk sharing Interesting Owner: risk for uncertainty in quantity Owner: Contractor: risk for unit price (efficiency, procur) Contractor: Contractor overhead must be integrated in Contractor the units price Necessity of an owner presence on site to Necessity measure the actual quantities Typically renegotiate if quantity 20% off Typically Quantity influences price b/c economies of scale Quantity Unit Price Contract Unit Highly dependent on the accuracy of the Highly estimation of the quantities given by the Owner/Designer Risk of unbalanced bidding Risk If contractor believes actual quantity will differ, case If increase and/or decrease the unit price Contractor can make profit because payment is based Contractor on actual quantities but he can also lose money in the same way A contractor can be excluded if its bid is very contractor unbalanced The total cost for the owner can be greater than The planned Example: Pile Driving Example: Too risky to just charge fixed price Too Geotechnical uncertainties make length of piles Geotechnical uncertain Piles can be highly expensive Piles Risk allocation Risk Price risk more under contractor control (efficiency, Price crew and equipment selection): to contractor Length out of contractor control: to owner Length Owner must precisely monitor length used Owner Cost Versus Price for GMP Cost Guaranted-Maximum-Price Contract (Price = cost of work plus fixed fee of $500 with a maximum price of $10,500) }c } }a $10,500 $10,000 $10,000 b $9,500 Final Price $10,500 Final Cost a = If final cost is $9,500, contractor profit is $500 (5.26%) b = If final cost is $10,000, contractor profit is $500 (5%) c = If final cost is $10,500, contractor loss is $0 (0%) Image by MIT OpenCourseWare. Macomber, 1989 Guaranteed Maximum Price or GMP Guaranteed Variation of the Cost Plus a Fee but GMP Variation can be a cap on direct costs direct After a certain point, the “floor” or “ceiling”, After the contractor assumes any additional costs Often start in cost plus fixed fee and then Often start impose GMP at e.g. 90% design Best: GM Shared Savings: Below Guaranteed Best: Maximum, savings shared (60-40% or sliding) Very good for turnkey, well-defined scope Very GMP: Advantages GMP: Permits easier financing Permits Can fast-track Can Owner keeps savings below GMP Owner Often can get started quickly on construction Often Particularly if contractor already involved w/design Particularly Contract may be higher than for fixed price b/c Contract design often not complete when contract set GMP: Disadvantages GMP: Contractors may still spend lots Contractors Owner must monitor contractor spending Owner Can be fights over what is direct vs. indirect cost Can i.e. what must fall below GMP i.e. Bad if unclear scope after GMP agreed to (must Bad renegotiate) Just as for CPFF, quality may be sacrificed Just whereas without GMP, cost and/or schedule would have increased Relative Costs of Construction Contracts Relative E= contractor's original estimate of the direct job cost at the time of contract E= award M = amount of markup by the contractor in the contract amount B = estimated construction price at the time of signing contract estimated A = contractor's actual cost for the original scope of work in the contract contractor's U = underestimate of the cost of work in the original estimate (with negative underestimate value of U denoting an overestimate) C = additional cost of work due to change orders additional P = actual payment to contractor by the owner actual F = contractor's gross profit contractor's R = basic percentage markup above the original estimate for fixed fee contract basic Rii = premium percentage markup for contract type i such that the total R percentage markup is (R + Ri), e.g. (R + R1) for a lump sum contract, (R + R2) for a unit price contract, and (R + R3) for a guaranteed maximum cost contract N = a factor in the target estimate for sharing the savings in cost as agreed upon factor by the owner and the contractor, with 0 N 1. Chris Hendrickson, 2000 Original Estimated Contract Prices Original Type of Contract Markup Contract Price B = (1 + R + Lump sum M = (R +R1)E R1)E B = (1 + R + Unit price M = (R + R2)E R2)E Cost plus fixed % M = RA = RE B = (1 + R)E Cost plus fixed fee M = RE B = (1 + R)E B = (1 + R + Guaranteed max cost M = (R + R3)E R3)E Adapted from Chris Hendrickson, 2000 Owner’s Actual Payment with Owner Actual Different Contract Provisions Different Type of Contract Change Order Payment Owner's Payment Lump sum C(1 + R + R1) P = B + C(1 + R + R1) Unit price Cost plus fixed % C(1 + R + R2) C(1 + R) P = (1 + R + R2)A + C P = (1 + R)(A + C) Cost plus fixed fee C Guaranteed max cost 0 P = RE + A + C P=B Adapted from Chris Hendrickson, 2000 Contractor’s Gross Profit with Contractor Gross Different Contract Provisions Different Type of Contract Lump sum Unit price Cost plus fixed % Cost plus fixed fee Guaranteed max cost Profit from Change Order Contractor's Gross Profit C(R + R1) C(R + R2 CR 0 -C F F F F F = E - A + (R + R1)(E + C) = (R + R2)(A + C) = R (A + C) = RE = (1 + R + R3)E - A - C Adapted from Chris Hendrickson, 2000 Principles of Incentive Principles Contractslowering cost Additional profits are possible by Customer and contractor share cost savings •OWNER PAYS 80 % OF OVERRUN •CONTRACTOR PAY 20 % OF OVERRUN EXAMPLE TARGET COST: $20,000 TARGET FEE: $1500 SHARING RATIO: 80/20 % •PROFIT IS $1500 LESS CONTRACTOR’S 20 % •OWNER KEEPS 80 % OF OVERRUN •CONTRACTOR KEEPS 20 % OF OVERRUN •PROFIT IS $1500 PLUS CONTRACTOR’S 20 % Note: limitations may be imposed on price or profit Kerzner, 2000 Conclusion Conclusion When market is not very good, clients insists When on fixed price bids whereas when the project offers are numerous, it is more difficult to obtain those conditions The contract type choice must depend on: The The accuracy of the estimation The The ultimate cost know since the beginning or at The least the maximum The desired risk The If quick completion of work is wanted If Part III Part Award Methods Award Contract Selection Contract Award Methods: Contractor Selection Selection Extremes Extremes Payment method: Product Type: Award method Reimbursable Service Solicit based on Reputation and agree via Negotiation Fixed Price Commodity Bidding Bidding Bidding Variants Variants Low bid Low Multi-parameter bidding Multi Low bid plus arithmetic combination of other factors Low Low bid divided by ranking of other factors Low Fixed price low bid is win-lose Fixed Typically associated with lump-sum contract Typically Prequalification critical Prequalification Bidding Tradeoffs Bidding Time provided to bidders to review documents Time Too long: Construction delayed Too Too short: Too Bids low-quality because too little time to review contract Bids quality docs (incorporate high risk premium or unrealistically low) low) Few bidders willing to participate Few Bid count Bid Too many bidders: Scare away best contractors Too Too few bidders: Bid not competitive Too Bidding Tradeoffs Bidding Advantages Advantages Can get good price Can Transparency Transparency Disadvantages Disadvantages Can set up win-lose situation Can Competitive pressures can eliminate profit from bid Competitive Try to make up with change orders, cutting corners Try Can lead to combative relationships Can Insufficient consideration of design before pricing Insufficient Bidding Metrics Bidding Most common: Price alone Most Bidding “cap”: Bid on how far can go with set amount Bidding of money Multi-parameter bidding (increasingly popular) Multi Consider non-price items (time, quality, qualification) Consider A+B Additive measures A+B Price+($/day)*days (common for retail), Price+qualification+design Price+($/day)*days rank, price+design rank,… A/B (e.g. B scoring along some metric: Design, etc.) A/B Issues with Bids Issues Low bidders can be unreliable Low Prequalify aggressively! Prequalify To allow for fast-tracking may bid early (30%) To Don’t try to force delivery from low bid Don Growing Frequency: innovative bidding method Growing Pressure for lowest bid can create Pressure Cutting corners Cutting Low-quality personnel Low Bad feelings Bad Bidding Process Bidding A/E oversight typical A/E Publicity (specifies qualification requirements) Publicity Provide bid documents Provide Typically include fair cost estimate, sample contract Typically Answer RFIs Answer Pre-bid conference Pre Explain scope, working conditions, answer Explain questions, documented in writing) Public vs. Private Bidding Public Public Bidding Public Must be publicly advertised (posting in newspapers, Must public building, etc.) Qualification occurs after submission of bids Qualification Typically 60 day period in which can submit bids Typically Private Bidding Private May be by invitation only May Qualification occurs before submission of bids Qualification Dealing with Way-Out Low Bids Dealing Forcing collection from unrealistically low bids Forcing is dangerous Construction highly contentious, poor morale Construction Risk of extreme corner cutting Risk Default is possible Default Disruption Disruption Insurance companies fulfilling performance bonds very Insurance difficult to work with Subcontracting Bids Subcontracting GCs push subs for lowest possible price before GCs GC bids GC not obligated to use sub who gave bid GC Can lead to serious predatory behavior Can Bid shopping (before and after GC wins bid) Bid and Bid peddling (unsolicited calls from subs to GCs Bid after GC wins bid) Some owners/states require listing of chosen Some subs at bid time or assign based on sub-bidding Qualifications Qualifications Common items for qualifications Common Bonds/Insurance (bid, performance, payment) Bonds/Insurance Safety record Safety Reputation Reputation Financial strength Financial Total/Spare capacity Total/Spare Licensing Licensing Background in type of work Background Experience in local area/labor market Experience Management system (QA, planning, estimation, control) Management Interest, adaptability shown Interest, Negotiation Negotiation Typically selected based on reputation, qualifications Typically Typically used for two cases Typically Very simple Very Use trusted, familiar party Use Very complex/big Very Get contractor involved in design, start work early Get Requires relatively savvy owner Requires Evaluate proposals, monitor performance Evaluate Important even for DBB for post-bid changes Important Negotiation Considerations Negotiation Can get win-win because of differences in Can win Risk preferences Risk Relative preferences for different attributes Relative Goal is to find a pareto optimal agreement Goal Key skill in negotiation: Ability to find win-win Key win options Negotiation Tips Negotiation Try to maintain clear sense of reservation price Try Price or conditions under which will accept offer Price Want to adopt some objective basis for position Want Without this impersonal criteria, other party can take Without disagreements personally as arbitrarily demands Discuss multiple issues at once Discuss Permits trading off issues flexibly Permits Formal exposure good–but experience gives Formal edge Negotiation Tips 2: Major Sins of Negotiation (Thomson, 2001) Negotiation Leaving money on the table: Failing to identify Leaving and use win-win opportunities Settling for too little: Unnecessarily large Settling concessions Walking away from the table: Rejecting terms Walking that are favorable, often due to pride Settling for terms worse than existing alternative: Settling Pressure to reach some deal leads to opportunity less attractive than opportunity cost ...
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