Risk Management for Construction
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Document Sample
Risk Management for
Construction
Dr. Robert A. Perkins, PE
Civil and Environmental Engineering
University of Alaska Fairbanks
Class 2
• Construction and Risks
• Work Breakdown Structure
• Estimating and Risks
General Risk Allocation, Fisk
Contracting Strategy
• Contract type
– Lump sum, cost reimbursable
• Procurement method
– Sole source, prequalification, public bid
• Project Delivery System
– Design-bid-build
– Design-build
– CMAR
Design Build for Public Owner
• Start with “Design criteria”
• “Bridging Design”
• Contractor submits preliminary design
– 35%
• Changes
– Sure
• Less than DBB
– Probably
DB vs. DBB
• DB faster, see next
• Quality about the same
• Cost?
• Changes
– Are they different?
– Literature varies, some indicated DB had
more changes and they cost more
Projects Analyzed
No. of DBB
No. of DB
Housing 2 4
Barracks/ 2 5
Dormitory
Industrial 5 4
Utilidor 3 4
Other 2 3
34 DB and DBB Combined
Average Cost $ 15.9 Million
Cost growth and changes for DB
versus DBB projects
Average Average Growth
Construction No. of Cost per
-Contract Changes Contract ($)
Cost Growth per
(%) Contract
DBB 6.6% 25 1,069,882
DB 3.1% 14 480,046
p value 1.7% 1.5% 4.6%
Owner’s project manager’s point of view
• Controllable changes
– design errors
– lack of site access (perhaps due to permitting
problems)
– deficiencies in owner-furnished materials or
equipment.
• Uncontrollable changes
– changes requested by the using group
– differing site conditions
A comparison of the number and
costs of changes for each of three
change types
Engineering User Changes Differing Site
Changes Conditions
No./avg $/avg No./avg $/avg No./avg $/avg
contract contract contract contract contract contract
DBB
15 482,513 1 5,033 5 226,020
DB
4 195,714 5 71,514 3 221,524
p
0.1% 5.1% 0.4% 2.4% 27.1% 49%
Conclusions re D-B
• Certainly are design-related changes
– Much less than DBB
• More user-requested changes in D-B
• Worthwhile to examine these as a source
of cost growth distinct from design errors
What the hell is CMAR?
• Owner employs the A/E.
• CM is selected based on qualifications
• The CM provides “preconstruction
services:” evaluating costs, estimating,
providing value analysis, scheduling, and
constructability advice
• Owner and CM negotiate a price
• “Guaranteed Maximum Price” (GMP)
CMAR = nirvana
• Preferred by public owners of complex projects
• Used exclusively by higher education
– Minnesota
– Arizona
– Often by Texas
• Why?
– Control the A/E details
– QBS
– Complex scheduling issues
– Avoids disasters
– Cheaper?
Culture Change
• Owner, A/E, CM and Subs are separate
economic entities
• Clear roles in DBB
– Good fences make good neighbors?
• Poll
– Employer-type
– Number of Public CMAR contracts
CMAR Problems for Public Projects
• Hire CM shortly after A/E
• Subs expertise
• Scope and budget tension
• Teamwork and partnering
• Design Errors
• Design Constraints
When is delayed hiring a severe
impact?
• Most A/Es and Subs feel it becomes
severe if not done before 35%
• Most Owners and CMs don’t feel it is
sever until the 65%
• Opinion?
Disagree
Agree
• A/Es don’t believe CMs have specialty
experience in house and are comfortable
with negotiating with subs early.
• Owners want to show that they are
bringing in the best price.
Tension Regarding Scope and
Budget
• CM wants to cut scope and budget to
reduce risk
• Has an incentive to bring in high estimates
• Owner wants all the scope possible out of
the budget
• A/E does not want design changes
Regarding S-B Tension
• Yes, indeed
• Partnering is often a benefit
• Independent estimator may not reduce
tension
• Forcing estimate agreement may increase
tension
• Is tension bad?
Other Conclusions
• CM fees
– With more experience, fewer wanted CM fees in the
proposal
• Owners did not believe there were fewer design
errors in CMAR, while all other parties did.
• CM and subs felt there could be more fast-
tracking done, Owners and A/E felt there was
enough
• All were comfortable have the CM self-perform
some of the work.
Estimating and Risks
• Many risks are evaluated by considering
variation in estimates
• We will spend some time on estimating
• Owner’s
• Contractor’s
• Change Order
Project stages and WBS
• Estimate type will vary with project stage
• Uncertainty/risk associated with an
estimate will vary with stage and type
• Owners and contractors often estimate
differently
WBS
• The tasks needed to complete the project
• Tie WBS to risks
High Level WBS
• Planning
• Pre-design
• Design
• Procurement
• Construction
• M&O
Mid-level Pre-design
• Survey
• Soils
• ROW
• Environmental
• Public
• Other
More Detail - Soils
• Review Records
• Schedule Drilling
• Drill
• Analysis
• Report
Finer Detail - Drill
• Costs
– Labor
– Equipment
– Subcontract
• Schedule
– Permits and approvals
– Section A
– Section B
– Section C
And more
• Labor
– Bare
– Benefits
• Vacation
– Supervision
Nomenclature - sometimes
• Program
• Project
• Phase
• Task
• Sub-task
• Work Packages
• Etc.
Project Selection Estimates
• Usually based on conceptual design
• Estimate of costs
• Estimate of benefits
Cost Estimating
• Economic analysis is future based.
• Costs and benefits in the future require
estimating.
• Estimated costs are not known with
certainty.
• The more accurate the estimate, the
more reliable the decision.
General Types of Estimates
• Rough - gut level, inaccurate -30% to
+60%. AKA rough order of magnitude
ROM
• Semi detailed - based on historical
records, reasonably sophisticated and
accurate -15% to +20%.
• Detailed - based on detailed
specifications and cost models accuracy
-3% to +5%.
Estimates and Risk
• Purpose/Type
– Planning
– Owner’s Costs
• Percentage vs. size
– Design Stages
• 10, 35, 65, 95%
– Contractor’s Bid
– Change Order
• Contractor
• Owner
Estimating Models
Model Explanation
Per Unit Uses a “per unit” factor.
$/sq ft, Benefits/employee
Segmenting Divide problem into items,
estimate each & sum.
Cost Indexes Index number based on history. US CPI
Power Sizing Scaling previous known costs up
or down.
Triangulation Looking at costs from several
perspectives.
Learning Tracking cost improvements.
Curve
Power Sizing
• Scales known costs for smaller or larger item
• For motors, 5-20 HP, X=0.69
• Bridges
x
Cost of equip. A Size of A
Size of B
Cost of equip. B
Learning Curve
• Time required to complete a repetitive task
decreases with number of tasks completed
• Often, when output doubles, the time
required decreases by a fixed percentage
• Say 85%, 0.85
• Standard tables or historical for industry
• Tn = time for nth unit
• T1 = time for first unit
• n = number of units
produced
• R = log learning
rate/log 2
T T1n r
n
Cost Risks
Costs
• For estimates, some costs can be
considered
• Fixed
– Davis-Bacon
• Variable
– Fuel cost
Some terms
• Common in estimating and contract
negotiations
Fixed, Variable and Total Costs
Example 2-1
Fixed Costs Variable Costs
Bus Rental $ 80.00 Event Tickets $ 12.50
Gas Expense $ 75.00 Refreshments $ 7.50
Other Fuels $ 20.00 Total costs
Bus Driver $ 50.00
Total FC $ 225.00 Total VC $ 20.00 $800.00
$600.00
Cost ($)
Total cost
$400.00
Fixed cost
People Fixed cost Variable cost Total cost $200.00
0 $ 225.00 $ - $ 225.00 $-
5 $ 225.00 $ 100.00 $ 325.00
0 5 10 15 20
10 $ 225.00 $ 200.00 $ 425.00
15 $ 225.00 $ 300.00 $ 525.00 Volume
20 $ 225.00 $ 400.00 $ 625.00
Profit and Loss Terms
• Breakeven: total revenue = total costs
– Just getting along
• Profit region: total revenue > total costs
– Putting money in the bank
• Loss region: total revenue < total costs
– Going into debt
Breakeven Charts
Example 2-2
Fixed Costs Variable Costs Ticket price
Bus Rental $ 80.00 Event Tickets $ 12.50 $ 35.00
Gas Expense $ 75.00 Refreshments $ 7.50
Other Fuels $ 20.00
Bus Driver $ 50.00
Total FC $ 225.00 Total VC $ 20.00
People Fixed cost Variable cost Total cost Revenue Profit Region
0 $ 225.00 $ - $ 225.00 $ - $ (225.00) Loss
5 $ 225.00 $ 100.00 $ 325.00 $ 175.00 $ (150.00) Loss
10 $ 225.00 $ 200.00 $ 425.00 $ 350.00 $ (75.00) Loss
15 $ 225.00 $ 300.00 $ 525.00 $ 525.00 $ - Breakeven
20 $ 225.00 $ 400.00 $ 625.00 $ 700.00 $ 75.00 Profit
25 $ 225.00 $ 500.00 $ 725.00 $ 875.00 $ 150.00 Profit
30 $ 225.00 $ 600.00 $ 825.00 $ 1,050.00 $ 225.00 Profit
35 $ 225.00 $ 700.00 $ 925.00 $ 1,225.00 $ 300.00 Profit
40 $ 225.00 $ 800.00 $ 1,025.00 $ 1,400.00 $ 375.00 Profit
Profit-loss breakeven chart
$1,500.00
Total cost
Cost ($)
$1,000.00
Fixed cost
$500.00
Revenue
$-
0 5 10 15 20 25 30 35 40
Volume
Past (Sunk) Costs and
Future (Opportunity) Costs
• Sunk cost - money spent due to a past decision.
We cannot do anything about these costs.
– Purchase price paid for a car two years ago.
• Opportunity cost - a benefit that is foregone by
engaging a resource in a chosen activity instead
of engaging that same resource in some forgone
activity. We make a choice or decision.
– Buying lunch instead of gas.
• A distributor of electric pumps bought a lot
of pumps three years ago. Technology
advanced and the pumps are less
desirable to customers. The pumps are
steadily getting less valuable.
Which amount is the value at
present?
Price when purchased $ 7,000.00
Storage costs $ 1,000.00
List price when purchased $ 9,500.00
Current list price of new pumps $ 12,000.00
Amount offered for pumps 2 years ago $ 5,000.00
Current price that the pumps could be sold for $ 3,000.00
Expense Types
• Recurring expense - anticipated and occur at
regular intervals.
– Purchasing food, paying rent.
• Non-recurring expense - one-of-a-kind event
that occurs at an irregular interval.
– Illness, accident, death.
Sometimes we attempt to plan for large non-recurring costs
by buying insurance. Paying the periodic insurance
premium turns this expense into a recurring cost.
Incremental Costs
• An incremental cost is the difference between
the costs of two alternatives.
Example 2-4
Costs
Model Incremental
Cost Items A B (B-A)
Purchase price $ 10,000.00 $ 17,500.00 $ 7,500.00
Installation costs $ 3,500.00 $ 5,000.00 $ 1,500.00
Annual maintenance costs $ 2,500.00 $ 750.00 $ (1,750.00)
Annual utility expenses $ 1,200.00 $ 2,000.00 $ 800.00
Disposal costs after useful life $ 700.00 $ 500.00 $ (200.00)
Cash vs. Book Costs
• Cash costs - movement of money from
one owner to another - also known as a
cash flow.
– Payment this month on an auto loan.
• Book cost - cost of a past transaction
that is recorded in a book.
– Down payment recorded in your
checkbook from last years automobile
purchase.
• Book Value
Life-cycle Costs
• Life-cycle - all the time from conception
to death of a product (process).
• Life-cycle costs - sum total of all the
costs incurred during the life cycle.
• Life-cycle costing - designing with an
understanding of all the costs
associated with a product during it’s life-
cycle.
Estimates vary
• Many types
• By project contracting plan
– Traditional
– Design-construct
– Turnkey
– Fast-track
– Owner’s forces
• By contract type
– Lump sum (AKA hard dollar)
– Cost plus
– Cost reimbursable (fixed fee)
– Unit price
• Contractor’s Organization
– No sub-contractors
– All sub-contractors
• Labor Force
– Union (closed shop)
– Non-union (open shop)
– Mixed
– (Double-breasted)
– Local vs. Expat (expatriate)
• Who’s doing the estimate?
– Owner
– A/E
– Contractor
– Subcontractor
– Government
– Consultant
When (what phase)
• Concept
• A/E
Components
• 15%, 35%, 65%, 95%
• Is the budget fixed?
• Cast in concrete
• Contactor’s Bid
• Post bid negotiations
• Usually non-government
• Changes
Non-construction Estimates
Owners estimate of owners expenses
Contract administration
Insurance
Lost or interrupted work
Permits and fees
Housing and travel
DOT?
A/E estimate of A/E’s expenses
(Contract type)
Hours
Other expenses
Sub-consultants
Soils
Travel
Construction phase?
Inspection
Testing
Engineering Design Estimates
• Selecting materials
Insulation thickness
Heat loss
Fuel expense
• Design life
• Economic analysis
• Careful with “free money”
Never call it that
Contractor’s Estimate
• Project costs
– Those that would not occur without the project
• Overhead/Home office/Indirect
– Would occur as long as contractor has some
work – stays in business
Types of estimate
• Guess
• Educated guess
• SWAG
With or without lanyap
• Historical, similar project
• Historical, unit prices
• Estimating guides
• Crew size and production rate
WBS, Contractor’s Estimate
• Estimate by tasks
• Crews and duration, schedule
– Equipment
• Job Overhead
– Job duration, schedule
• HOOH and Profit
– Contingency
• Break down into unit prices
– More contingency to risky tasks?
Cost Items
• Labor
• Supervision, project office
• Installed Materials and Equipment
• Operating Equipment
• Supplies and Consumables
Operating Equipment
– Capital cost
– Operation costs
– Fuel
– Permits
– Insurance
– Operator?
– Mechanics?
Steps in contactor’s estimating
process
Preliminary
• Get resources to bid the job
• Decide if you will bid
• Get plans, get on bidders list
• Engineer’s estimate reasonable
• Broad brush estimate, schedule
• Subcontracting strategy
• Consider your resources
• Call your bonding company
• Do you still want to bid?
Attend the pre-bid meeting!
Estimate
• Manager allocates work
• Be sure subs will bid
• Take off major installed equipment
Check delivery times
Barge schedules
Schedule for quote
Check delivery options, FOB
• Take off quantities
• Special matters
• Pre-bid fly over
• Hire consultants
• Do your own borings?
Historical unit prices
• Escalate?
• CPI, ENR
– Felix work
Fig. 2: AK Highway CCI vs. Anchorage CPI-U for the
period 1974 to 1983 (normalized to 1982-84=100)
160
150
140 Average Rate of Inflation 1974-
130 1986: 8.0% AK Highway
120 CCI
110
100 Anchorage
90 CPI
80
70 Linear
60 (Anchorage
Average Rate of inflation 1974-
50 CPI)
1986: 8.2%
40 Linear (AK
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
Highway CCI)
Dates
Fig. 5: Alaska HCCI vs. California HCCI
190
180
170
160
150 Alaska Highway CCI
140
130
120 California Highway CCI
110
100 Linear (Alaska Highway
90
80 CCI)
70 Linear (California Highway
60 CCI)
50
40
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Dates
Fig. 6: Alaska HCCI vs. ENR
Construction Cost Index
190 7,000
180
170 6,000
160
150 5,000
140
130 4,000
Alaska Highway CCI
120
110 3,000
100 ENR Construction Cost
90 Index
80 2,000
70
60 1,000
50
40 0
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Dates
Estimating guides
Production rate
See next
Unit Price
Read the front!
Factors
Crew size and production rate
Size crew and supervision
Equipment
All methods
• Is production rate average or high?
• Where do you put you operating factor?
• Read the front!
• Check contract for delays, risk
• Liquidated damages
• Experience with owner, location, etc.
Do you still want to bid??!!
• If so, secure bonding and financing
• Prepare bid documents with prices blank
• Check subs and major suppliers again?
• When, to the minute, will they give you the
price?
• How?
•
• Develop plan for bid delivery.
• Communications
• Time
Post bid
• Protest?
• Negotiations
• Intelligence?
• When is a deal a deal?
Plan for changes
• Pre-job photos and videos
• Documenting changes
• Know the contract
• Document everything
Ethics
• Never lie, cheat, or participate in any dishonest
act
• Admit your mistakes forthrightly, if they are
mistakes
• More often, just state the facts, without blaming
anyone, yourself included
• Don’t “trade on the specifications” unless it is in
writing
• Nothing unethical about asking for what you
have coming!
• Or demanding, if the situation warrants it.
A little on:
Risks and Change Orders
Overhead and Profit
Changes are inevitable
• Differing site conditions
• User changes
• Design errors
– “Contract documents are an imperfect
expression of the design professional’s and
owner’s intent for the project.”
• Value engineering
• Third parties
• Deductive
Pricing Changes
– Unit price within limits
– Unit price over limits
– T&M or Force Account
– Gold book method
– FARs
Types
– Directed Change, only argue about money
– Constructive change
• Owner directs but feels it is included in the
original contract
– Cardinal Change, essentially breach by the owner
• Owner mandates work outside the scope
• Owner directs multiple or drastic changes so
work is materially different.
– Cumulative and Impact
• Usually claim
• “A cumulative impact of change orders
occurs when “the issuance of an
unreasonable number [or unusual kind]
of change orders creates a synergistic
disruptive impact such that the total
disruption caused by the changes
exceed the sum of the disruptive impacts
caused by the individual changes when
looked at independently.”
Five elements are necessary to provide sufficient
burden of proof for a cumulative impact claim
– A significantly large number of change or
disruptive events
– The changes or events have an impact on
productivity (performance time and efficiency)
– The impact flow from the synergy of the number
and scope of changes;
– The contractor was unable at the time of pricing of
each change or event or directive to foresee the
ripple-type effect of the multiplicity of change and
events; and
– The contractor did not knowingly waive the right to
assert cumulative impact claims when negotiating
changes
Foreseeability
• “This change represents full and complete
compensation for all direct costs and time
required to perform the work set forth
herein, plus the overhead and profit as
provided for in the Change clause in this
contract. The contractor hereby reserves
the right to submit a request for equitable
adjustment for all costs resulting form the
impact of this change on unchanged
contract work. “
Risks to Owner
• Direct Change
• Ignore Change
– “Just do what the plans say.”
– Interest
– Legal (?)
– Contractor refusal
• Risks from T&M
Risks in Change Orders
• All risks belong to owner unless
transferred to contractor
• Base contract did that and is the reference point
• Delays to public
• Unit Time Value
• For highways this is the Daily Road-User Cost
– No standard computation
– Operating costs plus time delay.
Constructive Changes
No control over, four categories:
– Disagreement over meaning of contract
» Owner’s interpretation different, contractor must
comply or risk default termination
– Defective specifications
» Poor or misleading information
– Constructive acceleration
» Owner fails to acknowledge excusable delays
– Failure of owner to cooperate
» Other contractors not performing
• T&M
– Bear all cost and schedule risks
– May be OK for small, separable change
• Will not get rid of DSC risk
Risk to Contractor
• See next
• Personnel
– Hunting season
• Bonding and HOOH
• Market conditions
• Schedule
• Alaska
• Unknowns
– Probability increases with complexity and
unfamiliarity.
Disruption
Inefficiency due to CO
• Increased frequency of planning and replanning
• Loss of efficiency due to interruption, interference,
and lack of availably of tools, labor, and materials to
meet changed requirements
• Increase project management and supervision
involvement
– Shirt collar
• Loss of efficiency due to a ripple impact that is a
direct result of change orders, such as stacking of
trades, schedule compression, and out-of-sequence
work.
• Difficulty in determining equitable adjustment
compensation for parties REF 6
• Estimating Changes
– Unit price
– Force Account
– Forward Price
• Acceleration, Delays, Impacts, etc.
– Estimating for Forward Pricing
– Critical Path
– Other Issues
Profit
• Once job/project costs have been
estimated, contractor must add “profit”
• The profit line usually contains
– Home office overhead (HOOH)
– Contingency
– Profit
HOOH
• All costs not directly attributable to job
• AKA “indirects”
Contingency
• This is for the project
• Might be imbedded in cost items
– “conservative” vs.
– “neat”
• Or be in both places
Profit
• Return on Investment
• What is business worth?
– Garage sale
– Good will
• Would compare ROI with other, similar,
businesses
– With similar risks
Standards, Variables
• Divide Costs into
• Labor, which includes burden
• Materials
• Equipment
• Subcontracting
• Field Office Expense
Risk – Variable
Labor, which High
includes burden
Materials Low
Equipment Med
Subcontracting Low
Field Office Med
Expense
Contractor Overhead and Profit Allocation
1 15-25% A+B+C+D
2 8% A+B+C+D+E
3 8% A+B+C+D+E Or
35%-40% A+C greater
4 4-6% A+B+C+D+E Or
10% Total Labor greater
5 15% A+B+C+D+E
6 50% Total Labor
7 8-20% A+B+C+D+E Or
40%-100% Total Labor
8 15% A+B+C+D+E
A=Direct Labor, Excluding Field Office Staff; B=Materials Cost;
C=Equipment Cost D=Subcontracting; E=Field Office Expenses
Total Labor includes all direct and indirect labor
Allowable change order markups
California Major Owners 1992
Materials Equipment Bond Subs Labor
Labo Burde
r n
1 20 15 15 1 15 Actual
Typical 33 15 15 0 5 29
Several 20 15 15 0 0 29/Act
ual
In general the markup included field staff and small tools and
supplies up to $200.
Remarkably, the same percentages were uses if the lump sum was
negotiated, or if a force account (time and material) method were
used.
Corps / GSA
• Old manual
• Uses 15% G&A
• Variable profit, 3.6% to 13.2% depending on
risks
• Risk factors:
– “Degree of risk”
– Relative difficulty
– Size (smaller, larger)
– Period of performance (longer, larger risk)
– Subcontracting (more, smaller risk)
• Profit + G&A = 18.6% to 28.2%
DOT Change Order Profit
• Assumed mix of cost types
• AK 24%
• Colorado 41%
• Florida 17.5%
• Indiana 20.7%
• Ohio 25.7%
