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THE CONSTRUCTION INDUSTRY - PowerPoint Powered By Docstoc

Construction is Important
 $1.2 Trillion (2006)=
   total annual volume of new construction in the U.S.
 9% of U.S. Gross National Product is expended on
 Almost 1 out of every $10 spent for goods & services is spent
  on Construction
 7.7 Million Employed in Construction
   5.5% of workforce
Construction is Important
 Regarded as bellwether of economic growth in the U.S.
Construction Project
 Diverse Range of Specialized Services including:
   Financial organizations
   Government agencies
   Engineers
   Architects
   Lawyers
   Insurance and surety companies
   Contractors
   Material manufacturers and suppliers
   Building tradesmen
Construction Project
 “No 2 jobs are the same”
 Construction team
   Architects
   Engineers
   Building tradesmen
   Subcontractors
   Materials dealers
   others
Construction Project
 Unique complexities of each job include:
   Subsoil conditions
   Surface topography
   Weather
   Transportation
   Material supply
   Utilities and services
   Local subcontractors
   Labor conditions
   Available technologies
Project Stages
1.    Planning and Definition (Owner)
     1.   Establishing broad project characteristics:
          1.   Location, Performance criteria, size, configuration, layout,
               equipment, services, others
2.    Design (Architect and/or Engineer)
     1.   Final working drawings and Specifications
3.    Procurement and Construction (GC or other)
     1.   Procurement is the ordering, expediting, and delivering of
          key project equipment and materials
     2.   Construction is the process of physically erecting the
          project and putting the
Project Stages
       Construction is the process of physically erecting the
        project and putting the materials and equipment into
    •      Involves:
             Manpower
             Construction equipment
             materials
             Supplies
             Supervision
             Management
Major Players Involved in Project
 Owner
 Architect-Engineer
 General Contractor
 Subcontractor
 Owners Representative*
 Construction Manager*

 The owner is the instigating party for whose purposed
  the construction project is designed and built
 Public
   Projects paid for by appropriations, bonds (municipal and
    general obligation), tax levies, or other forms of financing are
    built to meet a public need.
   22% of projects
 Private
   Owners may be individuals, partnerships, corporations, or
    various combinations thereof.
   78% of projects
 Owner’s Representative
 Construction Manager

 Architect-engineer -(aka design professional) is the
  party that designs the project
 Typically private & independent
 Design-Construct Arrangements
 less common
 design and construction services performed by single
 Corporate Partnerships call upon the architect-
  engineer to provide a range of design, engineering, and
  related services on an open-ended basis
General Contractor

General Contractor
 General Contractor- (aka Prime Contractor)
 Contracts w/the owner for the construction of the
 Manages construction process
 GC is in complete charge of the field operations
   Allocates resources of manpower, equipment, and materials to
    the project w/goal of maximum efficiency of time and cost
 Subcontractor- is a construction firm that contracts w/a
  general contractor to perform some aspect of the
  general contractor’s work
 Contractual relationship b/w the GC and the
   The owner does not have a contractual relationship
 Liability issues
 Reasons Why GC’s Should Utilize Subcontractors:
 Expensive and laborious to employ craftsmen in multiple
 Expensive to own equipment for each trade
 Licensing, bonding, and insurance requirements for each
  trade is burdensome
 Subcontractors can be quicker and cheaper
Construction Categories
 Residential Construction
 Commercial or Building Construction
 Heavy or Engineering Construction
 Industrial Construction
Construction Categories
 Specialties:
   Electrical
   Concrete
   Excavation
   Piping
   Roofing
Residential Construction
Residential Construction
 Includes single-family homes, condominiums, multi-unit
  townhouses, low-rise garden, type apartments, high-rise
  apartments, and lofts
 Design performed by owners, architects, or builders
 Construction performed by owner, builder-vendors, or
  independent contractors
 Accounts for 56% of new construction
   (2004-US Census Bureau)
Residential Construction
 Affected by:
   instability of market demand
   governmental regulation
      Codes, RESPA, zoning
   national monetary policy.
 Financed through:
   private financial institutions
   quasi-government agencies such as FNMA, GNMA, and VA.
 Typified by periodic high rates of contractor business
Building Construction

Commercial or Building Construction
 Institutional, educational, light industrial, commercial,
  social, religious, governmental, and recreational
 26% of new construction
 Privately financed
 Design typically by architects
 Constructed by GCs or CMs
Heavy or Engineering Construction
 Structures planned and designed by engineers:
 Typically publicly financed
 16% of new construction, (2004-US Census Bureau)
 More functional than aesthetic
   utilize materials including: earth, rock, steel, asphalt, concrete,
    timbers, and piping.
Engineering Construction
 3 Subgroups include:
 Highway & Airfield-
 covers clearing, excavation, fill, aggregate production, sub-base and base,
    paving, drainage structures, traffic signs, lighting systems, etc…
   Heavy Construction-
   includes sewage & water treatment plants, dams, levees, pipe & pole lines,
    ports & harbor structures, tunnels, large bridges, reclamation & irrigation
    work, flood control structures, and railroads
   Utility Construction-
   involves sanitary and storm drains, curb & gutter, street paving, water lines,
    electrical & telephone distribution facilities, drainage structures, and pumping
Engineering Construction
 Cool Tools:
 Equipment includes: power shovels, tractor-scrapers, pile-
  drivers, draglines, large cranes, heavy-duty haulers, paving
  plants, rock crushers, etc…
Industrial Construction
 Includes projects associated with the manufacturing or
  production of a commercial product or service.
 Structures are highly technical in nature
 Account for only 2% of new construction, (2004-US Census

 Constructed by large, specialized contracting firms that
  do both the design and field construction.
 Design performed typically by an engineer.
Industrial Construction
 Typically privately financed
 Examples include: Refineries, steel mills, chemical plants,
  smelters, electric power generating stations, heavy-
  manufacturing facilities, and ore-handling installations.
Project Financing
 By Owner:
 By Builder-Vendor:
 By Developer:
Project Financing
 By Owner:
 Public Owners:
 Financing obtained by tax revenues, appropriations, or bonds
 Private Owners:
 Financing obtained through banks, savings & loan
  associations, insurance companies, real estate trusts, or
  governmental agencies
Project Financing
        Private Owners: (Most Common)
        Owner must typically arrange 2 kinds of financing:
          Construction Loan (Short Term)
          Mortgage (Long Term)- aka Permanent Loan
1.       Construction Loan: Provides funds for land and
         construction and extends through the construction
         period. Involves draw schedules
2.       Permanent Loan: Repays the construction loan upon
         completion and lasts typically from 10 to 30 years.
         Are typically 75-80% Loan-to-Value (LTV)
Project Financing
 By Builder-Vendor:
 Designs, builds, and finances the construction of structures
  for sale to the general public. i.e. tract housing where
  builder-vendor buys land and builds housing units.
Project Financing
    By Developer:
    2 ways that developers obtain financing for owner’ project
1.   Design-Finance Concept: Developers of large buildings for
     business corporations and public agencies arrange a design and
     a form of financing for the project. This process minimizes or
     eliminates the initial capital investment by the owner.
2.   Design-Finance-Construction Concept: Developers arrange
     for the design, financing, and construction of a project.
    Developer sells or leases the completed structure to the owner
The Contract System
 Typically the Prime Contractor enters into a contract w/the
 Contract details the nature of the construction to be
  accomplished and services to be performed.
 Prime Contractor may be selected by: competitive bidding,
  negotiation w/ a selected contractor, or a combination of
Competitive Bidding
 Projects are usually awarded to the lowest responsible
 Competitive bidding of public construction projects is
  normally required by law and is formal procedure for
  public agencies.
 Contractors must estimate a structures cost while it
  exists only on paper
 If costs exceed estimate, the loss is borne by the
 Bidding encourages efficiency and innovation
Competitive Bidding
 Competitive bidding can lead to the selection of incompetent
  contractors, excessive claims by the contractor against the
  owner, and disputes and litigation b/w the two parties
 2 Types of Bidding:
 Open Bidding:
 Closed Bidding:
Competitive Bidding
 Open Bidding: (aka “Hard Bid” Approach)
 Most common form of bidding
 All contractors use the same proposal form provided w/the
  bidding documents, w/the bids being opened and read
 Proposal is contractors final offer
Competitive Bidding
 Closed Bidding:
 Involves no prescribed form nor public opening.
 Contractors submit their qualifications, their bid and
  they often tender suggestions as to how costs may be
 Owner selects a proposal or interviews those
  contractors whose proposals appear most advantageous
  and negotiates a contract w/one of them
The Negotiated Contract
 It is a common practice for a private owner to forgo the
  competitive bidding process entirely and to hand-pick a
  contractor on the basis of reputation and overall
  qualifications to do the job.
 Most negotiated contracts are of the cost-plus-fee type.
Competitive Negotiation
 Now used by the Federal Government due to the passage
  of the Competition in Contracting Act of 1984
 This act was passed to eliminate the noncompetitive,
  sole-source contracts that were often used by the U.S.
  Dept. of Defense
 Prequalified contractors submit priced proposals. The
  agency then advises each contractor how it can improve
  its proposal from the standpoint of both design and cost,
  and new proposals are submitted.
Linear Construction
 Refers to the procedure of design, bidding, or negotiation,
  and construction following one another in consecutive order.
  (aka design-then-construct)
 Each phase is finished before the next one begins
 Complaints: It is not always an efficient one w/regard to the
  total time required for the design and construction of a
Phased Construction
 aka Fast-Tracking, refers to the overlapping
  accomplishment of project design and construction.
 Early phases of the project are under construction while later
  stages are still on the drawing boards
 Results in reduction of total time to achieve completion
Phased Construction
 Fast-Tracking helps counteract high interest rates and
  affords earlier usage of the structure.
 Criticisms:
 emphasizes time versus quality
 Final construction cost is unknown at the start of fast-
  tracked construction and if bids for subsequent phases of
  the work come in over budget, redesign options to
  reduce cost are very limited
The Team Approach
 The private owner selects the architect and building
  contractor as soon as the project has been conceived.
 The 3 parties constitute a team that serves to achieve
  budgeting, cost control, time scheduling, and project
  design in a cooperative manner
 This process offers the owner the advantages of time
  savings, cost control, and improved quality
 Owner sets goals and parameters and provides funding
Construction Contract Types
 Construction Services Only
 The Single Prime Contract
 Separate Prime Contracts
 Design-Construct
Construction Services Only
 This form of contract provides that the general contractor has
  responsibility to the owner only for the accomplishment of the
  field construction.
 The contractor is completely removed from the design process
  and has no input into it
 The design professional acts essentially as an independent
  contractor during the design phase and as an agent of the owner
  during construction operations.
 Owner, architect-engineer, and contractor play narrowly defined
  roles, semi-independently of each other.
The Single Prime Agent Contract
 The owner awards construction of the entire project to a
  single prime contractor
 GC accepts complete accountability, not only to build
  the project according to the contract documents, but
  also to ensure that all costs associated w/the
  construction are paid
 The GC has a nondelegable duty to the owner for the
  proper performance of the entire work and remains
  liable under the contract w/the owner for any negligent
  or faulty performance, including that of the
Separate Prime Contracts
 The project is constructed by several different prime
  contractors, each being in contract w/the owner and
  each being responsible for a specified portion of the total
 Advantages:
 The saving of the markup on work that would otherwise
  be subcontracted
 Must have strong, centralized management control
Design-Construct Contract
 Aka “Turnkey”- When the owner contracts w/a single firm for
    both design and construction. This is also referred to a “design-
    build” project
   The contractor obtains project financing, procures the land,
    designs and constructs the project, and hands it over to the owner
    ready for occupancy.
   Advantages:
   Achieves both time and cost savings for the owner
   Phased construction can be utilized
   Typically cost-plus-fee & a guaranteed maximum cost
   Single responsibility for entire project
Design-Construct Contract
 Interested companies submit advanced design concepts and
  cost proposals
 Fixed-Price-Incentive Contracts
 Provide for shared savings b/w the owner and contractor to
  encourage cost savings from the contractor’s originally
  proposed guaranteed maximum price
Pre-Engineered Metal Buildings
 Account for more than 50% of the low-rise commercial
  and industrial construction market in this country
 Now are custom engineered to meet the owner’s specific
 Advantages:
 Speed of construction, design flexibility, high quality,
  economy, minimal maintenance, and relative ease of
  future expansion
Pre-Engineered Metal Buildings
Construction Management (CM)
 The providing of professional management services to
  the owner of a construction project w/the objective of
  achieving high quality at minimum cost and time.
 CM is performed by design firms, contractors, and
  professional construction managers
 Owners will replace GC’s w/ CM’s and accept more
 Typically a fixed fee plus reimbursement of management
Project Management
 Owners who engage firms to function as an arm of their own
  staff and act as an agent for a fee and not at risk are said to be
  obtaining “project management”
 These firms are financially liable only for their fee, do not
  contract directly w/the prime contractor or subcontractors,
  and assume none of the responsibility of the GC
 CMAA: Construction Management Association of America
 Develops accepted professional identity for construction
  management and uniform standards for CM practice
 1986-CMAA published its standards of practice for
  construction managers
 Is an arrangement where the owner enters into a single
  contract for both design and CM services
 A single entity both designs the project and acts as a
  construction manager during the construction phase
 Typically is a result of a joint venture b/w a design firm
  and a construction management enterprise
 Usually implement phased construction
Construction by Force Account
 Force account, also known as doing work by day labor,
  occurs when the owner acts as the prime contractor.
 Owners may assume the responsibility of coordinating
  and directing the work of the subcontractors
 Is generally more expensive than the competitive-bid
 Quality of work is often worse than when done by a
  professional contractor
General Conditions Construction
 aka “Support Construction” are services that GCs customarily
  provide for their own forces and for subcontractors
 Services include temporary heat, access to project, hoisting,
  weather protection, guardrails, stairways, fire protection,
  drinking water, sanitary facilities, job security, job sign, trash
  disposal, and job parking
Small and Disadvantaged Business
 Programs have been devised by public agencies to assist
  small businesses (SBEs), minority business enterprises
  (MBEs), and businesses owned by women (WBEs) in
  obtaining a larger share of public works construction
 HUBs – Historically Underutilized Businesses
 “Set-Asides”- Certain public construction contracts are
  designated as being available only to such businesses
Small and Disadvantaged Business
 Another scheme requires GCs bidding on certain public contracts
  to subcontract at least a designated percentage of their work to
  small businesses or disadvantaged contractors.
 Results:
 Confusion for participants, difficulty in management, inconsistent
  enforcement, increase in costs for public projects
 National Association of Minority Contractors (NAMC):
  Helps minority contractors make the necessary contacts and meet
  established certification requirements
Seasonality in Construction
 Seasonal fluctuation varies w/the geographical location and
  type of construction activity.
 Summer is peak season, winter is slack period
 Total construction employment in the U.S. during a typical
  year will vary approximately 25% from the summer to the
  winter months
 Special laws pertaining to construction that are designed to
  protect the public health and safety.
 Requirements include zoning regulations, building codes,
  environmental regulations, building permits, field
  inspections, safety and health regulations, and the licensing of
  contractors and of skilled workers
 Licensing of contractors is not universally required, but
  many states and local governments do require that some
  or all contractors doing business w/in their jurisdictions
  be licensed as such
 Statutes require contractors to not only pay a fee but also
  meet certain minimum qualifications
 Most of these laws require licenses only for contractors
  whose annual volume of business exceeds certain
  designated amounts
 Some states now require that any party providing
  construction management services in those states possess a
  valid state contractor’s license
 Many political jurisdictions require the licensing,
  registration, or certification of workers in certain crafts
Licenses Bonds
 Some states and local govts. require that all licensed
  contractors, including subcontractors, who operate w/in
  their jurisidiction post permanent surety bonds w/the
  appropriate govt. authority
 Bonds are required to protect from unpaid debt or
  malfeasance on the part of the contracting firm
 Bonds also guarantee that the contractor will make
  proper payment for required permits and inspections
Building Codes
 Building Codes are rules that control the design, materials,
  and methods of construction, and compliance w/them w/in
  their jurisdiction is mandatory.
 Goal of protecting public health and safety
 Are MINIMUM standards
Building Codes
   Most local codes are based on the International Building Code
   International Plumbing Code
   International Mechanical Code
   Fire Code
   Fuel Gas Code
   Zoning Code
   Residential Code
   Property Maintenance Code
   Energy Conservation Code
   Private Sewage Disposal Code
   ICC Electrical Code Administrative Provisisons
Building Codes- History
    Most local codes, prior to 2003, were based on three
     model building codes that are sponsored by different
1.   Basic/National Building Code:
2.   Uniform Building Code:
3.   Standard Building Code:

•    International Building Code
Building Codes
   Basic/National Building Code:
   Published by Building Officials and Code
    Administrators International (BOCA), used
    predominantly in the Northeast & Midwest
   Uniform Building Code:
   Published by the International Conference of Building
    Officials (ICBO), used principally in the Western half
    of the U.S.
   Standard Building Code:
   Published by the Southern Building Code Congress
    International (SBCCI), use is predominant in South
   International Building Code, International Code
Building Codes
 Codes for specialty trades include:
 National Plumbing Code:
 Published by the American Public Health Association and
  the American Society of Mechanical Engineers
 National Electrical Code:
 Published by the American Insurance Association
 Life Safety Code:
 Published by the National Fire Protection Association
Building Codes
   For code enforcement, political subdivisions normally
    require various kinds of permits, field inspections at
    certain states of construction, and test reports
   Documents are reviewed for design conformance
    w/applicable codes by the responsible authority
   Permits for plumbing, electrical work, heating
    equipment, signs, air conditioning, elevators and
    escalators, and refrigeration systems are also normally
Building Codes
   Occupancy permits are sometimes required after
   Conformity w/the applicable building code is
    primarily the responsibility of the design professional
   GC is under a legal duty to notify the owner or design
    professional concerning any deviation from the
    requirements of the applicable building code that
    comes to the contractor’s attention
Contractor Organizations
 Associated General Contractors of America
 Represent GCs
 Includes building, heavy, highway, and utility contractors
 Associated Builders and Contractors
 Represents member contractors who operate open
  shops, aka “merit shops”
Contractor Organizations
 National Association of Home Builders
 Represents housing industry
 American Road and Transportation Builders Association
 Represents highway and heavy contractors
Contractor Organizations
 Services provided:
 Provide information about, and assistance w/ labor
  negotiations, monitoring local and federal legislation,
  sponsoring safety and apprenticeship programs,
  providing tax information, holding conferences,
  promoting public relations, and serving as clearinghouses
  for construction information
 Local chapters are usually affiliated w/national
Business Failures in Construction
 The construction contracting business has the second highest
  failure rate of any business, exceeded only by restaurants
 Most failures are firms w/small size and limited experience
Business Failures in Construction
 Failures all have underlying management weaknesses
  including: (Dun & Bradstreet, Inc.)
 Incompetence
 Lack of company expertise in sales, financing, and
 Lack of managerial experience
 Lack of experience in the firm’s line of work
 Fraud, neglect, disaster, or unknown

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