Construction Management Real Estate Development

Question: Define the Construction Management for Real Estate Development. Answer: The contractors, designers, developers and owners in construction industry are striving to find better opportunities for increasing the success of their projects by integrating the various factors of construction management throughout the stages of a projects life cycle. In the current context, whereas Project Delivery sets the rule book, it is the Contract Document sets the rules for the players. The players need to focus on the following Pre-Construction Services - Project Conception Project Delivery Project Design Contract Documents Bidding or Negotiating or Procurement For the purpose of this paper, the focus shall be on Project Delivery and Contract Documents as per Rahman Mundhada, (2013). Project Delivery This is the process which controls the procedures comprising of designing and building a project. Project Delivery forms the basis of the contractual relationship between the developer, architect / designer, site engineer and the contractor(s) for deciding the project management services which shall be utilized for completing the project, suggest Rahman Mundhada, (2013). These factors can be achieved by adopting any one of the following Delivery Methods: Design-Bid-Build Design-Negotiate-Build Design-Build Construction Management at Risk Of these four, the following two are specified as The Traditional Delivery Methods Design-Bid-Build Design-Negotiate-Build Whereas, the considered as the Modern Delivery Methods Construction Management at Risk The Design/Build Delivery Method Contracts Once the project management has arrived at its decision about the Delivery Method, it needs to decide about the Contract Document. Basically, a contract document is an agreement between two parties, specifying certain terms and conditions under which one party agrees to take the services of the other party against a pre-agreed consideration, assert Kandale Patil, (2013). Contract Types Some of the frequently used contract types are: Lump Sum or Fixed Price Unit Price Cost Plus Fee Cost Plus with a GMP Selecting A Method Of Delivery The following factors help in selecting the appropriate method: Developers own capability, qualification and experience. The form, magnitude, complexity and function of the project. Meeting the Cost, Budget and other Financial Challenges. Establishing the project timeline. Utilizing the services of a competent contractor to meet the project timeline. Sequencing of the project by the Contractor. The Traditional Method: Design-Bid-Build The Design-Bid-Build is the most often chosen method. The responsibility of the Design is with the Owner, as per Sandercock, (1990). The first requirement of this delivery method is the design and this is completed prior to commencing the pricing or bidding or construction process. Once the design has been finalised, the developer enters into a contract with a contractor who responds by a competitive bid for the project. The process of competitive bidding is used for determining the least project cost by defining the scope of work in the contract document, asserts Sandercock, (1990). Design-Bid-Build Limitations This method works on well-defined procedures and rules of conduct and experience of all parties concerned. Any risk connected with cost-increases is dependent on the completeness of the contract document and this gains importance as the actual cost of construction of the project is not finalised till all bids are received. Normally, a design-bid-build project has a specific timeframe and this does not allow the project to be fast- tracked. In case of poor contract documents, if the scope of the project is not defined accurately, it can increase the chances of change in orders and this can become a problem leading to litigation, as detailed by Luck, Race Black (ed.), (2010). The Traditional Method: Design-Negotiate-Build As in the case of Design-Bid-Build, in this case also the design is prepared before negotiations take place. The difference is that the contractor can be selected on factors other than low pricing and these may be reputation, qualification, expertise and timeline. The process adopted in these negotiations allows both parties to jointly work on issues such as design, project phasing, scheduling and budgeting. The primary consideration for selecting the contractor is its history of maintaining successful project timeline as compared to the cost factor, assert Luck, Race Black (ed.), (2010). Design-Negotiate-Build Limitations The biggest drawback in this method is that lowest cost cannot be obtained as there is no competition on pricing. Public sector contracts are seldom based on this method as public funded projects are required as per law to go for competitive bidding so as to protect the public interest. Among other limitations, in some cases the price may be finalised on incomplete information. Similarly, the cost increase may take place if there are any modifications to design after the price negotiations are completed. Also, the developer is financially committed to the project without ascertaining the final cost, says Davis, (2007). Modern Concept Method: The Design-Build Method Among the currently prevalent methods, this method puts the responsibility of providing design and construction of the project on either of the parties involved. Hence, the obligation to meet the design criteria and fulfil the performance requirements as specified in the contract document is limited to a single party. In this method, the designer and contractor work together to achieve the targets set for cost, schedule and scope of work. This method also offers flexibility for fast tracking the completion of the project, as explained by Tomlinson (ed.), (2012). Selecting A Contract Document In addition to choosing the appropriate delivery method for a project, the developer has also to decide about the contract to be used for the completion of the project. A contract is simply an agreement between two or more entities in which they agree to provide a specific task in exchange for something in return. Hence, the type of contract chosen is basically concerned with the format which details what mode of payment is adopted by the developer for the services provided by the contractor. The parties to the contract have the choice of various contract types as detailed below, as per Tomlinson (ed.), (2012). Contract Types Fixed Price The contractor agrees to provide the specified quantum of work (generally termed as scope of work) against the specific sum on which both parties have agreed. Cost-Plus-Fee Cost-Plus-Fee method specifies that apart from the actual costs connected with the project, an appropriate fee shall be paid to the contractor for covering the overheads and profit. Cost-Plus-GMP Fee In such type of contracts, apart from reimbursing the contractor for the costs incurred, a Guaranteed Maximum Price (GMP) is added in the contract document. The GMP can also be in form of share in profits. Similarly, in case the contract amount is above the contractors agreed price, it is required to compensate the overage. Time and Materials Specific labour rates which are agreed upon are based on the completed work within the stipulated time. All material costs are also reimbursed to the contractor with a pre-agreed mark-up allowed on the actual costs, as per Kandale Patil, (2013). Example: Time and Materials Carpenter $50.00 per hour X 400 hours = $20,000.00 Labourer $30.00 per hour X 100 hours = $ 3,000.00 Backhoe $45.00 per hour X 100 hours = $ 4,500.00 Lumber Invoice $1500 X .15% mark-up = $ 1,725.00 Total Project = $29,225.00 Unit Price or Rate The developer and the contractor agree on the price which will be charged on unit basis for the major elements involved in the project, assert Rahman Mundhada, (2013). Examples Labour rates are paid on an hourly rate per worker or for the equipment used and this includes all associated costs involved in providing labour and equipment. All overheads and profit are included in the labour and equipment rates. All material supplied is paid on invoice cost plus the agreed mark-up. Recommendation In the opinion of this author, Design-Build Method is the most appropriate method to be used. The biggest factor in favour of this method is its long history. It has been used for building the Egyptian Pyramids and The Dome of the Cathedral in Florence, Italy. Why Design/Build? The following factors are in favour of this method Ability for fast tracking the project. High quality projects. Reduced claims and litigations against developers. Early identification of costs. More Contractor involvement throughout the project. The biggest advantage is that the contractor is responsible for finalising the design. Design-Build in used both in the Public as well as the Private Sectors. This method also offers the flexibility of modifying the bidding process with each project delivery method and also allows the developer to choose from the below bid processes any one process which is most appropriate for the project. The Competitive Bid Process. Open Bid. Select Bid List. Negotiated Bidding. The table below clearly demonstrates how the different types of contracts and project delivery methods are used by the different sectors of businesses. The results, although not comprehensive, do indicate that no specific methodology can be considered to be fit for all types of businesses or projects. Each decision has to be taken on case-to-case basis and is influenced by the project type. Plans And Specifications: Types Of Contracts ll Industrial Heavy Specialty Companies Non-residential Highway Trades Fixed Price 61% 56% 47% 74% Guaranteed Max 14% 28% 1% 4% Cost Plus Fee 5% 7% 2% 3% Time and Materials 7% 3% 6% 13% Construction Management 2% 55% 0% 1% Unit Price 10% 0% 43% 5% Other 1% 1% 0% 0% List of References Davis, T. 2007, The Real Estate Developer's Handbook: How to Set Up, Operate, and Manage a Financially Successful Real Estate Development. Atlantic Publishing Company, Ocala, FL. Kandale, A.K. and Patil, S.S. Comparative study of Rectangular Pre-stressed Concrete Flat Slab and RCC Flat Slab. International Journal of Engineering and Innovative Technology (IJEIT), Volume 2, Issue 11, May 2013. Luck, G. W., Race, D. and Black, R. (ed.). 2010, Demographic Change in Australia's Rural Landscapes: Implications for Society and the Environment. Springer, Collingwood, VIC. Rahman, V.K. and Mundhada, A. R. Comparative Study of RCC and Pre-stressed Concrete Flat Slabs. International Journal of Modern Engineering Research (IJMER) Vol. 3, Issue. 3, May.-June. 2013 pp-1727-1730. Sandercock, L. 1990, Property, Politics, and Urban Planning: A History of Australian City Planning, 1890-1990. (2nd ed.). Transaction Publishers, New Brunswick, NJ. Tomlinson, R. (ed.). 2012, Australia's Unintended Cities: The Impact of Housing on Urban Development. Csiro Publishing, Collingwood, VIC.