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CONSTRUCTION PRICING – A FOUNDATION FOR QUALITY

CONSTRUCTION PROJECT MANAGEMENT


Ladislav Bevanda, Mario Jurišić
University of Mostar, Faculty of Civil Engineering; Hering d.o.o. Široki Brijeg,
ladislav.bevanda@tel.net.ba , info@gp-hering.com , jurisic@gp-hering.com

Abstract: This paper presents pricing methodology that is applicable to different


processes as related to a specific project (management processes as well as processes
related to a final product of a project). Authors present proposals for construction pricing
that would serve as a foundation for quality project management (ISO 10006:1998) and
for economy quality managing (ISO 10014:1998). Proposed pricing tends to be
applicable to all kinds of products: software, hardware, services and processed products.
Pricing methodology introduces risk analysis in construction projects as an exact category
therefore eliminating to the greater extent the factoring of indirect project expenses and
achieving complete cost transparency.

Keywords: project management, construction pricing, quality in project management,


risk analysis

1. Introduction
Traditional approach to estimating construction costs assumes two kinds of costs, indirect
and direct. Direct costs are those of individual executions of positions of building
structure for which most often accepted average standards of outputs are those for
corresponding technological possibilities of production (expenses of labour, material,
services and engines). Indirect costs include all other project costs, and are typically
divided into construction site expenses and company expenses. Current economic
situation (market economy, transition, high degree of risk in business operations, ...) a
perceived need to establish quality control system as well as quality in project
management, require new approach to project costs that would make transparent cost
structure a possibility.

2. Main Part
The often emphasized need for establishing the quality control/quality assurance system
in business environment as well as for quality control in project management requires
defining (establishing) a system, process and procedure definitions, work instructions and
specifications. It is more complex in case of construction project management since
construction is always in different location, under new conditions and product is usually
not the same. Project management process means “planning, organization, supervision
and control of all aspects of the project in order to achieve project goals” and it includes
the following processes: overall project management, project scope management, time
management, cost management, quality management, human resources management,
facilities management, managing communications, risk management and procurement
management (ISO 10006). Thus, models to establish the systems of quality control and
project management have to be universal in order to cover a great deal of various
situations that may arise in construction projects. In this paper it will be pointed out the
following, in connection with the construction projects: system definition, process
definition, within the establishment of the system for quality management a model for
project costs calculation that will be a sound basis for project management processes.
Among fundamental requirements with regards to project cost which are emphasized by
ISO 10006 ( quality standards in project management) and ISO 10014 ( quality standards
in economy quality managing) regulations are:
- estimating and managing all project costs and assuring project completion within
the limits of project estimates through development project cost structure,
budgeting of the project, project costs control;
- distribution of all expenses with regards to project phase, organizational units
OBS (organizational breakdown structure), work units WBS (work breakdown
structure), key resources RBS (resource breakdown structure), and types of
expenses (account codes), or some other expense classification specific to
particular trades, but not included in general expenses;
- distinguishing among conforming costs (due to good quality) and mon-
conforming costs (due to bad quality).

2.1. System Definition


Organization is a group of people and institutions with defined responsibilities, rights and
relationships. Basic organization is such an organization that decides to undertake a
project and to delegate it to project organization. Basic organization and its management
are trusted with investments funds (its own and from outside) to manage them with the
goal of returning dividends to the owner (interest on outside investments). Project
organization is such an organization that carries out a project.
Organizational structures OBS (organizational breakdown structure) are represented with:
Owner representatives (shareholders assemblies and its management; supervisory boards,
executive boards, outside auditors) – “pd”.
Basic organization management (management, research and development functions,
human resources function, production, supply and logistics, design function, production
preparation function, sales function, financial function, quality control function,
communication function) – “io”.
In general, project management is comprised of the following functions: project manager,
product manager, quality manger, supply and project logistics, human resources
management, project cost management, communication management, risk management –
“up”.
General scheme of construction project (hardware) is presented by construction
management “gr” and construction site management “grs”, with functions as follows:
Construction management (multiple construction sites) consists of: construction manager,
clerical/secretarial, supply and logistics, cost control, quality control, construction
security. Construction site management consists of: site manager, building managers,
superintendents, site supply and logistics, site cost control, quality control, laboratories,
site security.
Phases of the construction project that need to be analyzed are: concept (idea, market
demands, research, preliminary technical documentation, planning conditions (general
plan for city, town, country), preliminary permits, investment study, feasibility study,
budgeting, property rights); definition (bidding and awarding a contract for design,
project scope, working drawings preparation and supervision, working drawings
approvals, revisions and corrections, building permits, bidding for construction contract,
preliminary plans for construction management, cost estimates, awarding a construction
contract); construction (final construction management plan, pre-construction meeting
with contractor, preparatory works, building, delivery and assembly of equipment, final
inspection, acceptance, use permit); and use of objects, warranty period and maintenance.
Levels of observation of physical model of building projects – hardware from project
product point of view (WBS): 1. Design, 1.1. Phase, 1.1.1. Subphase-Activities, 1.1.1.1.
Complex processes, 1.1.1.1.1. Work processes-work standards .
In this context, work process (work standard) is average quantity of all resources (time,
material, equipment, others, …) that are necessary for a trained group (team) to make
certain standardized product units (software, hardware, services, processed products) in a
particular way and order of work operations, using particular tools and machines, under
normal conditions requiring normal efforts. These processes can involve either owner
representatives or representatives of basic organization, design organization, constriction
management, and construction site management, site installation and disassembly or
execution of individual positions.
Standardization is related to certain agreed standards of definition and description:
products rank, activities of owner representatives, basic organization activities, activities
of project management, activities of construction management, construction site
management, site preparation or execution of individual positions of project’s product
elements, (hardware, software, services, processed products). Work process assumes that,
during its duration, there are no changes in workgroup’s compositions at all levels of
organization.

2.2. Process Definition


Process is any activity that accepts inputs and converts it into outputs. Basic process
types are management processes and processes related to project products ( design,
production and verification, whether it is software, hardware, service or process product).
In modeling of processes on various organizational levels (OBS) one should be guided by
following: “ In order to fulfill various requirements, to maintain constant perfection and
improvement, to manage challenges, a unique idea and a way of thinking of the whole as
well as its parts are needed” - fractal1 structure - a complete structure is reflected in
every detail. Through the process of construction design realization, respecting the
above idea, there are (whether hardware - building structure H, software - technical
documentation, program S, services U, processing product P):
1. Managing Processes: owners’ representatives processes, basic organization
processes, project management processes, construction management processes,
construction site management processes, (in case of software or design
documentation those processes are related to management of particular phase or
parts of project documentation – design);
2. Project Product Processes: construction site setup and removal, execution of
individual positions (average output standards), (building construction, civil
1
“fractal “– comes from a chaos theory, means “self similar”
engineering construction, tunnels, various specialty standards), work on design
documentation production (various manuals for consultant services in funded
construction (KOPROJEKT Zagreb 1991 (S,U), or Manual for estimating
engineering and architectural services in Croatia)) ( in case of software, design
documentation those processes are related to design associates for specific phase
or part of project documentation – design), processes for various services (
service standards), processed products processes ( standards).
The formation of elementary operations is the same in all cases:
- building material (exact or estimated),
- labor (exact or estimated, in relation to management or to project product),
- services of others in realization of elementary operation ( exact or
estimated),
- infrastructure (means) for operation (one company’s assets (capital,
machinery, equipment, ...).
Definitions bellow will relate to the construction phase of a project.
Work processes of owners’ representatives “pd” consist of shareholders’ assembly
processes, supervisory board processes, executive board processes, and outside auditors,
and are vague and not well defined group of processes that needs to be determined on the
annual basis. They need to be defined through procedures and actions for owners’
representatives processes. These expenses are calculated on an annual basis and are
incorporated into a project based on their share of planned annual operation of basic
organization. They consist of: Rpd – work of shareholders’ representatives, Mpd –
material expenses of shareholders’ representatives, Upd – services of others to
shareholders’ representatives, Spd – means (dividends from own capital investments,
interest on investment of others) of shareholders’ representatives.
Work processes of basic organization consist of top, middle, and lower management of
basic organization (company, general contractor). They are often described in general
terms in job classification regulations and the like. They need to be defined through
procedures for basic organization processes by standardizing them with regards to size
and complexity of basic organization. These expenses are calculated on an annual basis
and are incorporated into a project based on their share of planned annual operation of
basic organization. They consist of: Rio – basic organization labor, Mio – material costs of
basic organization, Uio – services of others to basic organization management, Sio – basic
organization means (equipment and machinery amortization, and maintenance) not
amortized through projects.
Project management processes consist of processes on the project realization listed
below (defined in project management procedures), and which are standardized based on
the size and type of project: determining a project goal and managing other project
processes, dependency among management processes (project and project plan initiation,
interaction management, challenge management, project completion), processes related to
scope of work (concept development, development and control of project scope,
definition of work items, control of itemized activities), time related processes ( planning
of interdependency of project activities, activity duration estimate, activity schedule
preparation and control), cost related processes (cost estimates, cost calculation, cost
control), quality management processes, means related processes (infrastructure) ( means
planning and control), human recourses processes(defining of project organizational
structure, selection of personnel and forming a team), communication processes, risk
management processes (ISO 10006:1998).
These expenses are calculated at the project management level and are added to the
project; they consist of: Rup – project organization labor, Mup – project organization
material expenses, Uup – services of others to project organization management, Sup –
means (equipment and machinery amortization) of project organization which are not
amortized through construction sites.
Work processes of construction management consist of managing construction
activities and currently are not standardized group of tasks in managing multiple
construction sites. Through quality manual, they need to be defined as a part of
procedures for managing multiple construction sites by standardizing them with regard to
size and complexity of project. These expenses are calculated at the multiple
construction site management level and they consist of Rgr – construction management
labor, Mgr – construction management material expenses, Ugr – services of others to
construction management, Sgr – construction means (equipment and machinery
amortization) which are not amortized through single construction site.
Work processes of construction site management consist of construction site
management activities and also are not developed and defined system of construction site
management tasks. Through quality manual, they need to be defined as a part of
procedures for managing construction site by standardizing them with regard to size and
complexity of project. These expenses are calculated at the construction site management
level and they consist of: Rgrs – construction site management labor, Mgrs – construction
site management material expenses, Ugrs – services of others to construction site
management, Sgrs – construction means (equipment and machinery amortization) which
are not amortized through single task completion or construction site installation.
Work processes of installation and disassembly of construction site are those
activities that, within the given technology, establish proper work conditions for
realization of building structure (hardware). These expenses are calculated at the
construction site installation and disassembly level and they consist of: Rsi – construction
site installation labor, Msi – construction site installation material expenses, Usi – services
of others during construction site installation, Ssi –means (equipment and machinery
amortization) regarding construction site installation.
Work processes of individual execution consist of activities of particular positions
(elements of structure, of hardware) of project products (building construction), for
example, Average output standards (building construction, roads, tunnels). These
expenses are calculated at the level of single task completion of structure position and
they consist of: Rpi – individual execution of single task completion labor, Mpi –
individual execution of single task completion material expenses, Upi – services of others
to individual execution of single task completion, Spi –means (equipment and machinery
amortization) regarding individual execution of single task completion.
Work processes of technical and consulting services in realization of construction
projects may be defined from the Manual for consulting services in investment
construction KOPROJEKT Zagreb 1991 (H,S) or from Croatian Chamber of Commerce
Manual for service pricing of architects and civil engineers of Republic of Croatia
(Narodne novine RH Zagreb, July 22, 1999), where the scope of services is defined too.
In Germany, the cost regulations (payments, fees) of architects and engineering staff in
realisation of construction projects, Honorarordnung für Architekten und Ingenieure
HOAI, describe works of architects and engineers in realization of project and part-time
groups with corresponding payments.
Work processes on realization of services as project products are defined within various
independent standards of services (U).
Work processes on realization of processing products as project products are defined
within various independent standards for particular processing products (P).

2.3. Risk Analysis In Construction Pricing


1. Risk Identification
In the process of identifying risks in construction projects, check lists need to be made
with all possible causes of risks outlined. Risk sources are divided on outside risk sources
(legal, political, economical, social, environmental) and inside risk sources (management,
technical documentation, human factor, supply and logistics, contracts).
2. Risk Estimation
Based on outlined risk causes and by analyzing the effects of those risks in previous
projects (through check lists) it is possible to estimate the effects of risk factors on a
certain parts of calculated price.
That way, the difference between the final and calculated price, due to risk influence,
could realistically be presented as a function of probability distribution. Chart of
probability distribution defined this way could be used to make cumulative chart of
probability deviation. It is the whole over by testing determined interval (let’s say –10%
to +12%) and at the end of the interval its value is 1. Instead of that, analyzed events
could be presented by one of a known probability distribution charts, (for example,
normal, gamma, lognormal…) or by their cumulative charts of probability.

Cum ulative chart


probabiliti of probability
deviation deviation
1

0 0
deviation interval deviation interval

This chart should be defined for each influence of any identified cause of risk to any part
of calculative price.
Using “Monte Carlo” analysis, it is possible to determine the interval of expected project
budget, and to predict coverage of risk, in other words, percentage wise, how much it is
certain that offered price will not be exceeded. Step-by-step, it looks like this:
Using a random numbers generator a series of random numbers in interval from 0 to 1 is
formed. This way, obtained random numbers are transferred through cumulative chart of
probability deviation to random numbers from scope of defined interval for every part of
price and its corresponding risk. This way random numbers are formed with wanted
distribution of probability for each of our price parts and its corresponding risk separately.
Random project budget is obtained as a sum of random “pretended” parts of price. With
enough numbers of passes (iterations), a chart distribution probability of outcomes of
project budget can be formed. From its cumulative probability distribution chart a price
could be read that corresponds to exactly chosen probability of outcomes that project
budget will not exceed expected. Enough iterations is when the distribution chart become
convergent.
generated random number

Cumulative chart of
cumulative chart
of probability
probability of project budget
1 deviation 1
0.85

probabiliti distribution
of calculated project budget

0 random deviation Project budget with 85% probability


interval of random
deviation interval calculated project budget

If Ci represents parts of calculative price “i” and there are altogether “m” of them which
are affected by risk (parts of calculative price are execution of individual positions,
construction site installation and disassembly, construction site expenses, project
organization expenses, basic organization expenses and owner representatives expenses),
Xij represents random variable deviation from calculative price in given pass for every “j-
th” risk which affects i-th price Ci. There are “ni”-th Xi –s and as many as there are
identified risks affecting individual price parts Ci. Random calculated project budget C
,in one iteration, is defined as

C=C1*(1+(X11+...+X1n1))+C2*(1+(X21+...+X2n2))+...+ Cm*(1+(Xm1+...+Xmnm))

3. Development of Reactions to Risks – making of risk awareness plans


Based on determined risk sources and their influence on price, risk awareness plans are
made by identifying activities necessary to minimize risk effect on project. It is usable to
determinate correlation between each risk influence on project budget.

4. Risk Control
Carrying out and revising of risk plans is done by comparing planned (calculated) values
of project price components to the real ones which are determined during project duration
(based, for example, on check lists or quality observations) respecting assumed risk
causes in comparing them with real risks that have happened during a project ( identifying
them through the life of project). In the phase of control (comparison) of price part
regarding the plan throughout duration of project it is necessary to identify the real risk
that has happened, in other words, to identify a deviation from planned (or determined)
price and determined deviation’s cause. Such control charts could be used to predict
(estimate) quantitative and qualitative influence of a certain risk cause on a certain price
element. Thus, through multiple test readings (controls), it will be possible to determine a
link between risk causes and a probability deviation of predicted calculated price (project
costs) by establishing an identified risk causes control list at the beginning of calculation
(estimation), as well as by recognizing those risk causes’ influence on price and on a
deviation control list of planned cost elements and realized project costs, always taking
into account risks that have already happened.

3. Conclusion
For better quality in managing projects and risks within them attention should be paid to
the following:
-standardization of general and individual technical work and service conditions in
construction business, standardization of works description, as well as standardization and
regulation of work processes: single task completion (either carrying out tasks –
hardware, drawing technical documentation- software, services or processed products),
installation and disassembly of construction site, construction site managing, construction
managing, projects managing, basic organizations managing and work processes of owner
representatives,
-creating a model, at the company level, for risk identification, risk prediction
(quantitative analysis of risks effects on projects), risk awareness and risk control, as
prerequisites for establishment of a good quality system 9001:2000 in construction
business companies.

4. References
Vose D. Risk Analysis, 2001, England, ISBN 0-471-99765-X,
R.Lončarić, (1996) Organizacija uzvedbe graditeljskih projekatat, ISBN 953-96085-2-X
M.Radujković, Upravljanje rizikom kod graditeljskih projekata, Građevinar, 1997, ISSN
0350-2465,
M.Radujković, Voditelj projekta, Građevinar 52, 2000, 143-151, ISSN 0350-2465,
G.Bučar,Normativi građevinskih radova, Građevinar, 1998(3),155-158, ISSN 0350-2465,
J.Marušić(1994), Organizacija građenja,FS Zagreb, ISBN 953-6051-04-4,
R.B.Angus, N.A.Gundersen,(1997) Planing, Performing and Controling Projects,
Prentice Hall, ISBN 0-13-255381-3
William R.Duncan,(1996)A Guide to the Project Management Body of Knowledge
ISBN1-880410-12-5,
R.Dellen,E.Uhlmann(1996):Qualitats management,Rudolf Mueller,ISBN 3-481-01044-3,
Sikavica, Novak, (1999) Poslovna organizacija, Informator, ISBN 953-170—074-5,
M.Žaja, (1991)Ekonomika proizvodnja, Školska Knjiga, Zg, ISBN 86-03-00099-9,
T.Pejović,Izvori i struktura rizika kod planiranja građevinskih projekata,1997,
magistarski rad
Priručnik za konzultantske usluge u investicijskoj izgradnji, Koprojekt-Zagreb, 1991
ISO 10014:1998, ISO 10006:1998, HRN ISO 9000-2:1994, EN ISO 9000-1:1994
Wayne Winston (2000) Financial Models Using Simulation and Optimisation,

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