Monday 29 June 2009

CONSTRUCTION MANAGEMENT PRACTICES UNDER CONSTRUCTION MATERIAL PRICE FLUCTUATION

Project cost management is defined as one of the nine knowledge areas which are applicable knowledge and practices to most projects. Construction materials generally consume about 40 percent to 60 percent of total budget of the project.

In 2002, the result of break-up construction costs by Construction Industry Development Council Survey in India explained that construction material roughly consume at range from 41 percent to 60 percent of total construction costs. Hence, it is very important to closely pay attention on the material cost then build a good material cost management.

In cost management, one of the favorite indicators is the cost index. It is the ratio of cost or price for a given commodity or service or set of commodities or services at a given time and place compared to the cost or price at a base or standard time and place (Humphreys, 2005). Likewise, it is necessary to learn the cost index because one of many factors influencing construction costs is time due to changes in demand, economic conditions, and prices. Cost indexes convert costs which was applicable at a past date to equivalent costs now or in the future (William, 1994).

However, the use of cost indexes has several limitations. For example, cost indexes are based on average values so in specific cases, the actual value may be different from the average. Humphreys (2005) mentioned that at this time, the technology is changed so the method by which any given index is complied may periodically be changed by the complier. In such cases, the index values at different times should not be compared directly. Figure 1.1 is an example of construction material price indexes by Ministry of Commerce Thailand that based year to compare for these indexes is year 2000.





Figure 1.2 revealed that the construction price indexes in Thailand are very uncertain from year 2000 to 2008. A trend of uncertainty at recent years is increasing. To apply escalation in construction project, it should be considered in two levels which are historic and future (Squire, 2008). From historic escalation are such bid results, price indexes, price comparisons and cost record. For future escalation data, it can be found from assessed forecast which attempts to anticipate cost. Hence, it is important to find the way to handle with uncertain material prices in construction.

Squire (2008) stated that in construction, the price fluctuation comprises material, labor, equipment, overhead costs and fees. Cost management on projects becomes a particular challenge in a location where the economic climate is uncertain. In this circumstance, one of the significant consequences is uncertain construction price which can lead to many problems. Gallagher and Riggs (2006) stated that ripple effect of this price escalation has included numerous other impacts. For example, the first impact is putting project on hold while supplemental funding is sought. Second, the alternative of canceling the project if additional money is not available is chosen. Third, scale-down the project scope is attempting to be proceeded. Therefore, the price fluctuation can create enormous difficulty in the construction industry.

Ms. Piyachat Thaveelert made a survey on Construction Management Practices under Material Price Fluctuation to (1) investigate the situation of material price fluctuation and its effects on the practice of construction contractors during each stage namely estimating, bidding and construction stage; (2) identify the existing practices of how contractor strategically do to the situation and indicate interrelationships among practices; and (3) propose recommendation on how to handle the situation of construction price fluctuation.

Ms. Thaveelert found out that construction industry in Thailand usually confronts with the situation of material price fluctuation. Since the materials normally cost at the highest proportion of total cost, the situation of material price fluctuation becomes severe for construction industry. At this point, the appropriate management under material price fluctuation should be found out and investigated in order to be able to handle with the situation.

Her thesis abstract is copied and posted.

ABSTRACT

A construction management is very important for a construction project. To be a successful project, it requires an appropriate management from contractors to cope with especially the situation in construction industry that is unaccustomed. According to the recent record, it has been found that construction industry faced with the situation of material price fluctuation. Due to the material cost usually consumes the highest proportion in the construction cost, it is very significant for contractors to know how to handle with the situation. This research aims to investigate the existing of construction management practices under the construction material price fluctuation and propose the recommendation to respond to the situation.

The study uses a questionnaire as a research instrument to explore the existing practices of contractors. Two statistic methods were mainly used to analyze data from questionnaire surveys. The first analysis was descriptive analysis which used means and rankings to analyze. Second, the hypothesis testing was used to compare practices of the Bill of Quantity making and, procurement and employment among three groups of respondents. Those respondents are contractors focusing on private owners, public owners and both owners. In addition, another hypothesis testing was to compare practices relating to contract conditions between private owners and public owners through contractors’ perceptions. At his point, the correlation between groups of contractors was also tested through the hypothesis testing of correlation. Finally, the factor analysis was carried out to find out the interrelationship among practices by grouping the variables.

Result were found that for the Bill of Quantity making process, contractors prefer to find out the price trend by discussing the price trend with their suppliers with the highest mean. For the procurement and employment of contractors, contractors need to pay more attention on supplier selection process with the highest mean. For practices on contract conditions, it showed that the practice of the Specifying contract condition relating to furnishing materials clearly has the highest level of practice in private owners. In public owners, the Reasonable advance payment has the highest level of practice. The correlation between these two groups is also high positive correlation for practices on contract conditions. Last, the result of factor analysis showed that interrelationships of practices and it could be categorized into eight groups: Negotiating with Owners, Subcontractor Pricing Agreement, Government Pricing Index, Material Price Risk, Proactive Cost Control, Contractors’ Historical Data, Contractor Procurement Strategy and Estimate Pricing.

8 comments:

Mike said...

How can I obtain a full copy of Ms. Thaveelert's paper?

Entreprenørfirma said...

Very good article. Thank you for posting. I love it very much and its really interesting.

Unknown said...

I would also like to get a full copy of Ms. Thaveelert's paper. Is that possible?

Mitchelle Adams said...

I would also like to have a full copy of Ms. Thaveelert's paper. Is there a site,maybe or any source where we can DL them?

harry singh said...

Very good article and its interesting topic.....

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Tag: PM205A57. Let me share all of you about #5 Tips for Project Management Success,, I hope you enjoy it

1. Plan your day using time management techniques

As a project manager, time management skills are essential because you are dealing with a wide range of tasks that demand a quick turnaround time. Planning your day will go a long way in keeping you organized and increasing your productivity. Assist your task planning by using project management software which helps you track the work of you and your team.

If you are not very tech savvy, a simple to-do list can also be a great organizational tool. Prioritize your most important tasks by putting them at the top of the list and less important ones at the bottom. Having a visual plan of your daily tasks helps to keep you on track and aware of time.

Related post: Free ebook 104 secrets to become a great project manager

2. Include stakeholders in important project conversations

While you will have plenty of responsibilities regarding the project, don’t neglect your clients.

Good communication is essential is keeping both parties informed of project progression, curtailing scope creep, and apprised of changing requirements. Some clients may have different expectations when it comes to communication, so make sure to establish the frequency and type of communication (like emails, phone calls, and face-to-face conversations) at the beginning of your project.

Establishing communication expectations early helps alleviate stakeholder uncertainty about communication frequency and delivery.

3. Regularly communicate with your team

Daily team communication helps keep misunderstandings and unclear requirements under control. Keeping your team informed in every step of the project is essential to project management success.

For example, a study published by Procedia Technology found that good communication skills were the cornerstone of project management. The study examined over 300 “construction project managers, architects, construction managers, engineers and quantity surveyors” and their successes and failures on various construction projects.

4. Anticipate project setbacks

Even the best-laid plans often go awry.

Remember that even with a high amount of planning and attention to detail, your project may still encounter some challenges. Pay attention to complaints from stakeholders or colleagues, and other warning signs, like a missed deadline or cost overrun, that there may be a problem.

Preventing a crisis will keep your project running smoothly, save you a lot of time, and keep you, your team, and your stakeholders confident in progressing with the project.

Unfortunately not every complication can be avoided. Crisis management skills are essential for dealing with the unexpected. Project managers need to be flexible and pragmatic. Improvise and make sharp decisions when needed.

Related post: 92 free project management templates

5. Stay focused on the details

A common problem project managers encounter is having the project aims not aligned with the organization’s objectives. A great project manager will strategize a plan for the project to lead back to the overall success of the business.

Know your project’s scope by heart and avoid wandering outside of the project’s requirements. It’s too easy to get lost in minor details and forget what your focus is, so a well-planned project scope is essential for success.

And final, you should use KPI to measure effectiveness of the project, here are full list: 76 project management KPIs