Evaluation of effective design procedure is a difficult method to measure the performance of drawings. How can the architect manage this method effectively? How can they understand deeply in the role of design process? It is really a challenging task for them. For these above reasons, their experiences must be trained and modern technology methods applied in order to achieve as much best result as possible. Regarding to the way that the architect can manage the design process efficiently and effectively, they use a standardized method of measurement and common database.
During the past decade, the Vietnam government has opened its door for cooperating with oversea knowledge and business. This policy has resulted in many construction fields included design architectural professional. In practice, the concept of design measurement activities in design phase was an expectation for the perfectibility of output-drawings. Unfortunately, the traditional design consultant only pays attention to the process of design and planning projects lead to lack of concentration how to estimate this design process. Therefore, project participants faced many adverse factors influenced from design process such as: late or inaccurate drawings, maintainability, expensive changes originate, no specific details in technical drawing, and so forth.
With high demand in improvement of design aspect, Vietnam construction requires all design professional commit in quality of design functions. Mr. Nguyen Kim The Anh made a study which major objective was to improve the quality design process for consulting and design architectural companies. To achieve the objectives, the four specific sub-objectives were need to be accomplished:
1. Analyzing the current design management systems of Vietnamese design-consultant Company to identify the necessary improvement.
2. Defining performance of design output to clarify the meaning of design effectiveness.
3. Defining effectiveness criteria for Design Objective Matrix to apply for Vietnamese design-consultant Company.
4. Defining effectiveness criteria could apply on design architectural process for Vietnamese design-consultant Company.
Conclusion
1. Current design managements system
There are six sub-conclusions about the current management system:
i. The respondents perceive that problems of Design Company highly involve to “Business partner”, “Customers satisfaction” and “Management aspects”. They are main reason for low competitive abilities and influence into the company’s image. For better competitive abilities and business positions on free market economy, the research could identify clearly these problems at basis level to propose new improvement solutions.
ii. The traditional management methods such as: “Planning”, “Scheduling”, “Controlling”, “Technologies”, “Value engineering” and “Management Quality” are understood and applied at high perception degree. This fact reflects that these methods exist and apply on Vietnam’s architectural system for long time with repeatedly mentioning, training, and practicing at high knowledge in order to maximize customer satisfaction.
iii. Meanwhile, the degree of “design effective method” could be understood at low perceptions. This fact reflects that this method was not introduced and applied on design companies.
iv. The specific management problems currently happening on design process are “lack of autonomy”, “slowly react with change”, “outdate and unsuitable” and “low motivation”. They come from outdated business management. Design companies do not change their business attitude regarding the transferring from central planning system to free market system. The strict control system and cumbersome structural hierarchies from current managements system could make less power of self-decision-making of designers while they still react slowly against business changes. These limitations will decrease their competitive abilities on free market.
v. In order to make better management methods, respondents mostly suggest two solutions: “modify or add new management methods” and “maintain current management system, but try doing better”. These results reflect that design managers still trust on current systems even some existing but recommend applying new methods for concurrently operating.
vi. The respondent indicate that the high contributions of “management’s motivation”, “management’s commitment”, “designer’s motivation”, “designer’s commitment” and “effort” are value resources to enhance and improve the current managements system.
2. Design effectiveness method
2.1The important of management aspects in design effectiveness
Design managers understand that “human aspects” could be concerning “management ability of design managers”, “experience design”, “setting up schedule for project” and “allocate of budget” are important management aspects to contribute into making better design effectiveness.
2.2 Detail for evaluation of design effectiveness
The results from survey indicate that seven criteria (e.g. “accuracy of design documents”, “usability of design documents”, “cost of the design”, “constructability of design”, “economy of design”, “performance against schedule” and “ease of start-up”) take high perception from respondents. These criteria have proven to be meaningful and fairly comprehensive. Thus, they play important role to all designers, design activities, construction category and construction activity. Each criterion is necessary for designers’ evaluation, and can be assessed immediately after accomplishment of design projects.
2.3 Detail for design architectural
Base on Vietnamese design architectural situation, the high perception and application of ten criteria (e.g. “structures”, “arrangement”, “interface”, “material use”, “technologies”, “energy management”, “time site program”, “originality & uniqueness invention”, “historical reference” and “economy”) play important role into the successful of design architectural process. The mission of these criteria could measure degree and scope of integration that is necessary for creating design activities. Furthermore, there are many sub-criterions could be identified and ranked in order to understand their contribution into the successful of architectural design.
Recommendation
1. Current design managements system
i. Design companies need to solve and eliminate current problems (e.g. “customer satisfactions”, “business partners” and “management aspects”) to fulfill advanced demand of free market economy. In order to do so, they need to create all of problems becoming to database. Setting up the strategic and planning to solve these problems at basic level. Additionally, design companies should create new department focusing into the “customer satisfactions”, “business partners”. Their missions have to attend advance requirements, build up and maintain effective communication systems. It moreover recommends they need to select good business partners and setting up coordinates environment for sharing information.
ii. Regarding with specific management problems (e.g. “lack of autonomy”, “slowly react with change”, “outdate and unsuitable” and “low motivation”). Changing business attitude, purge of managements system, limitation of cumbersome and boosting of self-decision-making ability are introduced to improve the basic level of current problems.
iii. Design companies still maintain and enhance the “traditional management methods” and “human management aspect” at maximum advanced level. They need showing their commitments by contributing time, efforts, money, etc., for learning, implementing and maintaining these methods. Coordination with foreign partners is moreover suggested to gain mutual benefits for both sides.
2. Design effectiveness method
i. Design companies should plan and apply the design effective method as soon as possible to minimize the business risk and current problems occurring on design process.
ii. In order to achieve the best outcome on design process, designers need to focus the criteria of design architectural like guideline for design activities. However, based on actual situation, these criteria or sub-criterions may be to utilize or not to adapt with demands of design missions.
iii. Design managers need to create “Design effective method” to be the guided procedures in order to make suitable for design users.
iv. Design effective method model is partly proposed in this research and apply in design companies to draw their pros and cons. Feedbacks from practical application can help research modifying and making them more suitable for Vietnamese architectural design field.
His thesis abstract is copied and pasted below:
Abstract
Design effectiveness method has the potential to significantly benefits for consulting – design architectural companies to issue the best value outputs design to customers, while improves quality, reduces cost and shortens time. However, it is not widely know and applied on Vietnamese design construction field. Thus, the research focuses on main issues of current management system and design effectiveness method to find the best efficiencies and acceptability criteria suitable with Vietnamese consulting – design architectural companies. The data is mainly collected from thirty respondents at twenty-three companies who currently work on medium and large size design-consultant Vietnamese Company. The research could be utilizing questionnaires design as an efficiency tool to collect responses. The method of breaking responses’ survey is multiple rating list scale. The values “means” were considered as the benchmark to asset and rank the ratio of respondent’s perception on their responses. These results could reflect overall viewpoints of respondents toward research’s objective.
The finding shows higher knowledge and application of traditional management over new management. Meanwhile, design effectiveness method is not introduced widely in design companies. The research recommends solutions to improve management system to satisfy the research objectives. This action will enhance more application of design effectiveness method and boost up the effectiveness, efficiency abilities for Design Company to overtake with famous rivals on design architectural field.
Monday, 23 January 2012
Tuesday, 17 January 2012
Construction Litigation Analysis: A Case Study of Thai Supreme Court Cases
Thailand is fast becoming a newly industrialized country and, consequently, plenty of construction works are projected for the future. In the period of construction boom, it is inevitable to have a large number of disagreements that turn into large number of conflicts. These conflicts that end up as disputes reduce efficiency in the construction industry and cause a lot of detrimental problems (O'Reilly, M. P., 1993). All of the parties involved in the construction activity have become increasingly concerned with construction contract claims and disputes and generally agree that the handling of claims and disputes arising in the construction projects is a serious problem (Bruce M. Jervis, P. L., 1988). Whenever a dispute arises, neither owner nor contractor benefit from it. The beneficiaries are, by and large, those engaged in helping litigants through legal process (Cornes, D. L., 1994). Disputes divert resources from meeting project objectives and consequently the project suffers and progress slows down (Hughes, J. M. (2000). Many of these disputes have to be settled by adjudication through litigation at courts of law, which make project cost much more than they should, and those who deal with it lose their reputation when disputes mark the headlines of trade magazines and newspapers (Richard H. Clough, G. A., 2005).
Mr. Tanatat Wisetsurakarn made a research to investigate the information of construction contract and tort disputes in the Thai construction industry which were resolved in the courts of law. Such information can be collected from the law digests. These law digests, namely “Supreme Court Decision”, contain court cases which were decided by the Thai Supreme Court for use by lawyers as case references.
As indicated that the civil liability due to professional practice has caused many issues and subsequent problems. Therefore, it is necessary to initially explore and investigate the Supreme Court cases. Hence, the following objectives were needed to be accomplished:
i. To explore key decision making in court cases that affects the outcome of construction litigation in civil liability in Thailand
ii. To identify the civil liability due to professional practices in construction litigation
iii. To propose the recommendations on the improvement of professional practices to prevent civil liability in construction litigation.
Conclusions
Regarding the study of the acceptance of fault in civil cases for people who work in the field of civil engineering, especially engineers who deal with construction, the study shows that the faults were from engineers. This is because they lacked professional practice in many construction projects. It can be concluded from the results of the analysis that professional civil engineers such as contractors, project supervisor or architects who didn’t work carefully would cause damages to the project owner, the contractor, and outsiders. In terms of civil aspects, engineers have to pay compensation to those who are injured due to a lack of professionalism in their practice. This type of responsibility occurs when one breaks the contract or tort depending on the legal action between the contractor and the ones who receive damages. The damages resulting from violating or tort others will not exceed 1,000,000 baht. For legal cases concerning contracts, the damages will vary depending on the value of the project. The problems found in Supreme Court both in tort cases and in contract cases can mainly be divided into 7 problems as follows. Earthwork found that the piling was done with negligence or without sufficient careful planning, erroneous bid specs / lack of quality found that construction didn’t follow the architectural plan or drawing specifications and careless construction or lack of knowledge about proper construction methods., owner interference found that there was delay from the project owner, warranty period found that did not repair the work to its perfect condition while it was under warranty, project delay found that the construction wasn’t completed in due time, third party harm found that careless practice in constructing tall buildings that were adjacent to surrounding buildings and no signs or precautions to warn people of the construction, the digging, or other activities which caused danger, overdue debt found that didn’t pay wages or didn’t pay wages in due time.
From the aforementioned information, it can be seen that the engineers have high levels of responsibility and must be knowledgeable and experienced in their work. They also have to work carefully to complete their work. Therefore, it is suitable for both engineers and involved personnel to study work data and past court cases that are related to their work, so that they can be careful about their work.
Recommendation for Improving Professional Practices
The nature of work that engineers do causes them to have a high risk for being sued; it would be better if they were informed of legal laws and court verdicts on prior lawsuits similar to their professions. This can be done by giving training to and educating civil engineering students. Concrete examples from legal actions should be added to create basic knowledge so that engineers and students will recognize and take some precautions when they work. In terms of the Engineering Council, it should collect all legal cases and give legal advice to those engineers who have problems or have to go to court because they are being sued. Finally, the engineers themselves should be interested and eager to gain more relevant legal knowledge, and should also prepare themselves in looking into old cases. By doing these things, they will prevent problems which might occur in the future.
His thesis abstract is copied and pasted below.
Abstract
The Thai construction industry has been greatly developed, and experienced. Constructions of several large projects are being carried out in the both public and private sectors. There are an increasing number of construction contracts resulted in claims and disputes. All of the parties involved in the Thai construction industry are fully aware that disputes not only lead to cost overruns, but can end up as expensive and lengthy courtroom battles. However, very few studies related to construction contract claims and disputes in Thailand have been presented. This study is an attempt to gain further insight to construction contract claims and disputes in the Thai construction industry.
This thesis examines the subject-matter of construction contract and tort disputes, which were resolved in the Thai courts of law. The data examined include the reasons behind the legal disputes and the legal principles concerning construction contract and tort law. By using Supreme Court decisions pertaining to construction contract and tort disputes are analyzed and once know the judge key decision and detail story then proposing the specific problem of that case and recommendations for improvement the professional practices. The study indicates that the problems found in Supreme Court both in tort cases and in contract cases can mainly be divided into seven problems as follows. Earthwork found that the piling was done with negligence or without sufficient careful planning, erroneous bid specs / lack of quality found that construction didn’t follow the architectural plan or drawing specifications and careless construction or lack of knowledge about proper construction methods., owner interference found that there was delay from the project owner, warranty period found that did not repair the work to its perfect condition while it was under warranty, project delay found that the construction wasn’t completed in due time, third party harm found that careless practice in constructing tall buildings that were adjacent to surrounding buildings and no signs or precautions to warn people of the construction, the digging, or other activities which caused danger, overdue debt found that didn’t pay wages or didn’t pay wages in due time.
From the aforementioned information, it can be seen that the engineers have high levels of responsibility and must be knowledgeable and experienced in their work. They also have to work carefully to complete their work. Therefore, it is suitable for both engineers and involved personnel to study work data and past court cases that are related to their work, so that they can be careful about their work.
Mr. Tanatat Wisetsurakarn made a research to investigate the information of construction contract and tort disputes in the Thai construction industry which were resolved in the courts of law. Such information can be collected from the law digests. These law digests, namely “Supreme Court Decision”, contain court cases which were decided by the Thai Supreme Court for use by lawyers as case references.
As indicated that the civil liability due to professional practice has caused many issues and subsequent problems. Therefore, it is necessary to initially explore and investigate the Supreme Court cases. Hence, the following objectives were needed to be accomplished:
i. To explore key decision making in court cases that affects the outcome of construction litigation in civil liability in Thailand
ii. To identify the civil liability due to professional practices in construction litigation
iii. To propose the recommendations on the improvement of professional practices to prevent civil liability in construction litigation.
Conclusions
Regarding the study of the acceptance of fault in civil cases for people who work in the field of civil engineering, especially engineers who deal with construction, the study shows that the faults were from engineers. This is because they lacked professional practice in many construction projects. It can be concluded from the results of the analysis that professional civil engineers such as contractors, project supervisor or architects who didn’t work carefully would cause damages to the project owner, the contractor, and outsiders. In terms of civil aspects, engineers have to pay compensation to those who are injured due to a lack of professionalism in their practice. This type of responsibility occurs when one breaks the contract or tort depending on the legal action between the contractor and the ones who receive damages. The damages resulting from violating or tort others will not exceed 1,000,000 baht. For legal cases concerning contracts, the damages will vary depending on the value of the project. The problems found in Supreme Court both in tort cases and in contract cases can mainly be divided into 7 problems as follows. Earthwork found that the piling was done with negligence or without sufficient careful planning, erroneous bid specs / lack of quality found that construction didn’t follow the architectural plan or drawing specifications and careless construction or lack of knowledge about proper construction methods., owner interference found that there was delay from the project owner, warranty period found that did not repair the work to its perfect condition while it was under warranty, project delay found that the construction wasn’t completed in due time, third party harm found that careless practice in constructing tall buildings that were adjacent to surrounding buildings and no signs or precautions to warn people of the construction, the digging, or other activities which caused danger, overdue debt found that didn’t pay wages or didn’t pay wages in due time.
From the aforementioned information, it can be seen that the engineers have high levels of responsibility and must be knowledgeable and experienced in their work. They also have to work carefully to complete their work. Therefore, it is suitable for both engineers and involved personnel to study work data and past court cases that are related to their work, so that they can be careful about their work.
Recommendation for Improving Professional Practices
The nature of work that engineers do causes them to have a high risk for being sued; it would be better if they were informed of legal laws and court verdicts on prior lawsuits similar to their professions. This can be done by giving training to and educating civil engineering students. Concrete examples from legal actions should be added to create basic knowledge so that engineers and students will recognize and take some precautions when they work. In terms of the Engineering Council, it should collect all legal cases and give legal advice to those engineers who have problems or have to go to court because they are being sued. Finally, the engineers themselves should be interested and eager to gain more relevant legal knowledge, and should also prepare themselves in looking into old cases. By doing these things, they will prevent problems which might occur in the future.
His thesis abstract is copied and pasted below.
Abstract
The Thai construction industry has been greatly developed, and experienced. Constructions of several large projects are being carried out in the both public and private sectors. There are an increasing number of construction contracts resulted in claims and disputes. All of the parties involved in the Thai construction industry are fully aware that disputes not only lead to cost overruns, but can end up as expensive and lengthy courtroom battles. However, very few studies related to construction contract claims and disputes in Thailand have been presented. This study is an attempt to gain further insight to construction contract claims and disputes in the Thai construction industry.
This thesis examines the subject-matter of construction contract and tort disputes, which were resolved in the Thai courts of law. The data examined include the reasons behind the legal disputes and the legal principles concerning construction contract and tort law. By using Supreme Court decisions pertaining to construction contract and tort disputes are analyzed and once know the judge key decision and detail story then proposing the specific problem of that case and recommendations for improvement the professional practices. The study indicates that the problems found in Supreme Court both in tort cases and in contract cases can mainly be divided into seven problems as follows. Earthwork found that the piling was done with negligence or without sufficient careful planning, erroneous bid specs / lack of quality found that construction didn’t follow the architectural plan or drawing specifications and careless construction or lack of knowledge about proper construction methods., owner interference found that there was delay from the project owner, warranty period found that did not repair the work to its perfect condition while it was under warranty, project delay found that the construction wasn’t completed in due time, third party harm found that careless practice in constructing tall buildings that were adjacent to surrounding buildings and no signs or precautions to warn people of the construction, the digging, or other activities which caused danger, overdue debt found that didn’t pay wages or didn’t pay wages in due time.
From the aforementioned information, it can be seen that the engineers have high levels of responsibility and must be knowledgeable and experienced in their work. They also have to work carefully to complete their work. Therefore, it is suitable for both engineers and involved personnel to study work data and past court cases that are related to their work, so that they can be careful about their work.
Thursday, 12 January 2012
Business Diversification of Real Estate Company
Thailand’s economy grew at the lowest rate in the past several years resulting in a slow growth in construction. Construction companies encounter financial problems from external factors such as price fluctuation of raw materials and internal factors such as cash flow shortage. Therefore, financial relationship is quite complex, is contacted with lenders, investors, sub-contractors, employees, and customers. The company is careful for managing finance in each function and considering financial problem that can affect financial management in the company.
Business diversification is widely used and the supply chain is one form of diversification. The real estate is one of the business diversify into related business including material supplier, construction, and real estate. The fundamental of the diversification is to create value for stockholders. The additional value is created through synergetic integration of a new business into the existing one thereby increasing its competitive advantage. The real estate company should concentrate on each link between real estate developer and its members especially operation and financial inter-relation. The real estate company decides to diversify because it is more benefits in term of operation and financing. To study business diversification can decrease the cost of construction and can generate the diversity of incomes. It can also make more profit margins and increase the strength of financial capability in Real Estate Company.
Ms. Pichaya Bhanubhak made a study aimed to identify the inter-relationship among real estate developer and supply chain members. Next step, this study is to define the financial relationship through the business diversification and propose the guideline in financial strategy to Real Estate Company. To attain the main objective, three sub-objectives were needed to accomplish: i) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification; ii) to investigate how the real estate developer can diversify business into construction, and iii) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.
Conclusions:
The Financial and Operational Inter-relation of Business Diversification in Real Estate Developer
Based on the inter-relation between real estate developer and its parties, it is found that organization business process consists of three major issues including financial, spending, and revenue. There are three parties including material suppliers, land agents, and skilled contractors/skilled labors significantly affect on the operating and financial conditions in the business. Construction material cost, land cost, and labor cost are the main cost of real estate so these expenses relate to sale prices of housing units. Customers are the key parties also relate to the major source of revenue in the company. The key factor has impact on the number of customers who buy the housing products is the sale prices of housing units.
1.There are two parties including financial institutions and investors related to financial. Financial institutions give loan to the company and the company pay back principal and interest payment to them. Investors invest in equity in the company and the company pay dividend back to investors at the end of year. Financial is the process to find funds for operation and investment. The company uses fund for operation to spending to material suppliers, land agents, skilled contractors/skilled labors, and employees. Company uses fund to invest into subsidiaries.
2.Spending comprises of four parties are material suppliers, land agents, skilled contractors/skilled labors, and employees. Cost of materials is the one of the major part in cost of real estate because company purchases materials in high volumes which are more costly for the company. So, company purchases the major construction materials by inviting tenders and entering into long-term price agreement as 3-6 months or 1 year to protect fluctuation of material price.
3.Company purchases land from owners and agents when it develops a project. Skilled contractors and skilled labors hire as outsource contract. High value projects or urgent tasks, company uses bidding process to find competent contractors.
4.Customers are the major source of revenue and the company receives revenue from sales of real estate. More than 90 percent of company’s home buyers borrow by mortgage. Customers lend money from the commercial banks or Government Housing Bank to buy houses and they use their land and house as collateral. They pay principle and interest payment at MRR 4.75% (in 2009). However, the economic slowdown and changing policy of commercial banks or Government Housing Bank on mortgage loans impact confidence and spending of the customers so these situations affect company’s revenue. The company will take the risks of rejection rate of customers that will decrease the revenue from sales of real estate. Thus, the company has appointed a working committee to regularly monitor and track on the bank’s loan policy and the economic status in order to adapt the appropriate strategy.
The business diversification of real estate developer
From the case study, real estate developer diversified into construction business and it also diversified business into sales of real estate. Moreover, the company expands its business in traveling city such as Phuket and Chonburi and foreign markets to capture the business opportunity.
The company diversified into seven subsidiaries that are divided by type of business as following:
1) Subsidiary A to operate as a contractor for home decoration and construction
2) Subsidiary B and Subsidiary C to operate as property developers to sale of real estate
3) Subsidiary D as investors for investment
4) Subsidiary E to operate as real estate developer and housing construction for construction and development of oversea projects.
5) Subsidiary F to operate as real estate developer and housing construction in India
6) Subsidiary G operates as a contractor in India. Furthermore, company manages construction works and constructs houses by itself.
Company A, Subsidiary B, and Subsidiary C sustain in the old market by capture the real estate business. Subsidiary A expands business into construction but it still capture in the old market. Subsidiary E and Subsidiary F expand into new market to capture the real estate business. Moreover, Subsidiary E, Subsidiary F, and Subsidiary G expand to capture the contractor business into new market. There are several benefits from the business diversification as following:
1.The company can reduce the construction period that are shorter than conventional method. The construction of one-story townhouses can build 30 days and two-story townhouses are complete in 60-80 days. The construction period of single-detached houses is about 75-90 days.
2.The company diversified into subsidiary so it can invest more in R&D to improve the efficiency of the business and to improve in high technology to build houses. The company can reduce the cost of construction. Thus, the company can set the sale price that is lower than other developers. The company’s sale prices for townhouses are 15-20% lower than other developers and the prices of the single-detached houses are 10-15% lower than other developers.
3.The company is granted with the Board of Investment (BOI) to exempt tax from BOI promotion privileges because it can build houses that not exceeding 600,000 baht at a unit price including land cost. The company gets the exemption the corporate income tax on net profits receives from sale of residential units in the promoted projects for a period of five years.
4.The company invests into subsidiary A as home decoration and contractor. The company is more flexible to get some benefits. Company separates into two contracts when customers buy houses. The first contract is to sell land and houses that not exceeding 600,000 baht at a unit price to exempt tax from BOI promotion privileges and second contract is decoration by the subsidiary company. The company hires the subsidiary to work in its project.
5.The company invests into subsidiary B and subsidiary C to sales of real estate. It is more flexible in some laws and regulations for the EIA report. Land development for residence, the number of units is more than 500 units or the area is more than 100 rai so the company must do EIA report to office of Natural Resources and Environmental Plans and Policy. Subsidiary B or Subsidiary C develops project after the company in the exceed units to avoid the EIA report.
Her thesis abstract is copied and pasted below.
Abstract
The property market was volatile and impacted by political instability and global financial crisis. These causes affect consumer confidence. However, real estate company adopts business strategy by diversifying business to maintain the business growth. The study focused on diversification of real estate into construction which can affect the operating and financial inter-relation in organization business process to determine the financial outcome of business diversification. The objectives of study are 1) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification 2) to investigate how the real estate developer can diversify business into construction 3) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.
The study used qualitative method by using case study as a research design. The research methodology begins with modeling of business diversification which comprise of preliminary modeling and verification. It continued with the data collection by using the modeling to design the case study questions for interviewing and to select the case study. Data analysis is conducted by using explanation which all important evidences are described.
The result from the study showed that there are three main issues in business organization process including financial, spending, and revenue. The financial is the part to find funds for operation and investment. The spending is divided into material cost, land cost, skilled contractors/skilled labors cost, and wages. The revenue comes from to sales of real estate to customers. Finally, the benefits of diversification are to exam tax from BOI promotion privileges, to reduce the cost of construction, to reduce construction period, and more flexibility to operate business such as in some laws and regulations for the EIA report. The modeling of business organization process, business diversification, and money management are developed and discussed in this study. Moreover, the analysis of causes and effects of business diversification are also proposed in this study.
Business diversification is widely used and the supply chain is one form of diversification. The real estate is one of the business diversify into related business including material supplier, construction, and real estate. The fundamental of the diversification is to create value for stockholders. The additional value is created through synergetic integration of a new business into the existing one thereby increasing its competitive advantage. The real estate company should concentrate on each link between real estate developer and its members especially operation and financial inter-relation. The real estate company decides to diversify because it is more benefits in term of operation and financing. To study business diversification can decrease the cost of construction and can generate the diversity of incomes. It can also make more profit margins and increase the strength of financial capability in Real Estate Company.
Ms. Pichaya Bhanubhak made a study aimed to identify the inter-relationship among real estate developer and supply chain members. Next step, this study is to define the financial relationship through the business diversification and propose the guideline in financial strategy to Real Estate Company. To attain the main objective, three sub-objectives were needed to accomplish: i) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification; ii) to investigate how the real estate developer can diversify business into construction, and iii) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.
Conclusions:
The Financial and Operational Inter-relation of Business Diversification in Real Estate Developer
Based on the inter-relation between real estate developer and its parties, it is found that organization business process consists of three major issues including financial, spending, and revenue. There are three parties including material suppliers, land agents, and skilled contractors/skilled labors significantly affect on the operating and financial conditions in the business. Construction material cost, land cost, and labor cost are the main cost of real estate so these expenses relate to sale prices of housing units. Customers are the key parties also relate to the major source of revenue in the company. The key factor has impact on the number of customers who buy the housing products is the sale prices of housing units.
1.There are two parties including financial institutions and investors related to financial. Financial institutions give loan to the company and the company pay back principal and interest payment to them. Investors invest in equity in the company and the company pay dividend back to investors at the end of year. Financial is the process to find funds for operation and investment. The company uses fund for operation to spending to material suppliers, land agents, skilled contractors/skilled labors, and employees. Company uses fund to invest into subsidiaries.
2.Spending comprises of four parties are material suppliers, land agents, skilled contractors/skilled labors, and employees. Cost of materials is the one of the major part in cost of real estate because company purchases materials in high volumes which are more costly for the company. So, company purchases the major construction materials by inviting tenders and entering into long-term price agreement as 3-6 months or 1 year to protect fluctuation of material price.
3.Company purchases land from owners and agents when it develops a project. Skilled contractors and skilled labors hire as outsource contract. High value projects or urgent tasks, company uses bidding process to find competent contractors.
4.Customers are the major source of revenue and the company receives revenue from sales of real estate. More than 90 percent of company’s home buyers borrow by mortgage. Customers lend money from the commercial banks or Government Housing Bank to buy houses and they use their land and house as collateral. They pay principle and interest payment at MRR 4.75% (in 2009). However, the economic slowdown and changing policy of commercial banks or Government Housing Bank on mortgage loans impact confidence and spending of the customers so these situations affect company’s revenue. The company will take the risks of rejection rate of customers that will decrease the revenue from sales of real estate. Thus, the company has appointed a working committee to regularly monitor and track on the bank’s loan policy and the economic status in order to adapt the appropriate strategy.
The business diversification of real estate developer
From the case study, real estate developer diversified into construction business and it also diversified business into sales of real estate. Moreover, the company expands its business in traveling city such as Phuket and Chonburi and foreign markets to capture the business opportunity.
The company diversified into seven subsidiaries that are divided by type of business as following:
1) Subsidiary A to operate as a contractor for home decoration and construction
2) Subsidiary B and Subsidiary C to operate as property developers to sale of real estate
3) Subsidiary D as investors for investment
4) Subsidiary E to operate as real estate developer and housing construction for construction and development of oversea projects.
5) Subsidiary F to operate as real estate developer and housing construction in India
6) Subsidiary G operates as a contractor in India. Furthermore, company manages construction works and constructs houses by itself.
Company A, Subsidiary B, and Subsidiary C sustain in the old market by capture the real estate business. Subsidiary A expands business into construction but it still capture in the old market. Subsidiary E and Subsidiary F expand into new market to capture the real estate business. Moreover, Subsidiary E, Subsidiary F, and Subsidiary G expand to capture the contractor business into new market. There are several benefits from the business diversification as following:
1.The company can reduce the construction period that are shorter than conventional method. The construction of one-story townhouses can build 30 days and two-story townhouses are complete in 60-80 days. The construction period of single-detached houses is about 75-90 days.
2.The company diversified into subsidiary so it can invest more in R&D to improve the efficiency of the business and to improve in high technology to build houses. The company can reduce the cost of construction. Thus, the company can set the sale price that is lower than other developers. The company’s sale prices for townhouses are 15-20% lower than other developers and the prices of the single-detached houses are 10-15% lower than other developers.
3.The company is granted with the Board of Investment (BOI) to exempt tax from BOI promotion privileges because it can build houses that not exceeding 600,000 baht at a unit price including land cost. The company gets the exemption the corporate income tax on net profits receives from sale of residential units in the promoted projects for a period of five years.
4.The company invests into subsidiary A as home decoration and contractor. The company is more flexible to get some benefits. Company separates into two contracts when customers buy houses. The first contract is to sell land and houses that not exceeding 600,000 baht at a unit price to exempt tax from BOI promotion privileges and second contract is decoration by the subsidiary company. The company hires the subsidiary to work in its project.
5.The company invests into subsidiary B and subsidiary C to sales of real estate. It is more flexible in some laws and regulations for the EIA report. Land development for residence, the number of units is more than 500 units or the area is more than 100 rai so the company must do EIA report to office of Natural Resources and Environmental Plans and Policy. Subsidiary B or Subsidiary C develops project after the company in the exceed units to avoid the EIA report.
Her thesis abstract is copied and pasted below.
Abstract
The property market was volatile and impacted by political instability and global financial crisis. These causes affect consumer confidence. However, real estate company adopts business strategy by diversifying business to maintain the business growth. The study focused on diversification of real estate into construction which can affect the operating and financial inter-relation in organization business process to determine the financial outcome of business diversification. The objectives of study are 1) to identify the financial and operational inter-relation between real estate developer and its parties through business diversification 2) to investigate how the real estate developer can diversify business into construction 3) to propose the recommendation for financial management that is appropriate for real estate business in handling with the important factors towards diversification into construction.
The study used qualitative method by using case study as a research design. The research methodology begins with modeling of business diversification which comprise of preliminary modeling and verification. It continued with the data collection by using the modeling to design the case study questions for interviewing and to select the case study. Data analysis is conducted by using explanation which all important evidences are described.
The result from the study showed that there are three main issues in business organization process including financial, spending, and revenue. The financial is the part to find funds for operation and investment. The spending is divided into material cost, land cost, skilled contractors/skilled labors cost, and wages. The revenue comes from to sales of real estate to customers. Finally, the benefits of diversification are to exam tax from BOI promotion privileges, to reduce the cost of construction, to reduce construction period, and more flexibility to operate business such as in some laws and regulations for the EIA report. The modeling of business organization process, business diversification, and money management are developed and discussed in this study. Moreover, the analysis of causes and effects of business diversification are also proposed in this study.
Tuesday, 10 January 2012
Collaborative Strategy between Stakeholders of Hydropower and Power Intensive Industry in Bhutan
Before 1960, handicrafts, wood products, bamboo products, agricultural products were manufactured in small scale. The number of industries continued to expand steadily after the implementation of first five year plan in 1961. Today most of produce includes cement, wood products, processed fruits, alcoholic beverages, calcium carbide and other minerals. (Bhutan, 2008). Due to high transportation cost, small domestic markets and under developed infrastructure, industrial development has experienced slow pace. Nevertheless as Bhutan continued cordial relation with India, growing demand for minerals and other products has made inevitable to exploit the available resources.
Industrial growth has increased to 5.8% in 2007 from 3.8 % in 2006. (Royal Monetary Authority, 2009). In spite of unprecedented industrial growth, RGOB has to slacken its development owing to power intensive. The demand of minerals and other products continues to grow but industrial development has to stand still until new hydropower plant is installed which can cater the power to these power intensive Industries.
As per the electricity demand scenario, with considerable increase in domestic demand and based on the existing demand forecast, there will be no power available for export by 2012 during the lean season. Due to increased coverage and industrial demand, 12 MW on average of power has to be added per annum to avoid reduction in export. 1 MW reduction of export of electricity will result in about Nu. 14.89 million losses in cash to the Government. (Department of Energy, 2005). The power intensive industries will be affected as the domestic tariff will make par with the export tariff.
The RGOB is in dilemma as to focus on industrial development which is backbone of socio-economic development or continue to earn enough revenue through the export of electricity. In order to encourage power intensive industries keeping in view the affordable domestic tariff and increased level of revenue through export of electricity, is it possible to have collaborative situation- i.e. “domestic tariff remains affordable while at the same time export earnings continue to grow” (Department of Energy,2005) so as to achieve the national goals of meeting the internal demand of the country at affordable tariff and at the same time increased sufficient revenues from the export of hydroelectricity for investment in socio-economic development sectors to achieve economic self-reliance and Gross National Happiness.
Mr. Karma Gyamtsho made a study which objectives were to: i) explore in-depth into the field of industrialization, hydropower generation and the policies of the Government and identify the key collaborative issues of different stakeholders and their behavioral approaches towards collaborative strategy between hydropower generation and power intensive industries in Bhutan; and ii) develop a collaborative framework between hydropower generation and power intensive industries of Bhutan keeping in view the unique development philosophy & strategy of Gross National Happiness and provide suggestions & recommendations.
Conclusion:
Economic growth in Bhutan through export of electricity and industrial development have become like two sides of coins, both cannot be seen at same time. If Bhutan strives to achieve economic development through export of electricity and industrial development, a complementary strategy of hydropower development by industrialist for its own consumptive uses should be permitted.
The network of interrelationships of the different stakeholders is illustrated in figure below.
The collaborative issues of the different stakeholders surfaced are lack of technical & managerial expertise, high logistic cost, import of foreign workers, land ownership, water user right, equitable regional development, under performance of the machines, excise duty, logistic cost, absence of policy, wheeling charges, feed- in tariff, opportunity cost, high lending rate, high insurance premium, absence of FDI in hydropower sector, environmental clearance, rational power tariff, scarcity of raw materials, excise duty, high lending rate, high insurance premium, equity in investment, access to external source of fund and sustainability. The collaborative approaches to the collaborative issues are human resource development, strategic infrastructural development, more foreign workers, full land ownership, full water user right, balanced development, excise duty refund, policy development, affordable wheeling charges, rights to feed in power, external borrowing, foreign insurance, accelerated environmental clearance, maximum equity in investment and affordable tariff. Based on the study, a collaborative strategy is developed.
The collaborative issues that are desired by the maximum stakeholders are policy development, strategic infrastructural development and human resource development. The collaborative issues such as wheeling charges and feed-in tariff are considered the most significant as it determines the tariff of electricity for the industries.
Recommendations
The following recommendations are made based on the collaborative strategy developed:
1. Policy Development: It is inferred that there is intense need for the policy development by Hydropower plant, Department of Industry, Bhutan Electric Authority, Investor, power intensive industries and department of Industry. The collaborative issues of these stakeholders include the absence of policy which inhibits them to develop such hydropower plant for industrial uses and there is considerable loss of opportunity for the nation. The rational power tariff between industries and hydropower plant can only be determined if the policy is in place and the inclusion of hydropower in foreign direct investment policy can greatly steer the investors. One window clearance system can reduce the lengthy procedures of approvals.
The following recommendations are done with regard to policy development:
The captive power policy formulation should be expedited meanwhile the permit to conduct survey and investigation for hydropower project should be issued to the interested industrialist.
Foreign Direct Investment should be allowed in hydropower sector.
One window clearance system should be established for speedy approvals for projects.
2.Strategic Infrastructural Development: There is also need for the strategic infrastructural development by contracting agencies, machinery supplier, raw material supplier, hydropower and power intensive industries where the collaborative issues is high logistic cost.
Following recommendations are done with regard to strategic infrastructural development:
- Enhanced quality and reliable road network should connect hydropower site and industrial estate.
- Alternate mode of transport such as ropeways and railways should be developed.
- The private sectors should be entrusted with the infrastructural development.
3. Human Resource Development: It also necessitate to have human resource development by the contracting agencies, machinery supplier, hydropower plant and power intensive industries where the collaborative issues includes lack of technical & managerial expertise and underperformance of machines.
The following recommendations are made with regard to human resource development:
- Mandate Indian contracting agencies executing the projects to induct Bhutanese contractors as joint venture.
- Establish more vocational training institutes which provide skill enhancement in Hydro Power and industrial sectors.
- Conduct short term courses and training in hydropower and industrial sectors.
- Financially support private and corporate sector for Human Resources Development.
- There should be involvement of Bhutanese with the reputed firm for the design of machineries and also in the operation & maintenance.
4. Environmental Clearances: An accelerated environmental clearance is also a priority for hydropower plant and power intensive industries where environmental clearance and the scarcity of raw materials are the collaborative issues. It is recommended to have one window clearance system for environmental clearance in the policy and more exploration for mines to meet the inadequate supply of raw materials for the industries.
5. External Borrowing: The permit to external borrowing is also necessary for hydropower plant and power intensive industries where high lending rate is the collaborative issues. It is recommended that the external borrowing should be permitted and the lending should be based on cash flow projection rather than the collateral based.
6. Refund of Excise Duty: The refund and exemption of excise duty is also emphasized by the machinery supplier, raw material supplier, hydropower plant and power intensive industries. It is recommended that there should be exemption of excise duty on import of machineries and refund of excise on the import of raw material.
7. Land Ownership: The land ownership is also area of concern for hydropower plant and power intensive industries. It is recommended that lease period specified in existing relevant policies and regulations should be increased and the lease rate to be made transparent in the relevant policies.
8. Import of foreign workers: It is desirable to allow more foreign workers for hydropower plant, power intensive industries and contracting agencies. It is recommended that entitlement of number of foreign workers should be based on actual requirement.
9. Balanced Development: Equitable regional development is desired by RGOB and is a collaborative issue for hydropower plant and power intensive industries. It is recommended that transmission grid should be extended connecting eastern and western grid. The industrial estate development should be diversified across the country.
10. High Insurance Premium: There is need to access the foreign insurance where high insurance premium is a collaborative issue of hydropower plant and power intensive industries. It is recommended that foreign insurance should be permitted and private insurance company established in the country.
11. Water User Right: The water user right need to assured to the hydro power plant. It is recommended that the full water user right should be assured through the license wherein the quantity and time frame of the use of water is specified.
12. Wheeling Charge: The affordable wheeling charge can be assured to the hydropower plant by BPC through the construction of sub-station and incorporating the cost of sub- station in the wheeling charge thereby reflecting in the contract agreement. It is recommended that wheeling charge be allowed and the necessary infrastructures developed by Bhutan Power Corporation.
13. Feed in Power: Feed in power in the BPC transmission grid is the issue of hydropower plant where the right can be assured through provision of energy banking facilities and willingness of the BPC to take the surplus energy at appropriate tariff. It is recommended that banking of energy be allowed and sale of surplus power to Bhutan Power Corporation at appropriate tariff be made available.
14. Equity of Investment: The investors can be attracted through the equity of investment. It is recommended that 100% equity in investment should be allowed.
15. Sustainability: The core of competency through cost leadership for the power intensive industries can be achieved through the affordable tariff that will be determined by the performance of hydropower plant. It is recommended that electricity duty should be exempted and subsidy on interest should be provided.
His thesis abstract is copied and pasted below.
Abstract
Bhutan still has the incidence to the poverty and unemployment which poses a challenge to industrial and hydropower sectors to create quality employment for the Bhutanese. The rapid industrial growth has increased the domestic power demand affecting the export quantity considerably. The power intensive industries will be affected if domestic tariff becomes par with export tariff. Therefore economic growth in Bhutan through export of electricity and industrial development have become like two sides of coins, both cannot be seen at same time.
It will be prudent if industrialists are permitted to develop hydropower plant for their own consumptive uses and Royal Government of Bhutan continue to focus on revenue generation through export of electricity. As Bhutan has always chosen middle path of sustainable development guided by central development policy of Gross National Happiness, it is necessary to explore the collaborative issues and the approaches of the stakeholders involved in hydropower development for industrial uses before realigning country’s development plan and policies to address these opportunities and challenges. A framework of collaborative strategy between hydropower generation and power intensive industries has to be sensibly derived based on collaborative issues and approaches of stakeholders for effective implementation without deterring the philosophy and strategy of Gross National Happiness.
Industrial growth has increased to 5.8% in 2007 from 3.8 % in 2006. (Royal Monetary Authority, 2009). In spite of unprecedented industrial growth, RGOB has to slacken its development owing to power intensive. The demand of minerals and other products continues to grow but industrial development has to stand still until new hydropower plant is installed which can cater the power to these power intensive Industries.
As per the electricity demand scenario, with considerable increase in domestic demand and based on the existing demand forecast, there will be no power available for export by 2012 during the lean season. Due to increased coverage and industrial demand, 12 MW on average of power has to be added per annum to avoid reduction in export. 1 MW reduction of export of electricity will result in about Nu. 14.89 million losses in cash to the Government. (Department of Energy, 2005). The power intensive industries will be affected as the domestic tariff will make par with the export tariff.
The RGOB is in dilemma as to focus on industrial development which is backbone of socio-economic development or continue to earn enough revenue through the export of electricity. In order to encourage power intensive industries keeping in view the affordable domestic tariff and increased level of revenue through export of electricity, is it possible to have collaborative situation- i.e. “domestic tariff remains affordable while at the same time export earnings continue to grow” (Department of Energy,2005) so as to achieve the national goals of meeting the internal demand of the country at affordable tariff and at the same time increased sufficient revenues from the export of hydroelectricity for investment in socio-economic development sectors to achieve economic self-reliance and Gross National Happiness.
Mr. Karma Gyamtsho made a study which objectives were to: i) explore in-depth into the field of industrialization, hydropower generation and the policies of the Government and identify the key collaborative issues of different stakeholders and their behavioral approaches towards collaborative strategy between hydropower generation and power intensive industries in Bhutan; and ii) develop a collaborative framework between hydropower generation and power intensive industries of Bhutan keeping in view the unique development philosophy & strategy of Gross National Happiness and provide suggestions & recommendations.
Conclusion:
Economic growth in Bhutan through export of electricity and industrial development have become like two sides of coins, both cannot be seen at same time. If Bhutan strives to achieve economic development through export of electricity and industrial development, a complementary strategy of hydropower development by industrialist for its own consumptive uses should be permitted.
The network of interrelationships of the different stakeholders is illustrated in figure below.
The collaborative issues of the different stakeholders surfaced are lack of technical & managerial expertise, high logistic cost, import of foreign workers, land ownership, water user right, equitable regional development, under performance of the machines, excise duty, logistic cost, absence of policy, wheeling charges, feed- in tariff, opportunity cost, high lending rate, high insurance premium, absence of FDI in hydropower sector, environmental clearance, rational power tariff, scarcity of raw materials, excise duty, high lending rate, high insurance premium, equity in investment, access to external source of fund and sustainability. The collaborative approaches to the collaborative issues are human resource development, strategic infrastructural development, more foreign workers, full land ownership, full water user right, balanced development, excise duty refund, policy development, affordable wheeling charges, rights to feed in power, external borrowing, foreign insurance, accelerated environmental clearance, maximum equity in investment and affordable tariff. Based on the study, a collaborative strategy is developed.
The collaborative issues that are desired by the maximum stakeholders are policy development, strategic infrastructural development and human resource development. The collaborative issues such as wheeling charges and feed-in tariff are considered the most significant as it determines the tariff of electricity for the industries.
Recommendations
The following recommendations are made based on the collaborative strategy developed:
1. Policy Development: It is inferred that there is intense need for the policy development by Hydropower plant, Department of Industry, Bhutan Electric Authority, Investor, power intensive industries and department of Industry. The collaborative issues of these stakeholders include the absence of policy which inhibits them to develop such hydropower plant for industrial uses and there is considerable loss of opportunity for the nation. The rational power tariff between industries and hydropower plant can only be determined if the policy is in place and the inclusion of hydropower in foreign direct investment policy can greatly steer the investors. One window clearance system can reduce the lengthy procedures of approvals.
The following recommendations are done with regard to policy development:
The captive power policy formulation should be expedited meanwhile the permit to conduct survey and investigation for hydropower project should be issued to the interested industrialist.
Foreign Direct Investment should be allowed in hydropower sector.
One window clearance system should be established for speedy approvals for projects.
2.Strategic Infrastructural Development: There is also need for the strategic infrastructural development by contracting agencies, machinery supplier, raw material supplier, hydropower and power intensive industries where the collaborative issues is high logistic cost.
Following recommendations are done with regard to strategic infrastructural development:
- Enhanced quality and reliable road network should connect hydropower site and industrial estate.
- Alternate mode of transport such as ropeways and railways should be developed.
- The private sectors should be entrusted with the infrastructural development.
3. Human Resource Development: It also necessitate to have human resource development by the contracting agencies, machinery supplier, hydropower plant and power intensive industries where the collaborative issues includes lack of technical & managerial expertise and underperformance of machines.
The following recommendations are made with regard to human resource development:
- Mandate Indian contracting agencies executing the projects to induct Bhutanese contractors as joint venture.
- Establish more vocational training institutes which provide skill enhancement in Hydro Power and industrial sectors.
- Conduct short term courses and training in hydropower and industrial sectors.
- Financially support private and corporate sector for Human Resources Development.
- There should be involvement of Bhutanese with the reputed firm for the design of machineries and also in the operation & maintenance.
4. Environmental Clearances: An accelerated environmental clearance is also a priority for hydropower plant and power intensive industries where environmental clearance and the scarcity of raw materials are the collaborative issues. It is recommended to have one window clearance system for environmental clearance in the policy and more exploration for mines to meet the inadequate supply of raw materials for the industries.
5. External Borrowing: The permit to external borrowing is also necessary for hydropower plant and power intensive industries where high lending rate is the collaborative issues. It is recommended that the external borrowing should be permitted and the lending should be based on cash flow projection rather than the collateral based.
6. Refund of Excise Duty: The refund and exemption of excise duty is also emphasized by the machinery supplier, raw material supplier, hydropower plant and power intensive industries. It is recommended that there should be exemption of excise duty on import of machineries and refund of excise on the import of raw material.
7. Land Ownership: The land ownership is also area of concern for hydropower plant and power intensive industries. It is recommended that lease period specified in existing relevant policies and regulations should be increased and the lease rate to be made transparent in the relevant policies.
8. Import of foreign workers: It is desirable to allow more foreign workers for hydropower plant, power intensive industries and contracting agencies. It is recommended that entitlement of number of foreign workers should be based on actual requirement.
9. Balanced Development: Equitable regional development is desired by RGOB and is a collaborative issue for hydropower plant and power intensive industries. It is recommended that transmission grid should be extended connecting eastern and western grid. The industrial estate development should be diversified across the country.
10. High Insurance Premium: There is need to access the foreign insurance where high insurance premium is a collaborative issue of hydropower plant and power intensive industries. It is recommended that foreign insurance should be permitted and private insurance company established in the country.
11. Water User Right: The water user right need to assured to the hydro power plant. It is recommended that the full water user right should be assured through the license wherein the quantity and time frame of the use of water is specified.
12. Wheeling Charge: The affordable wheeling charge can be assured to the hydropower plant by BPC through the construction of sub-station and incorporating the cost of sub- station in the wheeling charge thereby reflecting in the contract agreement. It is recommended that wheeling charge be allowed and the necessary infrastructures developed by Bhutan Power Corporation.
13. Feed in Power: Feed in power in the BPC transmission grid is the issue of hydropower plant where the right can be assured through provision of energy banking facilities and willingness of the BPC to take the surplus energy at appropriate tariff. It is recommended that banking of energy be allowed and sale of surplus power to Bhutan Power Corporation at appropriate tariff be made available.
14. Equity of Investment: The investors can be attracted through the equity of investment. It is recommended that 100% equity in investment should be allowed.
15. Sustainability: The core of competency through cost leadership for the power intensive industries can be achieved through the affordable tariff that will be determined by the performance of hydropower plant. It is recommended that electricity duty should be exempted and subsidy on interest should be provided.
His thesis abstract is copied and pasted below.
Abstract
Bhutan still has the incidence to the poverty and unemployment which poses a challenge to industrial and hydropower sectors to create quality employment for the Bhutanese. The rapid industrial growth has increased the domestic power demand affecting the export quantity considerably. The power intensive industries will be affected if domestic tariff becomes par with export tariff. Therefore economic growth in Bhutan through export of electricity and industrial development have become like two sides of coins, both cannot be seen at same time.
It will be prudent if industrialists are permitted to develop hydropower plant for their own consumptive uses and Royal Government of Bhutan continue to focus on revenue generation through export of electricity. As Bhutan has always chosen middle path of sustainable development guided by central development policy of Gross National Happiness, it is necessary to explore the collaborative issues and the approaches of the stakeholders involved in hydropower development for industrial uses before realigning country’s development plan and policies to address these opportunities and challenges. A framework of collaborative strategy between hydropower generation and power intensive industries has to be sensibly derived based on collaborative issues and approaches of stakeholders for effective implementation without deterring the philosophy and strategy of Gross National Happiness.
Friday, 6 January 2012
Construction Claim Types and Causes: A Study of Tala Hydroelectric Project, Bhutan
One of the key areas of controversy that arises in the field of construction industry is from the claim situation. The inherent problems of most of the construction projects are their uncertainty, complex in nature involving a wide variety of business parties that often extend over a lengthy period of time requiring detail plans and specifications, skillful supervisions and efficient coordination. Thus, in such complex process, the occurrences of claims are common phenomena that hinder the completion of project on time and cause cost overruns. Although the symptoms are well known, the real causes and associated costs that arise due to such claims and disputes are not well understood. Construction contract itself is often very long, complex documents which are not well understood by the parties leading to differing interpretation by the different parties and consequently, disagreements or disputes arises regarding contractual obligations or expectations. When one party feels that the contractual obligations or expectations have not been met by the other party, and believe that they deserve monetary and/or time compensation, they may submit a claim.
It is generally accepted and agreed by both the contractors and the contracting agencies that handling of the claims arising out of the construction projects is a serious problem, and that efforts are needed to improve both methods of preventing claims and procedures for settling them when they occur. It not only drains the energy and resources of the parties in trying to solve them but also brings about adversarial relationship between them. Often, the claims that cannot be settled by negotiated adjustments has to be dealt with higher appellate (arbitration, courts etc) which sometimes takes years to resolve. Thus, it is the common interest of both contractor and owner to device means to avoid claims as far as possible in the first place and manage claim process when it occurs.
With the accelerated hydropower development policy in place to achieve the target of 10,000 MW by the year 2020 in Bhutan, a lot of constructions of hydropower projects are in the pipeline and is expected to see the construction boom within next five years. The construction of Pungtsangchu I and Dagachhu are already in full swing. Punatsangchu II and Mangdechhu projects are expected to begin by early 2010 and the studies are being done on many other projects. It has been estimated that around Nu 442 billion will be invested to generate around 10,406 MW by year 2020 (DGPCL website, 2009).
In view of the expected mega constructions that would be taken up in Bhutan, it is pertinent that we look back to the past projects and learn from the experiences. Hence, this study on the construction claims in the recently completed Tala hydroelectric Project was very important and would be helpful to the project participants in preventing and resolving claims in the upcoming projects.
Mr. Sonam Tobgay made a case study which main objective was to find which causes of claims are important and which types of claims were frequent during the construction of Tala Hydroelectric Project in Bhutan. The objectives of his study were summarized as follows:
- Carry out the comprehensive analysis of the claims, their types and the causes that occurred in Tala Hydroelectric Project.
- Study the frequency and severity of each claim and rank them accordingly.
- Study how the claims have been settled/resolved (study the different modes of resolution applied with references to contract clauses)
- Provide solutions to reduce/ minimize or prevent the claims for the future hydropower projects in Bhutan.
Conclusions:
Two types of claims have occurred in this project namely Change claim and Impact claims. Though Change claims (23/35) were more frequent than Impact claim (12/35), the severity (amount) of the claim and duration for settlement was more with the Impact Claims.
The common causations of claims was also analyzed and result showed that five (05) broad groups namely ‘Differing site conditions’, ‘Delay from Project Participants’, ‘Changes in Design and Specifications’, ‘Force Majeure(Flood)’ and ‘Omissions/Ambiguous Contract Provisions’.
The claims due to ‘Differing site conditions’ ranked first followed by claims due to ‘Delay from Project Participants’. This result supports the similar studies done for hydropower projects in India and Vietnam where they also found ‘Differing site conditions’ as the main cause of Claims (Pillai et.al, 2001 and Thinh V.B, 2004). The Adverse Geological Occurrence (AGO) was the main differing condition claims that triggered and gave rise to both change claims and impact claims in different forms.
The different mode of claim settlement adopted in this project was also studied. Almost all the claims resolved were through negotiation. Only three (03) cases out of thirty-five (35) cases accounting to USD 1,890343.19 (5% of claim amount) went to Arbitration or Litigation, rests of the claims were resolved through mutual agreement or direct negotiation. The findings supports the of study done by Zaneldin (2006) in UAE where he found that more than 77.1% of the claims are resolved using negotiation while only 4.9% of claims are resolved through litigation.
Analysis revealed that duration of claim settlement varied from minimum of six (06) months to as long as four (04) years. The claims that were settled through negotiation took much shorter time than the arbitration cases which took as long as four (04) years. Among others, most of the claim cases that took longer duration for settlement sprung from the ‘omissions or ambiguous/conflicting contract provisions/clauses’(1.64 years) followed by claims due to ‘Force majeure’(1.63 years).
Overall, only 39% of the total claimed amount was successfully achieved by the contractor through negotiation. Rest of the claim either got rejected by the owner in the first place or contractor dropped the case during the process of arbitration or litigation. This indicates that the bargaining power of the contractor is much less than the owners since most of the claim cases were not pursued after being rejected by the owner for fear of future adversarial relationship.
The severity and frequency of claims in different contract packages were also studied and found that major portion of claims appeared from civil works (21/35 cases) with over 81% of the total claimed amount while the rest (19%) was from the hydro-mechanical and electro-mechanical combined. Claims from ‘differing site conditions’ which ranked first were more prominent and high for the contract packages which dealt with underground tunneling works while the claims due to ‘delay from project participants(owner)’ dominated the claim for the electro-mechanical works. This is due to the fact that most all the electro-mechanical items were purchased from foreign countries like Japan, Germany, Italy etc which needed long procurement lead time whereby the supply order for these items and mobilization notifications for other resources were done in order to meet the original schedule. Meanwhile, due to delay in completion of preceding civil works for varied reasons, the electro-mechanical works got delayed leaving the mobilized resources to remain idle. Thus, the claim for compensation for the idling charges of the resources.
All the claim issues being analyzed were originated form contractor side. The contractor put up the claim to client with factual narrative of ‘how’, ‘why’ and ‘when’ claims have arisen along with attachments of detail calculation of claim amount, site records, correspondences, photographs if any, change orders etc. On the other hand, the client verifies the claims referring to the various documented proofs and contract clauses, and makes their own justification. The final approval goes through different hierarchy of officials of different departments for their comments and vetting.
Recommendations for minimizing/avoiding claims in future projects:
Having studied the claim cases in Tala Hydroelectric Project, Bhutan, the author has learnt a lot with regard to how and why the claims happened in this project and the various factors that contribute to the occurrence of claims. The different ways and means adopted by the parties to resolve the claims have also been studied. From the knowledge gained by studying the claim issues in this project, the following are the recommendations for minimizing the occurrence of claims in future projects. However, in view of the constraint of the study: limited study period focused only on one project, the implementations of recommendations would further need the suggestions and inputs of the experts.
1.Involve site people in early recognition of potential areas of claim occurrence and risk sharing by partners.
2.Substantive pre-project site condition and hydro-geological investigations.
3.Proper planning, timely schedule updates and coordination according to the actual progress.
4.Develop clear, complete and unambiguous contract.
5.Have regular constructive meetings at site and device ways and means to prevent claims.
6.Have change orders or variation orders from the client before doing any work beyond the contract.
7.Clear provision in the contract defining the time frame for settling claims.
His thesis abstract is copied and pasted below.
Abstract
Due to the nature of hydropower construction projects being complex, uncertain, having long gestation period, involving many parties and requiring the integration of different work components (Civil, Mechanical and Electrical) together to work as a whole unit, claims are one of the common occurrences in such projects. Since claims are undesirable issues in construction projects, it is the common interest of all the parties involved to prevent/minimize from occurring at the first hand and resolve them in a most amicable way after their occurrence.
In this research, the study was done in Tala Hydroelectric project, Bhutan with the objectives to find out (1) How and why the claims occurred (2) What are the claim types (3) How are the claims raised (4) How are the claims resolved (5) What are the common causes of claims and (6) to provide recommendations for avoiding/minimizing claims in future projects with the experiences from this project. The study result shows that two main types of claims namely: Change Claims and Impact Claims have occurred in this project while the main/recurring sources of claims was found to be from ‘Differing site conditions’ coming mainly from the unforeseen hydro-geological conditions during the underground tunneling works. The methods and measures adopted in resolving the claims issues was mostly through the negotiated settlements while few cases of arbitration did also occur. The fact that most of the claims have been resolved through negotiation indicates that the parties enjoyed cordial relationship which enabled the project to successfully complete despite many hindrances due to encounterance of worst geology.
With the findings and the lessons learnt from this construction project, it is hoped that it will guide and help improve in the project performance and claim management in future hydropower construction projects in Bhutan.
It is generally accepted and agreed by both the contractors and the contracting agencies that handling of the claims arising out of the construction projects is a serious problem, and that efforts are needed to improve both methods of preventing claims and procedures for settling them when they occur. It not only drains the energy and resources of the parties in trying to solve them but also brings about adversarial relationship between them. Often, the claims that cannot be settled by negotiated adjustments has to be dealt with higher appellate (arbitration, courts etc) which sometimes takes years to resolve. Thus, it is the common interest of both contractor and owner to device means to avoid claims as far as possible in the first place and manage claim process when it occurs.
With the accelerated hydropower development policy in place to achieve the target of 10,000 MW by the year 2020 in Bhutan, a lot of constructions of hydropower projects are in the pipeline and is expected to see the construction boom within next five years. The construction of Pungtsangchu I and Dagachhu are already in full swing. Punatsangchu II and Mangdechhu projects are expected to begin by early 2010 and the studies are being done on many other projects. It has been estimated that around Nu 442 billion will be invested to generate around 10,406 MW by year 2020 (DGPCL website, 2009).
In view of the expected mega constructions that would be taken up in Bhutan, it is pertinent that we look back to the past projects and learn from the experiences. Hence, this study on the construction claims in the recently completed Tala hydroelectric Project was very important and would be helpful to the project participants in preventing and resolving claims in the upcoming projects.
Mr. Sonam Tobgay made a case study which main objective was to find which causes of claims are important and which types of claims were frequent during the construction of Tala Hydroelectric Project in Bhutan. The objectives of his study were summarized as follows:
- Carry out the comprehensive analysis of the claims, their types and the causes that occurred in Tala Hydroelectric Project.
- Study the frequency and severity of each claim and rank them accordingly.
- Study how the claims have been settled/resolved (study the different modes of resolution applied with references to contract clauses)
- Provide solutions to reduce/ minimize or prevent the claims for the future hydropower projects in Bhutan.
Conclusions:
Two types of claims have occurred in this project namely Change claim and Impact claims. Though Change claims (23/35) were more frequent than Impact claim (12/35), the severity (amount) of the claim and duration for settlement was more with the Impact Claims.
The common causations of claims was also analyzed and result showed that five (05) broad groups namely ‘Differing site conditions’, ‘Delay from Project Participants’, ‘Changes in Design and Specifications’, ‘Force Majeure(Flood)’ and ‘Omissions/Ambiguous Contract Provisions’.
The claims due to ‘Differing site conditions’ ranked first followed by claims due to ‘Delay from Project Participants’. This result supports the similar studies done for hydropower projects in India and Vietnam where they also found ‘Differing site conditions’ as the main cause of Claims (Pillai et.al, 2001 and Thinh V.B, 2004). The Adverse Geological Occurrence (AGO) was the main differing condition claims that triggered and gave rise to both change claims and impact claims in different forms.
The different mode of claim settlement adopted in this project was also studied. Almost all the claims resolved were through negotiation. Only three (03) cases out of thirty-five (35) cases accounting to USD 1,890343.19 (5% of claim amount) went to Arbitration or Litigation, rests of the claims were resolved through mutual agreement or direct negotiation. The findings supports the of study done by Zaneldin (2006) in UAE where he found that more than 77.1% of the claims are resolved using negotiation while only 4.9% of claims are resolved through litigation.
Analysis revealed that duration of claim settlement varied from minimum of six (06) months to as long as four (04) years. The claims that were settled through negotiation took much shorter time than the arbitration cases which took as long as four (04) years. Among others, most of the claim cases that took longer duration for settlement sprung from the ‘omissions or ambiguous/conflicting contract provisions/clauses’(1.64 years) followed by claims due to ‘Force majeure’(1.63 years).
Overall, only 39% of the total claimed amount was successfully achieved by the contractor through negotiation. Rest of the claim either got rejected by the owner in the first place or contractor dropped the case during the process of arbitration or litigation. This indicates that the bargaining power of the contractor is much less than the owners since most of the claim cases were not pursued after being rejected by the owner for fear of future adversarial relationship.
The severity and frequency of claims in different contract packages were also studied and found that major portion of claims appeared from civil works (21/35 cases) with over 81% of the total claimed amount while the rest (19%) was from the hydro-mechanical and electro-mechanical combined. Claims from ‘differing site conditions’ which ranked first were more prominent and high for the contract packages which dealt with underground tunneling works while the claims due to ‘delay from project participants(owner)’ dominated the claim for the electro-mechanical works. This is due to the fact that most all the electro-mechanical items were purchased from foreign countries like Japan, Germany, Italy etc which needed long procurement lead time whereby the supply order for these items and mobilization notifications for other resources were done in order to meet the original schedule. Meanwhile, due to delay in completion of preceding civil works for varied reasons, the electro-mechanical works got delayed leaving the mobilized resources to remain idle. Thus, the claim for compensation for the idling charges of the resources.
All the claim issues being analyzed were originated form contractor side. The contractor put up the claim to client with factual narrative of ‘how’, ‘why’ and ‘when’ claims have arisen along with attachments of detail calculation of claim amount, site records, correspondences, photographs if any, change orders etc. On the other hand, the client verifies the claims referring to the various documented proofs and contract clauses, and makes their own justification. The final approval goes through different hierarchy of officials of different departments for their comments and vetting.
Recommendations for minimizing/avoiding claims in future projects:
Having studied the claim cases in Tala Hydroelectric Project, Bhutan, the author has learnt a lot with regard to how and why the claims happened in this project and the various factors that contribute to the occurrence of claims. The different ways and means adopted by the parties to resolve the claims have also been studied. From the knowledge gained by studying the claim issues in this project, the following are the recommendations for minimizing the occurrence of claims in future projects. However, in view of the constraint of the study: limited study period focused only on one project, the implementations of recommendations would further need the suggestions and inputs of the experts.
1.Involve site people in early recognition of potential areas of claim occurrence and risk sharing by partners.
2.Substantive pre-project site condition and hydro-geological investigations.
3.Proper planning, timely schedule updates and coordination according to the actual progress.
4.Develop clear, complete and unambiguous contract.
5.Have regular constructive meetings at site and device ways and means to prevent claims.
6.Have change orders or variation orders from the client before doing any work beyond the contract.
7.Clear provision in the contract defining the time frame for settling claims.
His thesis abstract is copied and pasted below.
Abstract
Due to the nature of hydropower construction projects being complex, uncertain, having long gestation period, involving many parties and requiring the integration of different work components (Civil, Mechanical and Electrical) together to work as a whole unit, claims are one of the common occurrences in such projects. Since claims are undesirable issues in construction projects, it is the common interest of all the parties involved to prevent/minimize from occurring at the first hand and resolve them in a most amicable way after their occurrence.
In this research, the study was done in Tala Hydroelectric project, Bhutan with the objectives to find out (1) How and why the claims occurred (2) What are the claim types (3) How are the claims raised (4) How are the claims resolved (5) What are the common causes of claims and (6) to provide recommendations for avoiding/minimizing claims in future projects with the experiences from this project. The study result shows that two main types of claims namely: Change Claims and Impact Claims have occurred in this project while the main/recurring sources of claims was found to be from ‘Differing site conditions’ coming mainly from the unforeseen hydro-geological conditions during the underground tunneling works. The methods and measures adopted in resolving the claims issues was mostly through the negotiated settlements while few cases of arbitration did also occur. The fact that most of the claims have been resolved through negotiation indicates that the parties enjoyed cordial relationship which enabled the project to successfully complete despite many hindrances due to encounterance of worst geology.
With the findings and the lessons learnt from this construction project, it is hoped that it will guide and help improve in the project performance and claim management in future hydropower construction projects in Bhutan.
Monday, 14 November 2011
Monday, 26 September 2011
AITVN organizes an Opening Ceremony & Welcome Party
The AITVN organized an Opening Ceremony & Welcome Party for the 5th entry of the Professional Master Program in Project Management in Construction (MPM Program) at the Majestic Hotel on Saturday, 10 September, 2011.
This event was attended by Dr. Amrit Bart, AITVN Director; Dr. B.H.W. Hadikusumo, SET Representative; Mr. Hoang Don Dung, SCQC General Director; Dr. Nakhle Kattan, Project Director of
Nestle Vietnam; and Mr. Nguyen Van Nhan, CEIM
student and Amata Project Manager.
The ceremony was followed by dinner party with raffle draws as an additional entertainment.
Group photo with new MPM students 2011 intake and MPM alumni from 2007, 2008, 2009, and 2010
In photo: (L-R) Mr. Hoang Don Dung, SCQC General Director, VIP guest
Mr. Ng Eng Wan, MPM faculty; Dr. Hadikusumo; Mr. Nguyen Van Nhan, CEIM student, Amata Project Manager; Dr. Nakhle Kattan, Project Director of
Nestle Vietnam
Awarding of prizes for the raffle draws
Subscribe to:
Posts (Atom)