Global business has moved towards more competitive environment over the past two decades. As local markets erode due to competition, firms need to change their business strategy and expand their traditional markets. According to Yoshino and Rangan (1995) joint ventures (JVs) have emerged as a popular strategy in an environment in which fast access to up-to-date technology and emerging markets is more critical than ever before. Geringer (1991) defined JVs as when two or more legally separate bodies from a jointly owned entity in which they invest and engage in various decision making activities.
In Thailand, the International Construction Joint Venture (ICJVs) has marked increase over the last two decades. A joint venture may be termed International where at least one of the parties (or parents) is based outside the country where the venture is taking place (Geringer and Herbert, 1989).The remarkable increment of foreign investment was continuing until the economic crisis of 1997. After that there has been a steady progress in the construction industry.
According to Lim and Liu (2001), the number International Construction Joint Ventures (ICJVs) are growing worldwide at an increasing pace, especially in developing countries. Developing countries see ICJVs as one of the best instruments for meeting the competing interests of national development and the prevention of the domination of the economy by foreign investors (Sornarajah, 1992). Despite the apparent importance, interest and frequency of international ventures many of these report only limited success (Adler et al., 1992). But why do these joint ventures fail? More importantly, is it possible to promote higher alliance performance through a better match between strategic outcomes? And what will be the effective strategy to make the joint venture successful?
The role of IJVs in international business operations has been significant and there are no signs that their role would, at least significantly decrease in future. The situation may be in fact the opposite. The great importance and high failure rates of IJVs raises the question of how to evaluate IJV performance and how to secure success in IJV operations? The goal of this study is to make a review of previous studies analyzing the IJV performance especially in an Asian context and to develop dynamic hypotheses about the relationships between various identified variables and IJV performance to be tested by system dynamic approach.
Mr. Muhammad Nateque Mahmood made a research which aimed to address the critical issues in developing International Construction Joint Venture performance model for a successful Thai-Foreign Joint Venture using System Dynamics Approach. The sub-objectives of his study were to: (1) identify factors that affecting performance of International Construction Joint Ventures; (2) develop the generic system dynamics model to explain how the factors affect the performance of International Construction Joint Ventures; (3) develop adopted system dynamics models for different cases of International Construction Joint Ventures; and (4) formulate implementable policies that may aid to achieve desired performance level for an International Construction Joint Venture.
Conclusion
ICJVs have become increasingly widespread in the business environment and the need to understand the dynamic nature of performance of these complex collaborative arrangements increase, as managers are struggle to find patterns and indications of how to effectively manage successful joint venture. Therefore, a generic system dynamics model has been developed by integrating a number of endogenous and exogenous factors to make dynamic interactions visible and facilitate managers to make decisions about the observed patterns and intervene, as appropriate, to increase the likelihood of partnership success.
In this study, the performance of an ICJV has been measured in terms of value, project output (cost, time and quality) and satisfaction factors. The critical factors associated with these three factors and their interrelationships can be highlighted as follows:
Value factor is significantly influenced by adaptability and complementary resources. Value factor is positively influenced by adaptability, mutual trust and commitment factor. Where, adaptability is positively induced by complementary resource sharing and also by commitment level of parent partners. Difference in working climate reduces the technology and knowledge transfer rate and in consequence value by hindering the improvement of adaptability. Mutual trust is accelerated by effective information sharing and reduced by dysfunctional conflict between partners, higher legalistic changes and partners’ misinterpretation factors. Commitment factor is highlighted through collaborative approach of the partners and also induced by higher level of mutual trust.
Project output is significantly influenced by productivity in construction. Project output factors such as cost overrun, schedule pressure and poor quality factors are negatively influenced by productivity in construction, work completion rate, coordination, and positively influenced by rework, conflict and uncertainty of work. Whereas, productivity in construction is accelerated by resource availability, motivation level of workers, business competency of partners and coordination and negatively influenced by government bureaucracy.
Satisfaction factor is significantly controlled by value gap (deviation of actual value to desired value), project output (cost, time and quality) and negotiation approach (either problem solving, compromising, forcing or legalistic strategy) factors which are organized in accordance to most significant factor to significant factor. Problem solving approach towards negotiation process tends to make a relationship more satisfying. Conversely, compromising and forcing attitude in negotiation process adversely affects on satisfaction level. A party’s higher reliance on legal mechanisms towards negotiation process decreases satisfaction level.
The generic performance model, when calibrated and tested with data from two ICJVs in Thailnad, the simulated behavior (base run) of the adopted model has been replicated with the historic behavior (reference mode) for both cases. This implies that the generic system dynamics performance model can be able to facilitate managers of an ICJV to identify the factors and causes of problems related to performance gap by adjusting inputs of exogenous variables with their real scenario.
While simulating the adopted models for different ICJVs, several problems related to performance of ICJVs have been observed from the base runs of both cases such as: (1) cost overrun, schedule pressure and poor quality due to low productivity in construction; (2) negative value gap; and (3) low level of effective information sharing between partners.
To minimize above mentioned problems related to performance of ICJV, the following component based recommendations are addressed to improve the performance of ICJV for both cases.
- In order to improve productivity in construction, three complementary HRM practices such as Performance Based Incentive (PBI) for the workers, problem solving team and multiskilled training are suggested. PBI can increase motivation of worker but the practice has flaws (free riders and inefficient evaluation technique) too. Firms can overcome free-rider problems by developing a “norm” or “culture” through peer pressure. Evaluation technique can be improved by incorporating other valued dimension such as workers’ dependability, corporation, or problem-solving initiative. The problem solving team should be developed in order to get feedback from the workers regarding productivity improvement and suggested best practices. Multiskilled training can lead to increased productivity as multiskilling leads to more efficient use of time on construction sites, affects the attitude of workers and increases the desire to perform. It will reduce layoff frequency of workers and subsequently reduce the probability of unavailability of skilled labors during the project progress.
- In order to diminish negative value gap through improving adaptability or absorptive capacity of the parent companies, training, workshops and high-performance team policies are suggested for both ICJVs. Three levels of training programs involved in managing collaboration and competition at the same time, open communication and trust for the smooth transfer of know-how and acquisition of a specific competence should be conducted. Workshops are useful for adjusting and regulating the partnering goals with the internal goals as well as the project goals to ensure that they are compatible. Most often, the partnering goals consist of some tangible project goals, such as quality, cost, schedule, safety, and time, and some intangible contextual goals, such as communication, trust, commitment, etc. The high performance team will focus on value gap to overcome. Besides, the team should look for continuous improvement in response to the turbulent environment. The team can then prescribe actions to induce changes, seize opportunities, and rectify the course.
- In order to enhance effective and efficient information sharing, Integrated Proactive Team (IPT) and “Project Web” are suggested for both ICJVs. IPT can aid in building of mutual trust and providing decision makers with the necessary information to make the right decisions at the right time. Whereas, “Project Web” can improve in communication and coordination of information between all project participants resulting an increased efficiencies, better-facilitated decision making and improved project control and in turn increase mutual trust.
Maximum benefit can be attained by integrating above three policies and applied at the same time.
His thesis abstract is copied and posted.
ABSTRACT
The uncertain and dynamic nature of ICJV performance is evolved with many critical factors which lead to make partner relationships more complex in respect of making decisions to maintain a cohesive environment that creates desired strategic outcomes. Addressing to the fact, a generic system dynamics performance model for ICJV is developed by integrating a number of exogenous and endogenous variables as to get an overall impact on performance of ICJV and to make effective decisions based on that. During performance model development process, several key feedback loops are developed with the endogenous variables incorporated with exogenous variables which lead the path to formulate stock and flow mapping under three sub models (value, project output and satisfaction). In order to formulate and validate the model both structurally and behaviorally and also to find out the causes of poor performance, both qualitative and quantitative data are gathered by conducting intensive interviews from two ICJVs in Thailand and also backup with literature review. The performance model, when tested with data from two ICJVs, replicates historic data well. This implies that the system dynamics performance model can be able to facilitate managers of an ICJV to identify the factors causing problems related to performance gap by adjusting inputs and or structure of variables. After conducting intensive simulations of model, three major problems are identified related to negative value gap, low productivity in construction and high rate of ineffective information sharing of both ICJVs. In terms of diminishing negative value by improving adaptability, the suggested effective policies are: (1) training, (2) workshops and (3) high performance team. In order to stimulate productivity in construction, the recommended effective policies are: (1) performance based incentive, (2) multiskilled training and (3) problem solving team. Regarding improvement of effectiveness of information sharing (1) integrated proactive team and (2)“Project Web” are suggested. Integrated application of these policies provides a maximum improvement to the performance of the ICJV.
Wednesday 27 January 2010
Tuesday 26 January 2010
Modeling Contractor’s And Subcontractor’s Trust: A System Dynamics Approach
Modern constructions processes rely on the contributions of diverse functional specialists working in inter-organizational teams to design, cost, procure and manage modern construction projects. Moreover, construction companies are increasingly dependent on the organizations; they supply to and buy from, particularly leading contractors who in most cases act as management contractors, subcontracting work in packages to a range of specialist contractors (Constructing Excellence, 2004). The critical importance of subcontracting to the success of construction projects has long been recognized. Gray and Flanagan (1989), in their comprehensive study of subcontracting, concluded that it would account for an increasing proportion of total construction workload. Lead contractors can use specialist contractor’s cash flow as a means of surviving the volatility of the construction business cycle a practice that still causes much tension in the supply chain. Co-operative relationships between and among supply chain partners are crucial to successful supply chain implementation.
According to Hsieh(1998), the benefit of subcontracting is that it not only allows the general contractor to acquire various construction services efficiently from the resource market but also is an effective means of cost control and risk management. Unfortunately, this practice may also pose tremendous barriers to site productivity. Hsieh (1998) attributed that the institutional gaps between the general contractor and the subcontractors are crucial factors affecting site productivity. This is due to the lack of trust and negative attitudes. Moreover, this attitude towards many of the essential requirements of supply chain management suggest that the industry is a long way off being able to align systems and procedures for improved project performance (Constructing Excellence, 2004). The key barriers to develop trust as well as greater integration seem to stem from the industry’s traditional approach of vertically differentiating the construction process, which results in a subordinate position for subcontractors within the hierarchy of relationships forming the traditional design–management– construction process. Consequently, main contractor–subcontractor–supplier relationships are often found to be strained and adversarial (Hinze and Tracey, 1994; Latham, 1994).
Alternatively, poor performance of subcontractor, conflicts with payment generates distrust of the contractor towards the subcontractor. Indeed, the cultural issue of mistrust between the parties has been seen as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration (Dainty et al., 2001).
Trust is dynamic and either growing or diminishing (Hawke, 1994). It is often associated with situations involving personal conflict, outcome uncertainty and problem solving. It is a prediction and expectation of future events. Varying in intensity, this is the confidence in and reliance upon the prediction (Nyhan and Marlowe, 1997). As trust is the fundamental element for a successful project team and is also varying with time thus it is very difficult to managers to make decisions effectively in order to maintain good trust between team members during several stages of project. Most of the time project participants interpret the team-relationship in one direction and hence make decision without thinking other negative factors that may impact on the team performance. However, the uncertain nature of trust is involved many critical factors which leads to make contractual relationship more complex in respect of maintaining trustworthy environment. Trust can be regarded as glue that fosters cooperation among organizations and different team members and an essential lubricant that helps to complete the project smoothly (Wong and Cheung, 2005). As trust is dynamic e.g. if either one deteriorates, this will have a negative impact on the other, thus a system dynamics model related to trust in creating project team can help to make decisions effectively and encounter the problems related to parties’ relationship as it involves two major characteristics: 1) changes over time and 2) allows feedback. System dynamics model are well suited to representing multiple interdependencies, to deal with dynamics nature and involved in significant feedback processes (Ogunlana et al., 1998).
Ms. Azmeri Rahman made a study which focused in developing a system dynamics model of trust from both contractor and subcontractor point of view in order to experience the impact of factors on trust.
The primary objective of her study was to address the critical issues in developing trust model for effective supply chain integration between contractor and subcontractor in construction industry using System Dynamics Approach. The secondary objectives of the study were specified as follows:
- To identify attributes of trust in a contractor’s and subcontractor’s relationship.
- To develop generic system dynamics model of trust from both of contractor and subcontractor perspectives in order to explain how the factors affect the trust in developing an effective relationship.
- To develop adopted system dynamics models for different construction projects.
- To formulate implementable policies that may accelerate the trust level between the contractor and subcontractor.
Conclusion
The lack of trust between contractor and subcontractor on the adversarial nature of their working relationships has been characterized as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration. This appears to be preventing the active involvement of supplier companies to the construction process. As trust is path dependence phenomenon, thus it is extremely difficult to capture the behavior of trust in a construction project relationship at a holistic view. Therefore, by adopting system dynamics approach, two generic trust models from both of contractor’s and subcontractor’s perspectives have been formulated in the study to facilitate the contractors and subcontractors easily understanding trust related issues during their contact period.
Permeability, performances, satisfaction, business competency and equitable contract terms enhance trust building, where as bad experiences during interaction, negotiation approach towards conflict and unsatisfactory dispute resolution techniques deteriorate mutual trust between contractor and subcontractors. These are the key factors that have been found during generic model formulation. However, these issues are further influenced by several factors which have been explained briefly as follows.
- Permeability is positively influenced by effective information flow, frequent communication and openness of the contractual parties. Situation ineffective, inaccurate and unorganized information generate work uncertainty, increase rework amount as well as project risk. In addition, changes in project scope also accelerate uncertainty and enhance subcontractor’s claims regarding extension of time and extra/advance payment. Conversely, claim and risk make conflicts among parties which disrupt trust level.
- Performance level of subcontractor is directly measured by productivity which is extremely affected by work competency, joint approach of problem solving and adaptability of the subcontractor. Moreover, commitment towards completion of the project and on time resource availability enhances the productivity level positively.
- Satisfaction levels of subcontractor are comprised of complete and effective information and drawings from contractor, win-win negotiation and getting prompt payment from contractor. Problem solving or compromising attitude towards negotiation bring its efficiency. However, forcing attitude of contractor generate adversarial relationship as well as develop conflict between the parties.
- Frequent changes in design and project scopes, induce extra work and decline the business competency of contractor. Moreover, these additional works interrupt the flow of work as well as make the subcontractor to claim for advance and extra payment. Furthermore, claims reduce negotiation efficiency.
When the models have been calibrated for the case study projects, the simulated behaviors and historic behaviors have been found similar as long as relevant parameterizations have been undertaken. This implies that the model is able to simulate the dynamics of the trust relationship between contractor and subcontractor. After observing modified models, the following features have been concluded.
Commitment of subcontractor towards resource availability, work competency regarding technical, managerial and financial aspect and adaptability has been observed major barriers to the sufficient productivity. Knowledge sharing between the parties play significant role for information flow. Poor information and variation of honesty have been found as critical issues in permeability aspect. Making claim by searching contractual loophole has been found another problem, which erode trust level between the parties from contractor’s perspective.
Conversely, a forcing attitude toward subcontractors at negotiation and unfair dealing, especially when paying subcontractors, has been identified as being ways of destroying main contractor–subcontractor trust level as well as relationships. Financial stability of the contractor company has significant affect on business competency of the contractor as well as subcontractor’s trust. Moreover, incomplete drawings, frequent changes of design, lack of frequent communication and transparency in relationship have been identified other major attributes in diminishing trust between contractor and subcontractor.
Recommendations for the improvement of the contractors-subcontractors relationship
To encounter above mentioned problems related with trust, the following recommendations are suggested to the contractors and subcontractors to improve their relationships.
1. The contractor should change their contracting process by shifting from ‘‘Price Only’’ single criterion to multiple performance criteria. This criterion facilitates a competitive contracting process, which requires projects to be awarded to the contractor offering the best combination of price and qualifications, instead of just the lowest bid. Conversely, it is also concluded that subcontractor should give considerations in selection of main contractor based on the reputation as well as business competency of the contractor company.
2. The contractor should consider the subcontractors as internal team and manage as a site employee of the construction firm by putting more emphasis on the job training, project safety systems, documentation and evaluation of work ethics and performance, and team building. Alternatively, subcontractor should pay higher concern in achieving these improvement techniques by including more skilled workers and by reducing frequency of worker switching from site to site, and most importantly, by maintaining higher commitment to the project.
3. The most significant recommendation has been made here for integrating subcontractors into partnering approach. Partnering aims to reduce the adversarialism which is said to be typical in the industry and which has confounded previous attempts to encourage better integration and cooperation between contractual partners. It is also consistent with the general philosophy of partnering, in integrating all key participants and inculcating a common sense of project purpose, commitment, teamwork, and problem-solving. This established need for main contractor-subcontractor partnering must therefore be incorporated in the subcontractor selection criteria and reflected in the selection process itself. The needs to incorporate other non-price criteria in selecting subcontractors can also be addressed by drawing on appropriate approaches from innovative and ‘‘better practice’’ contractor selection methodologies that are also scanned in this paper. Examples include the incorporation of (1) indicators of responsiveness, responsibility, and competency; (2) performance ratings derived from previous projects; and (3) capacity ratings of potential participants.
Her thesis abstract is copied and posted.
ABSTRACT
A general mistrust within the contactor and subcontractor companies has identified one of the significant barriers to derive benefits from true downstream supply chain integration, can further lead to the development of adversarial relationships. Moreover, this kind of relationship is reflected in projects delays, adversarial attitudes, cost overruns, litigation and a win-lose climate. Using the general theory of trust in inter-organizational relations and conducting interviews, this research discusses factors that influence development of trust and cooperation in contractor–subcontractor relationships in construction projects. System dynamics is the simulation method is selected in this theory-building effort, based on qualitative data collected from two projects of a construction company in Thailand. Reference mode which leads to the formulation of dynamic hypothesis of trust is drawn by interviewing parties. Explanation of the changes or dynamic hypothesis is done based on the principles of feedback loop. Two generic models from both of contractor’s and subcontractor’s perspective, focusing on the aspects of trust formation, evolution, and propagation is formulated incorporating the dynamic hypothesis along with the other essential detail of the system relating to the problem being addressed. The simulation experiments show plausible path dependent behaviors with the characteristic asymmetries between trust and distrust described both in the literature as in the case data. Performance, permeability, satisfaction and system- based trust are found to make significant contributions toward parties’ trust level. In addition, the result suggests that the contractor’s trust level is more sensitive towards a wider range of action and behavior of their counterpart than vice versa. However, subcontractor’s trust level relies strongly on both of system based trust and permeability of the main contractor. Three strategic policies such as best value contracting, management of subcontractors as internal team and semi project partnering approach are recommended to stimulate the trust factors as well as cooperative long term relationship. The reliability of the findings is augmented by a confirmatory study with interviews with field experts.
According to Hsieh(1998), the benefit of subcontracting is that it not only allows the general contractor to acquire various construction services efficiently from the resource market but also is an effective means of cost control and risk management. Unfortunately, this practice may also pose tremendous barriers to site productivity. Hsieh (1998) attributed that the institutional gaps between the general contractor and the subcontractors are crucial factors affecting site productivity. This is due to the lack of trust and negative attitudes. Moreover, this attitude towards many of the essential requirements of supply chain management suggest that the industry is a long way off being able to align systems and procedures for improved project performance (Constructing Excellence, 2004). The key barriers to develop trust as well as greater integration seem to stem from the industry’s traditional approach of vertically differentiating the construction process, which results in a subordinate position for subcontractors within the hierarchy of relationships forming the traditional design–management– construction process. Consequently, main contractor–subcontractor–supplier relationships are often found to be strained and adversarial (Hinze and Tracey, 1994; Latham, 1994).
Alternatively, poor performance of subcontractor, conflicts with payment generates distrust of the contractor towards the subcontractor. Indeed, the cultural issue of mistrust between the parties has been seen as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration (Dainty et al., 2001).
Trust is dynamic and either growing or diminishing (Hawke, 1994). It is often associated with situations involving personal conflict, outcome uncertainty and problem solving. It is a prediction and expectation of future events. Varying in intensity, this is the confidence in and reliance upon the prediction (Nyhan and Marlowe, 1997). As trust is the fundamental element for a successful project team and is also varying with time thus it is very difficult to managers to make decisions effectively in order to maintain good trust between team members during several stages of project. Most of the time project participants interpret the team-relationship in one direction and hence make decision without thinking other negative factors that may impact on the team performance. However, the uncertain nature of trust is involved many critical factors which leads to make contractual relationship more complex in respect of maintaining trustworthy environment. Trust can be regarded as glue that fosters cooperation among organizations and different team members and an essential lubricant that helps to complete the project smoothly (Wong and Cheung, 2005). As trust is dynamic e.g. if either one deteriorates, this will have a negative impact on the other, thus a system dynamics model related to trust in creating project team can help to make decisions effectively and encounter the problems related to parties’ relationship as it involves two major characteristics: 1) changes over time and 2) allows feedback. System dynamics model are well suited to representing multiple interdependencies, to deal with dynamics nature and involved in significant feedback processes (Ogunlana et al., 1998).
Ms. Azmeri Rahman made a study which focused in developing a system dynamics model of trust from both contractor and subcontractor point of view in order to experience the impact of factors on trust.
The primary objective of her study was to address the critical issues in developing trust model for effective supply chain integration between contractor and subcontractor in construction industry using System Dynamics Approach. The secondary objectives of the study were specified as follows:
- To identify attributes of trust in a contractor’s and subcontractor’s relationship.
- To develop generic system dynamics model of trust from both of contractor and subcontractor perspectives in order to explain how the factors affect the trust in developing an effective relationship.
- To develop adopted system dynamics models for different construction projects.
- To formulate implementable policies that may accelerate the trust level between the contractor and subcontractor.
Conclusion
The lack of trust between contractor and subcontractor on the adversarial nature of their working relationships has been characterized as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration. This appears to be preventing the active involvement of supplier companies to the construction process. As trust is path dependence phenomenon, thus it is extremely difficult to capture the behavior of trust in a construction project relationship at a holistic view. Therefore, by adopting system dynamics approach, two generic trust models from both of contractor’s and subcontractor’s perspectives have been formulated in the study to facilitate the contractors and subcontractors easily understanding trust related issues during their contact period.
Permeability, performances, satisfaction, business competency and equitable contract terms enhance trust building, where as bad experiences during interaction, negotiation approach towards conflict and unsatisfactory dispute resolution techniques deteriorate mutual trust between contractor and subcontractors. These are the key factors that have been found during generic model formulation. However, these issues are further influenced by several factors which have been explained briefly as follows.
- Permeability is positively influenced by effective information flow, frequent communication and openness of the contractual parties. Situation ineffective, inaccurate and unorganized information generate work uncertainty, increase rework amount as well as project risk. In addition, changes in project scope also accelerate uncertainty and enhance subcontractor’s claims regarding extension of time and extra/advance payment. Conversely, claim and risk make conflicts among parties which disrupt trust level.
- Performance level of subcontractor is directly measured by productivity which is extremely affected by work competency, joint approach of problem solving and adaptability of the subcontractor. Moreover, commitment towards completion of the project and on time resource availability enhances the productivity level positively.
- Satisfaction levels of subcontractor are comprised of complete and effective information and drawings from contractor, win-win negotiation and getting prompt payment from contractor. Problem solving or compromising attitude towards negotiation bring its efficiency. However, forcing attitude of contractor generate adversarial relationship as well as develop conflict between the parties.
- Frequent changes in design and project scopes, induce extra work and decline the business competency of contractor. Moreover, these additional works interrupt the flow of work as well as make the subcontractor to claim for advance and extra payment. Furthermore, claims reduce negotiation efficiency.
When the models have been calibrated for the case study projects, the simulated behaviors and historic behaviors have been found similar as long as relevant parameterizations have been undertaken. This implies that the model is able to simulate the dynamics of the trust relationship between contractor and subcontractor. After observing modified models, the following features have been concluded.
Commitment of subcontractor towards resource availability, work competency regarding technical, managerial and financial aspect and adaptability has been observed major barriers to the sufficient productivity. Knowledge sharing between the parties play significant role for information flow. Poor information and variation of honesty have been found as critical issues in permeability aspect. Making claim by searching contractual loophole has been found another problem, which erode trust level between the parties from contractor’s perspective.
Conversely, a forcing attitude toward subcontractors at negotiation and unfair dealing, especially when paying subcontractors, has been identified as being ways of destroying main contractor–subcontractor trust level as well as relationships. Financial stability of the contractor company has significant affect on business competency of the contractor as well as subcontractor’s trust. Moreover, incomplete drawings, frequent changes of design, lack of frequent communication and transparency in relationship have been identified other major attributes in diminishing trust between contractor and subcontractor.
Recommendations for the improvement of the contractors-subcontractors relationship
To encounter above mentioned problems related with trust, the following recommendations are suggested to the contractors and subcontractors to improve their relationships.
1. The contractor should change their contracting process by shifting from ‘‘Price Only’’ single criterion to multiple performance criteria. This criterion facilitates a competitive contracting process, which requires projects to be awarded to the contractor offering the best combination of price and qualifications, instead of just the lowest bid. Conversely, it is also concluded that subcontractor should give considerations in selection of main contractor based on the reputation as well as business competency of the contractor company.
2. The contractor should consider the subcontractors as internal team and manage as a site employee of the construction firm by putting more emphasis on the job training, project safety systems, documentation and evaluation of work ethics and performance, and team building. Alternatively, subcontractor should pay higher concern in achieving these improvement techniques by including more skilled workers and by reducing frequency of worker switching from site to site, and most importantly, by maintaining higher commitment to the project.
3. The most significant recommendation has been made here for integrating subcontractors into partnering approach. Partnering aims to reduce the adversarialism which is said to be typical in the industry and which has confounded previous attempts to encourage better integration and cooperation between contractual partners. It is also consistent with the general philosophy of partnering, in integrating all key participants and inculcating a common sense of project purpose, commitment, teamwork, and problem-solving. This established need for main contractor-subcontractor partnering must therefore be incorporated in the subcontractor selection criteria and reflected in the selection process itself. The needs to incorporate other non-price criteria in selecting subcontractors can also be addressed by drawing on appropriate approaches from innovative and ‘‘better practice’’ contractor selection methodologies that are also scanned in this paper. Examples include the incorporation of (1) indicators of responsiveness, responsibility, and competency; (2) performance ratings derived from previous projects; and (3) capacity ratings of potential participants.
Her thesis abstract is copied and posted.
ABSTRACT
A general mistrust within the contactor and subcontractor companies has identified one of the significant barriers to derive benefits from true downstream supply chain integration, can further lead to the development of adversarial relationships. Moreover, this kind of relationship is reflected in projects delays, adversarial attitudes, cost overruns, litigation and a win-lose climate. Using the general theory of trust in inter-organizational relations and conducting interviews, this research discusses factors that influence development of trust and cooperation in contractor–subcontractor relationships in construction projects. System dynamics is the simulation method is selected in this theory-building effort, based on qualitative data collected from two projects of a construction company in Thailand. Reference mode which leads to the formulation of dynamic hypothesis of trust is drawn by interviewing parties. Explanation of the changes or dynamic hypothesis is done based on the principles of feedback loop. Two generic models from both of contractor’s and subcontractor’s perspective, focusing on the aspects of trust formation, evolution, and propagation is formulated incorporating the dynamic hypothesis along with the other essential detail of the system relating to the problem being addressed. The simulation experiments show plausible path dependent behaviors with the characteristic asymmetries between trust and distrust described both in the literature as in the case data. Performance, permeability, satisfaction and system- based trust are found to make significant contributions toward parties’ trust level. In addition, the result suggests that the contractor’s trust level is more sensitive towards a wider range of action and behavior of their counterpart than vice versa. However, subcontractor’s trust level relies strongly on both of system based trust and permeability of the main contractor. Three strategic policies such as best value contracting, management of subcontractors as internal team and semi project partnering approach are recommended to stimulate the trust factors as well as cooperative long term relationship. The reliability of the findings is augmented by a confirmatory study with interviews with field experts.
Monday 25 January 2010
Problems Affecting Contractor Cost: A Case Study In Indonesia
Construction is one of the ways doing business. As a financially risky business, construction will have sensitive behaviors towards the market cycle (booming, normal and recession) (Cooke & Williams, 2004). When the market is good the construction industry will rise great profit, however if the crisis comes, it will suffer more than any other industries. This is true because construction business is a capital intensive industry. It requires high up front capital investment to start and run the business. If the market is fierce and the demand is drop than the idle equipment will create waste cost. These will lead to the idea to point out that financial resources management is a key critical system to be installed in the management of a contractor company.
There are many financial problems during construction operation that need to be solved. The first main issues are in the operation point of view. The operation wise problems will address both revenue sides and cost sides because these two sides will determine the profitability from the operation (Fellows, et. al. 1988). The most important function that facilitates construction organizations to accomplish profit maximization is cost control (Charoenngam, 2001). A good construction company needs to know how to secure its timely revenue. A smart client tends to delay payment to safe opportunity cost (Harris and Mc Caffer, 2001).
The second issue which needs to be observed is the financing effect of the either project or head office operation and significantly its equipment procurement (Halpin, 1985). A company will have two sides of financial management these are operation management and equipment management. Operation management falls within short-term financial management. In another hand, equipment management is placed in long term financial arrangement (Ross, et. al. 2005). A company or project that is financed its assets/equipments mainly by its own cash basis will have quite different behaviors from those which borrow from the third parties or even leasing arrangement. This situation will create additional complication. Borrowing creates particular constraints on its operation and cash flow that must be generated to satisfy the money provider. Inadequate cash to pay its obligation will put the company into trouble (Barboza and Pimentel, 2001) and insufficient growth to attract shareholder will make the market company price toward shareholder drop. The exit methods that are common to happen are voluntary insolvency (liquidation), merger (Buehler, 2005), private work out, etc.
From the four big problem groups above, it is required for the contractor to be able to solve financial problems in the project level directly before the problem causing further damage to the company performance. The company needs to identify what kind of cost variances will likely to happen on site, develop the indicator and monitor the project financial performance. The same things also applicable to the company level cost variances solution. If the company fails to manage their short-term finance then what the company should do later on to secure its asset and sustain profitable. If they still can not manage the current financial problems then the contractor probably can suffer from bankruptcy and other solution such as liquidation, private work out will be discussed throughout this research. In summary the company needs to create a systematic decision support system to help them behave and solve its current cost variances before it is going worse and to provide the implication chains of its serious cost variances.
Mr. Ariono Dhanisworo Indra Budhi made a case study which main objective was to explain within a systematic approach, the problems affecting contractor cost which happened in Indonesia. The developed approach can be used by contractor as decision support system, in order to make right decision at the right time to save the shareholder interest. His study objective was subdivided into several sub-objectives to: (1) identify and classify the adverse specific problems arisen during construction period affecting contractor cost, (2) investigate the cause and implication of identified specific problems, (3) make recommendation on how to reduce the effect of the problems on contractors finance; and (4) derive model of explanatory critical parameters leading to cost variances.
CONCLUSION & RECOMMENDATION
Based on the data analysis, the major problems affecting cost variances with the general effect in Indonesian contractors are summarized in the table below.
As not all problems can be treated the same way, the solutions and preventive actions are developed from previous grouped unit of analysis.
His thesis abstract is copied and posted.
ABSRACT
As Indonesian contractors perform their business day to day they are subjected to hidden problems affecting their cost. Therefore the main goal of this research is to explain and explore the source cost during construction period specific to Indonesian contractors. The research is conducted with qualitative method: a case study from 6 companies as sample.
The research result is that the identified problems are not controlled by the contractor. These problems are hurdle escalation claim, bad intention change order, un-match between BOQ and drawing, and loss from government auditor volume re-measurement. The other problems are happened in finance department including interest rate increment, tax restitution problem, double taxation for interest income, late payment without interest rate compensation and promissory note problem. Serious identified crisis are also happened in legal department: client doesn’t pay on time, foreign design hidden error, fail claim to insurance company under CAR policy and permit to build a building without official written evidence from government. These cost harms need to be managed and controlled in integrated corporate management system to avoid unnecessary sub optimization.
Keywords: integrated cost; contractor; Indonesia; escalation; payment; change order; promissory note; design liability; insurance; CAR.
There are many financial problems during construction operation that need to be solved. The first main issues are in the operation point of view. The operation wise problems will address both revenue sides and cost sides because these two sides will determine the profitability from the operation (Fellows, et. al. 1988). The most important function that facilitates construction organizations to accomplish profit maximization is cost control (Charoenngam, 2001). A good construction company needs to know how to secure its timely revenue. A smart client tends to delay payment to safe opportunity cost (Harris and Mc Caffer, 2001).
The second issue which needs to be observed is the financing effect of the either project or head office operation and significantly its equipment procurement (Halpin, 1985). A company will have two sides of financial management these are operation management and equipment management. Operation management falls within short-term financial management. In another hand, equipment management is placed in long term financial arrangement (Ross, et. al. 2005). A company or project that is financed its assets/equipments mainly by its own cash basis will have quite different behaviors from those which borrow from the third parties or even leasing arrangement. This situation will create additional complication. Borrowing creates particular constraints on its operation and cash flow that must be generated to satisfy the money provider. Inadequate cash to pay its obligation will put the company into trouble (Barboza and Pimentel, 2001) and insufficient growth to attract shareholder will make the market company price toward shareholder drop. The exit methods that are common to happen are voluntary insolvency (liquidation), merger (Buehler, 2005), private work out, etc.
From the four big problem groups above, it is required for the contractor to be able to solve financial problems in the project level directly before the problem causing further damage to the company performance. The company needs to identify what kind of cost variances will likely to happen on site, develop the indicator and monitor the project financial performance. The same things also applicable to the company level cost variances solution. If the company fails to manage their short-term finance then what the company should do later on to secure its asset and sustain profitable. If they still can not manage the current financial problems then the contractor probably can suffer from bankruptcy and other solution such as liquidation, private work out will be discussed throughout this research. In summary the company needs to create a systematic decision support system to help them behave and solve its current cost variances before it is going worse and to provide the implication chains of its serious cost variances.
Mr. Ariono Dhanisworo Indra Budhi made a case study which main objective was to explain within a systematic approach, the problems affecting contractor cost which happened in Indonesia. The developed approach can be used by contractor as decision support system, in order to make right decision at the right time to save the shareholder interest. His study objective was subdivided into several sub-objectives to: (1) identify and classify the adverse specific problems arisen during construction period affecting contractor cost, (2) investigate the cause and implication of identified specific problems, (3) make recommendation on how to reduce the effect of the problems on contractors finance; and (4) derive model of explanatory critical parameters leading to cost variances.
CONCLUSION & RECOMMENDATION
Based on the data analysis, the major problems affecting cost variances with the general effect in Indonesian contractors are summarized in the table below.
As not all problems can be treated the same way, the solutions and preventive actions are developed from previous grouped unit of analysis.
His thesis abstract is copied and posted.
ABSRACT
As Indonesian contractors perform their business day to day they are subjected to hidden problems affecting their cost. Therefore the main goal of this research is to explain and explore the source cost during construction period specific to Indonesian contractors. The research is conducted with qualitative method: a case study from 6 companies as sample.
The research result is that the identified problems are not controlled by the contractor. These problems are hurdle escalation claim, bad intention change order, un-match between BOQ and drawing, and loss from government auditor volume re-measurement. The other problems are happened in finance department including interest rate increment, tax restitution problem, double taxation for interest income, late payment without interest rate compensation and promissory note problem. Serious identified crisis are also happened in legal department: client doesn’t pay on time, foreign design hidden error, fail claim to insurance company under CAR policy and permit to build a building without official written evidence from government. These cost harms need to be managed and controlled in integrated corporate management system to avoid unnecessary sub optimization.
Keywords: integrated cost; contractor; Indonesia; escalation; payment; change order; promissory note; design liability; insurance; CAR.
Wednesday 20 January 2010
Consistency Of Safety Management System Implementation: A System Dynamics Approach
Site safety issues have always been a significant concern in the industrial world. As in any other industry, the construction industry also has a deep impact because of accidents. Accidents do have greater impact on human life and health but besides these, there are several other issues affected by an accident in a working area. Site accidents can have serious effect on the company’s position and reputation in the extremely competitive construction marketplace due to the direct impact on the company’s business.
Different researchers have attempted to identify the factors attributable to a successful construction project. It was obviously seen that, in the components of project management factors, safety management or safety program is one of complementary factors contributing to a project success.
There are several questions and concern that every policy maker trying to focus on safety matters in a company. The basic drawback of the policy maker is that they always search for the defect in their policy rather than evaluating the working environment and conditions under which it had been adopted. It should be noticed that the policy that has been effective 10 years back may not produce the same result today. Also the policy that has successful in one region may not bear the same outcome in the other. The effectiveness of policy depends not only in the content of policy itself but also on factors like time, working culture, hierarchical need, human attitude, behavior etc.
Throughout the entire construction projects life starting from the design phase to the very end of execution phase, numerous project management actions are deployed in terms of planning, scheduling, quality assurance and communication system (Chan et. al, 2004). Action involving safety issues is also a basic process included in order to execute the project safely. This is because a major accident during execution phase can leads to many problems for company.
As a result, many companies have established own safety program for preventing the occurrence of accidents, as they have recognized the potential impacts of accidents and their impacts in the longer run. But do they ever review “What are the impacts of such safety program”, “Are these safety programs consistent or are they being followed with great care” or in other words whether the program positively or negatively affected their execution or is there any consistency in their Safety Management System Implementation. National Occupational Health & Safety Commission (NOHSC) has stated that most of companies have traditionally focused only on outcome measures of performance, for example, the accident records.
Therefore, Mr. Niraj Baidya made a study to review the actual position which main aspect is that, under their safety program, do they know these:
1. Whether the root causes of accidents still exist or were eliminated.
2. Whether the safety program implemented is effective or not.
3. Whether project participants are satisfied with the program.
4. How consistency they are in terms of their Safety Management System Implementation
This study primarily aimed to investigate the Consistency of Safety Management System Implementation using the System Dynamics Approach under safety operation of Case Study Company i.e. Bovis Lend Lease (Thailand) Limited. The main objectives of the study were to: (1) identify the endogenous and extraneous factors which affect safety performance; and (2) develop a system dynamics model to explain how the factors affect the safety performance
Conclusion
This research investigated the impact of various components on the site condition in terms of unsafe act and condition in the various Bovis projects. The objective of this modeling exercise was firstly to understand the mechanism of various endogenous and exogenous factors affecting the safety performance of various Bovis projects and develop a system dynamics model to explain how the factors affect the safety performance and secondly to identify the general guidelines for policy formulation. Budget, attitude and behavior, BLL employee commitment, BLL employee understanding, BLL supervision, equipment on hand, knowledge, pre contractual communication, safety practice, safety training, subcontractor supervision, subcontractor understanding, top management commitment, understanding BLL requirement, and worker understanding are the primary focused variables. Going into details of each factors helps to give a clear picture of the problem existing in the site. These are the key factors that have been found during generic model formulation. However, these issues are further influenced by several factors which have been explained briefly as follows:
1. Unsafe site condition is positively influenced by the work speed, uncertainties and the skilled fraction in the project. Complexity of project and weather influenced the uncertainties whereas the total number of workers and skilled workers generates skilled fraction. Unsafe condition causes accident generation, thus affecting the progress rate. Progress rate results the increment of schedule pressure and thus increasing the work speed.
2. Understanding of worker, subcontractor and BLL staff directly affected by the knowledge flow gained from the safety training. With the improvement of understanding, supervision and commitment level of the different parties enhances, thus affecting the attitude and behavior or workers and improve the site condition.
3. Subcontractor safety understanding, experience working with BLL and BLL work system comprising of pre contractual document, safety practice and coordination positively affects the subcontractor understanding of BLL safety requirement. In addition to subcontractor understanding, intention of subcontractor affects the subcontractor budget allocation and safety expenses.
4. Complexity of project, client and the desired goal of safety condition implemented by the BLL management influence the budget allocation.
A dynamic simulation model representing the perceived mode was built using the system dynamic methodology. Simulation describes the current behavior and the inferred future. Site condition is measured in terms of unsafe act, condition and accident record of the project. The model structure is based on the literature reviews and the information gathered from the interview conducted with the different parties namely Bovis Project team, subcontractors and the workers involved in the project site.
Sensitivity test indicate the potential parameters for behavioral improvement. The model was applied to the investigation for various components affecting the safety performance. Real life practices were explored to make practically possible changes in the sensitive parameters. Three policies in order to improve the safety training and knowledge flow, Proactive subcontractor awareness and improving supervision were presented in the model for an improved and safe site condition. The implementation methodology of the derived policies was also described in a reasonable detail.
Recommendation
To enhance the project site condition, the following recommendations are suggested:
1. To develop a Proactive Awareness to Subcontractor. BLL should not only to provide the written documents and formal meeting but also arrange some kind of workshop where the sub contractor are provided with training and demonstration about all the safety need so that they have thorough with the Bovis safety requirement before the commencement of the work.
2. Supervision is a critical process for maintaining proper site condition. Thus BLL should provide sufficient training and information to all supervisors. They could also provide a specialist supervisor in the site. Providing a supervisor who is specialist to his work increases the effectiveness of supervision on the site by. Having a specialist leads to not only proper quality of work, but the attitude and behavior of workers to quality and safety increases.
3. Training is the most common method of responding to employee’s performance deficiencies. BLL should make their training program more effective by providing focused group training, survey based training and interactive training. For the focused training, workers should be divided into groups based on their skill and scope of work. The training program content and method of presentation should reflect the needs and characteristics of the work force. Safety program should also comprise of evaluation procedure to determine its effective and to provide feedback for future improvement.
His thesis abstract is copied and posted
ABSTRACT
The construction industry is notorious for its poor safety record when compared with other industries. The major causes of accidents have been identified, and can be directly attributed to unsafe design and site practices. Accidents arise from different causes that can generally be classified as physical incidents posing hazardous situations, and behavioral incidents caused by unsafe acts. These studies is concerned with understanding the mechanism of various endogenous and exogenous factors affecting the safety performance in terms of unsafe act and condition of various Bovis projects from different prospective of BLL employees, Subcontractors and workers. Based on the factors, an applicable simulation model was built using the system dynamic methodology. The model was calibrated to investigate its dynamic problem to explain how the factors affect the safety performance and to formulate and evaluate the practical policies to improve the performances. In order to considerably improve performance and to be able to adapt to different scenarios, four integrated policies combining the individual policies having the most potential were evaluated. The results reveals that Developing a Safety Culture, Effective and Focused Training Program, Proactive Awareness to Subcontractor and Specialist Supervisor are the most effective policies for improving the exiting safe site condition.
Different researchers have attempted to identify the factors attributable to a successful construction project. It was obviously seen that, in the components of project management factors, safety management or safety program is one of complementary factors contributing to a project success.
There are several questions and concern that every policy maker trying to focus on safety matters in a company. The basic drawback of the policy maker is that they always search for the defect in their policy rather than evaluating the working environment and conditions under which it had been adopted. It should be noticed that the policy that has been effective 10 years back may not produce the same result today. Also the policy that has successful in one region may not bear the same outcome in the other. The effectiveness of policy depends not only in the content of policy itself but also on factors like time, working culture, hierarchical need, human attitude, behavior etc.
Throughout the entire construction projects life starting from the design phase to the very end of execution phase, numerous project management actions are deployed in terms of planning, scheduling, quality assurance and communication system (Chan et. al, 2004). Action involving safety issues is also a basic process included in order to execute the project safely. This is because a major accident during execution phase can leads to many problems for company.
As a result, many companies have established own safety program for preventing the occurrence of accidents, as they have recognized the potential impacts of accidents and their impacts in the longer run. But do they ever review “What are the impacts of such safety program”, “Are these safety programs consistent or are they being followed with great care” or in other words whether the program positively or negatively affected their execution or is there any consistency in their Safety Management System Implementation. National Occupational Health & Safety Commission (NOHSC) has stated that most of companies have traditionally focused only on outcome measures of performance, for example, the accident records.
Therefore, Mr. Niraj Baidya made a study to review the actual position which main aspect is that, under their safety program, do they know these:
1. Whether the root causes of accidents still exist or were eliminated.
2. Whether the safety program implemented is effective or not.
3. Whether project participants are satisfied with the program.
4. How consistency they are in terms of their Safety Management System Implementation
This study primarily aimed to investigate the Consistency of Safety Management System Implementation using the System Dynamics Approach under safety operation of Case Study Company i.e. Bovis Lend Lease (Thailand) Limited. The main objectives of the study were to: (1) identify the endogenous and extraneous factors which affect safety performance; and (2) develop a system dynamics model to explain how the factors affect the safety performance
Conclusion
This research investigated the impact of various components on the site condition in terms of unsafe act and condition in the various Bovis projects. The objective of this modeling exercise was firstly to understand the mechanism of various endogenous and exogenous factors affecting the safety performance of various Bovis projects and develop a system dynamics model to explain how the factors affect the safety performance and secondly to identify the general guidelines for policy formulation. Budget, attitude and behavior, BLL employee commitment, BLL employee understanding, BLL supervision, equipment on hand, knowledge, pre contractual communication, safety practice, safety training, subcontractor supervision, subcontractor understanding, top management commitment, understanding BLL requirement, and worker understanding are the primary focused variables. Going into details of each factors helps to give a clear picture of the problem existing in the site. These are the key factors that have been found during generic model formulation. However, these issues are further influenced by several factors which have been explained briefly as follows:
1. Unsafe site condition is positively influenced by the work speed, uncertainties and the skilled fraction in the project. Complexity of project and weather influenced the uncertainties whereas the total number of workers and skilled workers generates skilled fraction. Unsafe condition causes accident generation, thus affecting the progress rate. Progress rate results the increment of schedule pressure and thus increasing the work speed.
2. Understanding of worker, subcontractor and BLL staff directly affected by the knowledge flow gained from the safety training. With the improvement of understanding, supervision and commitment level of the different parties enhances, thus affecting the attitude and behavior or workers and improve the site condition.
3. Subcontractor safety understanding, experience working with BLL and BLL work system comprising of pre contractual document, safety practice and coordination positively affects the subcontractor understanding of BLL safety requirement. In addition to subcontractor understanding, intention of subcontractor affects the subcontractor budget allocation and safety expenses.
4. Complexity of project, client and the desired goal of safety condition implemented by the BLL management influence the budget allocation.
A dynamic simulation model representing the perceived mode was built using the system dynamic methodology. Simulation describes the current behavior and the inferred future. Site condition is measured in terms of unsafe act, condition and accident record of the project. The model structure is based on the literature reviews and the information gathered from the interview conducted with the different parties namely Bovis Project team, subcontractors and the workers involved in the project site.
Sensitivity test indicate the potential parameters for behavioral improvement. The model was applied to the investigation for various components affecting the safety performance. Real life practices were explored to make practically possible changes in the sensitive parameters. Three policies in order to improve the safety training and knowledge flow, Proactive subcontractor awareness and improving supervision were presented in the model for an improved and safe site condition. The implementation methodology of the derived policies was also described in a reasonable detail.
Recommendation
To enhance the project site condition, the following recommendations are suggested:
1. To develop a Proactive Awareness to Subcontractor. BLL should not only to provide the written documents and formal meeting but also arrange some kind of workshop where the sub contractor are provided with training and demonstration about all the safety need so that they have thorough with the Bovis safety requirement before the commencement of the work.
2. Supervision is a critical process for maintaining proper site condition. Thus BLL should provide sufficient training and information to all supervisors. They could also provide a specialist supervisor in the site. Providing a supervisor who is specialist to his work increases the effectiveness of supervision on the site by. Having a specialist leads to not only proper quality of work, but the attitude and behavior of workers to quality and safety increases.
3. Training is the most common method of responding to employee’s performance deficiencies. BLL should make their training program more effective by providing focused group training, survey based training and interactive training. For the focused training, workers should be divided into groups based on their skill and scope of work. The training program content and method of presentation should reflect the needs and characteristics of the work force. Safety program should also comprise of evaluation procedure to determine its effective and to provide feedback for future improvement.
His thesis abstract is copied and posted
ABSTRACT
The construction industry is notorious for its poor safety record when compared with other industries. The major causes of accidents have been identified, and can be directly attributed to unsafe design and site practices. Accidents arise from different causes that can generally be classified as physical incidents posing hazardous situations, and behavioral incidents caused by unsafe acts. These studies is concerned with understanding the mechanism of various endogenous and exogenous factors affecting the safety performance in terms of unsafe act and condition of various Bovis projects from different prospective of BLL employees, Subcontractors and workers. Based on the factors, an applicable simulation model was built using the system dynamic methodology. The model was calibrated to investigate its dynamic problem to explain how the factors affect the safety performance and to formulate and evaluate the practical policies to improve the performances. In order to considerably improve performance and to be able to adapt to different scenarios, four integrated policies combining the individual policies having the most potential were evaluated. The results reveals that Developing a Safety Culture, Effective and Focused Training Program, Proactive Awareness to Subcontractor and Specialist Supervisor are the most effective policies for improving the exiting safe site condition.
Tuesday 19 January 2010
A Study Of Safety Budgeting Process In Thai Construction Projects
Most incidents in the construction industry are caused by human act more than improper conditions. Heinrich (1920), who studied accidents in industrial, mentioned that there are three main causes of accidents. First, 88% are human causes, 10% are mechanical failures or improper conditions, and acts of God are 2%. In order to reduce the accident, construction companies have to emphasis on safety programs which relate to human act more than the working condition.
The Social Security Office in Thailand has classified the construction industry at the high risk of accident. In order to avoid accidents, construction companies have to allocate some budget to manage site safety. Since this safety budget will be a part of the total bidding price, contractors must be able to estimate the budget for a competitive bidding price. Otherwise, the contractor might not be able to get the project.
In the competitive construction environment, the essence of estimating safety budget is emphasized not only preventing accidents, but also minimizing the total cost and time of project. There are three exiting methods in order to estimate safety budget. Firstly, estimate by using optimal cost of safety, this method try to find the optimal cost between accident costs and investment costs of safety. According to Son et al. (2000) and Tang et al. (1997), the optimization of safety cost in construction is proposed. They collected accident costs and safety investment costs from the companies and studied the relationship in order to find the optimal cost of safety. Second method, estimating by manual calculation, the lists of all safety requirements in design state will be calculated into cost. Third method, estimate by using percentage of safety budget from the total budget. Unfortunately, each method of safety budget estimation has its own limitation and not applicable for all types of construction project. It is still skeptical and questionable why different project has a different safety budget.
In Thai construction industry, base on an interview with several construction companies, most of safety budget in local construction companies was estimated by two approaches: experience of estimator and requirement of owner. In case of estimating safety budget by the estimator’s experience, a problem mostly occurring was inadequacy of safety budget during construction stage. They had to use another cost item as a budget for safety work. For some of international construction companies, on the other hand, they estimate safety budget in percentage of total budget. Therefore, the project’s safety budget exceeds the actual cost can be happened. Both of methods are unreliable and not systematic. Clearly, there is currently no competency and reliable systems for estimating of safety budget.
Mr. Siwachon Limpakornkul made a study which main objective is to investigate the safety budgeting processes in building construction projects. In order to achieve the main objective, his study sub-objectives were to (1) identify the process of safety budgeting; (2) identify problems occurring in the existing safety budgeting practice; (3) identify the factors that affect safety budget; and (4) recommend a better safety budgeting mechanism.
Conclusions
Nowadays, Thai construction companies pay attention in safety construction more than the past. Because the development of construction industrial changes from developing to developed country, the contractor must improve their quality of work in order to qualify for ISO. The safety management system is one of the systems that need a number of improvements especially in the context of developing country like Thailand. Some of the companies lack of understanding the safety management and thus perceive safety cost as a necessary evil as well as a fortune. The way capable of changing their perception is to promote the knowledge of safety such as in term of costs. The safety cost is the main focus in this research. The purpose is to give an idea that the safety cost or the safety investment is not a useless cost when compared with the accident cost.
The weakness of the current bidding system is that a contractor who bids a project with minimum price will get the project. This system will have an impact to the safety budget and the safety program approach to be included in the project and thus generate the occurrence of an accident. This research aims to identify the safety items and study the estimating process of safety budget and to find out the factor affecting the safety budget by interviewing several respondents in Thai construction companies and making a summarization into four case studies.
The data collection requires a lot of cooperation from the companies and some of the companies did not wish to support or attend an interview or did not cooperate with the academic approach. Only the companies that realize the importance of academic research have paid attention in the study and thus allow for data collection. These included 8 companies and 20 respondents in data collection. The framework of this research was thus generated and concluded into safety budget life cycle including planning, budgeting, and monitoring state. In the addition, the estimation processing on safety budget, the development of safety budget and calculation, affecting factors on safety budget, problems of safety budget and monitoring safety budget would be explained.
The process of safety budget
Normally, most of the investigated companies divided their business operations into two parts; head office and site operation units. The major goal of the head office is to get the project from project’s bidding or direct hired. The major goal of site operation is to operate the project within time, cost, quality, and safety. The project manger is the person who has the highest authority in the project. The safety budget is one of duties that the project manager has to handle. The estimation of safety budget can be concluded into three methods; manually calculation safety items or unit price, using lump sum cost, and percentage. The arrangement of safety items were organized by each of the companies. Safety budget in views of most of the companies includes PPE, safety programs, safety items which used only for safety. However, there were still such safety items that were hidden in main construction items or direct cost.
The problems occur in the existing safety budgeting practice
According to the data analysis, most of the contractors had the same problems on safety budget. The main problem was safety budget overrun. It was evident that most of them estimated safety budget by using their experience with lack of a systematic calculation. In addition, they were not able to identify the safety items clearly in the safety budget which includes: cost of PPE, safety programs, and supportive items for safety.
The factors that affect safety budget
The factors affecting the safety budget of the company were divided into two groups. The first group of factors was identified by the contractors who has clearly separated safety budget from the total budget and has been monitoring safety budget during construction. These factors included type of project, safety programs approach, number of workers, subcontractors, worker’s experience, and type of owner. On the other hand, several factors were also identified by the contractors who were not clearly separate safety budget from the total budget and lacked of monitoring the safety budget including location of project, market condition, consultant, total budget, and project duration.
Recommendation
The four stages recommendation was given in order to improve the existing process of safety budget for Thai construction contractors.
First is a planning stage, the project manager must involve in every project in order to select the suitable safety items and prepare the safety programs to a particular project.
Second is a budgeting stage, this aims to group the safety items into one group of safety budget. There are six accounts related to safety items; small tools, safety materials, wage & OT, subcontractor, rent, and special items.
Third is a monitoring safety budget by reporting every month.
Final stage is recording the actual cost of safety budget into a database. The database can be such intelligent system when input the information. This system should be able to predict the future safety budget and current safety cost expended.
His thesis abstract is copied and posted.
ABSTRACT
The safety cost is one major element of the total cost that a construction company has to control as it can cause the construction organization to have a loss or accomplishment the goal of profit. Because of the problems on a lack of understanding of safety management as well as a lack of allocating safety budget management, Thai contractors have encountered with such accidents in the job site. To overcome these problems, studying the exiting safety budget process and the requirements for achieving such effective system were conducted. Besides, factors affecting safety budget, problem of safety budget, and monitoring of safety budget were also identified in this study. This study assessed four case studies from different contractors (i.e. foreigner international contractor, Thai international contractors, and local contractor). Data from Thai construction companies which have experience in high-rised building was collected by in-depth interview technique. It was found that each of the companies has different perception on factors affecting safety budget, depending on the company’s safety budget process. Most of the companies were struggling to the problems on inability to control their safety budget due to the ambiguous calculation of safety budget as well as the difficulty in predicting the safety items before construction. Moreover, Thai construction regulations were too weak to force the contractor to emphasize more on safety. This study, thus, recommended that a safety manager must be involved in establishing a safety budget as well as recognizing the safety items from both indirect and direct costs into one safety budget. After that, monitoring the safety budget from the beginning until the completion of the project must be performed. The actual cost of safety should be recorded into a database. By following these, the safety budget could be more predictable and controllable and the safety performance of the project was believed to be improved as a consequence.
The Social Security Office in Thailand has classified the construction industry at the high risk of accident. In order to avoid accidents, construction companies have to allocate some budget to manage site safety. Since this safety budget will be a part of the total bidding price, contractors must be able to estimate the budget for a competitive bidding price. Otherwise, the contractor might not be able to get the project.
In the competitive construction environment, the essence of estimating safety budget is emphasized not only preventing accidents, but also minimizing the total cost and time of project. There are three exiting methods in order to estimate safety budget. Firstly, estimate by using optimal cost of safety, this method try to find the optimal cost between accident costs and investment costs of safety. According to Son et al. (2000) and Tang et al. (1997), the optimization of safety cost in construction is proposed. They collected accident costs and safety investment costs from the companies and studied the relationship in order to find the optimal cost of safety. Second method, estimating by manual calculation, the lists of all safety requirements in design state will be calculated into cost. Third method, estimate by using percentage of safety budget from the total budget. Unfortunately, each method of safety budget estimation has its own limitation and not applicable for all types of construction project. It is still skeptical and questionable why different project has a different safety budget.
In Thai construction industry, base on an interview with several construction companies, most of safety budget in local construction companies was estimated by two approaches: experience of estimator and requirement of owner. In case of estimating safety budget by the estimator’s experience, a problem mostly occurring was inadequacy of safety budget during construction stage. They had to use another cost item as a budget for safety work. For some of international construction companies, on the other hand, they estimate safety budget in percentage of total budget. Therefore, the project’s safety budget exceeds the actual cost can be happened. Both of methods are unreliable and not systematic. Clearly, there is currently no competency and reliable systems for estimating of safety budget.
Mr. Siwachon Limpakornkul made a study which main objective is to investigate the safety budgeting processes in building construction projects. In order to achieve the main objective, his study sub-objectives were to (1) identify the process of safety budgeting; (2) identify problems occurring in the existing safety budgeting practice; (3) identify the factors that affect safety budget; and (4) recommend a better safety budgeting mechanism.
Conclusions
Nowadays, Thai construction companies pay attention in safety construction more than the past. Because the development of construction industrial changes from developing to developed country, the contractor must improve their quality of work in order to qualify for ISO. The safety management system is one of the systems that need a number of improvements especially in the context of developing country like Thailand. Some of the companies lack of understanding the safety management and thus perceive safety cost as a necessary evil as well as a fortune. The way capable of changing their perception is to promote the knowledge of safety such as in term of costs. The safety cost is the main focus in this research. The purpose is to give an idea that the safety cost or the safety investment is not a useless cost when compared with the accident cost.
The weakness of the current bidding system is that a contractor who bids a project with minimum price will get the project. This system will have an impact to the safety budget and the safety program approach to be included in the project and thus generate the occurrence of an accident. This research aims to identify the safety items and study the estimating process of safety budget and to find out the factor affecting the safety budget by interviewing several respondents in Thai construction companies and making a summarization into four case studies.
The data collection requires a lot of cooperation from the companies and some of the companies did not wish to support or attend an interview or did not cooperate with the academic approach. Only the companies that realize the importance of academic research have paid attention in the study and thus allow for data collection. These included 8 companies and 20 respondents in data collection. The framework of this research was thus generated and concluded into safety budget life cycle including planning, budgeting, and monitoring state. In the addition, the estimation processing on safety budget, the development of safety budget and calculation, affecting factors on safety budget, problems of safety budget and monitoring safety budget would be explained.
The process of safety budget
Normally, most of the investigated companies divided their business operations into two parts; head office and site operation units. The major goal of the head office is to get the project from project’s bidding or direct hired. The major goal of site operation is to operate the project within time, cost, quality, and safety. The project manger is the person who has the highest authority in the project. The safety budget is one of duties that the project manager has to handle. The estimation of safety budget can be concluded into three methods; manually calculation safety items or unit price, using lump sum cost, and percentage. The arrangement of safety items were organized by each of the companies. Safety budget in views of most of the companies includes PPE, safety programs, safety items which used only for safety. However, there were still such safety items that were hidden in main construction items or direct cost.
The problems occur in the existing safety budgeting practice
According to the data analysis, most of the contractors had the same problems on safety budget. The main problem was safety budget overrun. It was evident that most of them estimated safety budget by using their experience with lack of a systematic calculation. In addition, they were not able to identify the safety items clearly in the safety budget which includes: cost of PPE, safety programs, and supportive items for safety.
The factors that affect safety budget
The factors affecting the safety budget of the company were divided into two groups. The first group of factors was identified by the contractors who has clearly separated safety budget from the total budget and has been monitoring safety budget during construction. These factors included type of project, safety programs approach, number of workers, subcontractors, worker’s experience, and type of owner. On the other hand, several factors were also identified by the contractors who were not clearly separate safety budget from the total budget and lacked of monitoring the safety budget including location of project, market condition, consultant, total budget, and project duration.
Recommendation
The four stages recommendation was given in order to improve the existing process of safety budget for Thai construction contractors.
First is a planning stage, the project manager must involve in every project in order to select the suitable safety items and prepare the safety programs to a particular project.
Second is a budgeting stage, this aims to group the safety items into one group of safety budget. There are six accounts related to safety items; small tools, safety materials, wage & OT, subcontractor, rent, and special items.
Third is a monitoring safety budget by reporting every month.
Final stage is recording the actual cost of safety budget into a database. The database can be such intelligent system when input the information. This system should be able to predict the future safety budget and current safety cost expended.
His thesis abstract is copied and posted.
ABSTRACT
The safety cost is one major element of the total cost that a construction company has to control as it can cause the construction organization to have a loss or accomplishment the goal of profit. Because of the problems on a lack of understanding of safety management as well as a lack of allocating safety budget management, Thai contractors have encountered with such accidents in the job site. To overcome these problems, studying the exiting safety budget process and the requirements for achieving such effective system were conducted. Besides, factors affecting safety budget, problem of safety budget, and monitoring of safety budget were also identified in this study. This study assessed four case studies from different contractors (i.e. foreigner international contractor, Thai international contractors, and local contractor). Data from Thai construction companies which have experience in high-rised building was collected by in-depth interview technique. It was found that each of the companies has different perception on factors affecting safety budget, depending on the company’s safety budget process. Most of the companies were struggling to the problems on inability to control their safety budget due to the ambiguous calculation of safety budget as well as the difficulty in predicting the safety items before construction. Moreover, Thai construction regulations were too weak to force the contractor to emphasize more on safety. This study, thus, recommended that a safety manager must be involved in establishing a safety budget as well as recognizing the safety items from both indirect and direct costs into one safety budget. After that, monitoring the safety budget from the beginning until the completion of the project must be performed. The actual cost of safety should be recorded into a database. By following these, the safety budget could be more predictable and controllable and the safety performance of the project was believed to be improved as a consequence.
Monday 18 January 2010
Application Of Capital Structure Optimization Model For PPP Projects: The Case Study Of Civil Aviation Training Center Of Thailand
Civil Aviation has been recognized as one of the major developments of Thailand. Due to the establishment of the new infrastructure airport called “Suvarnabhumi”, the role of the aviation becomes more and more important to generate the national income. There have been numerous increases in the number of flights and passengers at the major airports in the recent years. All private Thai airlines have been allowed to operate all domestic routes as of September 2000, and international routes as of September 2001. Today, besides THAI Airway International, six private airlines are in operation and further deregulation is expected to allow more airlines to emerge. As a result, it claims for the need of the aviation training center to fulfill the requirement of the human resources for these developments. At present, most of the countries in the South-East Asia have to depend on the training centers of Australia for recruiting the human resources. So if Thailand can operate the aviation training center by itself, it will surely catch the attention of the neighboring countries and will get the good revenue from this project development.
Aviation training becomes one of the major issues as people are more and more interested in traveling by air. The development of the Aviation training centers is also essential to the Thailand due to the development of the new airport “Suvarnabhumi”. In another words, Thailand also becomes in the need of the human resources development in the aviation sector. However, the development of such a training center is not the easy task, especially concerning with the financing. It needs the assurance of the enough amounts of revenues and profits to overcome the project cost and expense. It also asks for the benchmarking with other institutes in the region to know what its competitive advantages that the institute has especially in the financing sector with the help of the proper financial model.
Many of the privatized infrastructure projects have the difficulties and problems in the financing structure. Financing engineering techniques and capital structuring skills are required to find the proper mix of debt and equity to achieve successful financing for the proposed project. There should be the systematic way of monitoring and controlling the financial condition in every project. There is the need for the development of the sound financial model for evaluating the financial viability of a privatized infrastructure project.
Mr. Aung Khin Tun made a study mainly aimed to investigate and synthesize application of capital structure model in the early stage Public Private Participation (PPP) projects development using modified parameters and variables. After the model has been developed, it was applied to determine the financial viability of capital investment program for the Civil Aviation Training Center of Thailand to enhance its service delivery. In accomplishing his main objective, the following sub-objectives had been accomplished: (1) to identify and adopt the financial indicators to be used in developing the financial model based on their applicability and characteristics; (2) to modify the capital structure optimization model to be used as fundamental criteria for investment decision making in the capital investment program; (3) to test the model and parameters thorough the scenario analysis using capital investment program of the Civil Aviation Training Center of Thailand (CATC); and (4) to recommend the consideration process for the project participants based on the investment degree in the equity levels.
CONCLUSIONS
Many capital investment programs have been developed across a wide range of industries with the help of privatization. Here, construction and financial risks are two major types of risks in these programs, where the capital structure affects not only the total life-cycle cost of the project that in turn affects its financial viability, but also affects the motivation and commitment of different participation to the success of the project. The evaluation of the financial viability of the project can help the participants to give the overall financial condition of the project on the long-term basis. In this research, the financial model to determine the optimal capital structure was developed for the investment decision making process. The model evaluates the program from the equity holder’s (often contractor) point of view. As a result, the model allows the decision makers to make early decision for capital structuring, hence association structuring to get the optimal capital structure.
From the result of the applicability of the financial model development for the capital investment program with the case study of Civil Aviation Training Center of Thailand (CATC), the following conclusions were formed.
1. With the easy input of parameters and variables, the financial model can come up with the useful figures and values to help the decision makers to know about the different scenarios.
2. The financial model developed reflects the characteristics of project finance and incorporates simulation and financial engineering techniques.
3. The model is mainly designed for the capital investment program, by taking accounts of the investment proportions of equity and debt structure, the concession period, and other items featured in the capital investment.
4. The model optimizes the capital structure and evaluates the financial viability of the investment program under construction and economic risks, and is subject to other constraints imposed by different participants such as minimum equity level and minimum DSCR.
5. In generating the model, Total Project Cost (TPC) is found as a function of equity with negative slope because less debt in capital structure means less interest during construction. Accordingly, TPC is a declining function of equity. As a result, more equity means less TPC, and thus less total investment cost for a project. This is one of the reasons why government favors high equity.
6. In determining the optimal equity level for the CATC Program, the maximum equity level that can satisfy the constraints and characteristics of DSCR, NPVp and IRR is selected.
7. Finally, the contribution of the financial model development will significantly facilitate both public and private sector in evaluating the capital investment program’s financial viability and collectively determining an optimal capital structure that safeguards their respective interests.
His thesis abstract is copied and posted.
ABSTRACT
The development of PPP projects has been growing rapidly, and numerous projects have been implemented around the world. Public-Private Participation (PPP), in other words, is the initiated combination of capital investment from the public sector and the private sector. One key aspect to the successful implementation of the PPP project in any country is the raising of finance by project sponsors. Financial engineering techniques and capital structuring skills are required to find the proper mix of debt and equity and to achieve successful financing for the proposed project. The objective of this research is to present a simplified model to determine the optimum equity level for decision-makers at the evaluation stage of the PPP project, which takes place after the completion of the feasibility study. The resulting model is the combination of optimization model developed in Microsoft Excel with the function of determining the optimal equity level from the equity holder’s point of view. To show versatility of the model, a real case study (Civil Aviation Training Center of Thailand) is conducted. Thus, this research is concerned with the determination of an equity funding level in PPP project development. There are different equity levels found in this kind of program, and there is a need for such a model to determine optimal capital structure, which would assist the project sponsors to ensure that the equity level necessary for optimal capital structure is available prior to the project implementation stage.
Aviation training becomes one of the major issues as people are more and more interested in traveling by air. The development of the Aviation training centers is also essential to the Thailand due to the development of the new airport “Suvarnabhumi”. In another words, Thailand also becomes in the need of the human resources development in the aviation sector. However, the development of such a training center is not the easy task, especially concerning with the financing. It needs the assurance of the enough amounts of revenues and profits to overcome the project cost and expense. It also asks for the benchmarking with other institutes in the region to know what its competitive advantages that the institute has especially in the financing sector with the help of the proper financial model.
Many of the privatized infrastructure projects have the difficulties and problems in the financing structure. Financing engineering techniques and capital structuring skills are required to find the proper mix of debt and equity to achieve successful financing for the proposed project. There should be the systematic way of monitoring and controlling the financial condition in every project. There is the need for the development of the sound financial model for evaluating the financial viability of a privatized infrastructure project.
Mr. Aung Khin Tun made a study mainly aimed to investigate and synthesize application of capital structure model in the early stage Public Private Participation (PPP) projects development using modified parameters and variables. After the model has been developed, it was applied to determine the financial viability of capital investment program for the Civil Aviation Training Center of Thailand to enhance its service delivery. In accomplishing his main objective, the following sub-objectives had been accomplished: (1) to identify and adopt the financial indicators to be used in developing the financial model based on their applicability and characteristics; (2) to modify the capital structure optimization model to be used as fundamental criteria for investment decision making in the capital investment program; (3) to test the model and parameters thorough the scenario analysis using capital investment program of the Civil Aviation Training Center of Thailand (CATC); and (4) to recommend the consideration process for the project participants based on the investment degree in the equity levels.
CONCLUSIONS
Many capital investment programs have been developed across a wide range of industries with the help of privatization. Here, construction and financial risks are two major types of risks in these programs, where the capital structure affects not only the total life-cycle cost of the project that in turn affects its financial viability, but also affects the motivation and commitment of different participation to the success of the project. The evaluation of the financial viability of the project can help the participants to give the overall financial condition of the project on the long-term basis. In this research, the financial model to determine the optimal capital structure was developed for the investment decision making process. The model evaluates the program from the equity holder’s (often contractor) point of view. As a result, the model allows the decision makers to make early decision for capital structuring, hence association structuring to get the optimal capital structure.
From the result of the applicability of the financial model development for the capital investment program with the case study of Civil Aviation Training Center of Thailand (CATC), the following conclusions were formed.
1. With the easy input of parameters and variables, the financial model can come up with the useful figures and values to help the decision makers to know about the different scenarios.
2. The financial model developed reflects the characteristics of project finance and incorporates simulation and financial engineering techniques.
3. The model is mainly designed for the capital investment program, by taking accounts of the investment proportions of equity and debt structure, the concession period, and other items featured in the capital investment.
4. The model optimizes the capital structure and evaluates the financial viability of the investment program under construction and economic risks, and is subject to other constraints imposed by different participants such as minimum equity level and minimum DSCR.
5. In generating the model, Total Project Cost (TPC) is found as a function of equity with negative slope because less debt in capital structure means less interest during construction. Accordingly, TPC is a declining function of equity. As a result, more equity means less TPC, and thus less total investment cost for a project. This is one of the reasons why government favors high equity.
6. In determining the optimal equity level for the CATC Program, the maximum equity level that can satisfy the constraints and characteristics of DSCR, NPVp and IRR is selected.
7. Finally, the contribution of the financial model development will significantly facilitate both public and private sector in evaluating the capital investment program’s financial viability and collectively determining an optimal capital structure that safeguards their respective interests.
His thesis abstract is copied and posted.
ABSTRACT
The development of PPP projects has been growing rapidly, and numerous projects have been implemented around the world. Public-Private Participation (PPP), in other words, is the initiated combination of capital investment from the public sector and the private sector. One key aspect to the successful implementation of the PPP project in any country is the raising of finance by project sponsors. Financial engineering techniques and capital structuring skills are required to find the proper mix of debt and equity and to achieve successful financing for the proposed project. The objective of this research is to present a simplified model to determine the optimum equity level for decision-makers at the evaluation stage of the PPP project, which takes place after the completion of the feasibility study. The resulting model is the combination of optimization model developed in Microsoft Excel with the function of determining the optimal equity level from the equity holder’s point of view. To show versatility of the model, a real case study (Civil Aviation Training Center of Thailand) is conducted. Thus, this research is concerned with the determination of an equity funding level in PPP project development. There are different equity levels found in this kind of program, and there is a need for such a model to determine optimal capital structure, which would assist the project sponsors to ensure that the equity level necessary for optimal capital structure is available prior to the project implementation stage.
Wednesday 13 January 2010
Risk Approaches For Making Go/No-Go Decisions By Thai Consulting Engineering Firms
Thai construction situation was fast moving before the 1997 crisis, but after the crisis, most of the consulting engineering firms are faced with many difficulties to reconstruct their firms. Most clients are afraid of unstable situations and so investments in construction business slowed down. Nowadays, however, there is more supply than demand in the Thai consulting engineering environment (Consulting Engineers Association of Thailand, CEAT, 2005). The numbers of consulting engineering firms in the current situation are more than before the crises because the foreign consulting firms, joint venture consulting firms are expanding their business in Thailand.
Moreover, most Thai consulting engineering firms are finding international projects especially in Southern Asia or developing countries now-a-days. One of the reasons is that there are not many jobs for consulting firm since the Suvarnabhumi international airport construction finished. Moreover, the globalization of international construction markets provides tremendous opportunities for consultants to expand into new foreign markets by allowing local firms to compete internationally (Construction Industry Institute CII, 1993). International projects involve not only the uncertainties that arise in domestic construction projects, but also those from the complex risks that are particular to international transactions (Lee and Walters, 1989: Hill International, 1995). Not only domestic/local projects but also international/oversea projects, risks associated with different projects are paramount. In the context of doing business successfully in local and international construction markets, consulting engineering firms need reliable risk analysis, risks reduction or mitigation strategies and decision making tools to make consistent strategic Go/No-go or take/not-take entry decisions.
Go/No-go decisions by consulting engineering firms are very complex due to the risk and uncertainty about many factors. Not only in local markets but also in international markets, risks have to be considered clearly before making go/no go decisions to the projects. No clear rules can be found in considering go/no-go decisions. In this problem domain, decisions are commonly made based upon intuition and past experience. If consultants make wrong decisions, they have to face a large loss in term of time, cost and other resources. Once appropriate go-decisions are made, consultants would get expected profit, potential projects, relationship etc.
Ms. Nang Kham Kyi Oo made a research which aimed to solve those problems by risk management, such as risk identification, risk analysis and risks reduction or mitigation strategies. The importance of risk factors that are concerned with go/no go decision making will be identified and evaluated, and then the importance of those risk factors on the profitability or consultant fee will be discussed. Then the risks reduction strategies will be identified and their effectiveness to local and international projects will be found.
The objectives of her research are: (1) to identify the major risk factors associated with local/domestic and international/oversea projects when making go/no-go decisions and the major risks factors affecting the profitability of a consulting engineering firm; (2) to rank the importance of the identified factors on go/no go decision making and on profitability; and (3) to identify the risk reduction or mitigation strategies being used in industry and determine the effectiveness of those factors on local/domestic and international/oversea projects.
Conclusion
The conclusion of this research based on the work carried out and the result of analysis are shown in figures in brief.
According to analysis, figure 1, the top five risks considered as important by Thai consulting firms before taking a project within Thailand are as follows. 1) Client’s cash flow, 2) impractical designs, 3) incorrect & insufficient design information, 4) lack of skilled staff and 5) current workload. Consulting firms can prepare to manage risks if they know which factors are most important in real life. Thus, design risk (risk 2 and 3) is very important.
Profit is the live blood for every consulting firm. But there are many factors that can reduce profit. Sometimes consultants do not know which factors must take in first priority. Figure 1 shows the top five risks affecting profitability in domestic projects. They are 1) Client’s cash flow, 2) unreasonable time, 3) payment schedule, 4) enough resources and lack of skilled staff. Knowing those factors which are affecting their profitability, firms can find the way to reduce the impact of the risks and can increase their profit absolutely.
Figure 1 also shows the effectiveness of top five risk mitigation strategies in domestic projects that can reduce the impact of risks considered in decision making and profitability for Thai consulting engineering firms. To diminish the impact of those risks, there are six risk mitigation factors considered as most effective for consulting firms. Not only these five mitigation factors, but also all factors have their own effectiveness. Therefore, consulting firms should assign mitigation factors and should practice as possible as they afford.
International/Overseas Projects
In figure 2, the top five risks considered by Thai consulting firms before handling international projects are shown. The importance indexes of each risk are calculated and rank in terms of the highest indexes. According to the result after analysis, most of risks are to be considered as important. Consulting firms should do risk management carefully before entering international consulting markets.
Similar to the top five risks considered in making go/no-go decision, most of risks are measured as important risks affecting profitability. All factors in domestic projects are included in international projects. The detailed are shown in figure 2. Not only these factors but also other uncountable risks are essential for international projects. Consulting firms must always aware the factors that can make their profit low down and find to increase the intensity of profit.
Figure 2 shows top risk mitigation strategies in international projects that can reduce the impact of risks considered to engineering consulting firms. As there are many risks involved in international practices, most of them are important to be considered. As discussed earlier, the sample size for international projects is quite small. Moreover international projects are more risky than local projects. Therefore, most mitigation factors are given high scores and considered to have the same effectiveness. As per figure 2, five mitigation factors are for design risks, four are for technical risks, four are for project risks, and two factors in cultural risks, one each are for economic risk and client risk. In conclusion, most mitigation strategies are effective for Thai consulting firms doing projects outside Thailand. Consulting firms should be careful in considering risks before accepting projects in order not to make wrong decisions that may affect their profitability adversely.
Moreover, most Thai consulting engineering firms are finding international projects especially in Southern Asia or developing countries now-a-days. One of the reasons is that there are not many jobs for consulting firm since the Suvarnabhumi international airport construction finished. Moreover, the globalization of international construction markets provides tremendous opportunities for consultants to expand into new foreign markets by allowing local firms to compete internationally (Construction Industry Institute CII, 1993). International projects involve not only the uncertainties that arise in domestic construction projects, but also those from the complex risks that are particular to international transactions (Lee and Walters, 1989: Hill International, 1995). Not only domestic/local projects but also international/oversea projects, risks associated with different projects are paramount. In the context of doing business successfully in local and international construction markets, consulting engineering firms need reliable risk analysis, risks reduction or mitigation strategies and decision making tools to make consistent strategic Go/No-go or take/not-take entry decisions.
Go/No-go decisions by consulting engineering firms are very complex due to the risk and uncertainty about many factors. Not only in local markets but also in international markets, risks have to be considered clearly before making go/no go decisions to the projects. No clear rules can be found in considering go/no-go decisions. In this problem domain, decisions are commonly made based upon intuition and past experience. If consultants make wrong decisions, they have to face a large loss in term of time, cost and other resources. Once appropriate go-decisions are made, consultants would get expected profit, potential projects, relationship etc.
Ms. Nang Kham Kyi Oo made a research which aimed to solve those problems by risk management, such as risk identification, risk analysis and risks reduction or mitigation strategies. The importance of risk factors that are concerned with go/no go decision making will be identified and evaluated, and then the importance of those risk factors on the profitability or consultant fee will be discussed. Then the risks reduction strategies will be identified and their effectiveness to local and international projects will be found.
The objectives of her research are: (1) to identify the major risk factors associated with local/domestic and international/oversea projects when making go/no-go decisions and the major risks factors affecting the profitability of a consulting engineering firm; (2) to rank the importance of the identified factors on go/no go decision making and on profitability; and (3) to identify the risk reduction or mitigation strategies being used in industry and determine the effectiveness of those factors on local/domestic and international/oversea projects.
Conclusion
The conclusion of this research based on the work carried out and the result of analysis are shown in figures in brief.
According to analysis, figure 1, the top five risks considered as important by Thai consulting firms before taking a project within Thailand are as follows. 1) Client’s cash flow, 2) impractical designs, 3) incorrect & insufficient design information, 4) lack of skilled staff and 5) current workload. Consulting firms can prepare to manage risks if they know which factors are most important in real life. Thus, design risk (risk 2 and 3) is very important.
Profit is the live blood for every consulting firm. But there are many factors that can reduce profit. Sometimes consultants do not know which factors must take in first priority. Figure 1 shows the top five risks affecting profitability in domestic projects. They are 1) Client’s cash flow, 2) unreasonable time, 3) payment schedule, 4) enough resources and lack of skilled staff. Knowing those factors which are affecting their profitability, firms can find the way to reduce the impact of the risks and can increase their profit absolutely.
Figure 1 also shows the effectiveness of top five risk mitigation strategies in domestic projects that can reduce the impact of risks considered in decision making and profitability for Thai consulting engineering firms. To diminish the impact of those risks, there are six risk mitigation factors considered as most effective for consulting firms. Not only these five mitigation factors, but also all factors have their own effectiveness. Therefore, consulting firms should assign mitigation factors and should practice as possible as they afford.
International/Overseas Projects
In figure 2, the top five risks considered by Thai consulting firms before handling international projects are shown. The importance indexes of each risk are calculated and rank in terms of the highest indexes. According to the result after analysis, most of risks are to be considered as important. Consulting firms should do risk management carefully before entering international consulting markets.
Similar to the top five risks considered in making go/no-go decision, most of risks are measured as important risks affecting profitability. All factors in domestic projects are included in international projects. The detailed are shown in figure 2. Not only these factors but also other uncountable risks are essential for international projects. Consulting firms must always aware the factors that can make their profit low down and find to increase the intensity of profit.
Figure 2 shows top risk mitigation strategies in international projects that can reduce the impact of risks considered to engineering consulting firms. As there are many risks involved in international practices, most of them are important to be considered. As discussed earlier, the sample size for international projects is quite small. Moreover international projects are more risky than local projects. Therefore, most mitigation factors are given high scores and considered to have the same effectiveness. As per figure 2, five mitigation factors are for design risks, four are for technical risks, four are for project risks, and two factors in cultural risks, one each are for economic risk and client risk. In conclusion, most mitigation strategies are effective for Thai consulting firms doing projects outside Thailand. Consulting firms should be careful in considering risks before accepting projects in order not to make wrong decisions that may affect their profitability adversely.
Her thesis abstract is copied and posted.
ABSTRACT
It is very crucial for Thai consulting engineering firms making take/do not take or go/no-go decisions to on projects not only for domestic/local but also for international/overseas projects. The reason is that there are a lot of risks involved in both local and oversea projects. Due to reduced demand in the Thai consulting environment, most large Thai consulting firms are venturing to overseas markets. However small and medium sized Thai consulting firms are still in local markets. Because of low demand and much competition, they have to accept lower consultant fee and it will affect their profitability. They accept a project with low profit because they need to work; need to retain the staff and for the company itself. Consequently, companies face a lot of risks when deciding whether or not to handle a project. This research aimed to help Thai consulting firms in making decisions before accepting projects by approaching risk identification (knowing which factors is most important) and risk mitigation strategies (how to reduce the impact of risks).
To achieve the objectives of the study, risks were divided into nine main categories with sub-risk factors under each main category for identification of the important factors for making decisions and the important factors affecting profitability. To reduce those factors, risk mitigation strategies are suggested for the nine main risk categories. Statistical hypothesis was done using the T-test to find out the differences in perception among two groups: Thai consulting firms doing only local projects and those doing both local and oversea projects. For this purpose, questionnaire survey was done on managing directors, board of directors, upper level management and engineers. Moreover, interviews were also conducted with three large consulting firms to know the detailed opinion and ideas.
Since the sample of consulting firms involved in oversea projects is quite small, detailed discussions for oversea project was not done. According to the importance indexes, top five risk factors and top five risk mitigation strategies considered to be most important when handling local projects are discussed in detailed. Moreover, the hypothesis was tested and showed that there are four significant factors considered in making decision, six significant factors affecting profitability and five significant factors for effectiveness in mitigation strategies among the two groups.
ABSTRACT
It is very crucial for Thai consulting engineering firms making take/do not take or go/no-go decisions to on projects not only for domestic/local but also for international/overseas projects. The reason is that there are a lot of risks involved in both local and oversea projects. Due to reduced demand in the Thai consulting environment, most large Thai consulting firms are venturing to overseas markets. However small and medium sized Thai consulting firms are still in local markets. Because of low demand and much competition, they have to accept lower consultant fee and it will affect their profitability. They accept a project with low profit because they need to work; need to retain the staff and for the company itself. Consequently, companies face a lot of risks when deciding whether or not to handle a project. This research aimed to help Thai consulting firms in making decisions before accepting projects by approaching risk identification (knowing which factors is most important) and risk mitigation strategies (how to reduce the impact of risks).
To achieve the objectives of the study, risks were divided into nine main categories with sub-risk factors under each main category for identification of the important factors for making decisions and the important factors affecting profitability. To reduce those factors, risk mitigation strategies are suggested for the nine main risk categories. Statistical hypothesis was done using the T-test to find out the differences in perception among two groups: Thai consulting firms doing only local projects and those doing both local and oversea projects. For this purpose, questionnaire survey was done on managing directors, board of directors, upper level management and engineers. Moreover, interviews were also conducted with three large consulting firms to know the detailed opinion and ideas.
Since the sample of consulting firms involved in oversea projects is quite small, detailed discussions for oversea project was not done. According to the importance indexes, top five risk factors and top five risk mitigation strategies considered to be most important when handling local projects are discussed in detailed. Moreover, the hypothesis was tested and showed that there are four significant factors considered in making decision, six significant factors affecting profitability and five significant factors for effectiveness in mitigation strategies among the two groups.
Subscribe to:
Posts (Atom)