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1. The Field of Construction Economics

The constructed facility is a result of a complex process, known as the “Production process” or more specifically “Construction Production Process”. This is what a construction firm does - it turns some inputs, which are also called factors of pro­duction into outputs (a construction as a whole; parts of it, or simply a set of con­struction works).

The factors of production are the following four:

(i) Natural resources (land) = minerals, forests, fertile soil, oil ans.

(ii) Labour = which adapt natural resources for human use. It is defined by skill and amount.

(iii) Capital = is any man-made instrument of production that is a good used to further production (i.e.: a tool or an equipment, a factory, a bank deposit, raw materials ans.). NOTE: Capital should not be considered of being only money.

(iv) Entrepreneurship/Management. The entrepreneurs’ responsibility is to initiate production, to organize the other three factors of production and to operate the productive establishment (the business).

So, the construction production process refers to the process of putting the factors of production together to satisfy the client’s wants (needs) at the right time, in the right place and at the right price, in terms of both quantity and quality.

There are times when an item’s function will determine its role: a house is a con­sumer good when used for living, but is capital if it is used for renting.

The main purpose in going into a business is to make a profit. This is done by of­fering consumers or clients with something they want but do not have, or something better than they have. Profit is one of the means to evaluate whether the production process is going well or not. When analyzing the relationship between the inputs and the outputs of a production process, we usually are aware that the resources are not unlimited (resources are scarce) and the outcome of the process (product and service) is aimed to be maximized.

To answer to question “how to produce efficiently” or “how we will be getting the most value (output) from our resources (input)” we need an organized body of knowledge from which generalizations may be developed and used for predicting and controlling the economic performance of the constructed facility delivery proc­ess. That is what Construction Economics is all about.

Construction Economics is the study of choosing among alternative ways in which scarce resources (land, labour, capital) may be allocated to maximize the output. It provides managers a way of determining how to allocate the scarce resources through the production process in an efficient fashion.

Figure 1. shows an enterprise’s production process as an open cybernetic system (The process has feed-back and is opened to the environment).

Every one of the participants to the Construction Industry (Client; Designer; Con­tractor; Supplier) have their own concerns about how to construct the project effi­ciently. Sometimes their individual goals related to the establishment or the constructed facility may become conflictual. That is why Construction Management is needed.

However, each of the participants can use specific means and methods to cut off the costs. These means and methods form the main core of Construction Econom­ics.

There are two basic economic aspects that should not be forgone:

(i) An individual or a firm should always consider two or more alternative ways to satisfy the expressed needs and choose the most convenient (efficient) one.

(ii) Once a way has been chosen, the problem is to collect the proper factors of production and assemble them efficiently.

Basic knowledge about capital

Capital is a factor of production usually represented by either machinery, plant, buildings, land (physical capital = fixed capital = capital asset) or money (financial capital). The concept can be applied to a variety of other assets (e.g. human capital). Capital is something that is generally used to enhance the pro­ductivity of other factors of production (plant, labour).

An asset is something that is of value to its possessor and provides monetary flow to its owner. Ex: an apartment that provide rental income; a savings ac­count in a bank that pays interest. In simple terms an asset is either cash or can be turned into cash.


Fixed Capital/Capital asset/Capital good represents the amount of capital tied up in the capital assets that are expected to be used for a considerable time in a business. It is subject to depreciation which must be deducted against profits over its expected useful life span (ie: plant, machinery, buildings, land, vehicles, in­vestments ans.). The fixed capital is used to produce goods and services.

Circulating capital/Working capital/Current asset is the part of the capital of a company that is used in the activities of trading, as distinct from its fixed capital. It is turned over frequently in the course of trading (ie: raw materials, components, work-in-progress, finished products in stock, debtors, cash).

The circulating capital is locked up in a continuous cycle (see Fig. 2).


Capital is not only money but money could be the representation of capital when it is used for investment.

2. Tendering procedures

Traditionally, the Client (Promoter/Employer) engages a firm of consulting engi­neering to prepare the design, the bills of quantities, conditions of contract and other contract documents. The consultant is also involved in assessing the tenders and eventually in supervising the future work on site.

The Client may secure services of a Contractor in one of the three ways:

(i) Open Tendering

(ii) Selected Tendering

(iii) Negotiation

Tendering is the process by which Contractors return the contract documents completed. These documents are called tenders/offers or bids.

The central government authorities, local authorities or public authorities need to demonstrate that the award of a construction contract has not been influenced by corrupt practices. Tendering is therefore competitive. This means that a number of contractors submit tenders/bids/offers, and normally the contract is awarded on the basis of the lowest contract price. Because of the advantages that competitive ten­dering offers, clients from private industry tend also to employ this procedure.

Types of tendering procedures

(i) Open tendering - is when virtually any number of contracting firms may submit a bid.

(ii) Selected tendering - is when the contract documents are only sent to a few contractors. The advantage of this tendering form lies in that the analysis of tenders does not take too long and that the prequalification of tenderers en­sures that they have technical and financial capacity to carry out the work.

The disadvantages of selected tendering are as follows:

does not test the open market for value and performance;

could encourage cartels to form.

Prequalification inquires seek the following information:

evidence of technical expertise;

past records of performance to time and budget;

financial standing.

Once the offer of the successful tenderer for the construction of the works has been accepted by the client, a contract has been made.

(iii)Negotiation with a single Contractor - This does not require a competitive tendering. Where this approach is adopted, it can offer a considerable saving in time. Further more, when a cost reimbursable type of contract is used, site work can start almost immediately. Normally, the Client would enter into negotiations with a Contractor who has worked satisfactorily with him before.

The Tender Documents are prepared by the Consultant (Engineering firm) on behalf of Client, and will comprise:

(a) Instruction to tenders, such as:

place, time/date by which tenders must be returned

performance requirements to be met by tenderers: expertise, past per­formances, financial standing, availability of equipment etc.

provisions for site visits

documents to be submitted with the tender

(b) Form of tender:

whether performance bond is required

defects correction period

start date (and eventually a desired completion date)


(c) Conditions of contract:

set out the contractual responsibilities and liabilities

establish the administrative arrangements

(c) Form of agreement: Usually by a “letter of acceptance”

(d) Drawings: the drawings should be as comprehensive as possible to ensure that the contractor’s estimate truly reflect the nature and extend of the work.

(e) Specifications: any specific requirements that should be fulfilled in order to ensure the quality of the works.

(f)    Bill of Quantities.

(g) Other documents:

soil data

access to site

special conditions

tender period ans.

In order to facilitate the assessing of the tenders, the contract documents should ensure that the tenders will all be on the same basis.

The preparing of the bid

A contractor usually has 4-6 weeks in which to prepare his tender/bid. This is done by deciding upon a method of working and then for each item of work (included in the Bill of Quantities) estimating the cost of labour, plant and materials and adding on for overhead and profit.

The estimator in the course of preparing an estimate and tender depends on infor­mation provided by the client (or his consultant) in terms of designs, specifications and other contract documents and by his own company staff (buying department, plant managers, site managers, senior management). The estimator's work is to as­similate the contract details, collecting the relevant data and calculating the costs involved and explaining it to senior management who will decide on the final fig­ure of the tendered price.

A bid/offer may therefore be considered of being made up of two basic elements:

(i) The estimate of direct job cost, which includes:

- direct labour cost

In relation with the calendar of the works




- material costs

- equipment costs

- direct field supervision

(ii) The mark-up or return which must be sufficient to cover a portion of general overhead costs, taxes and allow a fair profit. The higher the mark-up, the less chance there will be of getting the job. The smaller the mark-up may also lead to bankruptcy.

The decision on the bid price reflects the Contractor’s judgment and how well the project fit into the overall strategy of the firm for the survival and growth as well as the Contractor’s propensity to risk greater profits versus the chance of not getting the contract.

The Analysis of Tenders

No tenders should be opened until after the closing date and time. All tenders should be opened at one time. At the opening each tender’s name and Bill total should be writtened down and witnessed by the parties present.

The Engineer (on behalf of the Client) must scrutinize each tender for errors and omissions:

arithmetic errors

utopian rates.

An omission indicates that the contractor is supposed to do the work for nothing.

Only when this procedure has been finished is the lowest tender known.

However, the Client is not bound to accept the lowest or any tender.


Once the Client has decided which (if any) of the Contractors he wishes to employ, a “letter of acceptance” is sent to the successful contractor. Once this letter has been sent, a formal contract (a binding contract) has been entered into; neither party can withdraw except by mutual agreement.


The award of the contract on the simple basis of the lowest tender price will not necessarily give the Client best value for money in the long run, because the final contract price after the determination of all variations and claims could be very different from the tendered price. It is likely that the lowest tender could have seri­ously underestimated the cost of work. If appointed, this contractor will then be tempted to allocate the minimum resources to the job and will be looking for every coin he can generate from variations and claims. This is not a desirable basis for a harmonious and successful contractual relationship.

On the other hand, the lowest tender should be so because the contractor is offer­ing an efficient method of construction, has particular skills and resources, good management which ensure that he can operate more efficiently than his competi­tors.

Therefore assessment must also involve:

scrutiny of the Contractor’s program and method statement;

comparison with the Client’s own estimate.

When the operations of several contractors have to be integrated, the program assumes particular importance if subsequent contractors are not to be disrupted.

3. Construction Contracts - Generalities

A construction contract is defined as a mutual agreement between two parties, un­der which a party (contractor) undertakes for a consideration to carry out for an­other party (client) works of a building or civil engineering character. This agree­ment is enforceable by law.

Although there are many types of construction contracts, they all must contain the following attributes to be valid:

(i) An OFFER must be made by Party A to Party B (contractor to client);

(ii) An ACCEPTANCE of the offer by Part B (the client notifies the winner pro­poses);

(iii) There mast be CONSIDERATION (a promise of payment);

(iv) CAPACITY - both parties must be mentally aware of what they are doing;

(v) It must be LEGAL - a contract in which one agrees to commit an illegal act cannot be enforced.

The terms of a contract are stated in the contract documents. These documents form part of the contract and will normally comprise:

(i) General conditions of contract define formally the duties, powers and obli­gations of the parties.

(ii) Specifications - the purpose of specifications is to give a clear and concise guide for construction and supervision purposes. The contents of specifica­tions include:

(a) a general description of the work to be carried out;

(b) a detailed description of the nature and extend of the works;

(c) a detailed description of the accuracy with which the works are to be con­structed, materials, workmanship and proprietary items;

(d) any special responsibilities of the contractor, not covered by the general con­ditions of contract.

(iii) Drawings - the drawings detail the works to be executed and the extent of the works in the contract. Tender drawings are prepared by the Engineer and is­sued for use by the Contractors when constructing the works and by the Resi­dent Engineer for supervising the Construction.

As the works are constructed, record drawings should be prepared by the Resident Engineer showing details of the works as actually constructed. These are known as “As - built” drawings.

(iv) Bills of Quantities - the main purpose of a bill of quantity is to itemize and quantify the work to be done and to provide information from which:

(a) Contractors can assess and submit their contract price (offer) in an identical form;

(b) the Engineer can compare the tenders submitted;

(c) the Engineer and Contractor can obtain a valuation of the work executed, ac­cording to the quantities of work actually carried.

A Bill of Quantity contains a list of items giving the quantities and brief descrip­tions of the works to be carried out and main materials to be provided. The quanti­ties are computed from the drawings showing the extent of the work and the de­scription are based on the drawings and specifications. A standard method of itemizing and measuring the works is used (in UK is the Civil Engineering/or Building Engineering Standard Measurement Method and in Romania the method is based on a standard collection of construction itemized works “Indicatoare de norme de deviz”/”Norme de consum orientative pe articole de deviz”).

(v) Form of Tender and Form of Agreement

The purpose of the form of tender is to provide a formal document upon which the contractor can submit his offer to the client to construct the works. It contains de­tails of the sum of money and period of time for constructing the works, together with other details.

The purpose of the form of agreement is to provide a formal document which con­firms the Contractor’s offer and the Client acceptance of that offer in accordance with the contract documents.


The obligations of the parties must be stated simply and concisely. In addition to the obvious requirements of access, supply information, standards of materials and workmanship and completion cost and duration, responsibility must be allocated for safety, security and compliance with local laws and regulations.

The remedies or actions to be taken should any party fail to honor his obligations must be clear. Thus the Contractor may be required to re-execute unsatisfactory work at his own expense.

The time for completion may either be stipulated by the Client or quoted by the Contractor in his tender. There is normally facility for extension of time and price should the Contractor’s operations be disrupted or additional work be introduced by the Client. On the other hand, penalties for Contractor may be introduced should he does not meet the Contract tendered price, quality standards and dura­tion because his poor management and expertise.

Arbitration of disputes clauses should normally also be included.

Because of the diversity of both construction work and the promoters/clients re­quirements no single uniform approach to Contractual arrangements can be specified or advocated. A number of alternative strategies is available to the client and each contract should be formulated with the specific job in mind. Special re­quirements may include:

(1) The Client may wish to be directly involved in site management or may prefer to delegate this responsibility to the Contractor.

(2) The need for early completion of the work may dictate that the Contractor is appointed before design is completed.

(3) Risks may be apportioned in various ways between the parties.

(4) The Contractor may be required to undertake the detailed design or to provide varying amounts or finance.

These and many other considerations will all influence the Client’s contract strat­egy. The strategy will be greatly affected by the nature of the work to be completed under the contract. The Client’s objectives and requirements will provide the prin­cipal constraints on his contract strategy.


(1) Completion in the minimum possible contract duration or at minimum cost.

(2) Timely completion of the contract (to receive any return from his investment as soon as possible).

(3) Quality.

(4) Allocation and payment for risk.


(1) Involvement in management of the contract.

(2) Involvement of Contractor in detailed design of the works included in contract.

The choice of contract will depend on:

time available for design and construction;

complexity and size of the project;

certainty of the design requirements and risks;

method of pricing the tender and payment to the Contractor within the partici­pants to the project.

Thus, when the Client is thinking to choose a contract form, he should consider a contract of having two related components: The CONTRACT TYPE and the CONTRACTUAL ARRANGEMENT (CONTRACTUAL SYSTEM OR SYSTEM OF MANAGING THE CONTRACT).

4. Types of construction contracts

Construction contracts can be classified into various types according to the method of payment to the Contractor.

While construction contracts serve as a means of pricing construction, they also structure the allocation of risk to the various parties involved. The client has the sole risk power to decide what type of contract should be used for a specific facil­ity. Therefore it is important for both the client and constructor to understand the risks of each other associated with different types of Construction Contracts.

The choice of a particular type of construction contract will be from [*]):



a) Bill of Quantity Contracts

b) Schedule of Rates Contracts


a) Cost Plus Fee Contracts

b) Cost Plus Percentage Fee Contracts

c) Target Contracts

The different types of contract offer different degrees of flexibility, incentive and allocation of risk between the parties (Fig. 3).

Fig. 3. Characteristics of different types of Construction Contracts


The contractor is invited to tender on the basis of drawings and specifications and required to submit a lump sum (fixed price) for the completion of the specified work by a certain date. The terms of this contract provide that the client will pay to the contractor the agreed sum of money, usually monthly, as the work proceeds, related to percentages of completion of specified works. Usually there is no provi­sion for adjustment to the quoted price, unless the client introduce changes subse­quent to the letting of the contract.

For this purpose the contractor might be required to complete a Schedule of Rates which will be solely used for pricing adjustment/variations.


Use of this type of contract implies that design is complete for the contractor to prepare a detailed cost estimate , as there is little or no mechanism within the contract for adjustment of the price during the execution of the works.

In a lump-sum contract, the client has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher mark up to take care of unforeseen contingencies. Under the terms of this contract the contractor may earn a profit (if he prepared a good estimate and stayed within the budget) or may sustain a loss (if his actual costs exceed his estimate).

When assessing the tendered lump sum, the contractor should balance his chances between underestimating and overestimating his tender:

If the actual cost of the project is underestimated, the underestimated cost (resulted from the contractor’s lack of experience in estimating the costs, in carrying out the works or of his wish to win the contract) will reduce the contractor’s profit by that amount.

An overestimate has an opposite effect, by reducing the chance of being a low bidder for the project.

Needs no Bill of Quantities but complete drawings and specifications.

This is the preferred type of contract for supplying of a particular unit of proc­ess plant or material, buildings and homes, because the client obtains the benefits of competing bidding and knows what the project will cost before he enters into a contract with a contractor.

It is widely used on “Construction Management” and “Package Deal”/ 'Turnkey” contract systems in which the Contractor is responsible for both the detailed design and construction.

In UK, the standard models of this type of contract are published by several pro­fessional bodies: Institute of Electrical Engineering, Institute of Mechanical Engi­neering, Association of Civil Engineers etc.


These are more common types of Construction contracts which also facilitate com­petitive tendering and which incorporate some mechanism for the introducing and evaluation of changes in the work content of the contract.

II.1. Bill of Quantities Contracts

This is the most widely used type of contract in both civil and building engineering (in UK, USA and Romania as well), because it provides a common document for pricing, in the form of a bill of quantities.

The Bill of Quantities is a list of items of work drawn up by the Engineer from the drawings, and taking into account the specifications (more details about how to prepare a Bill of Quantities will be given later in Section 9) and the Collection of Construction Items of Work. Against each item is a CODE, a DESCRIPTION stating briefly the nature of the work to be done, the QUANTITY of the item, and the UNIT OF MEASURE (eq. kilograms of reinforcing steel, cubic meters of con­crete etc.).

The Contractors are required to enter a UNIT RATE (UNIT PRICE) against each item (and consequently deducting the PRICE of each item multiplying the quan­tity by the unit price) allowing for labour, materials, and profit for each item (In some cases the overheads and the profit are computed and presented at the end of the tender as separate figures not included in the direct cost of the work item).

The sum of all the items plus preliminary works, sub-contract work, overheads and profit constitutes the bid figure.

If there are no variations and the estimated quantities remain unchanged, the Con­tractor will be paid the tendered sum, but all quantities are re-measured during the course of Contract, valued at the tendered rates, and the contract price adjusted accordingly.

Additional work is either freshly priced or re-evaluated at existing rates for similar work.


(with overheads and profit included)












Excavation for foundations, 0,4-0,9 m3 excavators, soil of type II.

100 m3

To be completed by the tender Contractor



This type of contract needs a complete design to produce the Bill of Quanti­ties.

The Bill of Quantities takes time to prepare.

Easy for tendering analysis; simple for paying Contractor as work proceeds.

II.2. Schedule of rates contract (unit-price contract)

Many projects are so complex that completed design are impossible to prepare before tendering and some of the details have to be produced as construction pro­gresses. In these cases a Schedule of Rates Contract can be used. This type of con­tract is similar to the Bill of Quantities Contract (a listing of work items is also provided) but the estimated quantities of work items are expected to be less accurate than those given in the Bill of Quantities Contract. Consequently it is common for separate rates to be quoted for labour, plant and materials, rather than being compounded against work items as in the Bill of Quantities Contract.

Payments are made at specified intervals during construction of the project (usually monthly) measuring the manhours, planthours and quantities of materials actually consumed, and then pricing them at the tendered rates.

In a Schedule of Rates Contract the risk of inaccurate estimation of uncertain quantities has been removed from the Contractor - the payment is made of the ac­tual quantities of works.

The Client, by requiring this type of contract obtains the benefits of competitive bidding without having contractors bidding higher to cover the unknown quantities involved. The Contractor may earn a profit or may incur a loss depending on only the accuracy of his unit-prices estimate. Under the terms of this type of contract work can start sooner than in a Bill of Quantities Contract, a full set of drawings being not necessary.

CONCLUSION: Both Bill of Quantities and Schedule of Rates Contracts offer systematic adjustment of the contract price for changes in quantity of work actually performed relative to the original estimate.


These types of contracts are used in cases such as:

Construction involving highly specialization (only one contractor can do the work).

The Client has extremely pressing needs (early start, urgently needed).

The nature of the works is vaguely defined, and the project carries high risks.

The works are intended to proceed as the design develops.

The contractor is reimbursed all direct costs (labour costs, material costs, equip­ment usage costs, subcontractors costs and job supervision costs). In addition, the Client agrees to pay the Contractor an additional fee to reimburse him for the cost incurred at his head office resulting from the construction of the project (rent, taxes, insurance, interest on borrowed money for the projects, main office costs ans.) and some expected profit for the Contractor.

III.1. Cost-plus fee contract

This is the extreme form of the Cost-reimbursable type and is so called because the Contractor is reimbursed for all the direct costs incurred during the fulfillment of the contract plus an agreed fee to cover overheads and profit.

The fee is defined as a percentage of the actual cost or as a fixed amount payable regardless the duration or direct cost of the project.

Under this type of contract there is no financial risk for the Contractor and there­fore he has little incentive to keep costs down

To give some incentive to the Contractor to hold costs down, there are many varia­tions of this type of contract: cost plus a fixed fee, cost plus a percentage fee etc.

III.2. Cost-plus a fixed fee contract

Under this type of contract, the Contractor will receive the actual direct cost plus a fixed fee to cover head office overheads and profit, but will have some incentive to complete the job quickly since his fee is fixed regardless the duration of the proj­ect. However, the Client still assumes the risks of direct job cost overrun while the Contractor may risk the erosion of its profits if the project duration is extended beyond the expected limit.

III.3. Cost-plus percentage fee contract

The Contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a reward if the actual cost is below the estimated job cost. In return for taking the risk on its own estimate the Contractor is allowed a variable percentage of the direct cost for its fee. This type of Contract allocates considerable risk for cost overruns to the Client, but also provides incentives to contractors to reduce costs as much as possible.

The project duration is specified (fixed).

III.4. Target contracts

To overcome the weaknesses of the ordinary fee contract, clients have tried to en­courage contractors to be more cost conscientious by relating the fee to an agreed target estimate based on a set of drawings and specifications or alternatively on a bill of quantities.

The actual fee paid is determined by increasing or decreasing the original fee by an agreed amount calculated on the saving or excess between the actual cost of the work and the target estimate adjusted for any variations or changes.

The Project duration is specified in the Contract. Bonuses or penalties may also be stipulated for different project completion dates.

Administration of a target contract is more complex than any other type of contract as the Client (or his Engineer) is involved in the audit of actual cost and in evalua­tion of the target. The target cost must be adjusted for inflation.

Advantages of the cost-reimbursement contracts

permits an immediate start;

permits complete changes in design and operation.

Disadvantages of the cost-reimbursement contracts

little control by Client on costs;

actual cost of work is unknown until completion;

poor incentive for Contractor to minimize costs;

difficult to adopt competitive tendering;

all (most) risks with Client.

Unless there are compelling reasons, the Client should not use these types of con­tract.

5. Contractual arrangements (Contractual systems)

The various relations among the three main actors involved in a construction proj­ect (Client, Consultant Engineer and Contractor) and the ways of procurement of construction contracts define the contractual arrangements / systems.


The common law countries traditional contractual system is the one described at the beginning of chapter 2. (Tendering Procedure) in which the Engineer - on behalf of the Client - design and supervises the work of the Contractor. The Con­tractor is selected on the basis of a competitive tendering.

Alternative ways to a “one stage tendering” is the “two stage tendering” and “serial tendering”.

I.1. Two Stage Tendering

This systems assumes firstly competition (tendering procedure) followed by nego­tiation with perhaps the two lowest tenderers.

I.2. Serial Tendering

The initial contract may be awarded by competition but contracts for subsequent stages are negotiated with the same contractor. This system offers a powerful in­centive advantages as the contractor tries to perform well and he can also plan his future work load.

On particularly complex and large projects, serial tendering may permit improved cost figures providing the contractor is prepared to be co-operative. After the selec­tion of the Contractor, the following stages of the project requires the chosen firm to collaborate with designers by giving advice on construction methods, equip­ment, program and procurement dates. The expected price to the Client is calcu­lated and the new contracts proceed on this improved basis.

This system encourages a more trusting relationship between both parties.


An “Authority” is here defined as a large public or private organization that pro­motes projects and employs its own professional engineering staff. The authority may therefore undertake the design of the works to be included in the contract or may employ an outside agency of consulting engineers for all or part of this work.

What is more important in this system, is that the Client will have his own staff to supervise and administrate the contract between him and the Contractor (without the services of Consultancy Firm).

The system facilitates liaisons between the Authority’s technical staff responsible for designing the works and those who are subsequent responsible for operating the project.

The contractual relationship is also simplified, providing no other firm (Consulting Engineering) between the Client and Contractor, with managerial concerns regard­ing the project.

Under the last attribute, the system is similar to the vast majority of Construction Contracts that have been carried out in Romania.


In this system, the Contractor will undertake the whole project, covering design, construction and commissioning (where relevant) in accordance with specifications prepared by the Client. Competition is introduced at the design stage through the price offered for the finished product. The price offered by the contractor is fre­quently a lump sum with little supporting detail of the price.

Because the cost of design up to tender stage can be high, the system is best suited to works that are very familiar to the firms concerned. Simple office blocks, indus­trial buildings, housing, schools ans. have been constructed under this system.

When the contract involves the construction of a process plant, it is common for performance requirements to be specified. The Contractor is then required to hand over the completed plant operating at the specified level of production and effi­ciency. This particular form of package deal is referred to as a “turnkey contract”.

When selecting a package deal, the Client is therefore likely to benefit from the choice of alternative designs and also from economy arising form the direct link between design and construction. On the other hand, he is in a weak position to influence the detailed design of the work.

Other advantages of this system are:

a simple relation, only between the Client and the Contractor;

early start (detailed, design does not have to be complete when construction starts);


effective project management of the design and construction process.


Over the recent years Clients of major building and process plant sections of the Construction Industry have often experienced difficulties in obtaining projects finished on time, to budget, of acceptable quality and serviceability. In particular considerably greater expertise and attention to planning, co-ordination and manag­ing projects from feasibility to handing over to the Client have been needed.

At the present time, two new systems have emerged, namely:

The Construction Management System of Contract

The Managing Contracting System (Main Contractor System)

IV.1. Construction management system (C.M)

Like in traditional arrangements, contractors obtain work from clients directly or through Architect or Engineer. The Contracts are made directly between the client and the work contractors (Fig. 4).

Under this system, a main construction firm is appointed early to act as the Cli­ent’s adviser to provide planning, management and co-ordination of construction. This firm is known as Construction Management firm, and is not allowed to carry out any construction work itself but plays a role similar to the Consultant Engi­neer, such as:

gives advice to the designer on buildability;

arranges for procurement contracts;

manages the bidding phases of the work contracts;

co-ordinate the works contractors.

Unlike the traditional system, the Construction Management firm has no respon­sibility with variations and actual orders (these are with the Client). The C.M. does not enter into contracts with the various contractors, therefore it only receive a fee plus direct costs

Fig. 4. Construction Management System

The main disadvantage to the Client is the lack of a firm tender price. The potential cost only becomes known as tenders submitted by works contractors are accepted.

IV.2. The managing contracting system (Main Contractor System) (M.C)

Many clients are unhappy of bearing the responsibility of many work contracts (sub-contracts) need on the large and complex projects, such as normally associ­ated with Construction Management System. As a consequence there has been a trend for Clients to entrust the engineering and completion of the project to a single Contractor (Managing Contractor) who may simply offer a project management service or may in addition undertake some, or all, of the design and/or construction of the works.

The Managing Contractor is also required to provide co-ordination, supervision and control of construction. He may then sub-lets the work (to sub-contractors) in the traditional manner (Fig. 5) (The main difference between the CM and MC is that in the last case the Main Contractor is allowed to carry out some/most works).

This system offers the advantages of Contractor involvement in design, tender as­sessment, and project management.. This would normally be between (5 10)% of the cost of the project: this is unlikely to be worthwhile unless completion to time and budget is very important.

In addition, the MC is paid by the Client for all the sub-contractors work and then, the MC pays the sub-contractors.

Other advantages of this system are:

- enforce completion ON TIME and TO BUDGET;

- early start/finish;

- buildability;

Fig. 5. The Managing Contracting System


A main contractor enters into a direct contractual agreement with client while a sub-contrac­tor is employed by a main contractor and has no direct contact with the client. The main contractor will normally require the approval of the client when appointed sub-contractors. Normally, the main contractor will charge a percentage of the sub-contracts price for its ad­ministration of the project.

Obs: The initial scope design is often executed by the Client’s own staff or an independent design firm, and form the basis for inviting tenders.


Some large local government and public service organizations have in-house de­signer and/or labour and equipment to undertake small construction works, main­tenance work and emergency repairs. A Contractor would be employed for rela­tively difficult and/or specialized works.

The direct works approach is not strictly a contract system since there is no con­tract, but is included as it may be one of the alternatives to be considered by the above mentioned types of client.

Direct labour should only be used where the Client enjoys continuous develop­ment which will provide long term employment for his workforce.

6. Resolution of Contract Disputes

Once a contract is reached, a variety of problems may emerge during the course of the work. Disputes may arise over quality of work, over responsibility for delays, over appropriate payments due to change conditions etc.

Resolution of contract disputes is an important task for project managers. The mechanism for contract dispute resolution can be specified in the original contract or, less desirably, decided when a dispute arises, and will comprise:

Adjudication in a court of law - this is the most proeminent mechanism for dispute resolution. It is expensive and time consuming.

Negotiation among the contract parties - does not involve third parties such as judges. The negotiation process is usually informal and relatively inexpressive. If an agreement is not reached between the parties, then adjudication is a pos­sible remedy.

Mediation and Conciliation - in these procedures a third party serves a central role in the resolution. These outside parties are usually chosen by mutual agreement of the parties involved and will have specialized knowledge of the dispute subject. The third party serves only as a facilitator to help the partici­pants reach a mutually acceptable resolution.

7. Guidelines for Preparing a Contract: Models and Strategy

Models of general conditions of contract have evolved over the past year to satisfy the different requirements and peculiarities of the various sections of the Con­struction Industry: building, civil engineering, mechanical and electrical plant, process plant ans. They are published by relevant professional institutions or is­sued by the government bodies. The wording is precise and should not be changed without a very good cause.

With little exceptions, in UK, USA ans. all relate to lump sum or admeasurement types of con­tract.

The various model forms and legal references of general conditions of contract and tendering procedures are briefly mentioned bellow:

(a) in UK:

(i) The Institution of Civil Engineers’ Conditions of Contract

This constitutes an admeasurement contract using a bill of quantities prepared in accordance with a prescribed method of measurement and all work items are sub­jected to remeasurement. Various clauses limit the effects of uncertainty that arises form the diversity and the nature of civil engineering.

(ii) The J.C.T. Standard Form of Building Contract

Provides guidelines for building works contracting, which are predominantly repetitive and mainly above ground, Lump sum and admeasurement types of contract are the most advo­cated.

(iii) The Institution of Mechanical Engineers’ Conditions of Contract

Refers to Contracts for erection of manufacturing and process plant.

(b) in Romania

(i) Hotararea Guvernului Romaniei nr. 592/93 pentru aprobarea Regulamentului privind procedurile de organizare a licitatiilor, prezentarea ofertelor si adjude­carea investitiilor publice.

(ii) Hotararea Guvernului Romaniei nr. 727/93 pentru aprobarea Regulamentului privind procedura de organizare a licitatiilor, prezentarea ofertelor si adjude­carea proiectarii investitiilor publice.

(iii)    Norme metodologice privind continutul cadru al proiectelor - pe faze de proiectare - al documentelor de licitatie, al ofertelor si al contractelor pentru executia investitiilor, anexa la Ordinul 1743/69/N/ '96 (Monitorul Oficial 232 bis/septembrie 1996).

8. Construction Economy and The Participants to The Construction  Industry

In this section some basic considerations of how to reduce the construction costs are presented. Each of the three main participants to the Construction Industry should be aware of his various possibilities in undertaking actions and initiatives resulting in a mutual effectiveness but above all in an economical construction process.

(i) Construction Economy and the Client

The Client is the one who finally decides upon the nature and extend of the proj­ect, and therefore will prefigure the main features of the project cost. He will also choose the form of contract with the Contractor. The Contractual agreements of payment to Contractor could influence the economy of the construction contract. The following considerations will sustain this:

The basic pattern of payment from Client to Contractor could be imposed by the type of contract, but usually payment is made monthly at billed or scheduled rates for all quantities of work completed during the month. But in most of the contracts the Contractor will incur heavy initial expenditure on new construction plant, ma­terials, setting up site facilities, temporary works ans. and this may be offset by a mobilization of payment from Client. Such payments normally range from 10-15% of the contract price and are repaid by deduction from moneys due to the Contrac­tor later in the contract.

Partial payment on account of materials on site but not yet incorporated in the works, may be included in the monthly account, as it is the Client’s best interest that the job should not be delayed due to shortage of materials (Payment in ad­vance).

The Client will also wish to ensure that the Contractors completes the many minor items of work and the clearance and reinstatement of the site, which have little nominal value in terms of tendered rates. He may therefore deduct retention money - normally (5-10)% from the monthly payments due to the Contractor. These money will be reimbursed after the Completion of the project and at the end of the maintenance period (During this period the Contractor must remedy any faults or defects that may appear in the work completed by him under contract).

In an inflationary situation, a Contractor's cost will escalate during the course of the contract as additional element of cost should normally be reimbursed by the Client.

When formulation his policy on payment for any contract, the Client must balance several conflicting factors:

Firstly, normal commercial considerations will deter him from paying money any earlier than is necessary (he will tend to pay only for the work ac­tually completed).

On the other hand, it is in his interest to ensure that the Contractor has suffi­cient funds available to secure a rapid completion of the Contract.

Another way a Client can positively influence the cost of the project is to adopt (where possible) those contractual systems which encourage contractors to undertake “value engineering studies” (see The Construction Economy and The Contractor).

(ii) Construction Economy and the Design Engineer

The cost of a project is determinated by the requirements of the Contract Docu­ments. Prior to completing the final design, the engineer should give careful con­siderations to the method and equipment which may be used to construct the proj­ect. Requirements which increase the cost without producing commensurate benefits should be eliminated.

The budget for a project may be divided into six or more items:







The design engineer has a strong influence over the costs of the first four of these items. If the Engineer specifies materials which must be transported over long dis­tances, or specifies excessive testing, or does not allow substitution of equal-quality materials, the costs will be higher than necessary.

Other costly engineering practices include requiring many one-of-a kind items which cannot be mass produced, the use of non-standard materials or techniques and establishing standards of quality that are higher than necessary.

The following list indicates methods which an engineer may use to reduce the costs of construction:

(1) Conceive the shape of the structure to obtain maximum achievement of the needs using minimum possible space.

(2) Design concrete structures in order to permit the reuse of forms without rebuilding.

(3) Simplify the design of the structure where possible.

(4) Use local materials when they are satisfactory.

(5) Write simple and straightforward specifications which clearly state what is ex­pected. Define the results expected, but within reason permit the contractor to select the methods of accomplishing the results.

(6) Hold prebidding conference with contractors in order to eliminate uncertainties and to reduce change orders to a minimum.

(iii)     Construction Economy and the Contractor

A contractor who does not keep informed on new equipment and methods will soon discover that his competitors are underbidding him.

Suggestions for possible reductions in construction costs by the contractor include the following:

Prebidding studies of the project and the site to determine the effect of:

topography and geology

sources of material


storage facilities

labour supply

local services

Use of construction equipment having high capacities/efficiencies and low operating cost.

The adoption of realistic safety practices as a means of reducing accidents.

The use of methods improvement techniques.

Specialization and subcontracting specialized operations to other contractors who can do the work more economically.

The use of marketing advantages: discounts of suppliers, low labour facilities.

Combining the financial side with the operational side of the project in order to achieve the optimum cost and duration of the project.

Perform value engineering studies.


This is a formalized application of a specialized branch of engineering whose ob­jective is to affect overall economy in the total-life-cycle cost of an engineering project, generally with the emphasis on the cost of constructing the project.

The terms of the contract provide that the contractor is requested to make a study of the design, specifications, materials and methods of construction to determine if any of these items can be modified to permit the construction of the project at a cost less than the amount of the contract without reducing the quality or usefulness of the project and without delaying the completion of the project. The resulted net savings are shared by the Contractor and Client on a preagreed basis.

As a beginning point, value studies should initially concentrate on those items that represent the larger costs in the project and those that are repetitive.

Ex: A reinforced concrete bridge was designed to be built on falsework. Because the superstructure was 40 m above the ground, the Contractor chose to build it by cantilevering out from the piers, thus eliminating the need for falsework. The sav­ings were about 400.000 $ and were shared equally to the Contractor and Client /17/.

Preparing the Bill of Quantities

The Bill of Quantities is a list of items of work (together with quantities) drawn up by the Engineer (usually) who must reflect in the bill how the work will be carried out and under what conditions. When doing this he needs the following:



collections of construction items of work

In the process of preparing the Bill of Quantities the person who makes the bill should insert every work that will contribute to the completion of the con­struction facility described by the drawings and specifications, in a standard man­ner.

In UK there are two widely standard Methods of Measurement:

Civil Engineering Standard Method of Measurement: CESMM3

Standard Method of Measurement of Building Works: SMM7

In Romania there is only one Method of Measurement and preparing the Bill of Quantities (Antemasuratoare) based on a Collection of Construction Items of Work (Indicatoare de norme de deviz/Norme de consum orientative pe articole de deviz pentru lucrari de constructie). The construction items of work are grouped in separate books (34 books for new works and 7 books for repairing and mainte­nance works) according to the feature of the works. This feature will be repre­sented by a relevant letter marked on the front page of the book, representing the work classification.


1. Norme de consum orientative pe articole de deviz pentru lucrari de constructii = C =

2. Norme de consum orientative pe articole de deviz pentru lucrari de izolatii la constructii si izolatii = Iz =

3. Idem pentru Terasamente = Ts =

4. Idem pentru Sanitare = S =

5. Idem pentru Drumuri = D =

6. Idem pentru Poduri = P=

7. Norme de consum orientative pe articole de deviz pentru lucrari de reparatii la constructii = RpC =

Each book comprising construction items of work is subdivided into several chapters, designated by letters, each chapter representing separate classes of work according to the dominant technology, material and construction method (capitole de lucrari).

For example, the C collection (“Building Works”) is subdivided into 17 chapters:

A = Concrete works

B = Formworks

C = Reinforcement works ans.

Furthermore, each chapter is subdivided into many items of work, according to more specific levels of detail. Each item has its own code which indicates the na­ture of the work, the chapter of work, technology and method.

For example code CA02XH identifies the item as being:

work classification: C = Building works (buildings, process plants, agricul­tural constructions)

chapter A: Concrete works

02 : the second item of the chapter: Concrete in foundations and retaining walls

X : denotes that the collection of construction items of work is published after 1990

H : The technological method of execution of the work

Hence the complete designation of the item will be:

“CA02XH. In situ concrete, class Bc, into foundations and retaining walls.

Unit of measure : 'cubic meter'

Therefore, the complete description of any item of work in a Bill of Quantities should comprise:


Description of the work

Unit of measure


Beside the code, description and unit of measure, each item in a Collection of Construction Works has attached three more indications, namely the usage rates of resources for the item (for materials, labour and equipment).

A resource usage rate is the quantity of resource consumed to construct a unit of measure of the specified item of work

For example concrete usage rate for the above item of work - CA02XH - is : 1,03 cubic meters of concrete per placing in situ one cubic meter of concrete. Hence the resource usage rates for a “x” resource is given by :

quantity of resource “x”

one unit of mesure of the construction item of work


The labour usage rates are:


The equipment usage rate is:

- vibrator = 0.6 hours/m3


(i) The material resource usage rate allows for wastage due to the handling and trans­porting (i.e. 3% of concrete is the difference between the quantity of concrete to be delivered on site and the quantity that actually is being poured).

(ii) The usage rates for formworks are exceptions from the above statement. Here, the material usage rate represents the percentage of wastage per a single use of the formwork, which is meant to last (2 10) cycles of usage.

m2 of form

m2 of slab

In case of “CB02XC: Plywood formwork for slabs and beams”, the formwork consumption rate is 0,13  . This means that the plywood panel is to be

reused a number of 7 times until deterioration.

(iii)    Method Related Charges: The UK method of measurement permits tenderers to insert items into a Bill of Quantity to cover work the costs which are not considered proportional to the quantities measured. The effect is to reimburse the Contractor for large setting up costs for operation and results in more real­istic pricing.

Description of work







(1) Plant Excavation for foun­dation (Method Related Charge)

Lump sum

(1’) Hand Excavation for foundation



The main functions of Bill of Quantities are:

(i) To itemize and quantify the elements of work to be completed within the con­tract.

(ii) To facilitate comparison of tender price. Each Contractor accumulates his ten­der price in an identical document and basis his price on the same quantity of work.

The resources usage rates allows computing lists of resources required to construct the contract (Extrase de resurse). The list of the required materials is therefore of great help for the purchasing department etc.

The Bill of Quantities are grouped according to the most relevant classes of works:

Structure works:



Finishing works

Sanitary works etc.

10. Basic Knowledge about Estimating and Pricing

A major use of the Bill of Quantities is that it is the basis for valuation of price of the contract (or interim valuation).

Basically, the price results as the sum between cost and profit/ benefit (Eq.1):

P = C + B

The cost of any contract for construction works is compounded of two components : direct cost and indirect cost (overhead cost) (Eq.2)

C = CD + Ci

Direct Cost (Prime Cost) comprises the costs of materials, labour, plant and sub­contractors. These costs can be directly allocated to a cost center (ex. A construc­tion process). Usually, the direct costs vary with the volume of production.

Indirect Cost (Overhead Cost) comprises the costs of materials, labour and ex­presses which cannot be identified to a cost center, but which provide some func­tions or services, such as:

site overhead: general labour, general materials, temporary works, small tools, welding equipment ans.

head office overhead: office accommodation, salaries and expenses for staff ans.

risk provision etc.

Indirect cost are mostly fixed costs (such as staff salaries, rent and rates, office equipment, small tools etc.) as they remain constant irrespective of the volume of the work done.

The English management literature refers Indirect Cost together with Profit as “the Margin“ of the Contract or “the Spread” (the difference between the Tender Total Price and the Prime Cost). The size and the fashion of allocation of the margin on the contract items of work can play an important role in getting a contract and de­livering it successfully.

The Estimating and Pricing Process

When preparing a bid the Contractor undertakes two basic stages:

estimating the direct costs of the works

adding for overheads and profit.

These stages are usually performed by separate management levels: estimators and the senior managers.

The detailed process of estimating and pricing for tendering is described in the following steps:

Decision to tender;

Detailed project study;

Collection and calculation of cost information;

Preparing the estimate;

Establish the margin (overheads, risk provision and profit) in pricing;

Submitting the tender.

1. Decision to Tender: The decision to tender for a particular contract is mainly the responsibility of senior management. The decision to tender is based on such factors as:

the company current work load;

the nature and size of the project ;

the identity of the Client;

the location of the site;

the detailed examination of the contract documents (drawings, type of contract, the period for completion of the works, the time available for preparing the bid, details of bound requirements etc.);

the company’s financial resource.

Detailed project Study: The project study seeks to give the estimator a gen­eral appreciation of the project in terms of what and how must be constructed. At this stage the estimator should work together with the site managers and senior managers. The following tasks should be performed:

1. A study of the drawings and site location;

2. The preparation of a Method statement for constructing the project;

The Study of the drawings and site location will reveal aspects such as:

shape and components of the structure;

a description of the site, ground conditions, access to site etc.;

facilities available for disposal of spoil;

the positions of existing services;

a description of any demolition works or temporary works etc.

The Method Statements are descriptions of how the work will be executed with details of the type of labour and plant required and pre-tender program. The estimator should be aware that the cost of the works will depend not only on the extent and type of the works, but quite substantially the cost will be influenced by the method of construction and the timing of the works. Therefore alternative methods statements, alternative sequences of work and different rates of construc­tion should be considered and estimated in order to find the most convenient solu­tion.

By performing the above tasks, sound cost estimates and program of works can be developed (cost figures, bar-chart, duration of the overall project, critical activi­ties, resource-chart).

Collection of Cost Information: This will provide information for assessing the contract cost in terms of labour, materials, plant and subcontractors.

(i)   Labour. The estimator is required to calculate or assess that rates for each category of labour, which is an hourly rate covering all wages and other allow­ances (ex: overtime, holidays ans.) paid to the operative.

(ii) Materials. The materials enquiries include information such as quantity re­quired, the specifications, the approximate delivery dates ans. To enable these inquiries to be sent out, the estimator must go through the bill of quantities and specifications and extract the relevant information and prepare a list of re­quired materials. The materials prices will be included in the direct cost esti­mate.

(iii)Plant. The hourly, weekly or monthly cost of plant can either be as a result of internal calculation or as a result of quotations from the internal plant depart­ment or from independent plant hire company.

(iv)Subcontractors. Subcontractors inquiries also have to be sent out early and the estimator will prepare a list of the items of work that will be subcontracted. Following receipt, the quotations must be compared and the subcontractors selected.

The factors that control the decisions of which work to subcontract are mainly the specialization of the work involved and the size of the contract.

(v) Preparing the estimate. The estimator’s task is now to establish the direct cost rates for each item in the bill of quantities. A direct cost rate is a rate for labour, plant and materials (expressed together or separately) or a rate of sub­contractors; exclusive of additions for site overheads, head office overheads and profit (these will be assessed and included later).

There are two basic methods of calculation of a direct cost rate: the unit rate estimating and the operational estimating.

(A) The Unit Rate Estimating

This is the most wide spread method in Romania. In UK and other common law countries it is used mostly in building engineering.

The unit rate method of estimating a direct cost rate involves the selection of the appropriate resources of labour, plant and materials for the item of work, selecting the usage rate for each resource and combining this with the cost in­formation collected.

Unit rate for labour in case of 'CA03XC: In situ concrete for slabs and beams'.

Line Callout 3 (No Border): Labour usage  rateLine Callout 3 (No Border): Hourly cost1,25 h/m3 x 2.000 lei/h = 2500 lei/m3 to be paid for one cubic meter of in- situ concrete.

The sum of the cost per unit for all resources of work item is its estimated direct cost rate.

Unit-rates can be build-up based either on the company own records or on pub­lished records (including usage rates and/or cost data). The resulting figures may be adjusted according to the actual conditions.

(B) Operational Estimating (Method - Related Charges)

This method can be used especially in civil engineering. Civil contracts are large, they are frequently sited in relatively remote locations ans. Each work must be treated as individual. The work content is much more mechanized.

Operational estimating is the process of compiling the total cost of the work by considering the constituent operations or activities (as work items) defined in the method statement or programme and the accumulated demand for com­mon resources. Labour, plant and materials are costed at current rates.

This method is effective in allowing for idle time, which is common in most plant-dominated work. For example, an excavator may be on site from the start of excavation operation to the end of excavation operation but may not be working continuously throughout that time period. Operational estimating would base the costs of the excavator on the time the excavator was on site, not on an assumed output. The time the excavator was on site would be derived from the construction program.

Establish the Margin and Pricing the Tender

At this stage the estimator together with senior management assess the overheads, taxes, risk and profit. These additions are referred as the “make-up” or “margin”.

The manner in which contractors assess these additions varies from company to company (either as separate figures or as percentage of the direct cost).

Disregarding the manner in which they are calculated, these figures should reflect the following:

site supervision cost;

site transport facilities;

site accommodation;

clearing site;

small plant;

first aid and safety provisions;

taxes and insurances;

head-office expenses;

rents ;

provisions for risks and other general expenses;


Submitting the Tender

The tender figure arrived at above is entered into the contract documents in the manner required by the contract documents which usually is a priced bill of quan­tities.

The direct cost rates calculated for each item need to be amended to take account of the manner of apportioning the mark-up, as follows:

marking-up all items by the same percentage calculated to cover the margin;

marking-up all items by different percentages to create a favorable cash-flow.

In some cases lump sums are included as preliminaries (site establishment) and the remainder of the margin is apportioned over the bill items.

The types of contracts described below are specific to common law countries (USA, UK, Australia, Canada and the Commonwealth Countries), most of the EU countries, and Arabian Countries. Although the Romanian legislation in the field does not refer totally identical with the above ones, the Romanian legislative core in the field of construction tendering and contracting is very similar to the aspects described here.

Politica de confidentialitate



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