Handbook of Construction Management and Organization

It has been said that a contractor is a man who takes contracts, and a successful contractor is one who makes money on them. This statement, although basically true, is an obvious oversimplification.

After deciding on the type of construction work to be pursued, management engages in its prime functions: the problems of getting work, financing the work until reimbursed, and performing the work properly and on time.

In a young or smaller contracting entity, doing perhaps a few thousand to a million dollars a year in work, and likewise in a growing medium-sized company in the one to five or even ten million dollar a year class, the selection and assignment of key organization are strictly personal matters. The determination is made gradually and on the basis of obvious necessity to fill a spot. Selection may be made by the owner, one or both partners, or by the president with the help perhaps of his general superintendent, engineer, accountant, and office manager. Selection is made on the basis of acquaintanceship and belief in the capacity of the person to be employed, his loyalty, and responsibility as an individual. In any case selection of each key individual is made on the basis of the individual’s performance, character, capacity, and personality in the positions that he has been serving in the organization. In making these selections, the owner or partners have to consider thoroughly how the individual will react in his new position of increased responsibility in the growing company.

Bid strategy is the most difficult of all the functions of management to define. It is the least subject to the rules of logic, impossible of scientific engineering analysis, and yet basically so important that an average contractor with a fair knowledge of the business and a competent organization who lacks an adequate concept of the art is almost foredoomed to failure.

This chapter is concerned with the various types of contracts commonly used in the construction industry. A simple but accurate definition of a contract is “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.”1 A construction contract is a contract under which one party promises to furnish services and materials to build a structure or to improve real property for another party who promises to pay for the work performed.

Arranging for financing is the first and paramount necessity facing a contractor. From the very start as a small individual operator or a partner, through all the stages of growth to the largest national or worldwide diversified construction organization, the problem of assuring adequate funds to operate contract commitments, provide for overhead, pay wages and salaries, buy and maintain adequate equipment, purchase supplies and materials, and stand behind losses if they occur remains always present. As the company grows larger the problems become more complex, but the principles never change.

ThisChapter will deal primarily with the financing of contractors to support their own activities during major construction projects. These include the large, frequently long-term, usually multimillion dollar projects, such as dams, superhighways, bridges, and many other works for public bodies, as well as factories, power plants, and large commercial and sometimes residential structures for private ownership. Such projects are ultimately paid for with public funds, or by private ownership, funded by mortgages, debentures, or other long-term or “permanent” debt or equity instruments. It is not our intention to review such permanent financing, but rather the financing required by the contractor in his work as mentioned above, and also the substantial area of “interim” financing for project owners as contrasted with contractors that bridge the time gap between the beginning of construction and conclusion of the “permanent” financing.

Because surety bonds usually are obtained through an insurance agent or broker there may be the tendency to classify bonds as insurance. This interpretation is a misconception.

Field maintenance consists of regularly scheduled lubrication, fueling, inspection and adjustments, preventive repair, and system analysis performed in the field.

A Large portion of a construction company’s capital is often invested in its equipment spread, whether it owns one machine or several hundred. This important investment can be managed instinctively, and some successful contractors have used this approach. Generally, however, management by instinct does not produce good results. Sound management practices are needed to ensure the best return on equipment investment.

One of the largest single factors of construction costs is the investment in and the operation of equipment. Proper management of this important asset is essential for any successful construction company.

A good purchasing department, properly utilized, will contribute substantially to the profit-making potential of the contractor’s organization. Close coordination of the purchasing activity with management, engineering, estimating, operating, and other divisions or subdivisions of the company will exploit purchasing’s potential for profit to the fullest.

So many factors are involved that no single rule for organizing the contractor’s engineering section and determining its functions can be applied to all companies. Among the factors affecting these critical decisions are each company’s scope and kind of contracting, its size, its degree of specialization, and how widely it operates. These factors will determine whether, at the least, the company owner performs engineering functions himself, or, at the most, an engineering section with diverse talents assumes broad functions and responsibilities. Some contractors, unable to justify economically large sections with diverse talents, employ outside specialists for functions that their own sections cannot perform. Almost all contractors find outside consultants necessary and desirable to deal with specialized or complex engineering.

This presentation does not purport to offer values of cost for pricing construction work. Its intent is to relate basic concepts and principles gained from study and experience in the development of estimating procedures which have been successfully applied, as well as to suggest useful formats.

Although the general rule in the construction industry is to offer work on a firm-price basis, there are conditions that warrant other arrangements. This chapter is devoted to the principles of pricing the contract work under such circumstances. It also discusses how the contractor is to be compensated.

This chapter explains the relative positions and the respective functions of the contractor’s engineering department and his accounting department with respect to cost controls related to the work. The principal duties in this regard are outlined below.

The networking techniques have been available since the late 1950’s. They appear to offer a tremendous potential for improving the planning and control of project-type work. They have been presented in countless management seminars and technical articles as well as many textbooks. They have been widely used in the construction industry and are frequently required by contract specifications. In spite of all this, it seems accurate to state that results have not lived up to expectations. Further improvements and more education are required for a truly effective level of application.

This chapter is devoted to the discussion of the use of computers in a contractor’s engineering organization. One of the main functions of the contractor’s engineering staff is to estimate the cost of the work. Thus, if a computer is to be used to any great degree, it has to be applied to some extent in this field. In the following we examine the computer capabilities to find its best qualities and how they can be applied to facilitate one of the principal tasks of the engineering staff—that of estimating.

Data processing systems and techniques in the construction industry have been firmly established over the last few years. Present data processing users are found in all segments of the industry, and the areas of application are broad. The environment today is one of expanding application, extending from the mechanization of such functions as payroll, cost, and scheduling to the mechanization of certain parts of the estimating operation. Data processing systems are being used for the planning and scheduling of projects and for the control of project costs through well-functioning and responsive cost control systems. The construction industry environment is one that has fostered the recogition of data processing as a tool of management.

Administration of construction operations is carried on both at the home office and in the field. The home-office or headquarters-office administration is centered on controlling operations overall, whereas field-office administration is concerned solely with the immediate project at hand.

The basic functions of accounting systems and procedures are to gather, process, and report on financial information. The end products are reports which may deal with the financial position of the company as of a specific date (balance sheet or statement of financial position), the results of operations during a specified period (statement of income), and cost data related to specific operations or projects (contract costs). In this chapter we will deal with the systems and procedures involved in producing the varied type of accounting reports related to the operations of a construction contractor.

Of all the costs involved in a construction project, payroll cost is the one of greatest concern to the contractor. Materials, equipment, components, and subcontractors can be fairly definitely priced prior to submission of the bid. Labor cost as charged through the payroll system is the one element most difficult to estimate and control. The payroll system, therefore, is one of the key elements to a contractor’s management of his construction.

A construction project is an organization of specialists, headed by the project manager. Included in the organization are various field engineers, scheduling and cost control analysts, estimators, quality control and material control experts, labor and craft supervisors, skilled craftsmen, and many others, all with a broad range of experience within their individual specialties and skillfully organized to work within the framework of a tightly scheduled project contract. It is a business of temporary employment and temporary assignments. Skilled craftsmen, hired by the hour and working under union agreement, complete their job specialty as needed during the construction phase of the project and are then laid off, to be rehired again by another company for another project. Even the smaller semipermanent staff of engineers and construction management personnel is on temporary assignment until the completion of the project, whereupon they must be reassigned to a new project.

The field of labor relations continues to grow in complexity and imposes an increasing demand for greater management expertise. One can be easily tempted into writing many broad statements and generalizations about labor relations; however, since we are dealing with construction, it is essential that we establish the fact that labor relations in the construction industry are not the same as labor relations in manufacturing, transportation, services, or other industries.

You can see these slogans on posters, signs, or in magazines whenever you are around men working in the construction industry. All too frequently, many companies feel that by providing this visual lip service to accident prevention they have a viable safety program. Safety must be a basic component of the management philosophy, just as operating at a profit is, because the cost of accidents presents a serious drain of profit dollars. An aggressive company will examine each of its operations with a keen interest to see not only that work is done in the most efficient manner to ensure greateset potential profit, but that it is done as safely as possible for the very same reason.

“We don’t need any public relations on this project,” a midwestern construction executive commented recently. “The job is so big we’ll get plenty of stories in the papers.”

To begin this chapter, let us take a hypothetical case. You have just received your Notice of Award of contract and you are busily engaged in furnishing your payment and performance bonds (if required); you are setting up your schedule of performance (an intelligent bar chart unless you are on CMP or PERT); you are making up your payment schedule; you are ordering your materials; you are contacting the labor unions for workmen; and you are negotiating with your prospective vendors and subcontractors.

Construction contractors are like most other businesses —various tax collectors take a slightly larger piece of the profit pie than is left for the shareholders or proprietors. And like other businesses, they are subject to gross receipts taxes, sales and use taxes, payroll taxes, property taxes, and many others.

First and foremost in the administration of any insurance program is the selection of a competent individual within the firm to perform the functions of a Risk Manager. Depending upon the size of the entity, this may be a full-time manager or a part-time manager whose other duties are related to analyzing the firm’s risks. People in the legal, financial or safety departments are usually excellent prospects for this delegation, although anyone with an observant outlook for exposures will fit the job requirement. Whoever the individual may be, he should maintain a close liaison with the previously mentioned departments for the following reasons:

Group insurance is an important management tool. It is generally recognized that the company without a sound group insurance plan cannot compete successfully with others in its field in attracting and holding worthwhile personnel. Group insurance is basic to a positive and productive employer-employee relationship. It is no longer a fringe benefit but a vital part of employee compensation. Group insurance protection is highly valuable to employees. Regardless of the extent to which they may share the cost of the insurance with their employer, whatever they pay will normally be substantially less than the price to them as individuals outside of the employee group.

This monograph discusses, for accountants and others, the considerations underlying the determination of funding contributions toward pension costs. It describes several commonly used types of pension plans and the related funding methods in a way designed to provide the internal accountant or the CPA with a working knowledge of the major cost elements of a pension program, and to help him better evaluate the relationships between a plan’s basic costs, the related periodic funding contributions, and the appropriate periodic accounting accruals.

There is no mystique about contractural relations. Contractural relations are basically human relations with legal obligations and responsibilities involved. The contract creates an association between the interested parties who have different functions but with the common goal of accomplishing a given result.