Construction Material

&
Equipment Management
Persevering the Scope across projects: Global Perspective

Presented by
Gautam Arora

Gautam Arora

PRESENT SCENARIO

Gautam Arora

Project Framework
You got to choose between tightening your belt or losing your pants
Gautam Arora

Project Information - System

z

Forum for Exchange of Ideas

Decisions

Dynamic

Policies

SOP

Profit & loss Statement

P
R
O
J
E
C
T

P
R
O
J
E
C
T

Gautam Arora

Information Framework
We'll take the cake with the red cherry on top

Gautam Arora

Project - Information System

Top-down & Bottom-up

Me or You -

Know or Dont know

Responsible

Interpretation

Mitigation

Reasoning

INFORMATION

Gautam Arora

en
Ma
na
ge
m

Project
Implementation
Unit / PMO /
Portfolio
Management

.
General Contractor
/ Management
Contractor

Contract
Administration

Procurement
Management

Ad
m

io
ut
ec
Ex

in
ist

ra
tio
n

Designers
Architects
Engineers

t
en
m
ge
na
Ma

THE PROJECT CHARTER

Sub-contractors /
Specialist Contractors

Gautam Arora

System Framework
You can't play a symphony alone, it takes an orchestra to play it
Gautam Arora

Man or Machine
Input & Output
Conclude or Confuse

Plan & Actual

Network to ask

Budget In or Out

S Y S TE M

M
E
T
S
SY

S Y S TE M

M
E
T
S
SY

EM
ST
SY

SY
ST
EM

SY S
TEM

SY
ST
EM

Project Information - System

Gautam Arora

THE PROJECT LIFE - CYCLE

Gautam Arora

Challenges - Family Member!!

Estimation
Inaccuracies in Cost Estimates
Detailed Working / basics for Cost
estimates not prepared
Margin forecasts are based on rough
estimates or thumb rule figure

Project Management
Schedule overruns
Contractual Non-Compliances
MIS reported inaccurate / untimely
Change in Scope not assessed for
impact or are not documented

Procurement Management
Rates not consistent across Projects
Inventory cost not optimized leading to
higher inventory cost or stock outs
Gautam Arora

Some More
Financial Management
Cash flow Management is sub optimal
credit periods are not utilized / cash
discounts are not explored
Project Budgets not monitored properly
leading to overruns

Risk Management
Project Risks are not determined
comprehensively
Risk Mitigation Plans are not consistently
applied across projects
Risk exposures are not known at
Management level

Sub Contractor / Vendor Management

Poor performance leads to delays
Compliance not monitored properly
Gautam Arora

Remedial actions required

Spend time on

Execution issued
Design
Delivery management
How to buy land cheap

Efficient & strong real estate regulator.

Escrow accounts
Single window clearances

Compliances
Approvals
RFIs
NCRs

If one has the Master plan for the city than issue the MOEF
clearance for that zone too.
Gautam Arora

MATERIAL MANAGEMENT

Gautam Arora

MATERIAL MANAGEMENT
Materials management is a coordinating function responsible for planning and
controlling materials flow. Its objectives are as follows:

Maximize the use of the firm's resources.

Provide the required level of customer service.

Materials management can do much to improve a company's profit.

If the right materials in the right quantities are not available at the right
time the process can not produce what it should. Labour and
machinery will be poorly utilized. The profitability and even the
existence of the company will be threatened.
Gautam Arora

Planning of Material

Basics

Objectives

Nature of the Project

Who all are Involved

Challenges

What do we do

Gautam Arora

Planning of Material

Quantum of Work / Material

required to be clearly defined

Drawings & Designs to be

available
BOQ - Specifications
Software
Rate Analysis

Conditions of the Contract to be

clearly defined & followed

GCC
SCC
EMD, BG, Defect Liability Period,
Insurance

Gautam Arora

Vendors to be short listed & informed about the Project requirement

Categorization as per Projects Completed, In-hand & In future

Expected Response period in the same scenario, with in company or
from outside - Source & Destination Analysis.
Quality of delivered Product - Variation from the requirement
Check for the requisite Compliances Supply / Supply & Installation
available with Vendor.

Payments & issuance of Purchase Order Methodology freezed.

Risk Assessment: Seasonal effect over the availability of Material

also effect on Cost.

Cement

Steel
Sand

Aggregates

Gautam Arora

FOB & FOR Analysis

Buffer maintenance

Develop Methodology for the events to follow

Checklist Quality & Quantity Methodology

Upon delivery - Variation from the requirement

Gautam Arora

Procurement Management
Youve got to put the saddle on the right horse
Gautam Arora

What do we do

Review Methodology / availability of front as per the Chronology of

the events / Milestones reference to Construction Schedule

Review for any Procurement to be delayed for the Scope of Work

involving Management perspective.

Review of the Market Demands / change in requirement of Stake

holders.

Gautam Arora

Contracting Plan

Contract statement of work

Review Contractual obligation of Client & Vendor
Confirmation of the order to be delivered as per Schedule
Review for the Supply & Installation Scope of Work.

Bid management

Review of the short listed Vendors & information of the current scenario
about the Project requirement.
Review the current scenario in Market Bulk / by-parts
Final negotiation
Gautam Arora

Contract Administration
z

Inspection & audit

Special task team to be appointed

Method Statement to be reviewed
Review for Change in Drawing / design / specifications
Review - Check for the requisite Compliances Supply / Supply &
Installation.

Performance reporting
Source & Destination Analysis
Review the expected Response time in which Vendor has facilitated the
service.
Review for Change in Specs after delivery at Project

Gautam Arora

Cont

Corrective actions

Plan for Issuance of NCR / NCN, Payment Certificate

Review Rate Analysis
Reviews of the budgetary compliances with the Material to be procured.
Review of the availability of Manpower with reference to the procurement.
Management MIS Review of the Vendor

Gautam Arora

Closure of contract
z

Contract Closure
final inspections tests
z

Plan Methodology for Handing over & taking over of Records

Plan Methodology for Joint evaluation ( Client / Consultant / Architect /

Contractor)

Plan Methodology for Sign-off on the Payment Certificate.

As build inspection & submission of records

Information assurance from the representative for not sharing the records
except with in the company.

Plan Methodology for Certificate for final Sign-off perceiving no obligations in

future except to what have been agreed in the Contract for a certain period of
time.
Gautam Arora

Delivery Management
The biggest room in this world is the room of Improvement
Gautam Arora

What do we do

Review the availability of Storage / Buffer Maintained at the Project.

Review the Project condition with reference to the Construction Milestone
Develop Methodology for the events
Checklist Quality & Quantity Methodology

Upon delivery - Variation from the requirement

Plan review from the prepared As-Built Drawings

Plan review from the prepared Operation & Maintenance Hand-over,
Manuals
Plan for timely Payments & review the planned conditions of Contract
Closure.
Plan review from the Achieving ( what has been done)
Finally Hand-over to Stakeholders

Gautam Arora

Contracting Plan

Contract statement of
work

Confirm the facilitation of

Contractual obligation of Client &
Vendor
Confirmation of the order
delivered as per Schedule
Confirmation of the Start as per
Schedule for the Supply &
Installation Scope of Work.

Gautam Arora

Contract Administration
z

Inspection & audit

Perform the Analysis as expected by Special task team appointed at the
Project.
Follow the Method Statement
Review/ Confirm for Change in Drawing / design / specifications with
reference to the product delivered.
Maintain the requisite Compliances Supply / Supply & Installation &
correspondingly inform the requisite authority.

Performance reporting
Confirm the movement of Material as per Schedule - Source & Destination
Analysis.
Confirm the final Response time in which Vendor has facilitated the service.
Confirm for Change in Specs after delivery at Project
Gautam Arora

Corrective actions

Issue NCR / NCN, Payment Certificate

Confirm the present Rate Analysis
Confirm the effect on the budgetary compliances with the Material procured.
Confirm the available Manpower to initiate the work accordingly.
Management MIS Review of the Vendor
Confirm for the additional resources required in the same pretext.
Confirm for the additional Material required which says the calculation done
earlier is matching or not.

Claim administration
Facilitate with the Interpersonal / Hospitality Management - Obligations
provide to the Client in case of Delays in the Construction Schedule,
provision of additional facilities (Category, Budget, Availability, and
Satisfaction).
Record the decision taken with the Auditor / arbitrator & work in future to be
carried out accordingly.
Confirm the viability / remaining duration BGs, Contract Period, Conditions
of Contract, Services to be offered with reference to Defect Liability Period.
Gautam Arora

Closure of contract
z

Final inspections tests

Joint evaluation ( Client / Consultant / Architect / Contractor)
Sign-off on the Payment Certificate.

As build inspection & submission of records

Joint evaluation with the competitive authority / Client / Contractor /
Consultant.

Closure of contract
Confirmation of Handing over & taking over of Records
Compliances to be recorded & maintained
Information assurance from the representative for not sharing the records
except with in the company.
Certificate for final Sign-off perceiving no obligations in future except to what
have been agreed in the Contract for a certain period of time.
Gautam Arora

CODIFICATION

ADVANTAGES OF CODIFICATION
The role of the warehousing and inventory controller is to serve the user
promptly

Unless the warehouse manager is able to identify instantaneously the users

requirement, he will not be able to render good service.

Delays lead to the building of queues at the service stations and consequent
delays in the production line.

In the case of finished goods warehouse, the customer will go to another

company, thereby affecting the image and profits of the organization.

The starting point is the consumer, who has to unambiguously identify his
requirements, through proper nomenclature
Gautam Arora

The advantages of unique identification and disadvantages of ambiguous

nomenclature can never be overstated.

Long description by tongue twisting long names must be avoided.

Systematic grouping of similar items is facilitated by codification.

Codification automatically leads to the process of standardization

Ordering becomes more economical as like items are ordered together.

Price advantage can be availed out of the resultant bulk ordering with discounts.

The procured item may have a trade name of its own, and the stores executive
has to correlate the two names, with the problem going out of hand if the number
of items is very large.

Codification helps to uniquely identify the item by having one-to-one

correspondence.
Gautam Arora

Location problems of items in bins are reduced by codification.

Service levels can be improved for the same level of investment.

Servicing time is less due to easy identification.

Stock levels are less as duplication has been eliminated by codification.

Obsolescence is less as the number of items is less.

Codification facilitates computerization.

The records, entries and transactions are less as less number of items are
handled per person.

The overall efficiency of warehouse staff is much better with higher level of
motivation.

Logical grouping of items 'facilitates variety reduction easily.

Gautam Arora

Procurement operations become easy as the purchase people, even if they are
non-technical, can understand the requirements easily.

Communication between different departments is smoother by process of

codification as they know what they are talking about.

The simplicity of codification enables even unskilled workers to distinguish one

item from another and trace where the wanted item is kept.

Codification introduces discipline and reduces inventory by removing non-stock

items and reducing items on temporary codes. After all we live in a coded world
consisting of permanent account number of income tax, telephone number,
postal index number, ration card number etc.

Codification aims at maximum service to users with minimum input resources,

after identifying items uniquely and classifying them into major class, subclass
group, subgroup and minor groups.
Gautam Arora

Standardization:
In product design, a standard is a carefully established specification covering the
products material, configuration, measurements etc. Therefore, all products made to
a given specification will be alike and interchangeable. A range of standard
specifications can be established so that it covers most uses for the item. A smaller
variety of components is needed, as the product standardization allows parts to be
interchangeable. Standardisation is the orderly and systematic formulation, adoption,
application and review of industrial standard which leads to simplification or variety
reduction. There are a large number of benefits of standardisation.

Gautam Arora

BENEFITS OF STANDARDISATION
The warehousing and inventory manager must have an unambiguous
nomenclature for identifying the items, in order to serve the customer promptly.

In this process, standardization which reduces the variety plays a vital role by
reducing the number of varieties of the same item held in the warehouse.

More than any other executive, the stores-incharge comes into direct contact
with a variety of materials. He can gain knowledge on the uses of the material in
the store and can contribute significantly to achieve standardisation.

Standardisation enables one to concentrate on large quantity of fewer items.

It is possible to place economic order quantity or orders of staggered deliveries

with bulk discount.

Economic lot size at manufacturing will not be a problem as items-can be

manufactured with the same set up timings for standard items.

Gautam Arora

Since the inventory is likely to be less, the working capital commitment of the
organisation will also be less.

The items can be easily identified by all persons in stores as the bin location can
also be standardised.

Standardisation reduces the time involved in negotiation process with the

suppliers as communication is better with prompt delivery schedules.

The procurement lead time gets reduced as everyone knows the item clearly.

The buyer-seller relations can be improved as all dimensions including price

analysis, specifications lead time etc., are standardised without scope for
disputes.

Standardisation promotes healthy competition amongst vendors as standard

items can be bought by several companies.

Standardisation minimizes obsolescence.

It is possible to have rate/running contracts for standard items.

Gautam Arora

Standardisation reduces design time by concentrating on fewer parts.

It minimises drafting time through repetitive use of standard drawings.

It expands the engineers list of known and proven items.

It reduces specification writing by repetitive use of standard speci-fication.

Interchangeability of parts is assured through standardisation.

Standardisation enables reduced inspection and quality control burden.

Since methods are standardised, it ensures safety to all.

Standardisation directly reduces the variety and improves the information system
of the warehouse manager.

Gautam Arora

Lower cost of production through continuous manufacturing run with material

handling problems and increased capacity utilisation is achieved by
standardisation.

The workers at all levels and departments become more efficient by repeated
handling of items and it is possible to utilise less skilled workers for standard
operations.

Standardisation enables reduced number of maintenance tools and improves

maintenance practices.

Standardisation aims at maximum variety of finished products with minimum

categories of assemblies, subassemblies and components.

In general, standardisation results in simple operations, minimum paper work,

improved inter departmental coordination, ease of computer application and
pinpoints areas involving inefficiency. In short, standardisation is a means to
faster and better understood communication, with fewer mistakes and hence
smoother life.
Gautam Arora

INVENTORY

Inventories are the materials and supplies that a business or institution carries either
for sale or to provide inputs or supplies to the production process. All businesses and
institutions require inventories. Often, they are a substantial part of total assets.
Inventories are very important to manufacturing companies and construction sites. As
inventories are used their value is converted into cash which improves cash flow and
return on the investment. There is a cost for carrying inventories which increases
operating costs and decreases profits. Good inventory management is, therefore,
essential. Inventory management is responsible for planning and controlling inventory
from the raw material stage to the customer.

Gautam Arora

Inventory and Flow of Material

Raw Materials

Work-in-process (WIP)

Finished goods

Distribution inventories

Maintenance, repair, and operational supplies (MROs)

Gautam Arora

Function of inventories
In batch manufacturing, the basic purpose of inventories is to decouple supply
and demand. Inventory serves as a buffer between:

Supply and demand.

Customer demand and finished goods.

Finished goods and component availability.

Requirements for an operation and the output from the preceding operations.

Parts and materials to begin production and the suppliers of materials.

Gautam Arora

Based on this, inventories can be classified according to the function they

perform. These are:

Anticipation Inventory

Fluctuation Inventory

Lot-size Inventory

Transportation Inventory

Hedge Inventory

Gautam Arora

Safety Stock (Fluctuation Inventory)

Fluctuation inventory is held to cover random unpredictable fluctuations in supply and
demand or lead time. If demand or lead time is greater than forecast, a stockout will
occur. Safety stock is carried to protect against this possibility. Its purpose is to
prevent disruptions in manufacturing or deliveries to customers. Safety stock is also
called buffer stock or reserve stock. Safety stock is a calculated extra amount of
stock carried and is generally used to protect against quantity uncertainty.

Gautam Arora

ABC Inventory control

Control of inventory is exercised by controlling individual items called stockkeeping units (SKUs). In controlling inventory, four questions must be
answered:
1. What is the importance of the inventory item?
2. How are they to be controlled?
3. How much should be ordered at one time?
4. When should an order be placed?

Gautam Arora

Control Based on ABC Classification

Using the ABC approach, there are two general rules to follow:
1. Have plenty of low-value items.

C items represent about 50% of the

items but account for only about 5% percent of the total inventory value. Carrying
stock of C items adds little to the total value of the inventory. C items are really
only important if there is a shortage of one of them-when they become extremely
important-so a supply should always be on hand. For example, order a year's
supply at a time and carry plenty of safety stock. That way there is only once a
year when a stockout is even possible.

Gautam Arora

2. Use the money and control effort saved to reduce the inventory of highvalue items. An item represents about 20% of the items and account for about
80% of the -value. They are extremely important and deserve the tightest control
and the most frequent review.

Gautam Arora

ABC Curve: Percentage of Value versus Percentage of Items

Gautam Arora

Different controls used with different classifications might be the

following:

A Items: high priority. Tight control including complete accurate records,

regular and frequent review by management, frequent review of demand
forecasts, and close follow-up and expediting to reduce lead time.

B Items: medium priority. Normal controls with good records, regular attention,
and normal processing.

C Items: lowest priority. Simplest possible controls-make sure there are plenty.
Simple or no records; perhaps use a two-bin system or periodic review system.
Order large quantities and carry safety stock.

Gautam Arora

ECONOMIC - ORDER QUANTITY (EOQ)

In the demand-certain situation, the total ordering charges are a direct function of the
number of orders. Demand from consuming centres is fairly well established. The
demand can be met by either having a few orders resulting in a large inventory, or by
holding low inventories and correspondingly increasing the orders. Since ordering
and carrying charges move in opposite directions, we have to balance the two costs
in order to get the optimum or economic order quantity.

Gautam Arora

Assumptions

The assumptions on which the EOQ is based are as follows:

1. Demand is relatively constant and is known.
2. The item is produced or purchased in lots or batches and not continuously.
3. Order preparation costs and inventory-carrying costs are constant and known.
4. Replacement occurs all at once.

Gautam Arora

Reorder point:
The reorder point is the sum of buffer, safety & reserve stock. When this order
point is reached, a prudent materials manager will go on for ordering Economic
Order Quantity.

Gautam Arora

LEAD TIME
It is the span of time needed to perform a process. In manufacturing it includes time
for order preparation, queuing, processing, moving, receiving and inspecting, and any
expected delays.
From the view point of the supplier this is the time, from the receipt of an order to the
delivery of the product whereas from customers view point it may also include time for
the order preparation and transmission. The customer will always want shortest
possible delivery lead time and the manufacturer/ supplier must design a strategy to
achieve this. The following are the four basic strategies:

Gautam Arora

Engineer-to-order

Make- to-order

Assemble-to-order

Make- to-stock
One can also define Lead Time as the duration that lapses between the
recognition of the need for an item and its fulfillment

Gautam Arora

Gautam Arora

Service Level:
The efficiency of a warehouse is normally measured on a negative scale i.e. in terms
of stock outs. The only time it is possible for a stockout to occur is when the stock is
running low, and this happens every time an order is to be placed.

The service level is directly related to the number of standard deviations provided as
safety stock and is usually called the safety factor. A service level is a statement of the
percentage of time there is no stock out. If a higher service level is needed, safety stock
must be provided to protect against those times when the actual demand is greater than
the average.

Gautam Arora

STORES MANAGEMENT

The objective of the store/ warehouse is to minimize cost and maximize

customer service. For doing this, efficient stores operations perform the
following:

Provide timely customer service.

Keep track of items so that they can be found readily and correctly.

Minimize total physical effort to reduce cost of moving goods in and out of the
stores.

Provide communication links with the customers.

The cost of operating a warehouse consists of the following:

Capital Cost
Operating Cost
Gautam Arora

STORES ACTIVITIES
Efficient operation of a store (warehouse) depends on how well the
following activities are performed.
1. Receive goods

Check the goods against an order and BL (Bill of Lading)

Check the quantities

Check for damage

Inspect goods, if required.

Gautam Arora

2. Identify the goods: Identification with appropriate stock keeping unit (SKU) No.
(Part No.) and the quantity received recorded.
3. Dispatch goods to storage
4. Hold the goods
5. Pickup the goods
6. Bring all the goods required as per single order together
7. Dispatch the segment
8. Operate an efficient information system

Gautam Arora

Principles of Stores Organisations

The following principles should be followed by the stores
manager to create a effective stores organisations

Define and clearly spell out responsibilities to each manager according to the
company objectives and the managers specialisation.

Responsibility should be commensurate with authority.

There should be no change in the scope and responsibility of a position without

prior discussion.

No employee should be subjected to orders from more than a single source of

authority so that unity of command is preserved.

Gautam Arora

Orders should never be given to subordinates superseding a responsible

executive.

Criticism should be done privately and not in open meetings.

All major/minor disputes between departments should be sorted out in

coordination meetings.

The immediate superior should approve promotion, disciplinary action,

increments, etc.

No employee should be the assistant as well as critic at the same time.

Gautam Arora

The quality of the assistant's work should be periodically checked and mistakes
pointed out so that corrective action can be taken at once.

For carrying out the above tasks effectively, the span of control or number of
employees reporting to an executive should not be too large.

Adequate delegation of powers commensurate with the responsibility must be

given.

It is advantageous to develop an organisation warehousing manual describing all

aspects of the storage function.

Gautam Arora

REASONS OF FAILURE
The primary purpose of stock verification is to check that the physical stock
agrees with book balance. If these fail to match, as often is the case, then it
could be due to the following reasons:

Failure of the system because the paper system is in error.

The item may be incorrectly labelled due to mistakes in packing or inspection as

the wrong issue could lead to less stock.

Stock could have been binned in the wrong location.

Poor warehousing as boxes containing items may be in gangways.

Items may have been mislaid or lodged between shelves and dislocated later
on.

Regular theft of valuable items in collusion with the stores personnel

Gautam Arora

Bad handwriting and figures copied incorrectly account for a majority of errors.

Loss of documentation and elimination of the number of copies to be made.

Deteriorating accuracy of records.

Transferring the paper work from first shift to the second shift has not been
proper.

Receiving by weight and issuing by number, in the case of items like nuts,
bolts, screw etc. could cause discrepancies.

Gautam Arora

Inaccuracy of weighing scales at receiving or issuing or both. If the scales indicate

1 kg less every time and if there are 100 issues in a period, but with one receipt
only - then the differences will be (100- 1) = 99 kg in the actual quantity.

Issuing machinery spares without authorisation or indents or issue vouchers when

the mechanics claim that the machines are idle.

Urgent issues made when the store is closed, without posting entries.

Delays in inspection, posting the goods receipt note and other receipt documents.

Gautam Arora

Using rejected material during emergency and not accounting properly.

Improper communication with user/indentor, inspection, external vendors etc.

Each bin containing more than one item leading to mixing and confusion at
issue.

Indentor using suppliers part numbers and not internal codification, leading to
confusion.

Stores personnel unable to identify the item and issuing wrong material.

Too many users coming to take material particularly in the morning creating
confusion at the issue counter.

Gautam Arora

Issuing without documentation as al1 the users are in a hurry.

Direct delivered items and bulk items are received and removed without adequate
documentation.

Understaffed stores and presence of unskilled stores personnel.

Improper records on the transfer from one store to another, lead to discrepancies.

Lorries with materials are received when the store is closed, resulting in delays in
posting.

In spite of the above difficulties, the warehouse manager should ensure the proper
receipt, issue and accounting of the items adequately by placing the items in their
proper location.

Gautam Arora

MATERIALS AUDIT

Two basic methods of checking of the inventory records:

Periodic (usually annual)

Cyclic (usually daily)

It may be important to audit record accuracy but it is more important to

audit the system to ensure the causes of record inaccuracy and eliminate
them.

Gautam Arora

Periodic Inventory

The primary purpose of this is to satisfy the financial auditors that the inventory
records represent the value of the inventory. The planner would like to correct
any inaccuracy in the records. The process of taking a physical inventory is as
under:

Counting of the items and recording the same on a ticket left on the item.

Verifying the count by recounting or by sampling.

On completion of the verification, collect the tickets and list the items in each
department.

Reconciliation of the inventory records for difference between physical count

and the inventory. This is to enable the material personnel to check in case of
any major discrepancy.
Gautam Arora

Cyclic Inventory
Some items are counted frequently throughout the year depending on
their importance.

Timely detection leads to finding the cause of error and to ensure that the error is
less likely to happen again.

Compete or partial reduction or lost production.

Use of personnel trained and dedicated to do cyclic counting

Gautam Arora

EQUIPMENT MANAGEMENT

Gautam Arora

EQUIPMENT MANAGEMENT

Construction is the ultimate objective of a design.

Machines make accomplishment of that objective possible.

Fundamental concept of machine utilization is to match machine capability to

specific project requirements.

Equipment is an economic investment.

Contractors must be able to apply the appropriate time value analytical formula
to the decision process of machine purchase and utilization.

The bottom line on completion of the project is-at a profit or loss!

The planner must understand the work and coordinate use of the companys
equipment to get a profit

Gautam Arora

The most important aspect of planning & building a construction project is

determining production & cost, and controlling both during the progress of the
work.

The ability to win contracts and to perform them at a profit is determined for the
construction contractor by two vital assets:
people and
equipments.
Therefore, it is most essential to have effective management policies
for effective manpower and equipments required for the project.

To be economically competitive, a contractors equipment must be competitive,

both mechanically and technologically.

New machines have lower repair costs and give higher production rates. In
comparison, old/used machines require costly repairs and there is down time
so they cannot compete with new machines.

Gautam Arora

A piece of equipment cannot work as a stand- alone as equipments work in

groups. As such even for small works, a large equipment spread may be
required. That means a large investment.

Individual projects must be planned and executed so that each machine

complements the production capabilities of all other pieces of equipments.

In some case the value of the equipment may be more than the contract value.

Gautam Arora

The successful contractor is one who accomplishes a continuing series of jobs

and completes each individual job at the least possible cost.

People & equipments along with the materials are the most important
ingredients, the first two are very important assets.

Optimization in the management of an equipment spread is critical for

contractor, both in achieving a competitive pricing position and in accumulating
the corporate operating capital required to finance the expansion of project
performance capability.

Gautam Arora

There are no unique solutions to the problem of selecting a machine to work on

a particular construction project.

The construction contractor works under a unique set of production conditions

that directly affect equipment management.

A construction company carries its factory from job to job.

If the construction gets completed on time as planned, the contractor makes a

profit.

Gautam Arora

The construction contractor has only a limited number of projects at a given

time. This limits the companys ability to spread the risk by volume and,
thereby, protect itself from that one bad project that can send the company into
bankruptcy. On the other hand, a manufacturing company can spread the cost
of production mistakes across the volume of individual pieces produced and
can adjust and fine tune the production line manufacturing process when the
product does not meet specifications.

Equipment-intensive projects are usually the ones that present the greatest
financial hazard. Such projects require an equipment commitment that is
greater than the amount a contractor will be paid for completing a single project.
Such a situation forces a contractor into a continuing sequence of jobs in order
to support the long-term equipment payments. The profit margins get reduced.
Gautam Arora

Additional risk factors facing equipment-intensive work are as under:

Financing structure
Construction activity levels
Labor legislation and agreements
Safety regulations.

Cash flow is the critical factor in any equipment purchase decision.

The contractor, by being in the direct chain of action used by government to
control economic cycles, gets affected, in whatever manner the cycle is moving.
During inflation periods, funds are withheld. In case of slow or stagnant times,
funds are pumped into projects to stimulate the economy.

Gautam Arora

During such swings, a company with long-term equipment notes may be forced to
bid for projects at a low price or sometimes with no margin even.

Almost all the work in heavy equipment-intensive fields is awarded on tender

basis, either through open bid basis or on selective basis. Recently, the method of
design-build method of bidding has also been resorted to. In this the contractor
has a control on the project design.

Each construction project represents a custom-built situation that is subject to a

new set of governing cost conditions, and a typical estimating situation. There are
no accurate cost records available. In most cases, the systems fail to allocate
expenses to the proper sources, and therefore cause false conclusions when
used as the historical database for estimating future works.

Gautam Arora

A contractor who, with the same contract volume as the competition, is able to
achieve a more rapid project completion, and therefore a higher turnover rate
while maintaining the revenue-to-expense ratio will be able to increase the firms
profits. If the contractor can improve production and increase turnover he has a
very effective construction management.

Gautam Arora

EVALUATING INVESTMENT ALTERNATIVES

An analysis should be made of each financial-investment alternative to
determine how to best use a companys assets.

Cost of capital: The interest rate a company experiences is usually a weighted average rate
resulting from the combined cost associated with all external and internal
sources of capital funds. These are as under:

Debt or borrowing
Equity (sale of stock)
Internally generated (retained earnings)

Gautam Arora

In addition, the cost of capital interest rate is also affected by the risk associated
with its business type. To work out discounted present worth analysis, the rate that
the banks charge for borrowings cannot be the only factor for the cost-of-capital
interest rate.
Discounted Present Worth Analysis:
This type of analysis involves calculating the equivalent present worth or present
value of all the amounts involved in each of the individual alternates to determine
the present worth of the proposed alternatives. The present worth is discounted at a
predetermined rate of interest. This is often termed as the minimum attractive rate of
return (MARR).The MARR is usually equal to the current cost-of-capital rate for the
company.

Gautam Arora

EQUIPMENT -INTENSIVE OPERATIONS & RISKS

Construction project is entirely different from a manufacturing facility.

Manufacturing company has a permanent factory.

Construction Company carries its factory from job to job.

At each construction site, a factory is setup to produce one of a kind project.

A manufacturing company can spread the cost of production mistakes across

the volume of production. It can also analyze and rectify the problem within the
closed environment of the factory.

Construction Company on the other hand will have only a limited number of
projects at any given time, and therefore can not spread the risk.

Equipment intensive projects like highways, dams, irrigation canals etc.

present the biggest financial hazards.
Gautam Arora

The cost of equipment for certain projects is very high and unless there are
repeated projects of the same nature the contractor will go bankrupt.

Control and management of equipments become very difficult, if the project is

spread over a large area/ length.

Cash flow is the critical factor in any equipment decisions.

Construction activity level variations are another risk factor.

In a Construction Contract, Contract Volume (value of work awarded to a

contractor) is a guide to the magnitude of resources a company has committed
at a particular time.
Gautam Arora

If a contractor is able to complete the project fast he will make money.

o
o

Data collection and analysis of machine utilization helps in having better

idea about equipment procurement for future projects.
This should be based on following:
1.
2.

Fuel consumption
Spare parts - availability and price

Fast moving

3.
4.

Slow moving
Down time
Tyres

5.

Oil and lubricants

Gautam Arora

Upkeep of accurate record of the equipments for evaluating performance,

establishing operating cost, analyzing replacement options, and managing
projects.

Whether the machine has useful working on a particular day or was idle?
Reasons for its being idle?

Gautam Arora

PLANNING AND ESTIMATING EQUIPMENT UTILIZATION

Must match the right machine or group of machines to the job at hand.

First determine the machine productivity.

It is not always obvious which machine/ equipment is best for a particular project
task.

The equipment planner must keep in mind the following before Planning /
Selecting any equipment
1.
2.
3.

Study the plans and specs

Visit the project site
Perform a quantity take off

Gautam Arora

4.

Visualize how to best utilize specific pieces of equipments:

The type of equipment that has a lowest total cost should be selected.

No two projects are alike.

Begin each project with an open mind and review all possible options.

New machine enables greater economics.

Good planner will match to project situations.

Gautam Arora

EQUIPMENT COST

The process of selecting particular equipment requires knowledge of the cost

associated with operating the machine.
Economic life of a machine is of paramount importance.
Reasons for purchasing equipment are to perform work that will generate profit
to the company.
Basic methods for securing equipment at the project site.
1. Purchase
2. Rent
3. Lease
The equipment owner must analyse
1. What is operating cost?
2. What is optimum economic life?

Gautam Arora

OWNERSHIP COST

Purchase value
Salvage value
Depreciation allowable
Major repairs/ overhauls
Taxes on holdings if any
Insurance

Storage etc

Operating cost includes

Fuel
Lubricants, lube oils, filters, grease
Repairs
Tyres
Spare parts
Operator wages

Gautam Arora

Therefore, the decision to induct a particular machine is based on the cost of

operating the machine in the field.
Decision to buy, rent or lease is based on thorough study analysis of the
advantages and disadvantages of the options.

Even though ownership guarantees control of machine availability and

mechanical condition, some time an obsolete machine may be used.

With rental, a machine which is exactly required may be picked up. Rental
charges are however higher.

Lease is alternative to ownership. It is a long term agreement to use the assets.

Gautam Arora

GENERAL

No contractor can afford to own all types or sizes of equipments.

Selection of equipments varies from project to project.
Money spent for an equipment is an investment which the owner expects to
recover with profit during its useful life.
A contractor doesn't pay for equipment; it pays for itself and in turn earns
something for the contractor/ owner.
The basic theme is that if an equipment earns less than the cost, do not buy it.

Two types of equipments

Standard equipment
Special equipment

Gautam Arora

Alternatives for investment evaluation

It is always good economic sense to make analysis of each financial investment

alternative.

Money has value. This is forgotten most of the time.

The cost of capital should be worked out by weighted average rate -by taking
into account borrowings, equities and retained earnings.

A discounted present worth analysis - to calculate equivalent present worth

should be carried out to determine the present worth of the proposed alternative.

Rate of return analysis gives an indication of the interest rate that makes the
discounted present worth of the investment equal to zero.

Gautam Arora

FACTOR OF RISK
Material & Equipment Management

Gautam Arora

Occupation Certificate- Inspection Requirements

Developers require the Occupational Certificate as a Compliance preliminary to
the Handover of the finished product. On receiving the same, the Market
pressure reduces as no more penalty is levied upon the developer for delays.
Basic Requirements at the time of Inspection for obtaining Occupational
Certificate:
Structure to be Complete

Finishing to a specified extent

Toilets & Kitchen to be Operational

Selective

External Glazing & Entrance door to be installed

Minimum One Elevator Operational
Minimum One Coat of External Paint
Approach road & Road along the Building to be complete
Staircase to be operational
External Yard Hydrants to be Operational
Fire Fighting System to be operational
Common area to be finished
Basement with signage & Parking to be finished
Boundary Wall/Entrance gate/Security Cabin in position
Landscaping to a reasonable extent
Proper Lighting & Air Conditioning & Ventillation system operational
Gautam Arora

Risk in Project Implementation

Procurement, more than 50%

Material & Equipment

Mismanagement

Sizeable
Focus on speedy Project
Completion

Key Component
Cost Leakage shell life

Manipulation of Work

Vendors collude with employees

Quality deviations

Gautam Arora

Cont.
z

Contract & Others,

Single point of responsibility

Inadequate monitoring of Vendors

Source & Destination Analysis

Variations in Contract

LD, Termination, Suspension

Work Certification may be

Manipulated Milestones MIS

Variation clause may lead to claim

higher cost
Sub-contractor / Vendor may use the
weak clause as Rider to exploit the
Contract
Improperly defined Scope may lead to
Scope Creep & reiterated billing cycle.
Gautam Arora

Issues & Impacts

z

Equipment Mis-management
Preamble says, PM has
Licensed to Award Contracts
Non-Interference, any
Strong Control over Activities

Actual, PM has
Award Contracts to associates
More ordered than required
Hire Charges/Consumables
Invoicing,100%, used 25-30%
No due diligence on Contract
Performance

Siphoning of Funds & higher

Project Cost

Gautam Arora

Cont.
z

Statistical Mis-management
Idealistic Situation says

Award of Project to EPC Company

Recruit PMC
Cash Flows on percentage
Completion

Actual

Misrepresented Completion status

with over Invoicing - Provisions
Payment made for on Project Cost
instead for Actual Cost of Work
Need of the time & reputation /
recommendation of Vendor /
consultant Priority
Within Budget release payment,
not able to check calculations lack of knowledge & expertise

Gautam Arora

Procurement the RIDER

z

SUMMARY
Do we need what we are
Buying?

Are we getting what we are

Paying for?

Did we follow the appropriate

Procurement process?
Gautam Arora

Key Ingredients Managing Risk

z

Organization Structure

SOP & Internal Controls

Standardization & non deviation

Hotlines

Manpower & Man Managementbackground check

Regular Audit Experts, ISOs, PMOs

Risk cannot be eliminated entirely, it can be reduced with the right approach
Gautam Arora

Thank you

Gautam Arora