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CONSTRUCTION CONTRACT MANAGEMENT Reg. No.

211-09-11-9912-2134

ASSIGNMENT

Contract administration and monitoring is the most important area of construction management. Contract administration process should start right from the day work is assigned to the company. Discuss any project contract currently in progress with your company and how administration and monitoring is being done. Draw the organization chart for this activity and explain all the functions carried out. Do you think the system is achieving results? Discuss.

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CONSTRUCTION CONTRACT MANAGEMENT Reg. No. 211-09-11-9912-2134

(A)

What is Contract ?

An agreement enforceable by law is Contract. The contract invariably follows a proposal from one party and its acceptance by the other. In absence of any of the above elements of a contract it becomes void, i.e. without a legal effect or voidable, i.e., which can be avoided by any of the parties to it. The term contract, so far as Public Works Department is concerned, means a written undertaking for execution of works or supply of materials or for the performance of any service connected therewith duly accepted and registered by the competent authority on behalf of the Union or State Govt. Contractors and their qualifications

(B)

In the above context the term Contractors mean Private individuals, Partnership film, Public or Private Limited concerns who have made such an undertaking for the execution of works, supply of materials, or for services concerned therewith with the respective Govt. In relation to Public Works the following Categories of contractors are generally enlisted (a) For Building and Rods (B&R), (b) For Sanitary installations and water Supply, (c) For Electrical and Air-conditioning, (d) For Furniture. Each of these categories of contractors should have an engineering organization competent to deal with works entrusted to them. Contractors at (b) and (c), must possess valid Plumbing and Electrical Licenses respectively. Each of them is expected to have the

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CONSTRUCTION CONTRACT MANAGEMENT Reg. No. 211-09-11-9912-2134

machinery and equipment required for the job. Their qualifications are further adjudged from (i) the professional ability to understand and implement the contractual obligations and subsidiary instructions given by the Engineer-in-charge of the Department, (ii) there financial resources, (iii) their capacity to control labour, particularly by way of regular payment of fair wages and observance of Labour

Regulations, (iv) and their zeal for maintaining reputation and integrity. Following are the different types contractors for execution of civil Engineering Works. 1. Item rate contract, 2. Percentage rate contract, 3. Lump-Sum contract, 4. abour contract, 5. Materials supply contract, 6. Piece Work Agreement, 7. Cost plus percentage rate contract, 8. Cost plus fixed fee contract, 9. Cost plus sliding or fluctuating fee-Sale contract, 10. Target contract..

Beside these there are (a) Measured Contract or Schedule Contract, (b) Negotiated Contract, (c) Rate Contract and, (d) Turn-key or combined Engineering and Construction Contracts.

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CONSTRUCTION CONTRACT MANAGEMENT Reg. No. 211-09-11-9912-2134

1. Item rate contract is also known as Unit-Price contract or schedule contract. For item rate contracts, contractors are required to quote rates for individual items of work on the basis of schedule of quantities furnished by the department. This schedule indicates full nomenclature of the items as per sanctioned estimate, estimated quantities and unit therein. While filling up the rates, the contractors are required to express the amount in figures and words and also to work out the cost against each item. The final total of the amount tendered for the work is also drawn up by them. This type of contract is followed by Railway department. Advantages : (i) This form of contract ensure a more detailed analysis of cost by the contractors and as such is more scientific. The departmental officers are to work out the schedule of quantities against each item of work and the contractors are to work out the rates agains each item. The element of uncertainty and guess which is inherent in the use of percentage rate contract is altogether absent in item-rate contract and the authority competent to accept the tender can easily check the rates with reference to his own calculations and decide which of tender is favorable. (ii) Since the contractors are to write down their individual rates of separate items in figures as well as in words, it is not easy to form a ring during submission of tender and to allot a work to one of the contractors without competition

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Disadvantages : (i) Comparative statement of item rate tenders is more elaborate and comprehensive and intelligent scrutiny is required. A mistake in it, may lead to the work being awarded to a contractor who is not the lowest tendered.

2. Percentage rate contract :- In this form of the contract the department draws up the schedule of item according to the description of items sanctioned in the estimate with quantities, rates, units and amounts shown therein. Thus the department fixes up the item rates of the tender (so called as item rate tender). The contractors are required to offer to carry out the work at par with the rates shown in the specific price schedule or percentage above or below the rates indicated in he schedule of work attached to the tender. The percentage above or below or at per, tendered by the contractor apply on the overall quantities. Advantages : (i) This type of contract is convenient in so far as the lowest rate and comparative position amongst the contractors are readily known just on the opening of the tender. (ii) As there is no provision to quote contractors own rate for an individual item, benefit due to increased quantity with a beneficial rate cannot be availed of by a contractor. thus there is no possibility of unbalanced tender.

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(iii)

Comparative statement can be prepared quickly and there is no possibility of tampering with the rates by a contractor in order to be the lowest tendered.

Disadvantages : (i) Since the contractors are to write down only the percentage above or at par or below, it is very easy to write such a rate in few minutes before the time of submission of the tender. also the correction of the percentage rate is only at one place. Thus the tenders can easily form a ring even up to the time of submission of tender in order to allot the work to a particular contractor at a high rate without actual competition. This leads to drainage of Government money.

3. Lump-Sum contract : In this form of contract (P.W.D form. 12) contractors are required to quote a fixed sum for execution of a work complete in all respect i.e. according to the drawing, design and specifications supplied to them with the tender within the specified time. The departmental schedule of rates for various items of work are also provided which regulates the payment of the contractor in respect of the items of works involved for any additions and alterations not covered by the original work.

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Advantages : (i) It has the advantage that the owner knows beforehand exactly what the work will cost. (ii) Detailed measurements of the work done are not required to be recorded except in respect of additions and alterations. (iii) Since the complete picture of the work from detailed drawings and also total cost of work are known beforehand, excellent planning and efficient management for execution of work is more convenient. Disadvantages : (i) Under such a contract it is essential that the work be accurately and completely shown on the drawing and described in the specifications and that full information as to site conditions should be available, otherwise dispute can easily arise. (ii) Difficulty arises in making any intermediate payment; generally a certificate is given by a responsible officer to the effect that, by superficial or general measurement, he has satisfied himself that the value of the work is not less than a specified amount in conformity with contract agreement.

4. Labour contract : This is a contract where the contractor quotes rates for item work exclusive of the element of materials which are supplied by the Department free of cost.

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Advantages : (i) (ii) The materials stored by the Government are thus utilized. The increase in the cost of the work is checked inspite of any rise in the prices of such materials in the market. Disadvantages : (i) There may be delay in obtaining the materials by the departments consequently the contractor is required to keep himself in touch with the day to day position regarding the supply of materials from the department. (ii) Theft from store, shortage of materials, difficulty during handing over storage charge, accounting all materials are constant worries for a department. (iii) Refund of surplus departmental materials by a contractor in a good condition, wastage, demurrage etc. are also involved in this type of contract.

5. Materials supply contract or contracts for the supply materials :In this form the contractors have to offer their rates for supply of the required quantity of materials, inclusive of all local taxes, carriage and delivery charge to the specified stores within the time fixed in the tender. This form of contract is generally used when purchase of materials viz. bricks, stone, chips, furniture, pipes and specials etc.

are involved. All materials received should be examined and counted or measured, as the case may be when delivery is taken.
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Advantages (i) Payment of this type of contract can be made promptly and so the contractors try to take the supply order even at less profit, resulting low cost of the materials. (ii) As the supply of materials is taken through a contractor, the department receiving the supply of materials is not worried due to loss of materials, breakage, demurrage charges during transit. Disadvantages : (i) Constant control for quality of materials to be received in several batches at different times is required. (ii) During submission of tender intending contractors may form a ring to get the supply order at a higher rate at different turns.

1. Piece-Work Agreement :- As the name signifies the piece work Agreement it that for which only a rate is agreed upon without reference to the total quantity of work to be done the quantity of work to be done within a given period. In case of petty work valued up to Rs.10.000/- each inclusive of cost of materials may be carried out through contractors by Piece-Work Agreement. It this type of agreement detailed specifications and the total cost of the whole work to be done are mentioned. It is terminable from either side at anytime and cannot be called a contract in true sense. Work may be executed under simple work order agreement form (as shown next) ; there is no security money and penalty claus
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Advantages : (i) Urgent small work may be taken up for execution without inviting tender and considerable time is saved. (ii) If a contractor delays to execute the work or uses inferior quality of materials of leaves the work partially complete, another contractor may be engaged at any time. Disadvantages : (i) For this type of small work approved contractors find little interest and as such work is entrusted to petty contractors having little experience in management system and adequate knowledge to carry out the work according to departmental procedures.

2. Cost Plus Percentage rate contract :- In tendering for work on a Cost plus basis the contractor is paid the actual cost of the work, plus an agreed percentage in addition, to allow for profit. This type of contract is generally adopted when conditions are such that labour and materials rates are liable to fluctuate. In adopting this system of tendering no Bill of Quantities or Schedule of Rates has to be framed but the owner or the Department should carefully define the actual cost and record exactly what is permissible in the cost of the work.

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Advantage of cost plus percentage rate contract :(i) It has the merit that contracts can quickly be drawn up and agreed and also work of an urgent nature put in hand completed without delay. It is for this reason extent during war period when urgency prevails and work is required to be short notice. (ii) This type of contract is suitable when work can not be executed by other type of contracts at a competitive rate due to uncertainty and fluctuation in the market rates of labour and materials. Disadvantage of cost plus percentage rate contract :(i) Close supervision and checking of delivery notes and invoices which it involves, makes it unsuitable for works where the necessary staff is not available. (ii) It is to the contractors advantage to make the cost as high as possible by wasting materials and employing inefficient workmen, as the contractor takes little risk and his profit is assured. This form of tender is not popular with contractors, despite the fact that they can not lose on it, for it tends to spoil the dashing qualities of those carrying out the work.

3. Cost Plus fixed fee contract :- In this type of contract, the contractor is paid by the owner an agreed fixed lump-sum amount over and above the actual cost of the work. This fixed fee shall cover overheads and profit to the contractor. The fee does not vary with the actual cost of the work as in the case of cost plus percentage rate contract.
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Advantages Cost Plus fixed fee contract :Since the fixed fee cover the contractors overhead charges and profit the contractor shall naturally try to complete the work speedily in order to earn his fee as soon as possible.

Disadvantages Cost Plus fixed fee contract :This form of tender is not popular with contractors, despite the fact that they can not lose on it. The contractor shall try to complete the work as early as possible even by purchasing materials at higher rate and engaging labour at high charge and thus the owner may lose a reasonable amount to carry out the work of this type of contract.

4. Cost plus sliding or fluctuating Fee scale contract :- In this type of contract the is paid by the owner the actual cost of construction plus an amount of fee inversely variable according to the increase or decrease of the estimated cost agreed first by both the parties. Thus higher the actual cost, lower will be the value of fee and vice versa. Advantages :In this case a contractor shall not try to increase the actual cost, as in the case of cost plus percentage rate or shall not be indifferent to in the case of cost plus fixed fee contract because interest of a contractor is totally involved with the variation of the actual cost. The actual cost is thus lower and lower so both the owner and the contractor will be benefited. This is the best of the cost plus type contract.

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Disadvantages :The estimated cost must be very accurately determined. In case the estimate is much higher than the actual cost due to inefficiency of the estimator, a contractor will get more amount on the basis of savings and vice versa.

5. Target contract :- This is the type of contract where the contractor is paid on a cost-plus percentage basis for work performed under this contract, and in addition he receives a percentage plus or minus on savings or excess effected against either a prior agreed estimate of total cost or a target value arrived at by measuring the work on completion and valuing at prior agreed rates.

Advantage: The contractor is encouraged to use his skill and experience in keeping the cost as low as possible. This type of contract is profitable to both the contractors as well as to the owner.

Disadvantage : The contractor may show higher cost of construction and thus he gains more amount even covering the penalty for excess expenditure.

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11.Measured Contract or Schedule Contract :- Except lump-sum contract all other types of contracts are measured contracts. In this case the total cost of a work is worked out by detailed measurement of different items of work after its completion. A bill is then prepared by multiplying the measured quantities by their respective rates. Examples of measured contracts are item rate contract, percentage contract, cost-plus type contract material supply contract etc. but not Lump-Sum contract.

12. Negotiated Contract :- When work is awarded on contract by mutual negotiation between the parties without call of tenders, it is said to be a negotiated contract. It may be in any of the forms mentioned in 1,2,3 and 5 of 20-3,. In the Public Works Department the contracts are negotiated only in special circumstances with a view :(i) to obtain reasonable rates or (ii) to meet the situation arising out of emergency, viz, construction of shelters for displaced persons, or strengthening Runway for national defense etc. at short notice. Advantages of this system are that it brings some economy in expenditure . The parties selected being always reliable and financially sound it ensures uninterrupted work with less chances of dispute.

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13. Rate Contract :- In order to supply some manufactured articles or materials like pipe, A.C. sheets, cast iron specials , type of office furnitures, type writing machine etc. the Director General of Supplies and Disposal of Central Government invites tender and fixes rates of such articles and makes rate contract with the manufacturer or supplier to supply the articles of materials for a certain period which is known as Rate contract. In short

his is known as D.G.S. & . rate contact. In Government departments there some officers in the rank of Superintending and Chief Engineer who are enlisted as Direct Demanding Officers. They are authorized to place supply orders direct against this contract and they will endorse copies of such orders to the Controller of Accounts, department of Supply and Director Inspection. The prices of materials or articles remain firm and fixed during the currency of the Rate Contract except for the price variation conditions. Direct Demanding officers are authored to place the supply order directly through a prescribed form and there is no monetary limit for placement of supply order by the Direct Demanding (D.D.O.).

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2.1 Main data (related to project) The project referred to was to the relevant to the engineering and construction of a major integrated dam project in an India country, whose development was at a medium level and whose economic system was mixed. The complex was composed by : services units of utilities (Power generation) piping interconnection and storage system, auxiliary building and civil works (rods, office building, workshop, warehouses, canteen, gatehouse, etc.) The project was studied to be completed in different phases, in order that phase still through the engineering process. In order to have an idea about the magnitude of the project, reference could be made to the following data : concrete : 17000 m3 (cubic meters) piping : 360 M earth work : 4500000 cum masonry work : 75000 cum colgrout : 12000 cum pitching : 120000 cum standard man hours : 16.500.000 hr actual man hours : 28.000.000 hr. about construction time:4 years manpower on site :450 people (average), direct manpower 400 people value of the construction works (2000-01)=134 crore : 900.000.000 E
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2.2 Contractual organization

At the beginning, the purpose of the Owner has been to assign the whole of the project, engineering and construction, to s major Indian General Contracting company; the bidding process, however, was open also to Indian companies.

The first bidding process did not give any result: at that time, no one of the General Contractors in the world was willing to assume the whole responsibility of this project. To be noted that, at that time, the political risk of the country was still high.

The owner decided to manage the works by itself, assigning to various contractors the engineering and the construction works, separately. In reality, the owners structure was able to manage plants in operation, while they had no experience at all in engineering and construction, so co-ordination problems started. Initially those problems were due to discrepancies between engineering of different companies. The owner then decided to put in charge a project Managing Contractor. They called a major engineering company with a wide experience in general contracting of infra project.

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2.3. Partied involved

a. Owner The Owner was actually a Maharashtra Krishna Khore Corporation, Pune, whose scope was the management of many project already in operation as well as of the project under construction. In Owner under consideration the organization was composed by 11 members, three of whom involved in the project, namely: the construction Executive engineer with a wide professional experience, he was actually the project Director, The planning Executive Engineer The Owner Representative on site was a top manager whose title was construction Manager ( note that title was not properly used). The functions belonging to the Owner were the following: Financial management of the project, representation in front of other Government bodies and Authorities, Management of the complex after its completion. purchase of local material, Transportation of imported material to site. management of site warehouses. general site services (camp for workers, offices, power, etc.)

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b. Project Managing Contractor (PMC) The functions belonging to PMC were the following : Integrated Project Management, including general management of the project, with all powers to manage the contracts with all the involved parties and without the power of modifying those contracts, Operating management of the construction contracts, Planning, scheduling, progress monitoring and project control, cost control (limited to construction) co-ordination to head office activities, management of site engineering, Quality assurance. Training of the personal of he Owner (administrative management) Assistance to the Owner in relationship with other Govt. Bodies or Authorities.

C. Engineering Contractors or process Unit Contractors (PUC) The functions belonging to PUC were: Process Engineering, Licenses, Technology. Engineering, Purchase of material to be imported, transportation to FOB. Technical Supervision to site warehousing.

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Technical supervision to the construction works (to assure that the works were executed as designed and engineered), site engineering. Technical supervision to pre commissioning and commissioning. Training of the personal of the Owner (technical)

D. Construction contractors Major national or International contractors with a proper organization, their task was construction, installation of the imported material, pre

commissioning and commissioning of the petrochemical plant properly so said. they were using its own manpower and equipment, while construction material was given by the owner.

E. Civil Contractors Minor local civil contractors whose task was engineering and construction of the ancillary building, roads, fencing works, etc.

3 . Planning and project control Planning and project control were very sophisticated, based on PMCs technologies, extremely advanced at that time. The planning and project control procedure included : a master plan and a detailed scheduling, a weekly progress monitoring procedure and report, a monthly complete project control procedure and report, a monthly cost control procedure & report, Updating of scheduling whenever needed.

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4. Organisation of PMC PMC was a major engineering and construction company, whose scope was to act as consulting engineer and general contractor, with several hundred of employees. The company was organized by functional departments with co-ordination in details: The company was acting as CMD of all companies belonging to the same group (so he was actually the CMD of the group) The Vice CMD Chairman & Managing Director was the real Chief Executive of the company. directly under the Vice Chairman : The General Manager. Administration and Finance Dept. (accounting, bookkeeping,

treasury, finance) Human Resources and Organization Dept. Technology Dept. (Technologies, Patents, Licenses) The General Manager Would have been correctly defined as Operating Manager, since a lot of general management functions were belonging to the Vice Chairman; under the General Manager, The Engineering Manager (Project Co-Ordination, Planning and project control, engineering, Purchase, marketing and proposal), The organization of every single project was composed by Project Manager (under the General Manager), with full power of representation, regarding the project, towards external parties, but without strong internal powers,

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Project Co- Ordinate , (Under the Engineering Manager), who was the real governing authority of the project, Project staff (Project engineers, Contract manager, business manager, project comptroller), Site Manger (under the Construction Manager) and his Staff (construction Manager, site engineers, etc.), in each country a Resident Manager (under the general manager) and his Staff were in charge for all local administration,

representation and legal problems. It was actually the normal organization structure of a major engineering and construction company, with some peculiarities. The weak points were not enough power given to co-ordination and too much power given to Engineering and Construction Areas. The Consequences were a weak project management and a weak general management, in reality the chief executive was the Vice Chairman while the real general management was divided between the engineering and Construction Managers.

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5.Organisation of the project

a. Project Managing Contractor The Project Managing Contractors project organization was as follows: Head Office : - Project Manager and project Co-ordinate were the same person, as a matter of fact this was not considered as an important one, if compared to general contracting but as an experimental project, - Project Staff as above Country Office : since the company had several contracts in progress in the same country together with a continuous marketing activity, there was a Resident Manager in the capital town together with his staff. Site Organization : The Site Manager was the real governing authority of the project, at least locally; he was the manager accredited

towards the Owner. He was assisted by a Vice Site Manager. The site Organization was composed by: The Office Manager and his staff (accounting, site treasury, Personal, Local general services), The Planning and project Control Dept., composed by the Planning & Project Control Manager, two Planning Engineers, One Cost Engineer and four to five Assistants
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The Contract Administrator, The Site Engineering Manager, The Quality Assurance Manager, The data Processing Dept. (Mainframe on site), The Material Manager (Transportation, warehouses), The Construction Managers, with a matrix construction organization formed by Area Managers and by functional departments (civil,

mechanical, electrical, instrumentation, painting and insulation, pre commissioning).

b. Engineering Contractors

Major or middle size engineering companies. The head office engineering was organised in an independent matter and was not under the effective control of PMC . Locally their structure was limited to the technical staff under the supervision of a Manager.

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c. Construction Contractors They were differently organized. The major between them, whose contract was to make civil and installation works of five process units plus four utilities, was organised with the following scheme: the site & Construction Manager, was the overall responsible for all the activates as well as of the representation and legal problems of the company towards the local Authorities, as well as the full responsible for construction management; under him there were The indirect functions for administrative, financial and legal problems, The Planning Manager, who was also deputy of the Site Manager with some general co-ordination functions, The civil work Section, The Mechanical Section, The Electrical and Instrumentation Section, The Painting and Insulation Section, The road Work Section; -to be noted that some works were sublet to Subcontractors, creating some further problem and the need of a proper sub organisation with in the Mechanical and Electrical Sections.

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d. Relationship between Owner and Project Managing Contractor

it is worthy to note, between Owner and PMC, there was a very complicated network of relationship. As a matter of fact, since PMC was supposed to train the Owners staff, people from Owners organization were assigned, for this purpose, to different PMCs offices or departments. The relationship between these people, the chief of PMCs office and the chief of Owners corresponding office can be summarized as follows: PMC had the full power to assign duties and to define the level of discretionarily for each person to work, to decide start and stop of the various duties, to assign priorities and to check the execution of such duties, while PMC had no power about selecting and deselecting people (only limited powers to reject unsuitable persons), moving to an office to another, job evaluation and careers, holidays.

Useless to say that the above could have been improved, it was far from being perfect. The relationships between two different organisations due to cooperate or, like in this case, the injections of key-personnel from one organisation into a second one, should be carefully studied and contractually defined in detail. In the case under study, the results were that organisation and project control were good, enough detailed and reliable, it was possible to know every week the real progress
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(planned versus actual) in several aggregated or disaggregated forms, responsibilities for delays were clearly attributed to the really responsible party, while delays could not be avoided nor kept under strict control; PMC was able to suggest the proper corrective action but was not enough strong to impose its implementation; the main reasons of delay (transportation, construction manpower) were not actually under PMC control.

To be reminded that The term Project Director (in British terminology Project Manager, lev 5) identifies the person in charge for the main decisions relevant to the project , including decisions relevant to budget, contracts, major changes, suspensions, scope of works, he is also a key-person in the initial decision, whether to go on with the project or not, while the term Project Manager (in British terminology Project Manager, lev. 4) identifies the person in charge to manage the project, within assigned budget and contracts, with full power of interference in the management of all the departments as well as in the operations of contractors and subcontractors, The term Project Co-ordinator identifies a co-ordinator with limited or without powers of interference.

The project management does not change if it is done directly by the Owner, by the Owner through a PMC or by the General Contractor:

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in the first case the owner shall have the whole project management staff, with the functions of planning, monitoring, contracting etc., both Project Director and Project Manager shall belong to owners organisation while engineering and construction shall be done by the relevant contractors; in the second case the Owner shall have only the Project Director with a limited staff, while project management with all the involved function shall be given to PMC people; in the third case all functions shall belong to the General Contractor, who shall therefore have both Project Director and Manager; the owner shall have a Director in charge (Project Director, Program Director) with a limited staff and sometimes shall rely on an external consultant and Project Monitoring or Auditing Contractor in order to keep under control what the General Contractor is doing.

when the project is made under full project financing, the criteria do not change while the organisation could be different. In these cases, in general, a proper project company (Special purpose vehicle) is formed, whose study is beyond the limits of this paper.

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References: construction contract and management book valuation in civil engineering book , m chankraborti paper on organization and project management of a major industrial engineering and construction project

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