Predicting Profit Performance for Selecting Candidate International Construction Projects

International projects are inherently exposed to unpredictable and complicated risk scenarios. To minimize possible losses due to these risk exposures, construction firms have their own procedures or basic tools for selecting potential projects, but they are usually based on the experience and knowledge of the firm’s engineers and decision makers that are often very subjective and lack scientific basis. This paper presents a quantitative profit prediction model for the early stage of an international project as a systematic risk-screening tool that involves the processes of defining, analyzing, and evaluating various profit-influencing risk variables. Various successful and unsuccessful international project cases with respect to profit levels are collected. Then, a scale-based profit prediction model to select candidate overseas projects is developed through factor analysis and a multiple regression analysis. Finally, this paper provides implications for global project management and lessons learned from case studies to improve profitability for international projects.     

Capturing Knowledge in Construction Projects: Knowledge Platform for Contractors

Managing knowledge effectively is critical to the survival and advance of a company, especially in project-based industries such as construction. However, capturing knowledge in construction projects is a tedious task, as knowledge is usually experience based, tacit, and hard to pass on to others. In this study, a survey was carried out among eight leading Turkish construction contractors that are operating within the international construction market. The specific objectives of this survey are to find out how the tacit and explicit knowledge are captured, stored, shared, and used in forthcoming projects, as well as major drivers and barriers for knowledge management. Based on the survey, it was determined that most of these firms do not have a knowledge management strategy and a systematic way of capturing and storing tacit knowledge. A conceptual framework is proposed to formalize the knowledge-capturing process within construction companies. To demonstrate how the conceptual framework can be implemented in practice, a Web-based system, namely, Knowledge Platform for Contractors (KPfC) is presented. It is hypothesized that KPfC can be used to manage both tacit and explicit knowledge effectively in construction projects.     

Exploring Coordination Goals of Construction Projects

Effective coordination has been regarded in both theory and practice as a critical factor of success in construction projects. Previous coordination studies have focused on the time spent on coordination, its frequency, and its relationship with performance. However, coordination goals have received less attention, and their relationships with coordination methods and performance are not known. This paper studies coordination methods and goals for construction projects to identify what coordination goals are adopted and to what extent goals are achieved. In the research process, eight coordination methods and six goals were derived. A questionnaire was designed accordingly and sent to seven contractors for survey. Follow-up interviews were conducted with three or four managers and engineers from each contractor. The analysis results indicate that most coordination methods have multiple goals; written coordination methods such as plans, schedules, reports, and contract documents tend to have appropriate goals; and projects performed well by using coordination methods effectively to achieve the coordination goals.     

Improving Cost Estimates of Construction Projects Using Phased Cost Factors

Central to cost-based competition is the capability to accurately predict the cost of delivering a project. Most literature on cost estimation focuses on specific estimation methods as generic techniques and little attention has been paid to the unique requirements at each project stage. This note attempts to identify the critical factors for effective estimation at various stages of typical construction projects. Drawing from organization control theory and cost estimating literature, this note develops a theoretical framework that identifies the critical factors for effective cost estimation during each project phase of a conventional construction project. The underlying logic is that as a cost estimating effort progresses, both task programmability and output measurability improve. As a result, control effort will shift from input-oriented control to a combination of output and behavior control.     

Time-Cost Optimization of Construction Projects with Generalized Activity Constraints

Time-cost analysis is an important element of project scheduling, especially for lengthy and costly construction projects, as it evaluates alternative schedules and establishes an optimum one considering any project completion deadline. Existing methods for time-cost analysis have not adequately considered typical activity and project characteristics, such as generalized precedence relationships between activities, external time constraints, activity planning constraints, and bonuses/penalties for early/delayed project completion that would provide a more realistic representation of actual construction projects. The present work aims to incorporate such characteristics in the analysis and has developed two solution methods, an exact and an approximate one. The exact method utilizes a linear/integer programming model to provide the optimal project time-cost curve and the minimum cost schedule considering all activity time-cost alternatives together. The approximate method performs a progressive project length reduction providing a near-optimal project time-cost curve but it is faster than the exact method as it examines only certain activities at each stage. In addition, it can be easily incorporated in project scheduling software. Evaluation results indicate that both methods can effectively simulate the structure of construction projects, and their application is expected to provide time and cost savings.     

Estimating Performance Time for Construction Projects

The prediction of performance time for construction projects is a problem of interest to both researchers and practitioners. This research seeks to gain insight into the significant factors impacting construction duration by developing a regression model. Data were collected for 856 facility projects completed between 1988 and 2004. These data were analyzed using Bromilow’s time-cost (BTC) model (1969) as well as multiple linear regression. The multiple linear regression model was found to provide the most acceptable prediction. As in the BTC model and previous research reported in the literature, a significant correlation was found to exist between cost and duration. However, several other factors were also identified that resulted in significantly lower than average construction durations. These include projects completed within certain management groupings, managed by a certain construction agent, and designed by in-house personnel.     

Quantiative Methodology for Determination of Cost Contingency in International Projects

This paper presents a quantitative methodology to determine financial impacts of the risk factors during the bidding stages of international construction projects. Project and country data of 26 construction projects from 21 countries were collected for evaluation of the international risk factors. The factors impacting cost contingency were identified using correlation and regression analysis techniques. The results indicated that four factors had major contributions for explaining the variations in the contingency levels. A regression model including the significant factors was developed to support bidding contingency decisions. The methodology presented provides a robust and practical statistical approach for determination of contingency by focusing on important risk factors. Details regarding model development and validation are presented along with a discussion on study limitations.     

Reliability Buffering for Construction Projects

Buffering is a common practice in project planning. Project managers or schedulers have used a time contingency to guarantee the completion time of either an activity or a project. This traditional buffering, however, often fails to protect the project schedule performance, resulting in an unnecessary resource idle time. To deal with this problem, reliability buffering, a simulation-based buffering strategy, is presented. Reliability buffering aims to generate a robust construction plan that protects against uncertainties by reducing the potential impact of construction changes. The effectiveness of reliability buffering is examined by simulating a dynamic project model that integrates the simulation approach with the network scheduling approach. The research results indicate that reliability buffering can help achieve a shorter project duration without driving up costs by pooling, resizing, relocating, and recharacterizing contingency buffers. A case study of bridge construction projects also demonstrates how construction projects can benefit from reliability buffering in real world settings. Although further validation is needed, reliability buffering can potentially impact the planning and control of construction projects by improving the consideration of construction feedbacks and characteristics in buffering, and serving as an input to a dynamic project model.     

Estimation of Minimum Working Capital for Construction Projects in Malaysia

Forecasting cash requirements is essential for all contractors during the tendering stage since cash flow at the beginning of the project is a major cause of construction companies’ failure. Unfortunately, estimating minimum working capital (MWC) is not the mainstream practice of the majority of contractors in Malaysia, who find that the present models for estimating MWC are cumbersome and seldom give an accurate estimate. Therefore estimates of MWC made during the tendering stage need to be simplified so they can be prepared quickly with minimum input. It is important for the developer or owner to select a qualified contractor with competent financial backing. This paper establishes the relationship among the factors that contribute to MWC requirements and presents a simple model that could be used as a guide to estimate MWC for housing construction projects in Malaysia. The estimation is based on percentages of variables of contract value based on the historical data that influence MWC; the MWC obtained is then expressed in terms of percentage of contract value.     

Reconciliation of Owner and Contractor Views in Heavy Construction Projects

Delay and loss of productivity are the two main types of damage experienced by the contractor when the owner issues a change order. Courts have recognized critical path method schedule analysis as the preferred method of identifying and quantifying critical delays. As for the inefficiency damages, there is no direct way of measuring inefficiency due to its qualitative nature and the difficulty of linking the cause of the productivity loss to the damage. Most of the scholarly work published in this area was based on data supplied by the contractors; and that explains why there are discrepancies between what the contractor asks for and what the owner believes the contractor is entitled to. This study addresses the need for a statistical model to quantify the productivity loss from verifiable site data such as owner’s daily reports, change orders, drawings, and specifications, rather than rely solely on contractor surveys. A model is developed and validated to quantify the productivity loss in pipe work in roadway projects due to the change orders. The productivity loss study analyzed two sets of data that include: (1) variables that predict which of the two parties, the owner and the contractor, contributed to the productivity loss; and (2) variables that predict, from the legal viewpoint, productivity losses which only the owner is responsible for. The study showed the difference between what the contractor asked for and what he/she is actually entitled to. This model can be used by both the owner and the contractor to quantify the productivity loss due to change orders, and to offer an objective approach to reconcile their differences. This study concludes with an example to demonstrate the use of the model.     

Time-Profit Trade-Off Analysis for Construction Projects

This paper presents a multiobjective optimization model that provides new and unique capabilities including generating and evaluating optimal/near-optimal construction resource utilization and scheduling plans that simultaneously minimize the time and maximize the profit of construction projects. The computations in the present model are organized in three major modules: (1) a scheduling module that develops practical schedules for construction projects; (2) a profit module that computes the project profit; and (3) a multiobjective module that searches for and identifies optimal/near optimal trade-offs between project time and profit. A large-scale construction project is analyzed to illustrate the use of the model and to demonstrate its capabilities in generating and visualizing optimal trade-offs between construction time and profit.     

Causes of Bad Profit in Overseas Construction Projects

International construction projects do not necessarily produce a high level of profit, as opposed to what is generally expected of high-risk international attempts. Overseas construction projects tend to have various risk factors that can diminish project profitability. This paper provides a comprehensive hierarchical framework to investigate the cause-and-effect relationships of various profit-influencing factors for international construction projects. After long-term profitability trends are analyzed based on a total of 3,487 international projects performed by Korean global contractors during the last 4 decades, case surveys of 126 overseas projects are conducted to draw the criticalities of each factor and to develop a hierarchical framework. An in-depth comparative case study of 20 additional international projects is also performed to verify the applicability of the hierarchical framework. Finally, we present significant distinctions between successful and failed projects from the comparative case study.     

Contractors’ Views of the Potential Causes of Inconsistencies between Design and Construction in Saudi Arabia

The study identifies the causes of inconsistencies between the design and construction of large building projects. To achieve the study objectives, a questionnaire survey was carried out to collect information on potential causes of inconsistencies at the project design and construction interface. Responses from 27 contractors were analyzed. The results suggest that the involvement of designer as consultant, communication gap between constructor and designer, insufficient working drawing details, lack of coordination between parties, lack of human resources in design firm, lack of designer’s knowledge of available materials and equipment, and incomplete plans and specifications were considered as the most important causes of the project design and construction interface inconsistencies. On the other hand, project management as a professional service, weather conditions, nationalities of participants, involvement of the contractor in design conceptual phase, unforeseen problems, involvement of the contractor in design development phase, and government regulations were the least important causes of inconsistencies between professionals at the project design and construction interface in large building projects.     

Contractor’s Risk Attitudes in the Selection of International Construction Projects

International construction involves all of the uncertainties common to domestic construction projects as well as risks specific to international transactions. Consequently, despite the worldwide trend toward globalization, a very small portion of contractors actively seek international contracts due to concerns of probable failures. This paper describes findings from experiments done to investigate the risk attitude and bid decision behavior in the selection of international projects. The participants demonstrated either weak risk seeking in profit situations or strong risk seeking toward loss situations when choosing between conflicting options of risky opportunities and sure payoffs. On the other hand, another experimental test attempting to investigate bid behavior when making a realistic bid or no-bid decision in a complicated international construction project reveals the prevailing risk aversion. Further, this paper finds the experimental supports for some of the errors and biases due to risk attitude that commonly exist in bid decisions in this area. Finally, we present lessons learned and guidelines to make a qualified bid decision through feedback with the participants.     

Estimation of Cost Contingency for Air Force Construction Projects

Risk and associated cost overruns are critical problems for construction projects, yet the most common practice for dealing with them is the assignment of an arbitrary flat percentage of the construction budget as a contingency fund. Therefore, our goal was to identify significant variables that may influence, or serve as indicators of, potential cost overruns. We analyzed data from 203 Air Force construction projects over a full range of project types and scopes using multiple linear regression to develop a model to predict the amount of required contingency funds. The proposed model uses only data that would be available prior to the award of a construction contract. The variables in the model were categorized as project characteristics, design performance metrics, and contract award process influences. Based on the performance metric used, the model captures 44% of actual cost overruns versus the 20% captured by the current practice. Furthermore, application of the model reduces the average contingency budgeting error from 11.2 to only 0.3%.     

International Comparison of Cost for the Construction Sector: Purchasing Power Parity

The importance of the construction sector in national economies around the globe and the global nature of the industry require a prudent international comparison of construction costs. From the view of international construction ventures, cost comparisons have generally been accomplished using published currency exchange rates. Global organizations dealing with development aid and the comparison of the gross domestic product (GDP) of nations have used an approach that has its roots in established econometric theories. This approach is based on the Casselian purchasing power parity (PPP) doctrine that essentially conducts the comparison based on the local purchasing power of currencies, as opposed to exchange rates. The World Bank, which conducts the GDP comparison, uses the PPP-based approach to compare construction sector output. This paper provides an overview of the background and application of PPP and its use for international cost comparisons conducted for various nations. Methods currently used for construction cost comparisons are reviewed. A critical review of domestic construction cost comparison approaches is provided with the intent to identify the key differences between temporal and spatial comparisons. Case studies of construction cost factors are used to demonstrate the importance of PPP-based cost comparisons for construction economics.     

Analysis of the United States Department of Transportation Prompt Pay Provisions

In recent past the United States Department of Transportation has implemented a number of changes in regulations regarding federal-aid transportation projects. Some of these regulations are designed to help the disadvantaged business enterprise (DBE) firms and subcontractors in general, by requiring the general contractors to pay their subcontractors in a timely manner. Further, these regulations require that general contractors pay their subcontractors’ retainage after the subcontracts are completed, even if they have not received their own retainage from the owner. This paper reviews these new regulations and introduces a financial model for quantifying the effect of these new regulations on the contractors’ profit and the cost of transportation projects. The analysis is done using a spreadsheet-based cash flow model that takes into consideration the expenditure curve, the owner and general contractor’s payment and retainage policies, front money, finance charge on negative cash flow, and interest income on positive cash flow, and final payment and return of retainage policies. A survey was conducted among contractors in Massachusetts and their input was used to run the cash flow model. The results of the analysis for eight different projects are presented and it is shown that the new regulations, on average, reduced the contractor’s profit by 4.35%. It is also shown that the average potential cost increase for transportation projects is 0.14%.     

Lessons Learned from Principled Negotiation in International Construction Projects

Compared with other dispute resolution approaches, negotiation is still the easiest, most efficient, and most time- and cost-saving approach, if conducted appropriately. However, dispute resolution in international construction projects faces many unique challenges. This requires effective negotiation approaches, principles, and strategies. Although principled negotiation has been developed for more than two decades and is widely accepted by academics as an effective approach to solving conflicts and disputes, its applications in industries are still very limited. Practitioners need applicable guidelines and lessons learned. This paper, by reviewing and analyzing the negotiation processes in two international projects, discusses the key challenges facing construction dispute negotiation and the applications and limitations of principled negotiation in dispute resolution.