BFC31602 Chapter 1

Chapter 1
Construction Industry and

Contract Management
Prepared by: Dr. Azeanita Suratkon

Contents
Introduction to Construction Industry
Project Management, construction management

and contract management
Parties involved in construction project and

contract management
Stages and processes of construction project

Construction
3
Construction refers to the processes of building physical

structures and related activities.
The end products are site-specific and for each product the
processes involve elaborate commissioning, design,
management and assembly of resources human, finance
and materials over a period of time.
It encompasses all types of buildings, all civil engineering

works and the repair and maintenance of existing structures.
Construction
4
The Malaysian Industrial Classification (M.I.C) refers to

construction as:
new construction, alteration, repair and demolition.
Installation of any machinery or equipment which is built-in at the
time of the original construction is included, as well as installation
of machinery or equipment after the original construction but
which requires structural alteration in order to install.
The M.I.C categorises construction works into 2 categories:
General contracting covering residential, non-residential,
civil and engineering construction.
Special trade contracting - covering specialist works such as
metal work, electrical, refrigeration and air-conditioning,
carpentry, planting, etc.
Construction
5
Category of
Construction
CIVIL
BUILDING
ENGINEERING
CONSTRUCTION
CONSTRUCTION
Industrial Dam
Agricultural Port
Community Airport
Residential Highway
Educational Sub-marine pipeline
Recreational
& medical social.
The Environment
6
3D Dirty, Dusty, Danger.
Gathering of multi-sector industries.
Installation process or combination/compilation

construction materials or building components.
A manufacturing process?
The Characteristics
7
The products are heterogeneous

The final process is in-situ
The product is unique
The output consists of capital goods
Separation of design and construction responsibilities
The setting up of ad-hoc team
Methods of price determination
Risks
The Characteristics
8
The products are heterogeneous

The products are different in terms of design, size, location
and in terms of end-use.
The products differ widely in terms of the materials and
techniques used in production.
The final process is in-situ
The finished products are generally permanent in the
particular location where the construction takes place.
Consequently, the final process of construction must be in-
situ, although some sections of the completed products may
be produced elsewhere.
The Characteristics
9
The final process is in-situ (contd)

There is a limit on the potential for prefabrication. Prefabrication
refers to using component parts or sections of a structure
produced elsewhere, perhaps on the basis of economies of scale.
There must always be a balance between the savings that may be
gained from prefabrication and the ensuing costs of
transportation of components parts or sections of a structure to the
construction site.
Since the products of construction are site-specific, generally they
cannot be produced in advance of demand but rather have to be
sold before they are produced. Construction therefore, follows a
sequential process of planning, ordering and the final production
on the particular location where they are required.
The Characteristics
10
The output consists of capital goods

Capital or investment goods refer to products required for
the production of other goods or services in an economy.
The products of construction including roads, railways, air
and sea ports, telecommunication, electricity generation and
transmission, water supply, buildings for factories, offices,
hospitals, schools, houses, etc. are all regarded as capital or
investment goods.
This makes the construction sector highly susceptible to
variations in the level of activity in the economy.
The Characteristics
11
Separation of design and construction responsibilities

The general trend in the construction sector is that the party that
designs the project is normally different from the party that
constructs the project.
This approach referred to as the traditional system of construction
procurement follows a pattern of activities that is sequential in
nature: a client engages a team of designers to produce design
tender documents are prepared and tenders are invited from
contracting firms award the project to successful contracting firm.
However, there are alternative approaches (such as design-build
or turnkey system and management-oriented systems) were
developed in response to problems that may arise from the
separation of the responsibility for the design from the
responsibility for construction.
The Characteristics
12
The setting up of ad-hoc team

A construction project requires the setting up of an ad-hoc
team consisting of persons and firms, each specialising in a
particular area of expertise, to work together to complete
the project.
Since a construction project is one of its kind it is unlikely for
the same team to work together again and if they do so it
would be for a different project and in a different location.
The Characteristics
13
Methods of price determination

The common methods used for determining price: measurement-
based method and cost reimbursement-based method.
Measurement-based method the contractor is paid for the
work based upon the actual quantities of work that formed the
finished project multiplied by the respective unit rates. The
quantities of work is measured prior to commencement or
alternatively after the work is completed. The contractor is also
paid for costs of plant hire, temporary materials, contractors
overheads and profits, etc.
Reimbursement of costs method the contractor is paid for the
actual costs of materials that have been used, the time spent on
the project by the operatives and an agreed amount for the
contractors profit and overheads.
The Characteristics
14
Risks
Construction work involves risks, the level of risk is considered much
higher than in other types of economic activities.
A construction entrepreneur moves from one location to another, organise
the logistics required to complete each project, and follows a bespoke
design for each project.
Most contracts are awarded through some forms of competitive tenders
contractors have to estimate the cost based on assumptions about
many factors including weather, site conditions, availability and
productivity of labours, availability and timely supplies of materials and
plant, time constraint, interest rates, political and social scenarios, etc.
The Characteristics
15
UNIQUE
TIME CONSUMING
FRAGMENTED INDUSTRY
RELYING TO OTHER
INDUSTRIES CHARACTERISTCS JOB OPPORTUNITIES
OF
CONSTRUCTION
LACK OF INDUSTRY
COORPERATION RISKY INVESTMENT
SEPARATED PROCESSES
VAST WORK LOAD
COMPLEX
ORGANISATIONS
Project Mgmt, Construction Mgmt & Contract Mgmt
Project Management
16
Project: A temporary endeavour undertaken to create a

unique product through a set of inter-related tasks (Proj.
Mgmt. Inst.).
In engineering/construction industry, e.g. a building project
would constitute a temporary endeavour where a myriad of
skills and materials are brought together to create a unique
product (i.e., the building) through a set of inter-related tasks
(i.e. the relevant activities)
Project Management: The planning, monitoring and control

of all aspects of a project (i.e. financial, technical,
administrative etc.) and the motivation of all those involved
in it from inception right up to eventual completion with the
ultimate objectives of delivering the end product within the
specified cost, time, quality and performance.
Construction Management
17
A term used to describes:

the particular type of contract procurement method or
the actual process of running of a construction project
The planning, monitoring and control of all aspects of the
construction process from pre-tender to the completion stage.
Entails the planning, monitoring and control of essentially the
construction aspects of a project.
The scope of construction management includes not only the
activities pertaining to the construction stage but also all the
preliminary enabling matters at the pre-contract stage.
Construction management is weighted heavily to the construction
process.
Contract Management
18
Contract:A legally binding agreement between two or more

persons which creates mutual rights and duties, enforceable at
law, or
a legal device for conducting exchanges between parties/
binding parties to future performance.
ContractManagement: A term to describe the control and

administration of the legally binding agreement between
two or more parties from its inception up to its final discharge.
Scope of Contract Management

19
theplanning for the legal framework or transaction that is to

be entered into by the parties to a project;
The administration and enforcement of the provisions,
procedures and practices (as expressly or impliedly
stipulated) in the contract
The management of the roles, responsibilities, powers,
rights, duties and liabilities of the contracting parties
The implementation of relevant sanctions to induce
performance or to compensate for the non-performance on
part of the parties
Firstline resolution of disputes between the contracting
parties
Purpose of Contract Management

20
The contract entered into by the parties is efficiently and fairly

administered to ensure that:
the parties perform their respective obligations/duties under
the contract fully;
each party to the contract receives the full benefit due under
the contract;
the contract is completed within the time frame and cost
agreed between the parties;
the quality of the finished product as agreed upon by the
parties is not compromised in terms of material, workmanship
and design (as applicable); and
disputes and contentious issues are minimised or resolved
completely without having to resort to litigation or arbitration.
Parties involved in construction project & contract mgmt
Construction Stakeholders
21
Public Private
Sector Sector
Architect
OWNER /
DEVELOPER
Planner
Project Mgt. Engineer:

Federal
Consultant C&S, M&E
APPROVING Quantity
State CONSULTANTS
AUTHORITIES Surveyor
FINANCIER
Landscape Interior
Local
Architect Designer
Finance
Bank Land
Company
Surveyor
Other
Credit Leasing
Nominated MATERIAL & BUILDERS / Specialist
Corporation Company
Supplier EQUIPMENT SUPPLIER CONTRACTOR
Manufacturer Main Nomi. / Sub-

Contractor Contractor
Importer
MANPOWER
Distributer
Skilled Semi-Skilled Un-Skilled

Technologist Technician
Worker Worker Worker
Employer
Also called the client/ purchaser/ authority
Normally the person or party who wishes to have
development project constructed on a piece of land
The employer is the most important party to a contract as
he is in reality the paymaster who initiates and ultimately
uses the tangible fruits of the contract.
The employer may be a public entity (government bodies)
or private entity (developers/ owners/ investors).
He will appoints consultants, employs contractors and supply
the necessary fund to implement the project
22
Contractor
The contractor is the person or legal entity (partnership or
company) who under the contract is actually entrusted to
carry out construction works.
He is variously labeled as the contractor, the builder, the
installer, the erector, etc. depending on the nature of the
contract involved.
Construction development can only remain at blue-print and
drawing board stage without contractor and builders to
actually translate the project into reality.
23
Contractor
Owing to the complexities of the nature of the contracts
entered into between the employer and the contractor, the
contractor may be further described as a:
main or general contractor; or
turnkey contractor; or
design and build/design and construct contractor; or
management contractor; or
construction management contractor
Normally these contractors enter into a main contract with

the owner for the execution and completion of a construction
contract.
24
Sub-Contractor
A sub-contractor is a person or firm to whom part of the

main contract works are sub-let.
A sub-contract is a contract made between a main-
contractor and another contractor (sub-contractor) for part
of the work which the main contractor has already
contracted to carry out as part of his contract with the
employer.
25
Sub-Contractor
Depending on the complexity of the works, the specialist

skills required, the extent of detailing or design work
involved, the method of contract procurement adopted, sub-
contractors can be further classified as:
domestic sub-contractors; or
nominated sub-contractors; or
designated (or named) sub-contractors; or
selected sub-contractors; or
specified or named sub-contractors.
26
Sub-Contractor
Nominated Sub-Contractor (NSC)

Specialist contractor nominated by owner/architect/
engineer, who sign their respective sub-contract with the
main contractor and perform their respective duties and
responsibilities under sub-contracts.
In Malaysia, there is a prevalent practice of sub-contractors
further sub-letting portions of their work to an array of sub-
sub-contractors, i.e. labour, material supply, fabrication,
erection/installation, etc.
27
Supplier
A person or firm undertaking the supply of goods or
materials to a contract. The suppliers contract is with the
main contractor
In essence, a supplier is a sub-contractor concerned solely
with supplying goods or materials as compared to
undertaking services or labour.
As for sub-contractors, a supplier may be a domestic/
nominated/ designated/ selected/ specified supplier.
In practice, the common types of suppliers encountered are
of the domestic, nominated or designated types.
28
Professionals
The professionals are not parties to the various contracts
employed between employer and main contractor, main
contractor and subcontractor, and sub-contractor and his
sub-contractors/suppliers.
The professionals may have his own services agreement
whereby he may contract to undertake either all or some of
the following work depending on his term of employment:
design work; supervision work; contract administration;
auditing or independent checking of turnkey/design &
build contractors work; project management; facilities
management.
29
Professionals
Owing to the peculiarities of Malaysian law, in most
instances only the qualified person is entrusted with the
design and supervision of the works undertaken.
The definition of the qualified person encompasses mainly
architects and engineers.
30
Architect
In most building projects, i.e. of the traditional general
contracting type, the professional team during the design and
construction stage is normally led by the architect.
Person who practises the profession of architecture and usually
submits the application on behalf of the owner to obtained
development order and designs and submit building plans for
approval.
Building By-Laws defines architect as any person who is
registered as an architect under any law relating to the
registration of architects and who under that law is allowed to
practice or carry on business as an architect.
The Architects Act 1967 restricts the usage of the word to a
person registered as such by the Board of Architects, Malaysia
for the practice of architecture. 31
Engineers
Person who practises the profession of either civil, structural,
mechanical or electrical engineering and usually designs
and submits plans for approval by the approving
authorities.
In projects, i.e. of essentially engineering or infrastructure
origin, the engineers are expressly stipulated in the contract
as the principal designers and contract administrators.
In this country, the law restricts the label engineer to any
person who is registered as a Professional Engineer under
any law relating to the registration of engineers and who
under the law is allowed to practice or carry on the business
of a Professional Engineer.
32
Quantity Surveyors (QS)

Person who practises the profession of quantity surveying
and building economics and usually prepares bills of
quantities, tender and contract processes, evaluates interim
payment and final accounts of the project.
QS maybe engaged by the architect or engineer or may be
directly appointed by the employer to play a role during
the pre-contract and post-contract award stages.
There is a necessity for the QS to be registered with the
Board of Quantity Surveyors under the Quantity Surveyors
Act 1997.
33
Other professionals
Land Surveyor person who carries out boundary and
contour surveys and other surveys on land, submits survey
plans for amalgamation and sub-division of land, applies on
behalf of owner for qualified titles and final titles from the
land office.
Town Planner - person who practises the profession of town
and country planning covering land use, zoning, density, the
type, mode and form of development, traffic pattern, infra-
structural requirements, impact of development with other
developments in the vicinity etc.
34
Other professionals
Interior Designer - person who practises the profession of
interior designing involving furnishing and finishing work
usually for prestigious buildings
Landscape Architect - person who practises the profession
of landscaping architecture involving beautification of the
project internally and or externally by using plants of all
kinds, rocks etc.
35
Other specialists
Project Management Consultant
Person/group of persons practising the profession of
project management function.
The works involved ranges from feasibility report,
financial projection, design of management system,
evaluation designs prepared by consultants, co-
ordinating work of consultants etc.
These include traffic consultants, acoustical engineers,
information technology (IT) consultants and interior
decoration (ID) consultants.
36
Authorities/Regulators
Federal and State Authorities
Usually interested in matters regarding land, town and
country planning, drainage and irrigation, supply of
public utilities, fire requirements etc.
Local Authorities
Normally the building authorities and is therefore
entrusted with the power to approve layout plans,
building plans and services plans etc.
37
Other stakeholders
Finance
Invariably the owner requires to borrow funds from
banks and other financial institutions to finance or
provide adequate funding to their project
38
Manpower
Craftsmen
Represent the skilled workers of the industry especially in new
construction method it is necessary for them to appreciate not
only the how but also the why the work they do.
Semi-Skilled Worker
Those who possess skill of one or more construction trades but
have not attained the requisite level of skilfulness to be paid
as skilled workers.
Unskilled Worker
Those who do not possess skill in any building trades but are
working on construction sites performing such basic functions as
carrying materials etc.
39
Manpower
Technicians
Persons who qualified by specialised technical education and
training to work under the general directions of technologists.
Technologists
Person who have a qualification and experience required for
corporate membership of professional institutions.
40
Different Perspectives
41
42
43
44
Stages of a project
45
The principal phases of a typical engineering and construction

contract:
Pre-contract award phase: involves all activities or processes involved
from the inception of the project up to the award and/or signing the
engineering and construction contract pertaining to the project.
Post-contract award phase: involves the activities or processes arising
after the award and/or signing of the contract up to the issue of the
final certificate.
Pre-contract award phase Post-contract award phase
Inception & Handover &

Design Tendering Construction
Feasibility Maintenance
Stages of a project (Traditional)

46
Undertake all testing, Commissioning

and training
Obtain CCC or CF (all authority
approvals)
Identify project objectives Issue tender documents Handover of project to employer/user
Resolve all land issues Prepare and submit tenders, i.e. Carry out necessary maintenance and
Set up users requirements Contractors Proposals, etc. defect rectification during defect
Conduct feasibility studies Evaluate tender submissions liability period
Set up project organisation Award tenders Undertake migration
and management structure Prepare contract documents Carry out facilities management

Develop project brief further Site possession and mobilisation of

Develop concept and schematic design resources
Obtain planning approvals Obtain necessary permits and approvals
Undertake detailed design and detailing Undertake procurement, fabrication,
Prepare cost plan/budget installation, construction, etc.
Undertake value engineering Carry out contract administration
Undertake project financing
Parties involved in project stages

47
Developer/Owner Developer/Owner
Developer/Owner Project Manager Users/Consumers Nominated / Domestic
Valuer Architect Project Manager Sub-Contractors
Research firm Engineers Architect Regulatory bodies/
Real estate agents Quantity Surveyor Engineers authorities
Financial advisors Other specialists Quantity Surveyor Facilities Manager
Architect Main Contractor Other specialists
Engineers Nominated Sub-Contractors/ Main Contractor/ Turnkey
Quantity Surveyor Suppliers Contractor/ Management
Town Planner Domestic Sub-Contractors/ Contractor/ Construction
Other specialists Suppliers Manager

Developer/Owner Contractor for: Project Manager Suppliers

Project Manager Turnkey Contracts Architect Construction Site Staff &
Architect Management Contracts Engineers Workers
Engineers Construction Management Quantity Surveyor Regulatory bodies/
Quantity Surveyor (if applicable ) Other specialists authorities
Town Planner Main Contractor/ Financers
Other specialists Turnkey Contractor
Regulatory bodies/ Nominated/Domestic
authorities Sub-Contractors
48
RIBA Work Stages 2007

49
RIBA Work Stages 2007

50

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Chapter 1

Construction Industry and

Prepared by: Dr. Azeanita Suratkon

Project Management, construction management

Parties involved in construction project and

Stages and processes of construction project

Construction refers to the processes of building physical

It encompasses all types of buildings, all civil engineering

The Malaysian Industrial Classification (M.I.C) refers to

3D Dirty, Dusty, Danger.

Gathering of multi-sector industries.

Installation process or combination/compilation

The products are heterogeneous

The products are heterogeneous

The final process is in-situ (contd)

The output consists of capital goods

Separation of design and construction responsibilities

The setting up of ad-hoc team

Methods of price determination

Project: A temporary endeavour undertaken to create a

Project Management: The planning, monitoring and control

A term used to describes:

Contract:A legally binding agreement between two or more

ContractManagement: A term to describe the control and

Scope of Contract Management

theplanning for the legal framework or transaction that is to

Purpose of Contract Management

The contract entered into by the parties is efficiently and fairly

Project Mgt. Engineer:

Manufacturer Main Nomi. / Sub-

Skilled Semi-Skilled Un-Skilled

Normally these contractors enter into a main contract with

A sub-contractor is a person or firm to whom part of the

Depending on the complexity of the works, the specialist

designated (or named) sub-contractors; or

specified or named sub-contractors.

Nominated Sub-Contractor (NSC)

Quantity Surveyors (QS)

The principal phases of a typical engineering and construction

Pre-contract award phase Post-contract award phase

Inception & Handover &

Stages of a project (Traditional)

Undertake all testing, Commissioning

Inception & Handover &

Develop project brief further Site possession and mobilisation of

Parties involved in project stages

Inception & Handover &

Developer/Owner Contractor for: Project Manager Suppliers

RIBA Work Stages 2007

RIBA Work Stages 2007

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