Part 6-3. Features of Construction Industry explained in 5M, Advanced Civil Engineering, (NTUST, 5908701)
MT KAO (Blog: http://mtkaoforum31.blogspot.tw/)
(1) Payment: cash, in kinds or goods (barter), deferred (BT), franchise revenue (BOT, PMI).
Men work for money, only after the contractor can get full payment the completion of the project is meaningful to him.
And because the construction contracts normally are with big amount of money, public or private owners will have various form of payment according to their financial conditions. Normally they will be paid in cash, kinds or goods (barter), deferred payment after completion and transfer to the owner (BT), or paid through franchise revenue (BOT, PMI).
It also possible that the form of payment can be mixed between the above mentioned methods. The contractor must evaluate its own ability to accept the form of payment, for example, when he would have accept the payment in crude oil over long period, he has to evaluate the possible oil price fluctuation and the extent and cost that he would have been protected by the futures.
The reliability of the owners, government or private companies must be taken into account.
(2) Standard international contract Forms
How the contractors get paid depends on the contract conditions entered with the Owners. Normally we‘d have type of contracts such as:
FIDIC (The International Federation of Consulting Engineers) (Red Book 【building and engineering designed by the Employer】, Yellow Book 【M&E, building and engineering works designed by the Contractor】, Orange Book 【 design, build and turnkey works】, Green Book【 the short form of contract】 ,Silver Book【 turnkey contracts. 】, Gold Book for Design, Build and Operate Contracts】, Turquoise Book【 Dredging and Reclamation Works】), NEC3(New Engineering Contract3, used for civil works in UK., Australia, New Zealand and Hong Kong, the language of it is simpler and the signing parties are said to be more equal), AIA(American Institute of Architects, form of contract popular in USA.), JCT forms of Contract(Joint Contract Tribunal, for architectural works in UK.)…etc..
As projects are different for each other, the contracts need to be modified to fit the situation; they will be reflected in so called Special Application (or Conditions) and leave the General Application (or Conditions) unscratched. Whatever slight difference in Special Application will result in big departure in reality so that the contractor need to read carefully even the author of standard contract or the Owner would have claimed they're the most friendly contract terms.
(3) Money beget Money.
Compared to the old days now that big component of contractual money pays for intangible part of the project in the name to protect every party involved. The added value including the cost to acquire money, assure the delivery of the works, O&M of the project and even to the extent to guarantee the products or the purposed functioning of the project will be welcome by the customers. Thus, the added values are created.
But it is true that engineers are not playing the dominating roles in construction business because the invention as said is from improvement of technology, business skill, capital fluidity, which, financial, legal and MBA people intrude and colonize relentlessly.
Though money is everywhere (due to QE?), but they get more respected; people like to invent idea to attract the capital, for that they provide guarantees, mitigations and even placebo like assurance to fascinate mammon. Under the new trend, a big part of the construction projects will be controlled by hordes of non-technical people.
For example, the government has plain financial resource for construction project and it will be spent almost exclusively for construction related items last century. And right now, big chunk of them will be paid as financial cost for BOT and/or PMI as people argue private capital shall be required or investment on public works will lag behind. A small but still significant part of money will go to the so called independent third parties for their certificates, report and affidavits at non bargain-able cost (as to be disposed by those non-technical people), while the construction hands need to compete each other.
Engineers must realize, somehow, they would become a secondary role for the construction projects, but on the other hand, they could become a better manager than people of other discipline to control the whole project because they know better than any others. Of course, if they reject to become more "general" they will lose the chance to be the dominating figure of their project.
(1) Contractors with Lemming Mentality
As it's said above, there're 2,800 strong Class "A" contractors in Taiwan to apportion a small market; the threshold to go into the construction market isn't high as capital (relatively low to the contract amount) is concerned. When they get contracts, the contractors will find many sub-tier contractors more than eager to share risks and sometimes loss despite ability is in question.
The running cost for a Class "A" contractor is low in Taiwan, the minimum expense will be fee paid to registered PE, a tiny office, plus a secretary to answer the bell. When the bosses cannot get business, they just need to go for "hibernation", and pay such low cost for some time. They will wake up when they get contracts and then recruit people including manager and engineers, so as to activate the company. As a matter of fact, employees won't be against shoot and off employment styles because most of them like to attach themselves to the area they like, particular big city or home town, making themselves ready when someone get the contract.
So, the contractors of "entrepreneur" type are of the majority. They're competitive and spiral the awarding price, especially of public works down. The market practice is not possible to nurture big contractors with know-hows and experience.
But one day it will come, provoked by market mechanism destined to happen, such as sudden sabotage of dump trucks of 1990 (resulted in soil haulage hike and aggregate short supply), or sharp escalation of steel price in 2006. Many contractors didn't have sufficient provision for contingency gone broke and their number culled significantly before market re-juvenescence made competition rise again.
The process repeats again and again; the contractors go up and down like riding on the changing tides. One moment, the contractors' number will be swelling like lemmings grow to incredible number in short spring time; the other moment the nature will work, drive some of them jumping from the cliff and the rest follow. The market are still there for another cycle; but the saddest thing is the professionals wouldn't have chance to lead while public has to bear most of the cost that speculators have to pay.
(2) Style of Competition: Lowest Bid, Evaluated Lowest bid, Value for Money.
The problem of construction industry in Taiwan is over competition. Lowest bid is blamed because under the bureaucratic system the budgets were considered to be right and a standard for the contractors. The winning price was considered as true market cost or the one edit them shall be subject to official chastisement. Automatically, people, the budget builders or the tenders will consider it as a bench mark for similar tenders. Vicious cycle will begin and the prices become less flexible waiting for another episode to correct; of course, it's always too late.
Evaluated lowest bid is taken with the hope that the best contractor and their offer can be selected as the best for the project; however, the winners may not be the most outstanding one, and the judges' supposed imparity can be second-guessed. Authority try to improve the criteria for evaluation of the bid only invite more criticism and so the evaluated lowest bid system stopped at 2007. For similar stories, BOT and PMI also suspended except for particular projects; and the tendering system returned to lowest bid for next decade.
It could be true that in recent years the contractors didn't make money and running business only to keep office open. They lose expertise because the poor overhead don't allow them to afford the employment of senior engineers.
When they've made mistake individually, they suffer; when market changes drastically, everybody suffers too. Therefore several tenders in recent years, they are "aborted" because contractors consider the budget is too low and schedule tight. So, the evaluated lowest bid is coming back, the authority may get lessons and be more careful to choose the "judges" this time. Hopefully.it will last long.
The final goal for government spending shall be "Value for Money", in which, the project completed will worth money spent, it's subjective as modern construction will involve different requirement by different sectors, thus giving different evaluation. But it's starting, we wish the bad element in the market will be eliminated and professionalism will have chances to prevail.
(3) Elements of Competition.
A market considered normal will be the one that the consumer is most important. For public works the government is single biggest buyer, he can draw the lines to select the contractors based on their performance, past experience and readiness for the current tender.
It means the government can define a clear and objective criterion for elements such as price, technical approaches, time of completion, safety record, experience in similar works, existing work loading, managerial and technical resource in hands, records of contract disputes (with owners) …etc...
For international construction tenders, the owners usually will analyze and evaluate the tenders according to the criteria established objectively. The scores and the tabulation can then be submitted to higher ranking people, maybe figures with reputation, for review. The process will eliminate the subjective judgement to minimum to prevent the outside criticism and interference.
It's true that during the selection of the contractors, the authority and invited judges will "play god" to bring up the winners, and the result maybe that the selected aren’t the perfect ones because many factors are involved during the selection and later execution. In Taiwan, people may not be patient and policy makers are susceptible to criticism, however, the rules shall be respected at least for some time. There will be some time for confidence building, even if people are not fraternally to each other.
(4) Defying the International Norms.
For long past and even for now, the developed countries especially Europeans and Americans have big say on the codes, standards, disputes solutions and financial arrangement of the international projects. They are establishment enjoy privileges and power more than their competency.
The Asian powers are late comers in the field and also they are to follow specifications and conditions established by the advanced economies. As a result not to have sufficient chances or clout to interpret the contract, they suffers considerable losses in international construction market despite they have good engineering knowledge and construction dexterity.
We believe it's not an intended design based on the race and culture but is an essential market problem after long time practice, and realize to change it immediately will be difficult if not impossible.
There could be solutions, one is forceful and intransigent, complete "westernization" like what South Korean have gone under through; that they're indisputably good in high rise building and complicated plant built-up. The other is to change the game rules as Chinese have approached in their Belt and Road Initiatives, success or failure, remain to be seen.
People have to recognize that many of our practice in construction business, which shall be very local, actually involve many western norms; you modify them, or they change you. Again, to be patient.