Payment mechanisms for integrated teams in construction

Transcription

1 1 Payment mechanisms for integrated teams in construction Ibrahim Motawa and Ammar Kaka Schoo of the Buit Environment, Heriot Watt University, UK ABSTRAT The overwheming consensus for process and team integration has emerged as an enaber to manage construction projects. The performance of integrated teams is highy affected by the adopted payment mechanism. However, the payment mechanisms avaiabe for a project may need the team to compromise in order to agree on a fair mechanism for as many members as possibe. This paper introduces a methodoogy to simuate the profies of aternative payment mechanisms. The methodoogy aims to hep project teams define the most appropriate mechanism for each member. The proposed methodoogy is therefore nove and superior to existing cash fow modes where the focus has been imited to main contractors ony. To promote its use as a performance enabing mechanism, the methodoogy utiizes the project process map, the stakehoders & suppy chain, the pricing method and the payment mechanism. This wi act as an aid to design or finetune payment mechanisms to individua projects characteristics considering payment for offsite materias and components, which aways concerns project fabricators and suppy chain. Keywords: Payment mechanisms, Pricing methods, onstruction process. INTROUTION The roe of payment mechanisms in construction contracts inspired many researchers to categorise the types of contracts by the types of payment mechanisms, for exampe: Wiiams (199, O'Reiy s (1993, Potts (1995 and Smith (. ontracts that specify umpsum and whoy costreimbursabe payment are acknowedged by IhemE (3 to be the extremes of a wide range of forms of contracts that aocate risks and responsibiities between the contracting parties in different ways. A variety of forms of payment was isted by IhemE ( as: reimbursabe costpus a percentagefee; reimbursabe costpus a fixedfee; target cost (shared overrun and/or underrun; unitrate (incuding remeasure; guaranteed maximum price; umpsum services and materias with reimbursabe construction; umpsum (i.e. whoy umpsum. Nonetheess, other payment methods such as the openbook accounting, stage payments, incentive contracting, direct payment, trust accounts/funds, mobiisation advance payment and the mechanic s ien have been shown to be versatie and usefu in different project situations. Such aternatives may aow for better and active participation of the project members so as to ensure that the project objectives are we understood and deivered. For exampe, with the use of a costreimbursabe method, the contractor is invoved at a very eary stage in the project and contributes by his/her own expertise in buidabiity, costing, materia ordering, and programming, Masterman (. A stage payment method reduces administration time and cost to prepare interim payments and aows the responsibe project personne to be engaged in more productive project activities, Potts (1988 and heetham et a. (1995. Incentive payment method is often empoyed with disincentives so as to insti efficient contract arrangement and to reward the successfu contractors who are fuy motivated so as to achieve the cient objectives with high performance standards, Arditi & Yasamis (1998 and Bubshait (3. A direct payment method aows subcontractors and suppiers to be paid prompty and in fu which shoud resut in ower prices, better performance and faster competion, ough & Sears (1994. Trust accounts and mechanics iens coud be set up to protect and compensate the project participants who have invested in the project against a cient or main contractor going out of business and/or not fufiing their payment commitment, ough & Sears (1994 and Latham (1994. Projects contractors and subcontractors coud aso be paid in advance to assist them in starting the project and maintaining a heathy cashfow, Abeysekera (. The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ] 1

2 Each payment mechanism coud be appropriate for certain conditions of a project and cient circumstance. For exampe, the traditiona methods of the umpsum and unitprice are usefu when there is adequate information to produce a compete design, thereby, aowing proper contractor competition, ow tender prices, easy assessment of interim vauations and variations for payment, and higher eve of certainty that quaity and functionaity standards wi be attained, Smith (, IhemE (3 and Masterman (. RESEARH AIM This research was motivated by three observations. The first observation came out of the resuts of the above iterature review that have shown that each payment mechanism has its advantages and disadvantages. hoosing the appropriate pricing and payment method, from the avaiabe ones, has a positive effect on the management and deivery of projects. Meanwhie, the overwheming consensus for process and team integration in construction projects emerges the need for considering the potentia payment method in cash fow modeing for integrated teams. The agreed payment mechanism motivates the team to perform efficienty. As the team integration creates different direct/indirect manageria and contractua inks throughout the suppy chain, these inks are undoubtedy infuencing payment and cash fow mechanisms. Payment mechanisms therefore, have to be designed in response to the sensitivity of these inks to the team performance and satisfaction. The degree of invovement of the team members in deciding on the appropriate payment method affects the behavioura aspects of project teams. This coud be improved if the negotiation to reach the most suitabe payment method efficienty aows a options to be considered. However, the current practice starts by the agreement between the cient and the main contractors. The main contractors may then negotiate, based on this agreement, with the other team members. This obviousy imits the margin of negotiation and put unfair strain on the other parties, which in turn affects their satisfactions. Therefore, this research aims to address the need for PerformanceBased contracts, which are gaining momentum in construction contracts. The concept of these contracts is to aign targets and cients satisfaction with payments, encourage coaborative working, ensure that risks are aocated accordingy, remove the adversaria approach by reimbursing the contractor fuy and guaranteeing his profit, and provide a source of motivation that make project deivery much more effective. In this respect, and by enhancing the cash fow profie of the project team members, this research wi hep improving the team performance and satisfaction. The second observation was based on the fact that many contractors have used different ways to enhance projects cash fow. Some ways have been found in more efficient management processes and information systems which aow contractors to minimise the outstanding baances owed by cients. Some other ways have been found through pricing poicies (e.g. unbaancing and frontend oading or unfair procedures such as overmeasurement and deaying payments to subcontractors and suppiers. However, enhancing cash fow through anaysing aternative payment mechanisms from a suppy chain perspective has not been fuy addressed. Taking a wider suppy chain perspective, the conventiona payment mechanism paces a considerabe and unfair strain on particuar parties and thus on the overa spirit of team working, partnering and suppy chain management, Egan (1998. Therefore, this research is aso aiming to promote and faciitate the use of appropriate payment mechanisms considering the fow of payments throughout the suppy chain. The third observation was based on the fact that the probem of the payment for offsite materias and components is among the causes of cash fow faiure. ontractors are usuay paid for the work done in addition to any materias aready on site. Offsite materias and/or work, which become substantia in the modern prefabricated and preassembed components, are not paid unti provided on site. This mechanism of payment affects the contractors cash fow negativey and consequenty the suppy chain. Therefore, this research is aso aiming to enabe the project team to effectivey manage the payment for offsite work/materias. In this paper, a methodoogy to simuate different payment mechanisms for integrated teams in construction projects is proposed. The methodoogy defines a construction stages and when each project member wi be invoved. The avaiabe pricing and payment mechanisms wi then be tested in order to define the most appropriate ones for each member. This methodoogy is based on the The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ]

3 system deveoped by the authors, Motawa and Kaka (6, to further simuate payments for the suppy chain members and payment for offsite work/materias. METHOOLOGY TO SELET PAYMENT MEHANISM The adopted methodoogy to seect the appropriate payment mechanism, as shown in Figure 1, considers first the stages of the Project Process Map (PPM. PPM defines the products, services, management, design, engineering, and prefab & assemby needed for a project. Having a process map enabes the project team to agree on a common framework for managing and controing a project in order to meet the cient s business needs. This wi resut in far fewer probems and minimizing effort and dupication. The project team can use their experience to continuay refine and improve such process. A typica process map represents a ogica sequence of action that wi not prejudice progress. Most of the detaied actions that must be taken under the common framework of a process map are considered to be matters of norma good practice of a particuar profession, and must be panned and carried out in the ight of each project conditions. Many process maps have been deveoped to represent construction projects. Among the maps known to practitioners in the UK, there are the architect s pan of work (RIBA (1 and the Process Protoco (Kagiogou et a (1998, which are adopted for this research. Having such a process map wi hep simuating the payment requirements within design and construction stages in order to anayse the effect of using aternative payment mechanisms on the cash fow of the stakehoders and suppy chain members. The stakehoders & suppy chain defines the products and the services they wi be providing, and the contractua and cash fow arrangements between them. The concept of suppy chain management is emerging as a significant performance enaber for the construction industry. Partnering arrangements are enabing stakehoders to take more strategic and ong term approaches to the production, running and maintenance of buidings. ontractua organisations are becoming more compex to define and manage the manageria and contractua inks throughout the suppy chain. These inks are undoubtedy infuencing payment and cash fow mechanisms. The invovement of the suppy chain members from the eary stages of projects needs suitabe contractua agreements and procurement methods to reguate the reationships between these members. This proposed methodoogy expores the cash fow between the partners to a contract, as procurement decisions have been maeabe to project situations then payment mechanisms can simiary be made bespoke to the benefit of project performance and cient satisfaction. The process maps give detais to a construction processes that cover a project from the conceptua stage to the operationa and maintenance stage. This wi hep identifying who is paying whom from the defined stakehoders and suppy chain and when payments are due. A fu project program wi then be generated using a project management too. The Pricing and Payment methods, as shown in Figure 1, refer to the way in which each product or service is to be priced and paid. A avaiabe options can be considered, for exampe: payment time ags, retention arrangement, payments for offsite materias, etc. At this stage, the adopted methodoogy covers the features of the payment mechanism for fixed price contracts, cost reimbursement contracts, and incentive contracts. ifferent payment conditions within these payment mechanisms are considered, such as: interim payment (e.g. monthy payment, stage payment (when certain miestones are defined for payment, and mobiized advanced payment. The IT system deveoped to automate the adopted methodoogy wi generate the cash fow for each project member, as defined by Equation 1 and shown in Figure, with a data required to test different payment mechanisms for each individua member. ashfow (i = ( f (, T f ( P, T c p i. Eqn.(1 Where is the tota cost at the time T c, P is the tota payment at the time T p, is the tota project duration, i represents the assigned stakehoder or suppy chain member, and represents the eve of the i member on the chain ( = 1 or The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ] 3

4 Figure 1. Methodoogy to seect payment mechanisms The Project Process Map Project Process Maps Stakehoders & Suppy chain Project programme Payment mechanism & chain (3 Incentive Payment mechanism & chain ( ost Reimbursement Payment mechanism & chain (1 Fixed Price Seection of the payment mechanism The Pricing & Payment methods The stakehoder & suppy chain Financia institution ient Main contractors Subcontractors/ Suppiers Whatif mode System case base on1 Main Project on Mechanism defined Leve 1 onn Leve Seection criteria ash fow (stakehoders 4 The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ]

5 PAYMENT FOR OFFSITE MATERIALS Payment for offsite materias and components has aways been a concern for project fabricators. The proposed methodoogy considers the costs of offsite activities (e.g. materias and prefabricated or preassembed units as a percentage to the tota costs of individua activities, as defined in Equation. f (, off site = Y * f (, Eqn.( Where Y is the percentage assumed for the offsite activities The system aows breaking down the costs of offsite activities with corresponding time ags for instaation onsite, which aows for activities done before the actua start of construction to be considered as defined by Equations 3: T 1 f1, off site = X1 * f (, off site T1 ( Eqn.(3 Where X 1 represents the percentages of the offsite costs to the tota offsite costs, corresponding to a time ag T 1. T 1 may represent offsite units ordered before the actua start of construction. Other percentages and time ags (X j and T j can be defined to represent the costs of a offsite activities. The tota costs of offsite activities can then be determined by Equations 4: N f (, T x c off site T 1 T = f1(, off site + f(, T1 T off site Eqn.( Where N is the eariest start time of offsite activities before construction start. The system aows for the offsite activities to be considered for any chosen payment mechanism in any of the foowing ways: 1. Not to be considered unti provided on site and when construction starts.. To be fuy considered before provided on site and before construction starts. 3. To be partiay considered before provided on site, then fuy considered once construction starts. The payment profie wi be modified to accommodate these assumptions, as shown in Equation 5, Paymentprofie (i = Z * f ( P, T + f ( P, T Eqn.(5 N p i Z represents the percentage of the payment for the offsite materias/components: Z =, means the offsite materias are not considered unti provided on site Z = 1, means the offsite materias are fuy considered before provided on site < Z < 1, means the offsite materias are partiay considered The cash fow for each project member can then be modified, as defined by Equation 6. ash fow (i = ( f (, T Z* f ( P, T + (1Y* ( f (, T f ( P, T N x c off site p i c p i p i Eqn.(6 The IT system deveoped to automate the adopted methodoogy is based on a arge database. The database is used to retrieve the stages of project process maps. The database is integrated with Microsoft Project database to enabe producing the project programme reevant to each member of the stakehoders and suppy chain. It is aso retrieving the necessary data to cacuate the effect of different payment mechanisms on project cash fow. Other panning and contro data, as categorised in Figure 3 and 4, may aso be entered, if needed. The system produces numerica and graphica outputs that represent the effect of different payment mechanisms. The system output describes the cash fow profie for any combination amongst the avaiabe methods, for exampe: a umpsum with monthy payment or cost reimbursement with stage payment. SYSTEM APPLIATION An exampe has been deveoped to iustrate the system use, as shown in Tabe 1. The exampe shows the typica activities of a buiding project with components constructed offsite and requested before construction starts. Five main companies, given the names A, B,,, and E, are working as the project contractor and paid directy by the cient. Tabe 1 aso shows a number of subcontractors; A1, 1, E1, E, and E3, who wi be paid by the corresponding main contractor for the assigned activity. The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ] 5

6 The methods of interim payment, stage payment, and advanced payment are used in this exampe for each company. The system retrieves the reevant data for each company from the database of the project and cacuates its own cash fow considering the defined payment mechanisms. The scenario of considering the costs of offsite materias is shown in Tabe. The system output for this scenario is shown in Figure 5 and 6. The maximum negative cash fow and the date at which it wi occur are cacuated. The net area of the cash fow, which is the area under the cash fow diagram, is aso cacuated. The system has the abiity to impement whatif anaysis by changing any data eements and finding out the effect on the output. hanges can be made for the cost/duration of any process in the project and aso for any payment conditions such as payment deay, payment retention, and the amount of advanced payment. The system wi act as an aid to design or finetune payment mechanisms to individua projects characteristics and each member of the project team can compare different payment methods and seect the most appropriate one. ONLUSIONS The performance of integrated teams in managing construction projects can be enhanced if a fair payment mechanism is adopted. Appropriate payment is considered among the satisfactory factors for any project member. A considerabe number of disputes in construction are inked to probems in payment, hence buiding an integrated cash fow for the project team woud assist in ess disputatious industry. Therefore, a methodoogy for testing different payment mechanisms to improve the effectiveness of project management has been presented in this paper. This methodoogy and the deveoped system to automate its usage can hep projects stakehoders and suppy chain to forecast and pan their cash fow patterns in different payment mechanisms. The deveoped system has an advantage over the existing cash fow modes where the focus has been imited to main contractors ony. The system has the faciity of comparing aternative payment mechanisms and heps seecting the most appropriate payment one. This wi hep in soving the probematic issues of cash management such as reducing bankruptcies, optimising cash fow by gaining fair payment on time, payment for offsite materias and enhancing the quaity of the project process. Nr Activity Name ependency urations Vaues ( ontractors Main Sub Site setup Foundations rainage Ground foor Frame Externa was ground Externa was 1 st Externa was nd Interna was ground Interna was 1 st Interna was nd Interna doors Lift / stairs Roof Watertight(miestone Windows & Ext. doors Pumbing & Sanitaryware Mechanica Services Eectrica Services Foor finishes eiing finishes Wa finishes Fixtures & fittings Externa works Handover & cean days days 5 days 5 days*a 1 days*b days days days 35 days 17 days* 17 days* 1 days 15 days 5 days*b 1 days 1 days* 15 days*e 15 days 15 days*e 1 days days days* days 15 days 7 days* A A A A B B E E E E A1 A1 A E1 E1 E E3 * for stage payment, this indicates that after this activity a company wi be paid Tabe 1: ata of the Exampe Project 6 The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ]

7 % of the offsite activities (Materias ordered costs to the tota costs (Y : 3 1 % of the materia costs to the tota costs of materias (X 1 : orresponding time ag (T 1 : 1 month % of the materia costs to the tota costs of materias (X : orresponding time ag (T : 3 months 3 % of the materia costs to the tota costs of materias (X 3 : orresponding time ag (T 3 : % of the payment considered to the materia costs (Z : Z = (no consideration Z = 1 (fuy considered Tabe : osts/payments for offsite activities 5 3 months 5 ash in/out f (, T c i f ( P, T p i Time Figure. Project cash fow The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ] 7

8 Project Process ata P.P. RIBA User Phases eiverabes Work Stages P, P9 1, 19 PER, A,., M Tasks Basic data Progress data urations ates onstraints Reationships Resources osts % compete Actua work/cost Remaining work/cost Type Lag Fixed Time reated Working hours Materias On durations On resources At start At end Standard rate Overtime rate Per use cost Figure 3. Panning and contro data Payment ata Fixed Price ost Reimbursement Incentive Interim Payment Stage Payment Reimbursement in arrears Monthy advance of cash Schedue incentives ost incentives The first payment date Payment dates eay in payment Retention in payment Advanced payment Repaid method oneoff when needed paid back The first payment date Periodic payment ontractor fee eay in payment Retention in payment (% Advanced payment A a fixed oneoff cost B variabe cost per day of using additiona resources the inefficiency resuting from aocating more resources X No. of days which the project is speeded up the extra vaue to the cient per day of eary competion S c the sharing rate ost pus incentive fee Fixed price incentive Figure 4. ata for payment mechanisms Tp target profit a actua cost S c contractor sharing rate P contractor profit target cost 8 The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ]

9 Figure 5. System output (reports on different payment methods for company Figure 6. System output (cash fow patterns for company considering offsite Materia costs The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ] 9

10 REFERENES Abeysekera V., (. Reengineering payment procedures: an agenda for cient financed construction. In: Ng, S.T., heung, S., Lam, K. & Poon, S. (eds. Reengineering construction: Enabing and motivating exceence, Hong Kong, Arditi. & Yasamis F., (1998. Incentive/disincentive contracts: perceptions of owners and contractors. Journa of onstruction Engineering and Management, 14(5, Bubshait A.A., (3. Incentive/disincentive contracts and its effects on industria projects. Internationa Journa of Project Management, 1(1, 637. heetham.w., Lewis J. & Jones S.T., (1995. The effect of stage payments on contractors cash fow some possibe consequences. Proceedings of IB W96 Architectura Management ubin. ough R.H. and Sears G.A., (1994. onstruction contracting. sixth edition. New York: John Wiey & Sons, Inc. Egan Sir J., (1998. Rethinking onstruction. London: epartment of the Environment, Transport and the Regions. IhemE., (3. Form of contract: target cost contracts the burgundy book, first edition. Rugby: IhemE. IhemE., (. Form of contract: reimbursabe contracts the green book, third edition. Rugby: IhemE. Kagiogou M., ooper R., Aouad G., Hinks J., Sexton M. & Sheath.M., (1998. A generic guide to the design and construction Process Protoco. University of Saford, ISBN Latham Sir M., (1994. onstructing the team: Fina report of the government/industry review of procurement and contractua arrangements in the UK construction industry. London: HMSO. Masterman J.W.E., (. An introduction to buiding procurement systems, second edition. London: Spon Press. Motawa I. and Kaka A., (6. The architecture of an IT system for payment methods in construction. Proceedings of the Fifth Internationa onference on Engineering omputationa Technoogy, Las Pamas de Gran anaria, Spain, 5 September 6, paper 143. O'Reiy M.P., (1993. Principes of construction aw. Essex: Longman Group UK Ltd. Potts K.P., (1988. An aternative payment system for major fast track construction projects. J. of onstruction Management and Economics, Vo. 6, 533. Potts K., (1995. Major construction works: contractua and financia management. Harow: Longman Group Limited. RIBA Pubications (1. Architect s handbook of practice management, 7 th edition. London: RIBA Pubications. Smith N.J. (ed., (. Engineering project management second edition. Ames, IA: Backwe Science. Wiiams K., (199. ivi engineering contracts voume 1: the aw, administration, safety. West Sussex: Eis Horwood Limited. 1 The Austraasian Journa of onstruction Economics and Buiding [Vo 8, No ]