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The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

A Framework For Developing a Construction Cost Market Survey in a Developing Country

Abstract This paper develops the framework for a questionnaire that could be used as the basis for conducting a construction market survey. The market survey should generate enough specific data to allow a cost engineer to compile the construction cost of a project in a developing country where no historical data, labor productivity rates, and cost information publications are available.

As an application, the results of a market

survey, shown in Appendix A, were used for budgeting a construction project built by a Japanese Contracting company in Beirut, Lebanon.

Keywords Marketing, Construction, Developing Countries, and International Construction.

Introduction The latest changes in the world political map led to the creation of a global economy.

The emerging global market dictates that manufacturing companies

throughout the world re-assess their competitiveness, their cost structure, and their manufacturing strategy. More and more firms are building manufacturing and assembly plants across their borders, especially, in third world developing countries where labor wages are significantly lower. This global economy will have a considerable impact on


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

the volume of international construction. Cost engineers will be faced with the new challenge of compiling construction cost in foreign markets for which they have no access to cost information and historical data [McConville,96]

The Problem Comparing cost of construction facilities from one country to another is difficult. Every country is unique and has its own pre-established construction process; each has its own design standards and building regulations. Worker productivity differs significantly, as do wage rates, and labor cost, construction materials, inflation rates, and weather conditions. These are just a few of the cost related elements that make budgeting an international construction project a real challenge [McConville, 96]. While reviewing the literature for guidelines to price international projects one can find two types of information. Total construction cost indices are published as a general comparison between the total construction cost of a project in the United States and that in other countries. These are generic in nature and do not reflect the specific features, size and complexity level of the project. Another cost comparison is available through unreliable tabulation of the relative efficiency of labor in various countries or regions of the world versus that in the United States. This data is generic in nature and does not differentiate between the various type and phases of construction. For example, published data give a blanket statement on the relative efficiency of the labor force. This data may be representative of structural steel frame; however, it may vary significantly when compared with concrete


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

frame construction. The same statement applies when comparing the structural phase of the project with the finish phase. In summary, the information available through the literature does not provide an accurate mean for pricing construction cost in developing countries and alternative means should be investigated.

Objective The objective of this paper is to develop a generic questionnaire that will be used as the basis for conducting a market survey to address all the issues that a cost engineer needs in order to properly budget construction cost in a third world developing country. The results of the questionnaire, shown in Appendix A, were used for budgeting a construction project built by a Japanese Contractor in Beirut Lebanon.

Procedure While budgeting a construction project the Cost Engineer has to evaluate the material cost, labor cost, equipment cost, and then study the job overhead and profit margin that the market can withstand and at the same time overcome the risk and exposure of the contractor doing the work. In the process, the cost engineer should appreciate and understand local construction methods, cultures, customs, attitudes, and languages, develop an understanding of the country’s business practices and negotiating techniques.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Therefore, the survey should reflect the construction methods, engineering approaches, and the way construction contracts are formulated in the country of interest. Many issues should be investigated as part of the survey and their implication on the cost should be either included or excluded to the basis of the estimate. In order to evaluate all these issues, the survey was divided into the following main areas:

Labor and Equipment cost

General political and economical data

State of the local construction industry

Historical construction cost data

Labor and Equipment Cost When pricing labor and equipment cost, the cost engineer has to consider the following two components: *

The hourly wage rate of labor (or rental rate for equipment)

*

Labor or equipment productivity

Hourly Wage Rate: The survey should research what the contractor pays in US dollars to hire skilled and unskilled labor for conducting the various construction tasks.

This wage rate

should include the direct cost plus any additional charges to account for insurance,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

vacation, travel, or any special additives or fringe benefits. Any termination fee paid for contracted labor should also be considered under this category. The survey should research how wage rates could change over the life of the project for each of the different crafts used in the work.

Also, the survey should

highlight the skill level of the labor force in the locality in order to assess the trades or the skill that should be brought from outside that country. The survey should have a complete assessment of the various cost associated with using expatriates on the project.

Labor Productivity This is one of the hard areas to assess especially in developing countries where no data or historical records have been kept and if kept or available by an entity, this entity will be very reluctant to share. To overcome this limitation, the survey should go over various construction activities and identify how many man-hours are needed in order to perform the various construction tasks.

The survey should differentiate between earthwork, structural

systems, concrete work, finishes, plumbing, heating ventilating and air conditioning, and electrical systems due to the disparity of the labors skill level among these areas in developing countries.

Business Hours, Holidays, and Overtime The survey should identify a list of national holidays, what constitute usual working hours in the construction industry and when overtime is applicable. The survey


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

should seek clarification to see if there is any restriction for working overtime, on weekends, or during the holidays and whether these restrictions are of religious or civil nature.

General Information The survey should investigate the following issues:

Purchasing Requirements Many governments have purchasing requirements. Some countries demand that a high percentage, usually more than 50 percent, and in some cases as much as 85%, of locally produced construction materials and equipment be incorporated to the project.

Duties and Tariffs Many countries impose significant import duties and tariffs on materials and equipment imported into the country. These duties can be as high as 200 to 300 percent of the purchase cost of the materials imported [McConville, 96]. Therefore, it is important to identify these duties since they can dramatically affect the total cost of the job.

Heavy and Specialized Construction Equipment Many developing countries have limited supply of construction equipment (i.e., cranes, excavation equipment, concrete pumps, welding machines, etc.). If some of


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

the construction tasks cannot be performed with low cost labor, the cost of shipping such equipment should be incorporated to the project cost [McConville, 96].

Construction Schedule A project that would typically take 12 months to complete in the United States, could take as long as 24 months in a developing country because of various reasons including import of material and equipment, governmental red tape, low worker productivity, lack of productive machinery, etc.

The survey should provide an

assessment of the duration of comparable projects in size and complexity built in this country.

Taxes The survey should establish what local taxes, sales taxes, and value-added taxes are in effect and if any of these are recoverable by the international contractor.

Language Barrier The requirements of dealing with languages other than English (translation cost) should be addressed and the cost implication should be assessed.

General Political and Economical Data The survey should seek general political and economical information that would have a bearing on budgeting the construction cost of a project. This data could be compiled through general media and means of information like a specific country review


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

published by the World Bank, data published on the World Wide Web, etc. The collected data should highlight the following issues:

Geographical, Political, and Climatic Data The survey should review the general topography and terrain, surrounding countries, population size, major industries, predominant religious beliefs and languages of the country.

The collected data should highlight the current political

structure and any political unrest that can have a bearing on the welfare of expatriates. This section should also discuss temperature ranges, humidity, and annual rainfall [McConville, 96].

State of the Economy The local currency and the value of inflation in the last three years should be identified. Many times this information is not published due to political reasons. The survey should track the real inflation rate by asking questions related to the changes in the cost of some commodities over time.

General Information and Cost of Living for Expatriates The survey should address Visa requirements for expatriates.

The survey

should also discuss general hygiene and health issues, quality, availability and cost of international school catering for expatriates’ children. The survey should also address the various living expenses for expatriates working on the project.

Issues of concern include accommodation cost, utilities,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

furnishings, typical mode and cost of transportation used by expatriates in the city and throughout the country and finally local taxation laws on expatriate’s income.

The Local Construction Industry The survey should highlight the state of the local economy and study the health of the local construction industry in order to lead to a better understanding of the cost makeup. The survey should for a minimum address the following issues:

State of the local Economy The survey should review the national value of annual construction for the past three years and look for any data published by the World Bank on the State of the Country. The following questions should be addressed: •

What are the type and the makeup of the construction work: is it public or

private? •

How does it break down into commercial, residential, industrial, etc.?

How do these data reflect on the bidding climate: what is the status of supply

and demand in that market: are there enough contractors to create a competitive market? •

What are the current expected profit margins on new construction?

The survey should attempt to identify the overhead and profit through different means in order to question any inconsistency between the various respondents. One


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

approach is to look for the typical hourly rates that contractor charges an owner for various labor classifications, and field management like foreman, superintendent, and site engineer. Another valuable data will be to identify the normal hourly rates that Architect and Engineer charges a client for design work. The purpose of this exercise is to evaluate the cost of the finished construction project. Even though labor rates seems low compared to U.S. Standards, after incorporating the effect of productivity, risk, overhead, and profit, the cost of the finished construction project would not differ as much from that in the United States.

Labor Profile The survey should identify the makeup of the labor force, is it a local labor force or foreign, what is the skill level when compared with that of the U.S. labor force. Is the labor force capable of building sophisticated mechanical and electrical systems or is it limited to concrete, earthwork, and masonry skills? Is labor unionized in that market and if so does unionization have any effect on construction cost?

Typical Construction Methods The survey should describe the various building elements like foundations, substructure, superstructure, exterior closure, roofing, interior construction, conveying systems, mechanical, and electrical systems used in the local construction of warehouse space, office buildings, etc. to identify the local construction practices.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Construction Delivery System The survey should describe the way construction projects are let in this market and who are the various players in the process and the sophistication of the construction industry when compared to that of the U.S. market.

Following are questions that would help

identify lots of these concerns:

Who leads the design team? Architect, Engineer, etc.

Are quantity surveyors and Bill of Quantities used in the bidding process?

What is the typical delivery system used: general contractors, construction management, multiple primes, etc.?

What type of construction management procedures are typically used for cost control, scheduling, cost estimating, and what is the extent of automation and usage of computer software in this process?

What are the standard forms of agreement between Owner and Contractors? (Or are there any)?

What are the typical methods of contracting: lump sum, cost plus, unit price contracts, etc.?

How often are contractor paid and who approves their work and reviews their pay applications?

Is their any retainage?

What are the insurance and bonding requirements, and maintenance and length of the guarantee given to owners?


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Requirements on Imported Items The survey should identify all the customs fees and charges associated with importing building materials and equipment to the country where the construction project will be built.

Local Standards and Building Codes The survey should identify the building code(s) used in the country and the applicable Construction Standards. Also, a review of the environmental regulations and policies is very essential.

Building Permits and Inspection Process The survey should discuss the building permit process and provide an order of magnitude of all the costs that a contractor will incur in this process. A discussion of the inspection process will be beneficial especially if it sheds any information on construction cost. This issue is significant especially in developing countries where corruption exists in various government agencies and bribes have an important role in facilitating daily business.

Historical Cost Data

Square Meter Cost


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

The purpose of this section is to have an order of magnitude of the total construction cost of a structure using historical data collected by the Architects and Engineers (A/E) on similar projects of size and complexity that meets the local standards. This data will be used in order to validate and to uncover any inconsistency found in other sections of the survey. The A/Es were asked to provide a Square meter cost for warehouses, office buildings, Apartment buildings, Hospitals, schools, etc.

Unit Cost Estimate A/Es were also asked to share unit cost data received on previous projects. These unit costs consist of contractors’ quotations and includes material, labor, overhead and fee for change order work. Again, the benefit of this data is to create another level of validation for the detailed material cost and labor cost generated through the previous findings. In this unit cost, a “package deal” is presented. For example: The unit cost of concrete in beams and columns per cubic meter of concrete include all the various components that make up that work package including: formwork, reinforcement, concrete placement, stripping the forms, curing, rub finishing, and pointing and patching the concrete member.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

INTERNATIONAL MARKET SURVEY QUESTIONNAIRE COUNTRY: Beirut, Lebanon 1997

DATE: December

Appendix A: International Construction Market Survey For Beirut Lebanon


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

The Construction Scene in Lebanon Since 1992 the country has enjoyed relative peace. Before being devastated by the civil war, Lebanon was the financial and commercial center for the Middle East and a favorite tourist area. Location, an educated population, religious diversity and a just legal system are some factors that contributed to Lebanon’s success before the war and will aid its re-emergence. Local government and business leaders are anxious to rebuild Beirut. This is seen as the key to revitalizing Lebanon’s economy. The price of goods continues to increase and, except for the construction industry, unemployment remains high.

The rebuilt

Lebanon is envisioned as a regional convention, financial and education center. Since the peace talk started, commercial activity in Beirut has increased. Tourism, although improving, is still very small compared to pre-war visitors of over 2 million per year. The country’s infrastructure, particularly around Beirut, was severely damaged by the civil war. The European Community, the World Bank, Saudi Arabia and Kuwait are providing large sums of money.

The Conseil du Developpement et de la

Reconstruction (CDR) is the organization responsible for the public works restoration program. Real progress is being made in the reconstruction of the infrastructure. Traffic and parking, however, remain a problem. In a city with over 1 million cars it can take hours to go a few miles. This only complicates delivery of building materials. Very little ready-


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

mix concrete is used for this reason. Unless the plant is very close, concrete is mixed on site. SOLIDERE was formed as a private corporation to reconstruct the Beirut central district. Landowners in the area received shares according to their holdings. It has the ambitious task of reconstructing (repair and new construction) over 4.5 million square meters of space in the next 3 years. SOLIDERE provides the overall coordination. However, buildings or small areas will be treated as individual projects with opportunities for CM, design and construction services. While there are many small and medium sized contractors in Beirut, there are few large General Contractors, so there is opportunity for foreign companies to provide construction management services. With the on-going rebuilding effort, bidding has been and continues to be very competitive. As can be expected in a city with the history of Beirut, archeological finds are complicating the reconstruction effort. The reconstruction planned by SOLIDERE will maintain the historical aspect of Beirut. Limited high-rise development is planned.

Contracting/Procurement Despite French influence in Lebanon, the construction industry is organized along more traditional lines with a strong general contracting tradition and a full range of responsibilities carried out by Architects and/or Engineers. Lump sum contracting is preferred and Bills of Quantities may or may not be prepared, according to client requirements, by the Architect/Engineer. Inevitably, as foreign investment comes into Lebanon, it may bring with it its own preferred methods for handling work that may


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

depart from these traditional norms, such as Design/Build, separate trade contracting, and Construction Management. Lebanese building standards are being revised.

Nine revised standards,

concerning civil engineering works, have been released.

Most sound international

standards (e.g., British, French, German, American) may be used in the preparation of construction specifications. There are standard forms of agreement for design services available. The form used will vary depending upon type of project and whether it is public or private funds. However, standard forms of agreement are not used for construction services. While the form of agreement is left to the discretion of the parties involved, the FIDIC form of contract is commonly used.

Contractors are typically required to provide bid

bonds, performance bonds and liability insurance.

Construction bids and most long-

term contracts are in US dollars. Local immediate purchases use Lebanese currency.

Construction Prices Construction prices are very volatile. This may be attributed to several factors:

The law of supply and demand - the market is very busy.

The large number of small construction companies and self employed tradesmen.

The tradition of bargaining.

The price for the same work may vary as much as 300 to 400 percent. Location and type of project are two important factors in this variance. One example


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

cited to us was that concrete finishing work for a commercial building in the Verdun/Hamra district could be double the cost for the same work on a residential project in the southern suburbs. We usually caution that any prices provided are for comparative purposes and that actual prices will vary.

In Beirut, this is warning

particularly true. The costs that follow are representative of costs in the Beirut area during fall, 1997. Real estate prices deflated significantly in the last three years.

The growth

anticipated after the Israeli-Arab peace process did not materialize. Therefore, most of the construction work is concentrated in the public and infrastructure projects: like Solidere, Beirut International Airport, and the Arabic Highway.

1. GENERAL DATA 1.1

Area of Country

Beirut

1.2

Terrain

1.3

Bordering Countries

Syria from East and North Israel from the South Mediterranean Sea to the West

1.4

Capital city and population

Beirut- 2 Million

1.5

Population of country

Roughly Four Million - No published statistics exist.

1.6

Major Industries

Tourism, Financial Services, Engineering and Consulting to the Arab World


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

1.7

Predominant Religion

Muslim and Christian

1.8

Predominant Language(s)

Arabic, French and English are widely spoken by the majority of the population

1.9

Political Structure - Recent, past or present - Any political unrest?

Republic. Democratic System. The country has been in peace for the last 7 Years after the Taiif Agreement. Only problems in South Lebanon Between Hizbollah and Israel.

1.10

Climatic Conditions - Winter Temperature Range - Summer Temperature Range - Annual Rainfall

Range from 10 -20 Degree Celsius Range 25 -32 Degree Celsius-Humid Only during Winter.

1.11

Pollution Considerations - Environmental Regulations

No strict Implementation-However, Government is in the process of preparing these Regulations-and Setting All kind of standards

1.12

Local Currency Rate Exchange with $ 1.00 U.S.

Livre Libanaise (LL) 1525 LL been stable for the last three years

1.13

Are visas required for U.S. Yes but it can be obtained at the Airport. citizens?

1.14

Please list National Holidays

Independence Day, Ashoura, Christmas Day, Labor Day, New Years, Islamic New Year, Easter, El-Fitr (Ramadan (3 Days), Mar Maroun, EID EL-KIBIR (4 Days)

1.15

Usual Business Hours Monday-Friday Saturday Sunday

42 Hours Week 8:00AM -5 PM 8:00 AM-1PM N/A


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

1.16

Any restrictions to working No restrictions for working overtime or overtime holidays weekends? weekend. The only two days where typically no work will be allowed is the Islamic New Year and the Labor Day. Holidays Rate = Regular Rate x2

1.17

Local time G.M.T.

1.18

Telephone codes (major cities)

compared

with Winter: -2 Hrs Summer -3 Hrs

011-961- 1 Beirut 7 Saida 6 Tripoli 5 Mountain 3 Cellular 1.19

Travel-Please list major airports

Beirut International Airport

1.20

Usual travel within the city (cab, Travel within the City: Taxi, Buses, and train, etc.) Usual travel within the Personal vehicles. All transportation within country (train, aircraft or by the Country by Road.

road) 1.21

Electrical power voltage -High -Low

1.22

Piped drinking available

1.23

What is the monthly cost of expatriate accommodations in the major cities? -House (3 bedrooms) Range $1500-2000 -Apartment (2 bedrooms) $1200-1500

1.24

Does the monthly rent include for: Yes - Utilities

water

Most Areas are 220 Volts

readily Yes. However the Water distribution system is a ventoury system not a meter system. As a result of that, tanks are installed in the roof or basement of a building to store water.

No

X


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

- Furniture X A furnished One-bedroom apartment in Beirut is approximately $1200/Month 1.25

What is the duration of a typical Typical lease is for a period of a year or three lease? years. However, furnished apartment could be lease monthly at a higher rate. In many cases the lease would not include escalation clause. Six Month Advance payment are very common

1.26

What is the cost to purchase mid- 1996 Chevy Malibu 16-$18,000 sized cars? (State type) 1991 Honda Accord $7,500 1995 Grand Cherokee $25,000 New cars are roughly 10-20% more expensive then the U.S Market. All kinds of financing exist. Financing is quite new for the Lebanese Society that uses to be a cash only society.

1.27

What are the average operating Liability Insurance is roughly $100 costs per month for this car Maintenance and Repair $50 including tax insurance, Gas and Misc. Expense $200 maintenance and repairs?

1.28

Do expatriates typically drive?

1.29

If not, what is the monthly cost for $500-600 Since he should be capable of a local driver? communicating in English/or French

Yes, If they have been around for a while. All they need is their international driving license. However, they should be quite aggressive driver in order to make it.

1.30 Describe briefly the requirements for work permits for expatriates working in the country

International firms awarded contracts in Lebanon are allowed to get their staff. Visa and work permits are granted upon showing a proof of job offers.

1.31

Beside the work permit fee there is no additional taxes applied. Companies will cut 5-10 % (depend on income bracket) of the wages in order to account for Social Security and other taxes.

Describe briefly (or attach information) on the local taxation of expatriates' salary and other income.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

2. THE LOCAL CONSTRUCTION INDUSTRY 2.1

National value of annual construction for past year? Roughly two billion dollars

2.2 Labor availability. available? Skilled Unskilled 2.3

Readily

Is labor unionized?

Are the unions powerful?

2.4

Inflation rates Past year 1996 Current year 1997 Year after 1998

Yes. However the Construction labor force is typically from: Syria, Palestine, or Sri-Lanka Yes Yes There is no Construction Labor Union. However, there is a General Labor Union. It does not have any power as in price fixing. They have medium power. They call for strikes asking Government to raise Salaries and or conditions of employment.

7-8 % 6.5 % 6-8 %

2.5

Bidding Climate (competitive, favorable, abundance of work etc.) Past year 1997 Current year 1998

Very competitive market. Typically the Owner will get back and negotiate with the lowest bidder to get the best offer and the best price. There is plenty of public work. The private sector is relatively slow because the economy is relatively stagnant and Real Estate prices are deflated as compared to three years ago when everybody was expecting tremendous growth after the Arab-Israeli Peace talks started.

2.6

Does the architect lead the No. The Civil Engineer is the leader in most design team? cases. This is due to the nature of construction where most projects (Residential and Office space) are concrete frame building (9-15) story.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

2.7

Are quantity surveyors and bills Yes: payments, however, are based on inof quantities used for bidding the place measured quantities. work?

2.8

Are cost management techniques Yes, for major contracts that tend to be used? infrastructure projects or high profile: like Solidere, Airport, Arab Highway, and Bank Headquarter. Not common for residential Construction.

2.9

What type of scheduling systems CPM is used. Primavera is typically used? Are schedules software is very widely used automated?

2.10

Do architects/engineers need to Yes be registered locally to sign drawings?

2.11

Are there standard forms agreement Owner-Contractor

Owner-Architect

2.12

scheduling

of Yes There are forms developed by the CDR (Conseil du development at de la construction). Another set of forms are developed for large projects by the CEGP (Conseil executive des grand projets) Same as above

What are the usual fee scales for all professional services: Depends on the size and quality typically 4Architect, Engineers, Quantity, 11% Larger figures are for industrial projects Surveyors, etc. as they usually require foreign supports. Total

2.13 Are the drawings usually 100% Yes complete before bidding?


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

2.14 Is a Bills of Quantities (B.o.Q.) Yes issued with the bidding documents?

2.15 Who is responsible for the Designers and Consultant accuracy of the quantities in the B.o.Q., e.g. contractors, quantity surveyors, and owner? 2.16 Are the contracts firm lump sum Unit Price mostly. Lump Sum can be used on or unit price contracts? smaller size project.

2.17 Are lump sum contracts derived Yes. from the bill of quantities and if so, who Design and Consulting firms are responsible is responsible for any errors? for errors. Typically contractors examine and confirm the Bill of Quantity.

2.18 What are the typical customs fees and clearance charges for building materials and equipment imported into the country?

Each year there is a revised list of items with their appropriate fees. Should bear in mind that this is a country that is coming out of 15 year of war. Lots of changes and many of the standards and policies are now getting established.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

3. CONSTRUCTION STANDARDS/APPROVAL PROCESS 3.1 What building codes, etc. are Combination of various system taken from typically U.S., French, and British Codes applicable to the local construction industry? 3.2

What standards apply USA/British/French Codes B.S.S./German Codes/Euro Codes etc.?

3.3

Information on Drawings -

Metric Typical scale floor plan Typical scale site plans Typical sheet sizes

Yes 1/100 1/500-1/200 A3-A1-A0

3.4

Who typically approves the contractors work and at what Supervisor from the Consulting and intervals? Designer Office. Approval can be done daily, weekly, or per task. The design team will provide a full time team for oversight.

3.5

Brief description of the land acquisition and building permit approval process -

Typically City Permit, engineering review List permits and government and approval, Power Company, etc. approvals required, and Typically it takes 4-6 Months. However, this can vary depend on “Who is behind the duration to obtain each. Process”, “whether proper “fees” has been paid”, etc. Should keep in mind that you are in a developing country, and corruption still exists in various government entities.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

4. TYPICAL CONSTRUCTION 4.1 Warehouse Buildings What is the typical local construction for warehouse buildings for each of the following building elements? Code

Element

Outline Specification

01

Foundations

Spread Footing

02

Substructure

Concrete Slab on Grade

03

Superstructure

Concrete Two Way Slab on Concrete Columns

04

Exterior Closure

Concrete Block Painted

05

Roofing

Applied Asphalting Roof Membrane directly on a concrete roof structure

06

Interior Construction

Plastered Concrete Block Walls

07

Conveying Systems

N/A

08

Mechanical

09

Electrical

10

Gen. Conditions/Profits

11

Equipment


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

4.2 Office Buildings What is the typical local construction for a central business district (i.e., downtown city location) office building for each of the following building elements?

Code 01

Element Foundations

Outline Specification Spread Footing/Pile (Depend on Location)

02

Substructure

Underground structured parking. Slab on grade.

03

Superstructure

Concrete slab on concrete beams and columns

04

Exterior Closure

Concrete block with marble veneer

05

Roofing

Applied asphalt membrane to concrete structure

06

Interior Construction

Concrete block wall, plaster on walls, painted. Carpet in offices, terrazzo flooring at lobby, and paint underside of structure.

07

Conveying Systems

Hydraulic passenger elevator

08

Mechanical

Central heat and air No Sprinkler System

09

Electrical

10

Gen. Conditions/Profits

11

Equipment


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

5. TYPICAL SITE CONDITIONS

5.1

Within major cities are utilities typically available for: Drainage

Yes X

Power

X

Water

X

Gas Communications

5.2

What is the average ratio of site area to Warehouses building area for these facilities? Depend on zoning 2 2 (i.e. 10,000 M site 1000 M building = Office buildings 10:1) Depend on zoning

5.3

What are the typical hook up connection Cost fees, related costs and durations for the following site utilities?

No

X X

Time Required to obtain or implement

− City heating systems − Drainage - Sewage − Drainage - Storm − Electrical power − Waste discharge − Water − Gas Depends Depends − Communications The real cost is not the declared or stated fee that the government requires. The cost is basically the “fee” that should be paid in order to accelerate the process of receiving such services. In most cases is way above the hookup and connection fess.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

5.4

What are the regulations and limitations Dump Debris / Waste at an approved for waste discharge from manufacturing site. No existing regulations and or processes? limitations. Again Government is working on setting these standards and policies.

5.5

Describe briefly typical land costs: acquisition fees, procedures and approvals required for acquiring land.

Government fees. Real Estate Agency fees (Roughly 5%). Government fees fall back into the previous category where the cost of getting things done is more significant then the acquisition fees.

5.6

Describe briefly requirements and Bank guarantee that funds are typical costs for leasing office, available to pay lease. warehouse buildings. Lease in areas like Verdun and Hamra Street will run around $350-400 per square meter. This cost does not include any utilities.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

6. MATERIALS INCLUDING DELIVERY TO SITE COSTS 6.1

Are the following materials readily available:

Yes

No

Units

Currency ---U.S.$---Cost per Unit

Cement

X

M-Ton

85

Sand

X

M3

9

Aggregate

X

M3

9

Ready-mix concrete

X

M3

55

Reinforcing steel

X

M-Ton

315

Structural steel

X

M-Ton

315

Concrete Blocks

X

Each

0.22

Brick Facing

X

Each

0.75


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

6.1

Are the following materials readily available:

Quarry Tile

Yes

No

Units

Currency ----$-----Cost per Unit

X

M2

20-30

X

M2

15-35

Windows wood & metal

X

M2

55-85

Curtain Wall

X

M2

200-300

Pipe Size Plastic: 4�

X

M

3

Galvanized Sheet Metal -Straight Curved

X

KG

2-4 8

Ton X

Each

1000

Fan Coil Unit (York) 2 R.T. (Hot and X Cold)

Each

1730

Fan Coil Unit 5 R.T. (Hot and Cold)

X

Each

3250

Do the above material costs include V.A.T.? or other taxes?

No. VAT is not required in Lebanon. No Sales Tax is applicable.

Colored Ceramic Tile

Fan Coil (Refrigerator)

Unit

(York)

1


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

7. LABOR COSTS AND EFFICIENCY 7.1

What does the contractor pay for: (US $ currency) Skilled Labor -

Per Hour

Per Day $15-20

Unskilled Labor

$10

7.2

What are the additional costs payable by a contractor for Skilled Labor: 40% employee labor to include, insurances, vacations, travel and other fringe items as a Unskilled Labor: 40% percentage?

7.3

Are there termination fees, if so, how much? Skilled Labor: % Unskilled Labor: % One Month of pay for every year of work, if there is a contract. Typically only managerial positions have contractual agreements.

7.4

7.5

In addition to the above, are there any special benefits, if so, please No provide details.

How efficient is labor compared Skilled Labor.....% with one of the following countries? N/A . . . . . . U.S.A. . . . . . . U.K. . . . . . . Japan . . . . . . Other

Unskilled Labor....% N/A


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

7.6

To help compute efficiency factors, please indicate the number of man-hours for skilled and unskilled labor necessary to carry out the following operations. Exclude overall supervision and foreman's time.

Unit of Measure

Labor Hours

4.5 M H

Place concrete in - foundations - walls

M³ M³

1.2-1.5 MH 2-3 MH

Bend and place reinforcing steel (6 mm-10 mm).

M-Ton

55-90 MH

Lay 20cm thick masonry wall.

.88 MH

Install metal door and frame.

1 each

4.4 MH

7.6

15mm plaster to walls

0.20 MH

7.7

Lay ceramic floor tiles including grouting

1.5 MH

7.8

Install 100mm drain pipe

M

0.4 MH

7.9

Install light switch

1 each

0.18 MH

7.10

2 coats latex/emulsion paint to walls

0.24-0.36 MH

7.1

7.2

7.3

7.4

7.5

Activity Excavate foundation in normal ground (by hand).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

7.7

What are the normal hourly rates an Architect/Engineer charges a client for design work? (in US $) Per Hour

7.8

-

Principal

$85

-

Senior Designer

$45

-

Junior Designer

$25

-

Draftsman

$15

What are the normal rates a contractor charges an owner for labor? (in US $) Per Hour -

Skilled Labor

-

Unskilled Labor

-

Foreman

-

Site Engineer

*

Per Day *

* This is not a typical approach of contracting. The labor is always embedded as part of the total cost.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

8. COST DATA M2 8.1

Based on the descriptions given in section 4, please indicate today's general price range for average quality construction to international standards (exclude cost of the site works and bringing utilities to the site.)

Code

Element

01

Foundations

02

Substructure

03

Superstructure

04

Exterior Closure

05

Roofing

06

Interior Construction

07

Conveying Systems

08

Mechanical

09

Electrical

10

Gen. Conditions &Profit

11

Equipment * TOTAL

* Identify type of equipment, if any.

Warehouse Bldg.

US$ 200-300

Office Bldg. Incl. Tenant Build out

US$ 325-450


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

8. COST DATA M2 8.2 Please indicate the current general prices for average quality construction to local and industrial standards for the following building types. (Exclude cost of furniture fittings, site works and the cost of bringing utilities to site.) Building Type

Local Standards (In US$)

Warehouse Building

200-300/m²

Office Building (dimension) -Shell and Core -Tenant Fit out

250-300/m² 300-450/m²

Apartment Building Construction

350-450/m²

Housing - Low Cost -Expatriate quality

200-300/m² 400-500/m²

Hospital

350-550/m²

Schools

250-350/m²

*F.F. & E. means furniture fittings and equipment.

8.3 8.4 8.5

Do the above costs m2 includes for V.A.T. or other local taxes? Are all areas measured on plan to the outside face of external wall? (all floors) Is VAT refundable on construction projects

Yes No All inclusive. VAT is N/A X N/A


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

9. COST DATA UNIT PRICES FOR BUILDINGS 9.1 Based on the descriptions given in Section 4, please indicate today’s unit prices (labor and material work net in place) for average quality construction to International standards (indicate currency). Currency (US$) Cost per Unit 160-230

9.1 .01

Description Reinforced Concrete in beams and columns include formwork and rebar

Unit M³

.02

Reinforced Concrete in foundations include formwork and rebar

105-170

.03

100mm insulation in walls

18

.04

Single Ply Roof Membrane

7-10

.05

100 mm Roof Insulation

18-20

.06

200mm facing brick wall

45

.07

200mm Concrete partition wall

10

.08

Plaster to walls

6

.09

W.C. including accessories and adjacent piping

1 each

150

100 mm P.V.C. pipe including fitting

M

.10

Yes

9.2

Do the above unit rates include general contractor overhead and profit? If not how X much should be added?

9.3

Do the above unit rates include for V.A.T?

6

No

VAT is required Lebanon

not in


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

10. SITEWORK COSTS

10.1 .01

.02

The following unit prices to include for labor, materials and equipment for work net in place. Unit Concrete including reinforcement and formwork in walls M3

Currency .........$........... Cost per Unit 150-175

Concrete curb to roads and parking areas M

18-20

.03 .04 .05

Asphalt paving 250 mm Concrete paving 100 mm 100 cm drain pipe & trench

M2 M2 M

16-18 15-20 35

.06

Gravel Path & Driveway 25 mm . Gravel Path and Driveway 50 mm

M2

.75

M2

1.25

.07

Yes 10.2

Do the above rates include general contractor overhead and profit? If not, how X much should be added?

Yes 10.3

No

Do the above rates include for V.A.T.?

No VAT is required Lebanon

not in


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

References

Spon, E., (1996). Middle East Construction Price Book (1st ed.). London; Spon

Pratt D., (1995).

Fundamentals of Construction Estimating. New York; Delmar

Publishers

McConville, J. (1996). The 1996 International Construction Costs and Reference Data Year Book, John Wiley and Sons, Inc.

Lucas, C. (1988). International Construction Business Management

Decker K. “ International Estimating: A never ending Saga” American Association of Cost Engineers Transactions; INT8.1-INT8.8, 1994

Hanscomb/Means

Report:

International

Construction

Cost

Intelligence:

The

Construction Scene in Lebanon, Volume 6, No. 8, Hanscomb, Inc., 1998

Lucas, C. and Kangari, R., (1997) Managing International Operations,

New York,

ASCE Press

Dr. Itr graduated with a Bachelor of Engineering in civil engineering from the American University of Beirut in June 1985, with a Master degree in civil engineering from Georgia Institute of Technology in June 1987, and finally with a Ph.D. in civil engineering with a specialty in Construction Management from Georgia Institute of Technology in 1992.

Dr. Itr assumed various construction and project management responsibilities and worked for leading firms at various stages of the construction process from feasibility, pre-construction services to execution. Industry employment included: Order Inc,


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Hanscomb Inc, Raytheon, Project Time and Cost, Westinghouse Remediation Services, and Management consulting and Training.

Dr. Itr is certified as a Cost Engineer by the American Society of Cost Engineers. He is also certified as an ISO 9000 Lead Auditor by the British Standards Institute. He received advanced training in Value engineering, Occupation, Safety, and Health Standards, best management practices, real estate development, and Design Build.

Currently Dr. Itr is an associate professor of construction management at Southern Polytechnic State University. His research interest includes international construction management, public policy in construction, and Application of ISO 900 Standards to the construction industry.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

WHAT IS DURABLE CONCRETE? John W. Adcox Jr. EdD, CPC W. Ronald Woods P.E. ABSTRACT One of the most common and expensive problems in the construction industry is concrete, the final in place product. The need to supply owners with durable concrete requires the collaborative effort of not just the contractor but the entire construction team from the design, specifications to placement.

KEY WORDS Concrete, Construction, Concrete Design, Specifications

INTRODUCTION Durable concrete may be defined as "Concrete which performs as intended in the environment in which it is placed, without premature deterioration or loss of serviceability." While this may seem to be a broad and encompassing definition, it is the result almost always sought, whether implied or stated.

Loss of serviceability and premature

deterioration may be considered subjective parameters, however, these parameters can be reasonably well-defined within the specific application of a concrete such as an interior floor slab or a cast-in-place concrete structure. In these applications, the end user usually knows the desired performance but does not usually know how it is achieved. As an example, a warehouse manager wants a floor slab that is not excessively cracked, has no


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

major joint deficiencies and has a surface that does not flake or dust excessively. This end user knows when these parameters are not met because it affects his (or her) operation.

THE BACKGROUND Durable concrete is not achieved by accident. Often it is assumed that a higher strength concrete implies better durability. This is often not the case. It is all too common to see a floor slab that has an in-place compressive strength exceeding 4000 psi that has crazing, map cracking and surface scaling. These occurrences have little to do with the average strength of the concrete and are typically caused by poor placement techniques and improper or inadequate curing.

When a designer decides on the compressive

strength required to resist an applied load, there is little further thought given to the concrete matrix and how it might react or perform to its environment. This usually occurs when there is a distinct lack of aggressive exposure, such as the seemingly innocuous warehouse application. The designer has failed to consider the probable abrasion of lifttrucks, pallets and other material handling equipment. In addition, the floor will likely be cleaned periodically, thus being exposed to a variety of chemical cleaning agents that can be aggressive to the concrete surface. Again, these items are not directly affected by the compressive strength without regard to durability considerations.

THE DESIGN To achieve durable concrete, certain controls must be placed on the concrete from


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

the selection of constituent materials through curing after placement. The mix design must address the end use by having a water-cement ratio compatible with the application. The water-cement ratio is one parameter that will directly affect both the compressive strength and the durability. For example, a high water-cement ratio (greater than 0.50) may lead to an increase in shrinkage of the concrete, increased bleed water during placement and problems in finishing, however, the strength of the concrete might be affected to a lesser degree than the durability. In short, the concrete will probably reach its intended compressive strength while long-term durability will be compromised. If the designer considers the durability factors before considering the compressive strength, it is likely that the concrete will be inherently strong enough for the intended application. There are exceptions to this, particularly in structural framework applications.

THE CONTRACTOR The controls must be continued through the delivery, placement and curing processes of concrete construction. Industry standards have been developed to achieve a modicum of uniformity in the production of concrete, especially ready-mix concrete. ASTM and the American Concrete Institute prescribe means of production and delivery of ready-mix concrete to provide a standardization of techniques and procedures. The National Ready-Mix Concrete Association also supports a uniformity of procedures by providing a certification program for concrete producers. Placement controls are slightly more difficult to implement since these usually require supervision or other means of quality assurance.

We can no longer assume that the placement crews are


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

knowledgeable of concrete control tasks and their contribution to poor concrete, nor can we assume that the crews have a desire to provide a level of quality implied and expected but not stated. Given the bottom-line cost consciousness of the construction industry, an increase in competition by a large unskilled labor force and the apparent lack of interest in trade education, there is little wonder that substandard quality of placement is to be the norm without specific well-defined controls. These controls are readily available in the industry, but they have to be referenced and enforced. An example of one of the controls available and respected in the industry, is the prohibition against adding water at the site by the contractor or placement subcontractor.

The ready - mix supplier knows, or

certainly should know, more about mix design and its properties than any other group involved in the construction process.

With this in mind, the ready mix supplier, through

its Quality Assurance representative, should be the only party to make modifications to the mix from time of batching through the point of discharge.

Indiscriminate water

addition by on-site personnel does more to compromise the durability of concrete than any other single factor.

SUMMARY Durable concrete can only be achieved by giving adequate forethought to the application of the concrete, responsive design to the application, the actual placement conditions on the construction project with good controls provided in the specifications.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

REFERENCES

ACI 304 Guide for Measuring, Mixing, Transporting and Placing Concrete, ACI, Detroit MI, 1989. ACI 301. Specification for Structural Concrete for Buildings, ACI, Detroit, MI, Oct. 1989. Allen, E. Fundamentals of Building Construction, 2nd Ed. New York: John Wiley & Sons, 1990. Ferguson, H., and L. Clayton.

Quality in the Constructed Project.

New York:

American Society of Civil Engineers, 1988. Herubin, C.A., and T.W. Marotta. Basic Construction Materials, 2nd Ed. Reston, VA: Reston Publishing Co., 1981. Jenny, D.P., and L.D. Martin, PCI Design Handbook, Precast and Prestressed Concrete,

3rd Ed. Chicago, IL: Prestressed Concrete Institute, 1985.

Schodek, D.L. Structures, 2nd Ed. Englewood Cliffs, NJ: Prentice-Hall, 1992. Smith, R.C., and C.K. Andres. Principles and Practices of Heavy Construction, 5th Ed. Englewood Cliffs, NJ: Prentice-Hall, 1998. Spiegel, L., and G.F. Limbrunner. Reinforced Concrete Design. Englewood Cliffs, NJ: Prentice-Hall, 1980.

JOHN W. ADCOX JR., an associate professor of construction management in the Department of Building Construction at the University of North Florida (UNF). He holds a bachelor and master's degree in industrial education from Mississippi State University and an EdD from the University of Florida in Curriculum and Instruction. He is a CPC certified Professional Constructor, State of Florida Certified General Contractor and State of Florida Certified Roofing Contractor.

His research interests are related to

delivering the construction education curriculum at the University level.

He has

authored many articles in the past 15 years and presented many papers. He is in the process of writing an estimating textbook and has taught for 28 years construction


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

education from the high school to university level and served as a department chair and coordinator for over 10 years.

He serves as an expert witness and operated and

owned a general construction business for over 30 years.

W. RONALD WOODS, is a graduate of the University of Florida and has 25 years of engineering design and consulting experience. A Vice-President/Senior Principal at Law Engineering and Environmental Services, Inc., he provides consulting to LAW’s clients at locations across the United States. He is a registered Professional Engineer in Florida, Georgia, Louisiana, and Michigan; and is a Certified General Contractor, a Certified Roofing Contractor, and a Certified Special Inspector.

In addition to providing consulting to public and private clients, Mr. Woods is an adjunct professor in the Building Construction Management Program at the University of North Florida, and serves on the Building Construction Management Advisory Council at the University. He also serves on the Board of Directors of the First Coast Chapter of the American Concrete Institute.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Construction Tax Accounting for Long-Term Contracts: The Percentage of Completion Method Francis M. Eubanks, PE,CPC,CIOB J. Mark Webb

ABSTRACT Numerous volumes have been published on the percentage of completion accounting method.

Unfortunately, not all of them provide congruous, or

currently viable information. Contractors and accountants continue to battle over tax reporting and the Internal Revenue Service continues to add complications to its reporting requirements. This article investigates current IRS tax accounting rules for long-term construction contracts as well as basic logic for applying them.

KEY WORDS Continuous Sale, Long-Term Contract, Completed Contract Method, Percentage of Completion Method, Overbillings, Underbillings, Look Back Rule, Capitalized Cost, Omnibus Budget Reconciliation Act of 1989

INTRODUCTION Imagine that Bob buys a bag of potato chips from a local grocery store. He pays for it at the cashier’s counter, and the bag of chips becomes his to consume or throw away or whatever else he may have in mind. The seller just recognized revenue and profit.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Now, imagine that Margaret goes to a local auto dealer and buys a brand new Ford Explorer.

She finances it through Ford Motor Company’s credit

division but later decides not to make her monthly payments. Does she actually own the vehicle? Maybe, but Ford has a right to take the Explorer back from her when her payments lapse. Finally, let us pretend that Bob and Margaret decide to start a small business and they hire ABC Construction to build an office building for them. ABC bills at the end of each month for work completed that month. At the end of the second month into the project Bob and Margaret receive their second application for payment from ABC and they throw it in the trash and tell ABC they will not pay any more. The project thus far consists of the foundations, slab on grade, and most of the wood framing. ABC stops work on the job, but what can they do? The job has not been consumed like a bag of chips, and they cannot bring trucks to the site and take the structure away (like Ford could with the Explorer).

ABC spent money on labor, material, and equipment to provide

services and produce a very unique item.

CONTINUOUS SALE The business activity occurring during an executed construction contract is basically a continuous sale (“transfer of ownership rights”) occurring as the work progresses. This is somewhat different from more common situations involving production of goods by a manufacturing company. In manufacturing, production units are produced and delivered. At a certain point, a sale is considered “made”


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

and title and risk of loss is usually transferred to the customer. Ownership rights are transferred once, not continuously. Delivery and acceptance are objective measures that are used to show that the goods meet the customer’s desired specifications and that the contract (if there was one) has been performed (Al CPA, 1981, pp. 118-119). Under a construction contract both the contractor and the customer have legal rights that are enforceable. The contractor agrees to sell his rights to work in-progress throughout the duration of the contract. He has no ownership claims, but he does have lien rights. The customer, in turn, usually agrees to make progress payments to the contractor in support of his ownership investment after the work to date is periodically approved. This continuity of the sale during the contract requires different accounting procedures than the basic completed contract method, where revenues and profits are recognized at the completion of the project (Al CPA, 1981, p. 118).

A BRIEF HISTORY Before 1986, businesses that engaged in long-term contracts (those who produce “unique” items, taking more than one year to produce or produced in overlapping fiscal years) did not have to pay taxes on income they were receiving until the contract was completed. Taxes owed in one year could be deferred until the next year (or even the following year, for larger contracts) when the project would be finished. Many of the firms that took advantage of this tax loophole were contractors.

These companies were receiving income in the form of


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

progress payments or prepayments during the duration of the job, yet they were not paying taxes on this income.

Especially interesting were defense

contractors. The federal government was financing and paying for large defense contracts that would last several years, and the contractors were receiving government payments but deferring taxes until completion (NTMA). This abuse was stopped with the 1986 Tax Reform Act. This law required contractors (and manufacturers with similar practices, such as producers of molds, dies, and jigs) to determine what percentage of the contract had been completed in a given tax year and pay taxes on that portion. For the most part, this Act of Congress was deemed to be fair. However, it did harm the business of some small manufacturers who were not paid for their work until it was completed.

For the purpose of this article, we will only be concerned with

contractors in the commercial and industrial construction industries. The percentage of completion accounting method more accurately relates to users of the firm’s financial statements the volume of economic activity of the company for a specific year and the income, expenses, and profits associated with that activity. It presents this information more timely and more clearly than do statements prepared under the completed contract method (AICPA, 1981, p. 119). The Omnibus Budget Reconciliation Act of 1989 (OBRA) created another significant provision for contractors. This act “allows the taxpayer to elect not to recognize income on, and not to take into account expenses allocable to, a long term contract if, at the end of the taxable year, less than 10 percent of the total


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

estimated contract costs have been incurred” (Callan, 1987, p. 18-3).

This

provides for contractors a way of deferring taxes to a certain extent.

Jobs

commencing at year-end can actually be advantageous to the construction company. The percentage of completion accounting method obviously has some interesting tax consequences.

In fact, many small subcontractors in the

construction industry who are able to “fast-track” their operations have found a good mix of accounting procedures. They often use percentage of completion for internal operating purposes and the completed contract method for tax reporting. This offers great tax benefits in addition to tighter control over cash flows (Harvey, 1999).

FOUR BASIC METHODS Before the Tax Reform Act of 1986, there were four basic methods of accounting available to contractors: cash, accrual, completed contract, and percentage of completion. The cash and accrual methods are available to most types of businesses. Under the cash basis of accounting, revenue and expenses are recognized in the period in which cash is received or paid. The accrual method recognizes revenue in the period in which the right to receive the revenue occurs; expenses are treated in a similar fashion (recognized when invoiced, not when payment actually made).

However, contractors in the

construction industry generally use the completed contract and the percentage of completion methods (Milliner,1988, pp. 36-37).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

When using the completed contract method of accounting, revenue and expenses for a certain project are recognized only upon completion of that project. But, with the percentage of completion method, revenues, costs, and profits are recognized throughout the project based on periodic measurements of progress (usually monthly for construction contractors).

Percentage of

completion is similar to the accrual method of accounting in that it recognizes income and costs throughout a project.

However, it treats overbillings and

underbillings differently (Milliner,1988, pp. 37-38). Overbillings are billings in excess of costs and estimated earnings on uncompleted contracts. If, in the earlier example of Bob and Margaret’s new office building, ABC bills the owners for 30% of the contract, but has only completed 25% of the work, then ABC has overbilled its customer. Under the accrual method, this extra 5% is treated as income, while the percentage of completion method treats it as a liability. Underbillings are costs and estimated earnings in excess of billings on uncompleted contracts; they are treated as an asset with the percentage of completion accounting method (Milliner, 1988, p 38). Overbillings and underbillings occur in a construction company’s financial environment because of the need in construction accounting to match a period’s income with that period’s expenses. This matching attempt gets muddled and confusing when dealing with a long-term contract, especially if several jobs each carry over into several accounting periods. The contractor needs a system to determine whether and how much each job has been overbilled or underbilled


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

and then to make adjustments to “fix” these overbillings and underbillings. In the same vein, the contractor must also figure out how and when to recognize a loss both for internal profit and loss purposes and for external (Internal Revenue Service) purposes (Eubanks). To further complicate the issue at hand, tax reporting must be reconciled with profit and loss records, and this must be done in one set of books for the company. For obvious reasons, contractors want to collect as much profit as possible (by overbilling or “front-end loading”) and defer taxes as much is as allowed. It is desirable from the contractor’s standpoint to finance the job with the owner’s money as much as possible. The Internal Revenue Service attempts to “look back” at the past year to make sure the contractor did not “swindle” anybody- hence, the Look Back Rule (Eubanks).

THE LOOK BACK RULE The Look Back Rule (from the Tax Reform Act of 1986) requires the contractor to look back at a job after it is completed and compare the actual revenue recognized and taxes paid to the estimated income and tax (if the project overlapped accounting periods). The actual contract price and costs are used to figure what taxes should have been paid. If the contractor underpaid taxes, there are no additional taxes owed, because taxes will be “caught up” the next year, but the contractor must make interest payments to the government based on the amount of the underpayments. On the other hand, if the contractor determines through the above calculation that taxes were overpaid, then the


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

government owes interest payments to the contractor (Milliner, 1988, p. 205). The interest on the overpayment or underpayment is computed at a certain rate that varies with the prime rate (Callan, 1987, p. 18-3). A good construction cost estimator can help avoid large variances in these numbers.

PERCENTAGE OF COMPLETION Percentage of completion is the method most widely accepted by the Internal Revenue Service for income tax accounting by contractors. The other methods are limited in certain ways. The IRS attempts to limit the variations between financial accounting and income tax accounting, and one way to accomplish this is to require strict acceptability controls on accounting procedures (Coombs & Palmer, 1989, p. 27). The percentage of completion method requires contractors to determine what costs have been incurred to date, divide this by total estimated costs to complete, and use this calculated ratio as a basis for progress on the project. This percentage (of completion) is applied to the contract price to determine how much cumulative revenue is recognized on the contract. Revenue earned in previous periods is then subtracted from the cumulative revenue to give revenue the firm must recognize in the current period. Roughly the same procedure is used to determine gross profit recognized in any specific period; the percentage is applied to total estimated gross profit, which is the contract price less the estimated cost to complete. This is probably best clarified with an example.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

EXAMPLE ABC Construction Company, Inc. is building new dormitories for a college campus. The contract is priced at $12 million, and the duration is 18 months. This is a long-term contract by definition (unique item built over a period longer than a year). The contract stipulates that the college will make monthly progress payments to the contractor. The percentage of completion method must be used for accounting purposes. Currently, the eighth month of the project is coming to an end, and the application for payment is being prepared.

ABC’s project

manager estimates that the total cost of the project will be $11.5 million. Costs incurred to date are $7 million. The percentage of completion is therefore about 61 % (7 / 11.5 = 0.61). To determine the progress billing to the college, this ratio is multiplied by the contract price: 0.61 * 12 = 7.3. This is the amount that ABC is due so far for their work ($7.3 million). Now, they must subtract revenue earned in previous periods (say, $6 million) to get the revenue earned this period, which is $1.3 million (7.3 - 6 = 1.3). This is the amount that is billed on the contractor’s application for payment, and this is how much revenue is recognized for the eighth month of work on the contract. To find the-gross profit earned in the eighth month, the percentage of completion (61%) obtained earlier is applied to the total estimated gross profit. Total estimated gross profit is the contract price less total estimated costs, which in this case would be $500,000 ($12 million less $11.5 million). Gross profit earned to date would be approximately $304,000 (0.61 * 500,000). Let’s say that ABC earned gross profit of $250,000 in previous periods. This is subtracted from


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

the gross profit earned to date to give a gross profit of $54,000 earned during the eighth month of work on the contract (304 - 250 = 54). An alternate way of performing the calculations above is to first apply the percentage of completion to the total estimated gross profit.

Then, this

cumulative gross profit earned is added to the total costs to date to determine earned income to date. It must be kept in mind that the costs used in these calculations are costs incurred, whether they have been paid or not (Coombs & Palmer,1989).

ESTIMATED COST TO COMPLETE As can be seen in the above example, it is imperative that future costs be accurately estimated.

The driver behind the percentage of completion

accounting method is the contract’s total estimated cost to complete. It is often very difficult to forecast such costs on a large, long, and complicated construction contract.

Unforeseen conditions, acts of God, vandalism, poor project

documents from architects and engineers, and many other factors can cause unexpected variability in the total cost of a construction project. This is why more and more colleges are adopting coursework catered to construction project management and cost estimating.

A bad estimate can literally break a

construction company. The use of the percentage of completion method depends heavily on a firm’s ability to accurately forecast costs. The American Institute of Certified Public Accountants’ Audit and Accounting Guide for Construction Contractors


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

states that “the ability to produce reasonably dependable estimates is an essential element of the contracting business” (1981, p.

20).

If a loss is

predicted on a certain contract, generally accepted accounting principles require that this loss is recognized as soon as it is anticipated. If a contractor cannot update and revise estimates on a regular basis with this level of competence, then generally accepted accounting principles have been violated (AICPA,1981, p.120). There are several variants of the percentage of completion accounting method.

These are compared in Figure 1, taken from Milliner’s Contractor’s

Business Handbook (1988, p. 204). This article focuses on the two methods used by “large contractors” which are defined as those firms with over $10 million in annual revenues or those with contracts lasting more than two years. The Modified Percentage of Completion Method and the Percentage of Completion Capitalized Cost Method are the two accounting choices generally utilized by large contracting firms (Milliner, 1988, p. 203). The Tax Reform Act of 1986 modified the existing percentage of completion method in two ways for large contractors. First, the calculation of the percentage of completion was limited to using costs as described in the previous ABC example (“cost-to-cost” method). Before 1986, the percentage of physical work completed was used as the “percentage of completion.”

The second

change dealt with cost capitalization rules, which are beyond the scope of this article. Basically, these rules require that all costs that benefit a contract, or are


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

incurred because of that contract, be allocated to that particular project for which they are incurred (Milliner, 1988, pp. 203-204). The Percentage of Completion Capitalized Cost Method also came about through the passing of the Tax Reform Act of 1986 and was modified in 1987. It simply allows the contractor to recognize 70% of its income by the modified percentage of completion method discussed above, while the other 30% can be recognized through the regular or normal method. For this reason, it is often referred to as the “70-30 method� (Milliner, 1988, p. 205).

ADVANTAGES AND DISADVANTAGES A main advantage of the percentage of completion accounting method is that it provides for periodic recognition of income rather than showing this revenue irregularly as contracts are completed.

Also, the status of each

uncompleted contract is depicted periodically as total estimated costs to complete are revised and updated (Coombs & Palmer, 1989, p. 31). The principle disadvantage of the percentage of completion method is that it is dependent on estimates of ultimate costs, which are affected by accruing revenues.

These figures can be difficult to estimate, considering the

uncertainties and complications that often permeate long-term construction contracts (Coombs & Palmer, 1989, p. 31).

Once again, it is apparent how

integral to the firm it is to have competent and meticulous cost estimators and project managers.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

FIGURE 1 Comparison of Income Recognition Methods by Size of Contractor Volume

Small Contractor Exemption - Contractor Size

Method of Accounting

Contractors with less than$5 million of Gross Revenue

Contractors with $5-10 million of Gross Revenue

Cash Basis Method

Available as optional method

Unavailable

Accrual Basis Method Modified Percentage of Completion Method (with Cost Capitalization rules) Completed Contract Method Percentage of Completion Capitalized Cost Method (“70-30 0 method”)

Available as optional method Available as optional method

Not required

Not required

Available as optional method Available as optional method

Not required

Not required

Contractors with greater than $10 million of Gross Revenue Unavailable Available in conjunction with either Long-term contract methods

Required option

Unavailable

Required option


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

There are some exceptions to the rules posed by the percentage of completion accounting method.

The “small construction contract exception”

applies to firms that have average gross revenues of less than $10 million for the past three years and that have contracts estimated not to exceed 24 months. This exception to the rule is best explained in an example from The Tax Adviser. In their article, Hammerschmidt and Luchs (1994) describe the following situation: Corporation X is a construction contractor that used the completed contract method for long-term contracts entered into before Mar. 1, 1986. Until 1994, X’s average annual gross receipts for the three preceding tax years exceeded $10,000,000.

Thus, X did not qualify for the small construction contract

exception. However, X’s extremely low gross receipts for its tax year ending Dec. 31, 1993 caused its average annual gross receipts for 1991 through 1993 to drop below $10,000,000. Therefore, X must use the completed contract method for construction contracts entered into in 1994, unless X obtains IRS consent to change its accounting method.

CLOSING REMARKS In 1997, the Internal Revenue Service coordinated an issue paper to warn contractors using the percentage of completion method against delaying income recognition by delaying recognition of subcontractor costs. Before the publication of this issue paper, many contractors were postponing recognition of costs incurred for the work of their subcontractors near a tax year’s end so that they


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

may postpone income and thus defer payment of income taxes.

The IRS

became concerned with this issue and stated in its 1997 paper that a contractor shall incur and recognize the cost of a subcontractor’s work upon receipt of the subcontractor’s invoice, not upon payment to the subcontractor (Bliha, 1997). In addition, when a contractor accepts its subcontractor’s work periodically throughout the project, the contractor should accrue income and costs at these inspection and acceptance intervals (Dermody, Burke & Brown, 1997). There have been volumes published on the percentage of completion accounting method, and - unfortunately - not all of them provide congruous information. Contractors and accountants still battle over cost control and recovery systems, and the Internal Revenue Service continues to add complications to its reporting requirements.

Currently, professionals in the construction industry are

attempting to determine how to treat change orders to a contract at a tax year’s end in light of the percentage of completion method. Because so much of the system relies on estimated figures, there is much disagreement over how to perform certain calculations. Contractors continue to find tax loopholes, while the IRS continues to revise percentage of completion policies to reflect new arguments. The percentage of completion accounting method has been greatly developed since 1986, but still has a long way to go.

REFERENCES American Institute of Certified Public Accountants.

(1981) Construction

Contractors. New York: American Institute of Certified Public Accountants.


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Bliha, R. F. (1997) Taxpayers using PCM cautioned by IRS on delaying income recognition. The Tax Adviser, 28(9), 543.

Callan, J.

L.

(1987).

Construction Accounting Manual: 1990 Cumulative

Supplement. Boston: Warren, Gorham & Lamont.

Coombs, W.

E., & Palmer, W.

J.

(1989).

Construction Accounting and

Financial Management: Fourth Edition. NewYork: McGraw-Hill.

Dermody, Burke & Brown, Certified Public Accountants, P.

C.

(1997) The

Percentage-of-Completion Method- IRS Issues Guidance. Retrieved October 7, 1999 from the World Wide Web: http://www.dbandb.com

Eubanks, F.

M., Clemson University Associate Professor of Construction

Accounting. (1999, October 1). Personal interview.

Hammerschmidt, P. E., & Luchs, L. D. (1994) Different Accounting Methods May Apply for Long-term Construction Contracts Depending on the Amount of the Three Preceding Tax Years’ Gross Receipts. The Tax Adviser, 25(5),296.

Harvey. (1999), Message Added Re: Contractors (percentage of completion accosting [sic]). Retrieved October 7, 1999 from the World Wide Web: http:// www.cashplan.com

Knight, K. U., Gilbert Construction Company, Ltd., Controller. (1999, September 24). Personal interview.

Long-term construction contracts. Retrieved October 7, 1999 from the World Wide Web: http://www.cob.niu.edu


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Milliner, M.

S. (1988). Contractor’s Business Handbook. Kingston: R. S.

Means.

National Tooling & Machining Association. Issue: Internal Revenue Code Section 460.

Retrieved October 7, 1999 from the World Wide Web: http://

www.ntma.org

Supplying Missing Amounts: Revenue Recognition (ex19) percentage-of completion method. Retrieved October 7, 1999 from the World Wide Web: http:// www.raw.rutgers.edu

Francis Eubanks is a professor of Construction science and Management at Clemson University.

J. Mark Webb is a Project Manager at Gilbert Construction in Florence, SC.


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

OCCUPANT SAFETY AND HEALTH ISSUES IN LOW COST HOUSING PROJECTS Theo C Haupt, Ph.D., M.Phil., MSAIB, MASI Richard J. Coble, Ph.D.

Abstract Occupants of houses have a right to expect their homes to be designed and constructed to be aesthetically pleasing, structurally sound while at the same time providing them a safe occupancy. Low cost housing for low income earners has, unfortunately, become associated with poor quality workmanship, and in some cases, is equated to unsafe buildings. Reasons postulated include restrictive budgetary limits, increasing competition, and compressed construction schedules. This paper will focus on the unsafe connotations which seem to be associated with low cost housing for occupants at the lowest end of the income scale. Regardless of economic status, all dwellings should strive for occupant safety and protection. Physical structural issues such as roof and ceiling support, health concerns about air quality, radon exposure, and toxic materials, and building materials containing asbestos, are typical examples of health related issues impacting occupants. This paper discusses potential danger areas and safeguards to prevent and overcome these issues. One recommendation argues for the assignment of the responsibility for quality control and accountability to a competent individual. This individual would be employed by the client and possess adequate and appropriate knowledge and experience to be able to accurately identify and provide remedial action. A further recommendation suggests that while occupant safety is achieved through quality


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

construction, it needs to be considered and addressed throughout the pre-design and design stages of projects. Since project design professionals contribute to overall occupant safety, they should question and demand a high level of safety requirements and precautions in their designs. Project professionals should plan for the entire construction process, from project inception through the final demise of the building by demolition at the end of its usefulness. The impact needs to be assessed that construction methods and routine maintenance will have on building occupants. This paper argues that economic status should not influence the subjection of individuals or groups of occupants to questionable standards of safety.

Keywords Low cost housing, occupant safety, construction quality, designer responsibility

Introduction In many countries especially those regarded as developing countries, affordable or low cost housing possesses many negative connotations, perhaps linked to a historical association with unsafe, and sometimes uninhabitable dwellings. The overarching desire to reduce the overall cost per housing unit while increasing the number of units constructed within a given budget, contributes to the perpetuation of these perceptions. Making homes more affordable to individuals and/or families with moderate to lower incomes whether they be single free-standing units or high density cluster single or multi-story units, has resulted in cost cutting measures that might compromise their structural integrity. Less costly, and less durable, building materials have been used in this cost reduction effort, potentially


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

endangering the inhabitants of the building. Where this has occurred, these structures have tended to deteriorate over time into run-down or possibly unsafe states. The United States has some of the highest standards of low cost housing among technologically advanced nations, due in part to federal legislation such as Section 8 public housing, block grants, low income tax credits and Federal Housing Authority initiatives. However, in many of the developing and least developed nations, lower overall quality of low cost housing results from considerably lower average per capita incomes and lack of adequate government and institutional funding for such programs. Critical elements of occupant safety such as air and water quality, building security, and regular maintenance are compromised. Designers and owners are responsible in providing safe and affordable housing to occupants.

Air and Water Quality Glues, adhesives, and other toxic building materials increase occupant health risks. Two basic categories of adverse health effects range from acute (short-term reactions) and chronic (long-term reactions). Headaches, nose and eye irritations are acute reactions. Recovery from acute reactions is quick when the exposure is terminated. Exposure to high levels of volatile organic compounds (VOCs) over a long period of time, results in chronic reactions that include immune system effects, cancer, and genotoxic effects (Haghighat and De Bellis, 1996). VOCs and other contaminants are prevalent in building materials. A sampling of contaminants commonly found in low cost housing projects, although not exclusively so, is shown in Table 1, with their respective sources and health effects. The


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

effect of VOCs and other contaminants is of particular concern during the time period immediately following new construction or construction renovation. Modern residential buildings are built more airtight than in the past, making the issue of indoor air quality even more critical. A Canadian study showed that houses these days are approximately 30% more airtight than homes built less than a decade ago (Haghighat and De Bellis, 1996).

Contaminant

Table 1. Sources and health effects of VOC and other contaminants Known/Suspected Known source Health Effects

Alcohols

paints, glues, paint thinners, varnishes

fatigue, lethargy, nausea

Benzene

silicone caulk, latex caulk, adhesives, paint remover, particle board

carcinogenic, leukemia, aplastic anemia

Formaldehyde

pressed wood, urea formaldehyde foam insulation, (UFFI), particle board, textiles, paint, glue, disinfectants, decomposition of formaldehyde resin used in products such as textiles, carpets, caulking, adhesives, linoleum

dry skin, eczema, eye and throat irritation, rhinitis, sore throats, coughing, wheezing, asthma, dizziness, fatigue, headaches, irritation of respiratory tract, mucous membrane irritation / lung carcinogen

Hexane

paints, varnishes, glues, wallpaper, floor covering, gypsum board

fatigue, lethargy, nausea, headache, odor, neurotoxic

Man-made Mineral Fiber

acoustic ceilings, insulation

mucous membrane irritation, eczema

Organic Dust

paper, textiles

mucous membrane irritation, fatigue

Styrene

insulation foam, joint compound, fiberboard, plastics, paint

odor, mucous membrane irritation / carcinogenic

Toluene

silicone caulk, paints, varnishes, glues, latex caulk, adhesives, wallpaper, linoleum flooring, nylon carpet

fatigue, lethargy, nausea, headache, odor

Xylenes

paints, varnishes, glues, adhesives, caulking, varnish, combustion sources

fatigue, lethargy, nausea, headache, odor

(Adapted from Haghigat and De Bellis, 1996)


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Buildings may cause illness to their occupants, producing symptoms like irritation in the nose, throat, eyes, and skin, as well as shortness of breath, nausea, dizziness, and fatigue. These symptoms are temporary and disappear when occupants leave that environment. The World Health Organization (WHO) has defined the sick building syndrome (SBS) as an excess of work-related irritations of the skin and mucous membranes and other symptoms, including headache, fatigue, and concentration difficulty, reported by workers in office buildings (World Health Organization, 1993). This definition is equally applicable to housing units where occupants spend lengthy periods of time. Although the cause of sick building syndrome remains unknown, it most probably results from a combination of poor hygiene, inadequate ventilation, and psychological factors. Poor quality indoor air has been reported as the cause in many instances of sick building syndrome. Other factors such as temperature, humidity, and microbial agents like dust mites also play a role in this complex condition (Senitkova, 1996). Typical pollutants are nitrogen oxides, carbon monoxide, sulfur dioxide, VOCs, and radon. Lead and asbestos are two potentially dangerous building materials that have been used extensively around the world. Although banned for residential construction applications in many industrialized or technologically advanced countries such as the United States and the United Kingdom, these two materials can still be found in many existing low cost housing projects completed before the ban, even in these countries. Their use was popular because of their ready availability and inherent properties. Asbestos is an excellent conductor for heat and electricity, resistant to chemicals, flexible and strong. Typically, asbestos roof sheeting and lead-based paint are used. Asbestos is hazardous when friable. The danger of using non-friable asbestos in materials


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

for residential projects is that occupants eventually perform activities such as drilling holes in walls, ceilings, or floors for attachment of furnishings and decorations. Once such activities make the asbestos friable, occupants are exposed to health hazards resulting from the inhalation and ingestion of asbestos fibers. These include asbestosis (a disabling disease of the lungs), lung cancer, and mesothelioma, a usually fatal cancer of the chest or abdominal cavity lining (Center to Protect Workers Rights, 1997) Pure lead (Pb), a basic chemical element, is a heavy metal at normal room temperature and pressure. Numerous lead compounds are formed as lead combines with other substances. Lead poses a threat to human health if it is bioavailable. Lead is deemed to be bioavailable if it: −

can be inhaled as dust, fumes, or mist;

can be dissolved into or physically suspended in water used for drinking, cooking, swimming, or bathing; or

can be touched in materials where it is present (Goldman, 1995).

Lead eventually works its way into the bloodstream and bodily tissues, causing various diseases such as lead poisoning, damage to the nervous system, kidneys and reproductive organs (Center to Protect Workers Rights, 1997). Human exposure to lead from leadbased paint (LBP) occurs as paint degrades. This degradation occurs in various ways that include chalking, chipping or flaking due to normal wear and tear, maintenance, or renovation work. In the United States, the Consumer Product Safety Commission in 1978 banned lead-based paint (LBP) for residential use. In lead piping or in freshly lead soldered connections, drinking water can dissolve lead and cause exposure to humans (Goldman, 1995). In the United States, lead was banned from these materials in 1986. However, this


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

is not the case in every country in the world, especially developing countries where large and increasing housing shortages are a constant problem. In many of these countries, the problem is exacerbated on site-and-service schemes where future occupants construct their own homes at their own pace and cost. Monitoring their use of unsafe materials in their projects becomes extremely difficult in these cases. Unfortunately, the occupants face exposure both as constructors and occupants.

Designer and Owner Responsibility As design professionals, architects and engineers directly impact the safety, health, and welfare of the public (Gambatese, 2000; Smallwood, 1996). Consequently, they should make safety an integral part of their design methodology (Smallwood and Haupt, 2000). Codes often specify minimum safety standards. When investigated, designers are often held responsible for decisions even if their design met these minimum code requirements. The issue becomes what the professional designer should have anticipated, in the light of reasonable care, and recognized standards of professional practice (Prugh, 1994; Gambatese, 2000). Since structural design standards are well defined, structural performance may be accurately predicted with engineering calculations. Safety standards, however, are less definitive since the safety performance of a building depends on the inconsistent behavior of people that include owners, designers, construction managers and workers (Smallwood and Haupt, 2000). Often safety standards change in response to perceived needs or problems, evolving based on empirical performance over time. Rather than defining what is


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

actually "safe," minimum safety standards really establish an acceptable level of risk (Prugh, 1994; Haupt, 2001). Designers of low cost housing projects need to make safety concerns a high priority in the design process. The concern must not be simply to meet minimum code requirements. Designers need to use reasonable care and recognized standards of professional practice in considering the potential activities and needs of the future occupants. They should accordingly design for their safety (Smallwood, 2000); Duff and Suraji, 2000; Haupt, 2001; Smallwood and Haupt, 2000). In the United States, owners are becoming increasingly involved in construction safety that includes the use of and exposure to materials that might also prove hazardous to the eventual occupants. This increased involvement arises from the ever-present threat of liability suits. In a recent study, 27% of owners surveyed with annual construction budgets in excess of $100 million reported that they selected their designers based in part on their concern with safety issues (Hinze, 1997). To help ensure that occupant safety will be achieved in low cost housing projects, it is recommended that a competent person within the owner's organization be assigned the responsibility and accountability for this area of quality control. This individual must possess adequate and appropriate knowledge and experience to be able to accurately identify and provide remedial action. Typically, such a person would be the owner's representative. This individual would work closely with the designer to integrate occupant safety features into the project, and then follow up by monitoring the project during construction to inspect for proper construction of the intended safety measures. In the U.K. and the European Community, it is mandatory for such a person to be appointed (CDMR, 1994; Directive 92/57/EEC, 1992).


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Security as a safety feature Designing for occupant safety in low cost housing projects includes the consideration of protection from criminal activity. This is particularly true in countries such as South Africa where crime is a major problem. The overall structural integrity of a building as well as the use of steel doors, steel window frames, and unit masonry provides protection for occupants. These are options used frequently in countries such as South Africa where the extensive use of timber and drywall is regarded as inferior quality and inadequate for security and fire purposes. Security features extend far beyond intrusion-resistant building materials, however. One concept, which has multiple implications for neighborhood and community design and development, is that of defensible space. These are communal spaces that communities take responsibility for. According to Oscar Newman, the concept of defensible space evolved in the mid-nineteen-sixties, when he was able to observe the demise of the PruittIgoe low cost housing project. Anonymous public spaces in Pruitt-Igoe led to poor occupant maintenance, since it was "impossible for residents to develop an accord on what was acceptable behavior in these areas" (Newman, 1995, p. 150). Since no one felt responsible for controlling these public spaces, they became run-down and attracted criminal activity. Territoriality, surveillance, access control, and activity generation are a few elements of defensible space. Territoriality, for example, involves a sense of control over environment. People must not only be able to defend their environment, they must also want to defend it. According to Gardner, this "want" results from feelings such as pride and ownership (Gardner, 1981). If an exterior porch area is clearly to be used by one or two


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

families in a complex, they will protect and maintain the porch since they "own" it and take pride in its condition. If such an area is designed in such a way that passers-by feel comfortable loitering there, it will most likely become an area of blight since no one will take pride in its care. Consequently, these areas potentially become unsafe to the occupants of the housing units served by them. Surveillance, often in the form of video cameras where this is preferred, affordable and available, will tend to act as a defender of an area and reduce crime. Access control, such as gated entrances to subdivisions, will have a similar effect. Activity generation attempts to draw the public traffic into an area for the purpose of warding off potential criminals who want to perpetrate their crimes without the possibility of having multiple witnesses.

Maintenance Proper maintenance of a low cost housing project is a major factor when evaluating the safety of its occupants. Although it may seem obvious that building maintenance is necessary, maintenance of low cost housing projects is often done poorly, or done only on an emergency repair basis. Such practices can cause serious safety hazards. Walking surfaces may be designed to provide the proper coefficient of friction, but the design may be all in vain if those surfaces are not properly maintained (Marshall, 1994). If walking surfaces are allowed to wear smooth, crack, corrode, or be covered by biological growth such as moss, occupants will be in danger of falling and/or slipping. If a leaking roof is not promptly repaired, ceiling panels may fall and injure occupants, or structural damage may


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

result, compromising the integrity of the building. Infrequent and irregular carpet cleaning and air filter replacement compromise air quality. Provision is made in the UK and other countries in Europe for the mandatory compilation of a safety file for every construction project which includes details of all materials and installations in the final facility to facilitate easier and safer maintenance (Haupt, 2001). Were such a practice to become universal, many of the problems alluded to would be preventable.

Conclusion All participants in the construction process have the responsibility to ensure safety for occupants of low cost housing. Issues such as air and water quality, building security features, and maintenance must be addressed in the pre-design (briefing) and design phases in order to achieve occupant safety. Although cost cutting methods which may compromise the safety of occupants in low cost housing safety occur frequently (Site Safe, 2000; Binnington, 1999; Haupt, 2001; Porteous, 1999) , architects and owners in countries such as the UK and European Community, for example, are beginning to realize their responsibility to provide housing that is safe as well as low cost. Safety performance cannot be predicted as readily as structural performance, but it can be predicted by such measures as defensible space (i.e., territoriality, surveillance, access control, and activity generation). In order to accomplish the goal of providing housing that is not only low cost, but also safe, it is recommended that at least three steps be taken. First, the owner of a low cost housing project needs to have a representative who is competent to work with the designer from the conceptual design stage in order to ensure


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

the integration of necessary safety elements. This representative should ensure that an adequate hazard control plan is implemented. Second, the designer must place a high priority on occupant safety. Rather than simply meeting minimum code requirements, the designer needs to carefully consider the potential activities and needs of the future occupants, and accordingly design for their safety using reasonable care and recognized standards of professional practice. Finally, maintenance must be planned for in advance, considering the impact of required maintenance on the future occupants, and then carried out after construction is complete.

References

Binnington, C. (1999). “By its very nature contracting is adversarial,” Construction World, November, pp. 18

CDMR, (1994). Construction (Design and Management) Regulations, SI 1994/3140, HMSO

Council Directive 92/57/EEC (1992). “Council Directive 92/57/EEC of 24 June 1992 on the implementation of minimum safety and health requirements at temporary or mobile construction sites (eighth individual Directive within the meaning of Article 16 (1) of directive 89/391/EEC),” Official Journal of the European Communities no. L 245/6

Duffy, R. and Suraji, A. (2000). “Incorporating Site Management Factors into Design for a Safe Construction Process,” Designing for Safety and Health Conference Proceedings, London, UK, pp. 61-68


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Gambatese, John (2000) : "Designing for Safety," In Coble, Hinze and Haupt (eds.), Construction Safety and Health Management, New Jersey, Prentice-Hall, pp. 169192.

Gardner, Robert A. (1981). Crime Prevention Through Environmental Design. April, 1981.

Goldman, Jonathon C.(1995). "Lead (Pb) in the Environment: Engineering, Construction and Public Policy." Construction Congress: Proceedings of the 1995 Conference, American Society of Civil Engineers (ASCE), San Diego, California, pp.380-386.

Haghighat, F., Haghighat, R., and De Bellis, L. (1996). "Occupants' and Workers' Health on Building Construction Sites." Implementation of Safety and Health on Construction Sites: Proceedings of the First International Conference of CIB Working Commission W99. Lisbon, Portugal, pp.473-484.

Haupt, T. (2001). “The Performance Approach to Construction Worker Safety,” Ph.D. Dissertation, University of Florida

Hinze, Jimmie W. (1997). Construction Safety, Prentice Hall, Columbus, Ohio. Marshall, Gilbert. (1994). Safety Engineering. 2

nd

ed. American Society of Safety

Engineers. United States.

Newman, Oscar. (1995). "Defensible Space: A New Physical Planning Tool for Urban Revitalization." APA Journal, Spring, pp.149-155.

Porteous, W.A. (1999). “Characteristics of the Building Industry and its Clients,” Global Building Model in the Next Millennium Convention, 12-15 April 1999

Prugh, Peter E. (1994). "A Conversation on the Ethics of Public Safety in Design." Proceedings of the Fifth Annual Rinker International Conference on Building


The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Construction Focusing on Construction Safety & Loss Control, Gainesville, Florida, pp. 255-259.

Senitkova, I. (1996). "Health Issues of Indoor Building Construction." Implementation of Safety and Health on Construction Sites: Proceedings of the First International Conference of CIB Working Commission W99. Lisbon, Portugal, pp.431-442.

Site

Safe

(2000).

“The

Facts

about

Construction

Injuries,”

October

23,

http://www.sitesafe.org.nz/facts.html Smallwood, J. (1996). “The Influence of Designers on Occupational Health and Safety,” Implementation of Safety and Health on Construction Sites: Proceedings of the First International Conference of CIB Working Commission W99. Lisbon, Portugal, pp.203-214.

Smallwood, J. (2000). “The Holistic Influence of Design on Construction Health and Safety (H&S); General Contractor Perceptions,” Designing for Safety and Health Conference Proceedings, London, UK, pp. 27-36

Smallwood, J. and Haupt, T. (2000). “Safety and Health Team Building,” In Coble, Hinze and Haupt (eds.), Construction Safety and Health Management, New Jersey, Prentice-Hall, pp. 115-144.

The Center to Protect Workers' Rights (1997). The Construction Chart Book. The U.S. Construction Industry and its Workers, CPWR, Washington

World Health Organisation (1993): Indoor air pollutants: exposure and health effects, Copenhagen, Denmark


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Theo Haupt is a lecturer in the Department of Construction Management and Quantity Surveying at Peninsula Technikon, Cape Town, South Africa. He has served as the chairperson of the Western Cape branch of the South African Institute of Building (SAIB). He remains a National Council member of SAIB and enjoys membership in Architects and Surveyors Institute (ASI), Chartered Institute of Building (CIOB), and Commonwealth Association of Surveying and Land Economics (CASLE). His research interests include infrastructure policy and delivery in the context of developing countries. However, he just completed doctoral studies at the University of Florida, where his focus has been on construction safety issues. He has published several safety-related articles and conference papers. He is currently the CIB W99 international area coordinator for Africa.

Richard J. Coble is an associate professor in the M.E. Rinker Sr., School of Building Construction and the director of the Center for Construction Safety and Loss control at the University of Florida. He has extensive hands-on experience in construction, having undertaken several major construction projects throughout the U.S.A. His major research interest is in safety and health in construction, and he has recently been conducting investigative studies into workman's compensation fraud. He has shown a strong research interest in the area of automating the construction foreman, which is integral to scheduling for safety into all aspects of the construction process. He is currently the international director of CIB W99, which is an international consortium of construction safety experts. He has published widely in the area of safety and health.


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A Type I Differing Site Conditions Claim: Analysis of the Reasonable Reliance Element Don Jensen, J.D., Ph.D.

Abstract The current trend in writing a construction contract is financial risk-shifting. This paper addresses one such risk transferring clause commonly termed a differing site condition clause. A differing site condition provision is a risk-shifting mechanism designed to transfer risk of an adverse subsurface or latent physical condition from the contractor to the owner. Critical to the contractor regarding prevailing under a claim for contractual adjustment resulting from a Type I differing site condition is the element reasonable reliance. Analysis of 18 court decisions is provided as a sample to provide a case law annotation demonstrating application or inapplication of this very elusive contractual concept.

Key Words Differing Site Condition, Contract Risk Transfer, Above Surface Condition, Below Surface Condition, Unexpected

Introduction A differing site condition is an unexpected work condition uncovered by a contractor during the actual construction process. Unnerstall Contracting Co., Inc. v. City of Salem,


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962 S.W. 2d 1 (MO. App. 1997). This condition is deemed unexpected because it is unanticipated or unforeseeable by one or more of the parties during contract formation (Beh, 1997). Although a differing site condition typically occurs below surface grade, there does exist certain contract instances whereby such a circumstance may be encountered above site surface. W.H. Armstrong v. United States, 302 So. 2d 1009 (1978). Because a differing site condition can significantly effect contract cost, thus profitability, it is the most frequently occurring owner-contractor dispute in the construction industry (Richter, Mitchell, 1992). Thus, the purpose of incorporating a differing site condition clause in a construction contract is to transfer the risk of an unforeseen site condition to the owner, thereby attempting to reduce contract price to same. Foster Construction v. United States, 435 F.2d 873, 887 (1970); Spirit Level Ins. v. United States 19 Cl. Ct. 84, (Friedman, 1993). Each of the following contracts contains such a clause: a) American Institute of Architect’s A201; b) the Federal Government’s Standard Form 23-A; and c) the Engineers Joint Contract Document’s Committee’s Document No. 1910-8. It is not conclusive however that, if a contractor does sign a contract with a differing site condition clause, that same is automatically entitled to equitable relief (contract adjustment to time and cost) under such a contractual provision (Casner, 1988; Stokes, 1985; Bednar, Brand, Cibinic, Ginsburg, Marguiles, Nash, Patin, Stephensen, 1981). The contractor must understand that it must also be compliant with many other contractual requirements (conditions of the contract) necessary to prevail when disputing a differing site condition. Therefore, a general contractor must be aware of the legal elements necessary to perfect a successful differing site condition claim under the typical differing condition clause.


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Purpose of a Differing Site Condition Clause The body of differing site condition case law in the United States places contractual risk of an unforeseen site condition squarely with the contractor.

While there are

exceptions to this general rule, typically speaking the contractor bears the risk of any unseen, or unanticipated condition associated with performing the work. This rule of law is set forth by the United States Supreme Court in United States v. Spearin, 248 U.S. 132, 134 (1918) stating in part: “The general rules of law applicable to these facts are well settled. Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered.” This holding was similarly stated in Eastern Tunneling Corp. v. Southgate Sanitation District, 436 F.2d 873 (1972). Further, the same principal was later cited and expanded in 1996 by the National Institute of Construction Law: “It is conceded that, under the common law, a contractor who undertakes an entire contract for erecting a building is presumed, in absence of an express provision to the contrary, to have assumed the risk of unforeseen contingencies arising during the course of the work, unless performance is rendered impossible by the act of God, the law or the other party.” Therefore, if a contract does not contain a differing site condition clause, the contractor generally bears the financial risk that performance of its obligations may be more time consuming or costly than contractor had anticipated at time of bid (Hatem, 1995, 1998). On the other hand, if a differing site condition clause is incorporated in the contract between the contractor and project owner, then typically the owner bears the financial risk of a differing site condition. The question that is naturally inherent in this statement is why


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would a project owner want to inculpate oneself with more contractual risk then necessary? The answer to the foregoing question regarding a differing site condition clause is clearly articulated in the case Foster Construction Co., et al. v. United States, 193 Ct. Cl. 587, 435 F.2d 873 (1970). In Foster, the court held that the purpose of the differing site conditions clause was to remove some of the “gamble” of subsurface conditions from the bidding process. The court stated a bidder should not need to decide between performing costly detailed site investigations or adding a considerable contingency cost to a bid to help lessen same’s risk regarding unknown circumstances. The court further opined that by using a differing site condition clause, an owner was afforded a more accurate bid price for work and, therefore did not need to pay for a differing site condition until actually encountered and proven. In essence, a differing site condition clause shifts the risk from the contractor to the owner and allows the contractor to recover construction contract costs associated with a differing site condition claim when such a condition actually exist (Foster, Davis, Schenck, Rowe, & Hurley, 1985). In essence, the intent of a differing site condition clause is to equally, but dissimilarly, protect both the owner and contractor, thereby creating static equilibrium in contractual conveyance of unforseen financial risk. This is because the clause supposedly removes built in contingencies for an unforeseen site risk that may occur only during construction (Gavin, Martin, 1996). Thus, a differing site condition clause provides an opportunity to the owner to decrease construction cost while simultaneously compensating the bidder who encounters a subsurface condition not foreseeable when preparing a bid for an unanticipated condition not readily apparent after completing a site observation or bid


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document review. Spirit Leveling Contractors v. United States, 19 Cl. Ct. 84, (1992); J. F. Shea Company, Inc. v. The United States, 4 Cl. Ct. 46.

To this end, express

representations in the contract specifications or drawings furnished by the owner to the contractor depicting specific conditions at the site can only result in a differing site condition warranting additional compensation, if other conditions are encountered during construction. Round Place Inc. v. The United States, 31 Fed. Cl. 749; United States v. Spearin, 248 U.S. 132, 136 (1918). Therefore, the intended risk function of a differing condition clause is to reassure the contractor that the information provided to the contractor is reliable. Without this contractual assurance, the contractor must select a bid strategy to measure this risk of encountering unfavorable conditions (Anderson, 1947). Several strategies exist. The contractor may increase the bid and decide to go to the expense of making extensive site investigations prior to bid, not knowing if they will receive the contract, bear the risk of the conditions without a contingency, or choose not to bid at all. The benefit to the owner is a more accurate bid and, thus a lower contract price (Beh, 1997; Keating, Keating, Sherry, 1994). Moreover, in order to avoid disruptions and to alleviate the unnecessary expense of contractor’s site borings and investigations, the typical owner normally obtains information during design programming regarding site conditions. The contractor then examines the information via bid documents.

Generally, the contractor is cautioned to make a

reasonable site investigation by disclaiming language (exculpatory clause) merged into the bidding documents. If the contractor reasonably interprets the information (indicates) contained in the contract documents, the contractor is generally relieved from the risk of


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the unexpected condition. The antithesis however, occurs should the contractor not review the bidding documents with reasonable care. The owner similarly is also protected when a more favorable condition results than expected prior to commencing construction work. S.J. Groves & Sons & Co. v. State, 273 S.E. 2d 465 (1980); Youngdale & Sons Const. Co. v. United States, 27 Fed Cl. 516 (1993); P.J. Maffei Bldg. Wrecking Corp. v. United States, 3 Cl. Ct. 482 (1983). Historically, the use of a differing site condition clause first arose in public sector contracting for the reasons mentioned in the previous paragraph. This risk transferring provision later gained acceptance in private contracts for the same reasons. As previously alluded to, the Federal Government;’s Standard For 23-A: General Provisions, the American Institute of Architect’s AIA Document A201: General Conditions of the Contract for Construction, and the Engineers Joint Contract Document Committee’s Document No. 1910-8: General Conditions of the Contract for Construction all contain a differing site condition provision. Although each document is somewhat unique regarding the language comprising a differing site condition provision, each nevertheless similarly defines a differing condition and establishes a managerial procedure to administrate differently to same. Nevertheless, each differing site condition provision allows equitable relief to the contractor when encountering a genuine differing site condition that subsequently increases the contractor’s time or cost to perform the contract work. This equitable relief comes in the form of an equitable adjustment to time of performance (date of substantial completion) or contract price (cost and overhead), or both resulting from a condition not


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foreseeably definitive in the original contract scope of work (Bednar, et el, 1981). The provision contractually obligates the project owner to grant the relief to the contractor if same can prove that the differing site condition causes an increase to project time or cost resulting therefrom. When a differing site condition claim does arise, federal case law precedent is heavily relied upon to resolve the claim since a derivation of the federal clause language is used in many construction contracts (Beh, 1997). The policy supporting the purpose of a differing site condition clause was described by the Court of Claims in Foster Constr. C.A. v. United States 193 Ct. Cl. 587: “The purpose of the changed conditions clause is thus to take at least some of the gamble of subsurface conditions out of bidding. Bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse subsurface, and they need not consider how large a contingency should be added to the bid to cover the risk. They will have no windfalls and no disasters. The Government benefits from more accurate bidding, without inflation for risks which may not eventuate. It pays for difficult subsurface work only when it is encountered and was not indicated in the logs.” Although the differing site condition clause is a risk-shifting device designed to transfer the risk of adverse subsurface or latent physical conditions from the contractor to the owner, it does not shift the risk of all unanticipated or unforeseeable adverse site conditions from contractor to the project owner. Rather, the project owner bears only those risks that encourage more accurate bidding. Olympus Corporation v. The United States 98 F.2d 1314. Therefore, the purpose of this paper is to further assist the contractor in understanding the extent to which a differing site condition clause is applicable or


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inapplicable when claiming relief for same. In furtherance of this purpose, this paper will address the aforementioned issue by providing a general discussion regarding this area of law. The first section herein examines the purpose of a differing condition clause. The section to follow thereafter defines the difference between a Type I and Type II claim. The third section writes to the elements necessary to prove a Type I, Type II differing condition claim. The fourth section analyzes the element reasonable interpretation for a Type I claim, followed by Appendix A providing a case law annotation describing fact scenarios regarding the application of the element reasonable interpretation to a Type I claim.

Differing Condition Types An understanding of the differing site condition clause begins with knowledge regarding the types of differing site conditions. There are two types: a) Type I and b) Type II. The first category, a Type I (sometimes referred to as a category I) condition is defined as, subsurface or latent physical conditions at the site differing materially from that indicated in the contract and, thus hidden from view (Jervis, Levin, 1998; Lunch, 1995); Dayton Construction Co., HUDBCA, 83-2 BCA Âś 16,809. A Type I condition is sometimes referred to as a misrepresented condition because the condition actually existing at thte construction site materially (substantially) differs from those conditions represented by the construction contract (Bednar, et el, 1991; Cibinic, Nash, 1995). Some examples of a typical unforeseen, or differing site condition is: (a) striking rock underground where none is shown on the contract documents, (b) finding that the actual grade is six inches lower than what is indicated on the contract documents, and (c) finding that an abandoned sewer line


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not depicted as originally shown on original as built drawings. Lockheed Shipbldg, & Constr. Co., ENGBCA 3141, BCA ¶ 10,512 (1976); F.D. Rich Co., ASBCA 14623, 75-2 BCA ¶ 11,537 (1974); Okland Constr. Co., GSBCA 3097, 72-1 BCA ¶ 9317 (1966); J.S. Alberici Construction, Inc., GSBCA No. 9897, 89-3 BCA ¶ 22,224 (1989); W.D. Kyle, AGBCA No. 85-2 BCA ¶ 18,105 (1985). As stated earlier, all of the preceding examples represent a site condition differing materially (significantly) from that originally bid and subsequently contracted. The second category, a Type II (category II) condition is defined as, unknown physical conditions at the site, of an unusual nature, differing materially from those originally encountered and generally recognized as inhering in work of the character provided for in the contract (Cibinic, Nash, 1995; Medsger, 1988). The difference in physical conditions must be of a nature that the typical experienced contractor would not have expected to encounter given a similar project scope or work scope. Alvin H. Leal v. United States, 276 F.2d 378 Ct. Cl. 1960. A Type II condition may also be referred to as an unknown condition due to the unknown and unusual nature or circumstances relative to project scope (Currie, Abernathy, Sweeney, 1985). Examplimatic of a Type II condition is: (a) finding buried stumps/timbers, (b) reaching water at a different level than anticipated, and (c) having problems with site drainage. Loftis v. United States, 110 Ct. Cl. 551 (1948); Gilloz Const. Co., BCA 826 (1944); Morgan Const. Co., IBCA 299, 1963 BCA ¶ 3855. The aforementioned are illustrative of conditions that the parties (contractor, owner, and architect) reasonably could not have foreseen, or anticipated encountering because of the unusual nature given a project having similar inherent characteristics (Friedman, 1993).


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Proving a Differing Site Condition Claim When the contractor encounters a differing site condition that results in an increase to time or cost, or both, then same must make a claim for relief based on the differing site condition clause in the contract. Stokes (1985) in his article: Filing a Federal Contract Claim cites two cases, Arundel Corp. v. United States, 96 Ct. Cl. 77 (1942), and Hoffmann v. United States, 340 F.2d 645 (Ct. Cl. 1964), as formulating a general rule for recovery in a differing site condition claim. The general rule is as follows: “...the physical condition must have existed at the time the contract was executed, but recovery has been allowed when an un-anticipatable man-made condition has occurred after the contract was made if the government [or owner] could have controlled the situation.� Although Stokes is referring to filing a federal claim for a differing site condition, this general rule can also be applied to private sector contracting as well. Before deciding to file a claim for relief, a contractor must make sure that what it deems a differing site condition is actually covered under the differing site conditions provision. A contractor should therefore be aware that unusual weather conditions such as a hurricane, excessive rainfall, flooding, excessive snow, and frozen ground are not covered under the differing site condition provision. The differing site condition clause does not include nonphysical conditions such as political, economic, or labor changes. A weather condition and/or unforeseen economic circumstance could be claimed for only if they are combined with or heightened by an already existing claim for differing site condition.

Otherwise, such claim relief goes to the question of impossibility of

performance. Arundel Corp. v. United States, 103 Ct. Cl. 688 (1945); Turnkey Enterprises


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v. United States, 597 F.2d 750 (Ct. Cl. 1979). The contractor should be aware of and prepared to face many obstacles to recovery for a differing site conditions claim. The first obstacle that generally precludes recovery is failure to provide sufficient proof (documentation) that a condition materially differs. The contractor in a Type I claim must therefore evidentially (documentation) prove the condition at the site differed materially from the condition represented in the contract documents and due to this the owner unintentionally misrepresented a condition at the project site. In this type of claim, the owner will argue that the contractor misinterpreted the contract documents and because of this there was no misrepresentation on same’s part (Currie, et el, 1985; Bednar, et el, 1991; Cibinic, et el, 1995). As previously noted, a Type I differing site condition occurs when subsurface or latent physical condition at the project site materially differs from those indicates in the contract. In Weeks Dredging and Contracting, Inc. v. United States 13 Cl. Ct. 193, the court identified six indispensable elements necessary to successfully claim a Type I equitable adjustment to the contract. A listing of these elements is as follows: a) the contract documents must have affirmatively indicated or represented the subsurface conditions which form the basis of the plaintiff’s claim; b) the contractor must have acted as a reasonably prudent contractor in interpreting the contract documents; c) the contractor must have reasonably relied on the indications of subsurface conditions in the contract; d) the subsurface conditions actually encountered, within the contract site area, must have differed materially from the subsurface conditions indicated in the same contract area; e) the actual subsurface conditions encountered must have been reasonably unforeseeable;


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and finally; f) the contractor’s claimed excess costs must be shown to be solely attributable to the materially different subsurface conditions within the contract site. In addition to the above, the contractor must also be able to show that same has fulfilled other conditions of the contract such as: a) proper notice to the owner; b) exculpatory language disclaiming accuracy of contract indicates; and c) complied with reasonable site investigation instructions. Furthermore, a Type I condition cannot occur if the contract does not explicitly or implicitly indicate the condition to be encountered. A Type II differing site condition occurs when an unknown physical condition at the site of an unusual nature, differs materially from a similar condition ordinarily encountered and generally recognized as inhering in the work scope as defined by the contract documents. Unusual conditions are judged or legally tested by the normal or typical condition type for the area (Cibinic, 1995). Type II differing site condition occurs less frequently than a Type I condition. Thus, a contractor is confronted with a relatively heavy burden of proof when asserting a Type II differing site condition. The elements must be established by a preponderance of evidence test.

Due to the amorphous basis of

comparison, the Type II differing site condition is generally more difficult to establish for a contractor (Cibinic, 1995; Bednar, et el, 1991). In essence, a Type II claim is a question of foresight. If a contractor’s judgement is based on: a) a reasonable site investigation, b) study of the contract documents, and c) an intelligent interpretation of the requirement of the job based upon sound construction experience, then such proof will provide a basis for maintaining a successful differing site condition claim. For a Type II differing condition claim, the contractor must establish the


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recognized and usual physical condition at the site of the work, the physical condition actually encountered, the material difference from the known and the usual condition, and the increase in the cost of performance caused by the condition encountered. The contractor must demonstrate that the condition was unknown, unforeseeable, and unusual. In The Lathan Company, Inc. v. The United States 20 Cl. Ct. 122, the court stated the requirements of this type of differing site condition claim as follows: “A Type II claim requires the contractor to show three elements. First, the contractor must show that it did not know about the physical condition. Second, the contractor must show that it could not have anticipated the conditions from inspection or general experience. Third, the contractor must show that the condition varied from the norm in similar contracting work.”

Other Conditions of the Contract As previously discussed, there exist other contract conditions a contractor must satisfy when attempting to recover under the differing site condition provision. The most common failure precluding a contractor from recovery under the differing condition clause is failure to adhere to the notice provision. Each construction contract type presented herein contains a differing site condition clause having some sort of notice provision. Some may be very specific while others are quite vague. For instance, the federal contract, Standard Form 23-A, merely stipulates that the contractor promptly give notice before disturbing as unforeseen site condition. The obvious question is what is considered to be prompt? On the other hand, AIA’s A201, calls for the observing party to give notice to


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the other party promptly but no later than 21 days. In either instance, failure to give proper notice is one of the major impediments to equitable recovery. Another requirement of the notice provision is that the contractor give written notice. This allows the owner to inspect the unforeseen condition and to mitigate same’s contractual damages resulting therefrom. If the contractor does not give proper timely written notice of the site condition and proceeds in the furtherance of the work, it is waiving its right to claim. An additional requirement is that the contractor give notice of a claim for equitable adjustment for a changed condition before the owner releases final payment. Although the contractor may fail to abide by the notice provision, the contractor may still be entitled to recovery based on the doctrines of substantial compliance and owner’s superior knowledge. Dawco Const. Inc. v. United States, 18 Cl. Ct. 682 (1989); Tobin Quarries, Inc. v. United States, 84 F. Supp. 1021 (Ct. Cl., 1949). Another obstacle to recovery of a differing site condition claim is the existence of an exculpatory clause in the contract. A contractor should be cautious when signing a construction contract whereby the owner has included explicit statements that shift certain contractual risks from the owner to the contractor. Such exculpating statements as these can make a differing site condition claim recovery nearly impossible for the contractor (Tansey & Kessler, 1988). The owner may incorporate exculpatory statements that disclaim responsibility and place the duty squarely with the contractor. Typical exculpating language is: a) owner does not warrant the accuracy of soil reports, or b) owner and architect assume no responsibility for the subsurface conditions that the contractor may encounter. Parsons Const. Co. v. State 725 P.2d 614 (1986); E.H. Morril Co. v. St. 423


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P.2d 551 (1967); Jerry Clark v. United States, 5 Cl. Ct. 447 (1996). An exculpatory clause of this nature does not always bar recovery, however. Reason being is because contractor is for the most part, justified in relying on owner-furnished data, thus the court system has a tendency to dismiss the exculpatory language disclaiming owner responsibility for the data. Although construction contracts typically may include a clause requiring a bidder to verify all site conditions, courts are generally reluctant to enforce such broad and unfair language. (Stokes, 1985). In toto, requiring a bidding contractor to verify all site conditions is simply unreasonable (Bednar, 1991; Casner, 1988). The third obstacle leading to recovery for a differing site condition is the failure to make a reasonable site investigation. If it can be proven that the contractor did not perform a reasonable site investigation prior to bidding the contract, more often than not, the differing site condition claim will be denied. This notion of going to a reasonable length to investigate the site is often a key area of dispute between contractor and project owner. The court system has generally said that the contractor is not responsible for extensive or unreasonably lengthy and costly site investigation to ascertain site information. However, the contractor is responsible for taking reasonable and necessary steps to ascertain the nature and location of the work and the general and local conditions that may affect the project scope (Sadur, 1985). In determining whether or not a site investigation meets the criteria of being reasonable the court will test the following factors: 1) to what degree did the owner furnish data on a particular condition; 2) how costly or feasible is it for a bidder to perform a particular test; 3) how much time during the bid process was available for the contractor to perform its site inspection, and lastly 4) whether or not a reasonable site


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investigation would have unveiled the particular condition (Tansey & Kessler, 1988).

Reasonable Interpretation As delineated previously, a differing site condition clause allows equitable adjustment for time and cost under the conditions of the contract. Therefore, without a differing site condition clause, a claim by the contractor against the owner for a differing site condition must be based on the theory of: a) negligence, b) misrepresentation, c) fraud and/or d) some combination thereof. Robert E. McKee, Inc. v. City of Atlanta 414 F. Supp. 957 (1976). The basis for recovery under a differing site condition clause is an evidentiary fact of variation between the contractual conditions indicated and the actual project site condition encountered.

Thus, unlike negligence, misrepresentation, or fraud, the

evidentiary proof necessary to prove a valid claim for a differing condition is not one of fault base directed at the owner. Even if the owner innocently misled, or honestly failed to discover the actual site condition, the contractor is entitled to relief providing the site condition materially differed. The contractor need only prove that the actual conditions encountered materially differed from those indicated via the contract documents (plans and specifications). Jerry D. Clark v. United States, 5 Cl. Ct. 447 (1996).

Materially is a fact

question evidenced by two conditions. First, there is a significantly greater amount of work being performed than originally contemplated at the time of bid. Second, the work requires a different method and technique necessary to perform the scope of work. Thus, to support an equitable adjustment claim for a differing site condition, the contractor must identify the contract indicates (element within the plans and specifications), reasonably


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interpret those indications (indicates), thereby demonstrating reliance on the contract indicates and, thus proving the increased costs/time caused by the materially (actual site) different conditions. Stuyvesant Dredging Co. v. United States, 834 F.2d 1576 (1987). It is also important to identify what other reasonably available information was available, such as experience or the actual site condition observable at a site inspection. Serridone Const. Corp. v. United States, 19 Ct. Cl. 1582 (1990). As previously alluded to, even when a contract contains an equitable adjustment clause for a differing site condition, there is still the risk involved that the contractor did not properly interpret the contract documents. In this instance, the court test whether a reasonable and prudent contractor would interpret a certain site condition or work scope as reasonably unforeseeable at the time of the bid process in a view of available project indicates (data). Typically conditions that are not discoverable by a reasonable investigation of the contract documents and/or site are thus considered reasonably unforeseeable. Robert E. Lee v. Comm’r of Pub. Works, 149 S.E. 2d 59 (1966). Further, the court looks to the nature of the information, and whether owner’s description of the information will determine whether the contractor’s reliance on the information was reasonable in view of same. Further, all contract indicates must be unambiguously contained in the contract documents. Framlu Corp. ASBCA 14205, 71-2 BCA ¶ 8989. Therefore, all material references in the contract documents provide relevant information and, thus, considered part of the contract documents. Furthermore, contract indicates need not be explicit or specific, but only impress or lull a reasonable contractor to assume not to expect a certain adverse site condition actually encountered subsequently thereafter. The court, when assessing


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whether a condition is foreseeable, therefore measures the contractor using a reasonable like contractor having reasonable like experience standard. If a reasonable bidding contractor would have foreseen such a condition, such knowledge is thereby imputed to the bidding contractor on the basis of the reasonable experience contractor standard. In determining the indicates a contractor should have reasonably ascertained and interpreted, the court considers: a) information in the contract, b) contractor previous experience and, c) experience of other similar contractors having like contractual experience. Husman Bros., Inc., DOTCAB No. 71-15, 73-1 BCA 9889 (1973); Leiden Corp., ASBCA No. 26 BCA 16,632 (1983). Moreover, the standard construction contract usually contains an exculpating (disclaimer) clause stating that the owner is not responsible for the interpretation of, or conclusions drawn from the contract data contained therein. A contractor cannot recover if same misconstrues or misunderstands the contract documents. Thus, miscalculation resulting as a consequence of misinterpretation is not a differing condition. Therefore, not only must a contractor examine and reasonably interpret the contract information, but same must show that it was induced to rely on this provision that materially differed from the on site condition while calculating bid price. Beco Corp. v. Roberts Const. Co., 760 P.2d 1120 (1988). The actual cost impact must be demonstrated with certainty by the contractor. Failure to present such evidential proof results in rejection of the claim for equitable adjustment. A contractor cannot be said to have reasonably relied on the contract indications, if same, had prior knowledge of a site condition other than that represented by the contract documents. The primary test governing interpretation are: a)


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what did the contract indicate (Type I claim only); b) were the conditions different than those indicated (Type I claim only); c) were the conditions unusual (Type II claim only); d) was the contractor misled their financial detriment; e) was the contractor justified in relying on the information provided; and f) were the losses caused by acts of God? Round Place, Inc. v. United States, 31 Fed. Cl. 749 (1968); J.E. Robertson Co v. United States, 437 F.2d 1360; United Telecommunications, Inc., NASA BCA 771-13, 72-2 BCA ¶ 9754.

Conclusion When determining what is “indicated” in the contract documents, all contract data must be considered. Indicates may be expressly provided for in the drawings and specifications or may be inferred from reading the contract documents as a whole. The contractor will be charged with the information contained in the indicates furnished as part of the documents, as well as data referred to in the documents and made available to the bidder. A claim for equitable adjustment for a differing condition cannot be based on one indicate resulting from one source with the contract documents and disregard information included elsewhere.

Further, when there exist no information, the contractor must

demonstrate that same reasonably relied on nonexistent information only if the reasonable prudent contractor would have done similarly. Furthermore, if information is provided, then the contractor must reasonably interpret such information correctly to prove same has reasonably relied thereon when creating a bid. Finally, there seems to be great weight placed upon the predicate question what a reasonable interpretation is for a reasonable contractor at the time of bidding. Further, the contractor may not focus on certain owner


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documentation and ignore other equally important data providing notice of a certain condition. Instead, the contractor must compile the entire document and indicates therein and, thereby infer what the condition is or is not according to the prudent contractor standard.

Ultimately, the level of action required of a contractor to prove it acted

reasonably varies with each project, thus such analysis is fundamentally a function of a case by case evaluation.

CITED SOURCES Anderson, F. Changes, changed conditions and extras in government contracting. 42 Illinois Law Review 29, 1947.

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The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Foster, C. Allen, Davis, Paul E., Schenck, James S. IV, Rowe, Eric C., and Hurley, Marshall R.

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The American Professional Constructor, The Journal of the American Institute of Constructors (AIC) – June 2001, Volume 25. Number 1

Sadur, Marvin P. Interpretation of working conditions. McGraw-Hill Construction business handbook (2nd ed) ed. Robert F. Cushman and John Bigda. New York: McGraw-Hill Book Company, 1985.

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Editor’s Note: This article first appeared in the Associated Schools of Construction Proceedings of the Annual Conference of 2001.

Dr. Jensen, J.D., Ph.D. is currently pursuing a Legal Law Masters at University of Miami in Real Estate and Construction Law and has advanced degrees in Construction Management and Finance. He is a professor of construction law, and project management at the University of North Florida and serves as a claims consultant.

The American Professional Journal - June 2001, Volume 25 Number 1  

The Professional Constructor is a refereed journal published two times a year by the American Institute of Constructors (AIC). The AIC's mi...