CONTRACT MANAGEMENT

(A RATIONAL APPROACH TO CONSTRUCTION CONTRACT PRICING)

by

T. KALYANA SUNDARAM

A thesis submitted to the

Indian Institute of Technology, Delhi
for the award of the degree of

DOCTOR OF PHILOSOPHY

Department of Civil Engineering

INDIAN INSTITUTE OF TECHNOLOGY, DELHI
JULY, 1989
 1.

CERTIFICATE

This is to certify that the thesis entitled CONTRACT

MANAGEMENT (A RATIONAL APPROACH TO CONSTRUCTION CONTRACT

PRICING) being submitted by Mr. T. Kalyana Sundaram to the

Indian Institute of Technology, Delhi, India, for the award

of the degree of DOCTOR OF PHILOSOPHY, is a record of

bonafide research work carried out by him under our

supervision and guidance. The thesis work, in our opinion,

has reached the standard fulfilling the requirements for

DOCTOR OF PHILOSOPHY degree. The research report and the

results presented in this thesis have not been submitted, in

part or full, to any other University or Institute for the

award of any degree or diploma.

P,
i.
(Professor P. Natarajan)
Professor, Civil Engineering Department,
Indian Institute of Technology, Delhi,
New Delhi - 110016.

(Dr. V.B. Deshpande)

Assistant Professor, Civil Engineering Department,
Indian Institute of Technology, Delhi,
New Delhi - 110016.
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DEDICATED TO

MY PARENTS

AND

K. REVATHI
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ACKNOWLEDGEMENTS

I wish to express my deep sense of gratitude and

indebtedness to my Supervisor, Prof. P. Natarajan, Indian

Institute of Technology, Delhi, who inspired and guided

me in the right direction with valuable advice throughout

the period of this research. It is needless to say that

without his help this work would not have come to this

stage.

I express my gratitude and thanks to Co-Supervisor,

Dr. V.B. Deshpande, Assistant Professor, Civil Engineering

Department, Indian Institute of Technology, Delhi, for his

inspiration, guidance and encouragement throughout this

work.

I am highly grateful to NPCC Management and

specifically to Mr. J.K. Mehra, Chairman and Managing

Director, Mr. R.P. Chopra, Director (Engg.), Mr. S.K. Relan,

Director (Finance), Mr. M.G. Sampathkumaran, Ex-Director

(Civil) and Mr. K.N. Taneja, Group General Manager

(Contracts), NPCC, for their valuable guidance and help and

for their understanding attitudes and for permitting me to

use certain data of NPCC in the research as well as the
computer facilities of NPCC.

I am very much grateful to RITES Management,

Mr. B.I. Singal, General Manager (Urban Transport), and

Dr. A.C. Sarna, General Manager (Traffic and Transportation)
for their appreciation, support and encouragement.
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I am very much grateful to Dr. C. Thangaraj, Civil

Engineering Department, Jamia Millia Islamia, New Delhi, for

his inspiration, encouragement, support and suggestions

throughout this work.

I am very much thankful to Mr. Sandeep Kumar, AEE(C),

NPCC, for his valuable help in obtaining certain literature

from U.K. and for extending his valuable help whenever

needed.
I had the privilege of having good friends to help me

during the course of this work. Notable among them are:

Mr. K.V.R. Murthy, Research Scholar, IIT (D), Mr. S. Selva

Kumar, Research Scholar, IIT (D), Dr. Chinnasamy, Central

Water Commission, Mr. Arun Kumar, SDM(C), Mr. S.K. Kathuria,

DM(C), Mr. S.A. Khan, AEE(C), Mr. S.N. Srivastava, Asstt.

Programmer, Mr. Dharam Vir, and members of Contracts and

Finance Division of National Projects Construction

Corporation Limited and members of Urban Transport Division,

RITES.

I express my sincere thanks to Mr. J.S. Negi,

Mr. Sanjay Bhatnagar, Mr. Udai Singh and

Mr. S. Mathiazhagan for their untiring and sincere

secretarial work but for which this work could not have been
completed in time. My thanks are also due to Mr. Y.P. Johar,
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Mr. R. Kapoor and Mr. Sridhar, RITES for their sincere

secretarial work during the final editing.

I express my thanks to all persons of the Computer

Centres, IIT, Delhi, Computer Centre, NPCC Office for

extending full co-operation and help during the computation

work.

I would like to express my gratitude and appreciation

to my wife Mrs. K. Revathi and my children K.M. Sundaram and

Madhu Sundaram for appreciating my difficulties and giving

me their valuable support in spite of missing my company and

love for long hours.

(T. IJ.7 LYANA SUNDARAM)

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ABSTRACT

This study suggests a rational solution approach to

the markup decision problem of Indian Construction
Contractors for a few types of problem situations.

The analysis of historical data on 181 Indian tenders

brings out the similarities between how the Indian and
foreign contracts have been responded to by tenderers. The
'spread' and the 1 range' of the bids received seem to have
some bearing in this context.

The limitations on the Contracting Organisation's

resources, like working capital, manpower and equipments,
are considered for selection of a portfolio of projects from
preferred sectors through a Sectorwise Portfolio Selection
Model (SPSM) so as to maximise the Sales Volume for an
adopted planning period of a few years.

Detailed study of the Cashflow of six construction

projects from different sectors at their pre-tender stage
identified the most sensitive policies affecting the
contractor's cashflow as comprising the owner's policies on
advances, materials issue and retention on bills. This
helped in identifying one completed project which, through
moderation of the owner's policies, turned out to be nearly
self-financing, i.e., without significant Captim conditions.

Considering owner-caused delays in terms of the time

of onset and the duration of the delay, a Fair and Just
Interim Payment Model was developed which would help in
maintaining the original markup agreed to in the contract.

The effect of owner policies has been analysed also to

develop a Minimum Markup Model which, under conditions of no
time or cost overruns, will just neutralise the cost of
working capital employed by the contractor.

The Willenbrock LOWBID Model seems to retain a nearest

relevance to Indian contracting situations if the Expected
Monetary Value Models are the choice.
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TABLE OF CONTENTS

CHAPTER TITLE PAGE

CERTIFICATE

DEDICATION ii

ACKNOWLEDGEMENTS iii

ABSTRACT vi

TABLE OF CONTENTS vii

LIST OF TABLES xiv

LIST OF FIGURES xvii

LIST OF APPENDICES xix

1 INTRODUCTION, OBJECTIVES AND SCOPE OF STUDY 1

1.1 INTRODUCTION 1

1.2 CURRENT STATUS OF RESEARCH ON CONSTRUCTION

CONTRACT PRICING 3

1.2.1 Trans-Indian Context 3

1.2.2 The Indian Context 3
1.3 NEED FOR RESEARCH 5
1.4 OBJECTIVES OF THIS STUDY 6
1.5 METHODOLOGY 8
1.6 ORGANISATION OF THE THESIS 8

2 A SURVEY OF INDIAN CONSTRUCTION INDUSTRY 12

2.1 HISTORICAL SETTING 12

2.2 ECONOMIC DEVELOPMENT AND DEVELOPMENT OF
CONSTRUCTION INDUSTRY 13
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2.3 GROWTH OF CONSTRUCTION INDUSTRY 15

2.3.1 Employment in Construction Industry 16

2.3.2 Construction Machines and Equipments 17

2.3.3 Economic Considerations 18

2.4 COMPOSITION OF CONSTRUCTION INDUSTRY 20

2.4.1 Owner / Client Organisations 20

2.4.2 Construction/ Contracting Organisations 23

2.5 EVOLVING TRENDS IN PREPARATION OF TENDER

DOCUMENTS 25

2.6 PUBLIC SECTOR CONTRACTING ORGANISATIONS 27

2.6.1 Enterprises Rendering Services 27

2.6.2 Financial Position of the Public Sector

Construction Organisations 29

2.6.3 Factors affecting the performance of

Public sector Construction

Organisations 29
2.6.4 Price Preference 31
2.6.5 Difference Between Goods Producing

Organisations and Contracting and

Construction Organisations 32

2.7 SOME GENERAL ASPECTS OF CONTRACTING

ORGANISATIONS 32
2.8 TENDERING PROCESS 36
2.9 MANAGERIAL PROBLEMS FACED BY THE CONSTRUCTION
INDUSTRY 37
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3 GOALS OBJECTIVES AND STRATEGIES IN PROJECT

SELECTION 39

3.1 GOALS AND OBJECTIVES 39

3.2 STRATEGIES 40

3.3 GOALS OF A CONSTRUCTION ORGANISATION 42

3.4 OBJECTIVES OF A CONSTRUCTION ORGANISATION 46

3.5 THE OBJECTIVES IN PROJECT SELECTION 47

4 REVIEW OF LITERATURE 48

4.1 GAME THEORY MODELS 48

4.2 STATISTICAL BIDDING STRATEGY MODELS 49

4.2.1 Decision Making Under Bidding Situation 49

4.3 EXPECTED MONETARY VALUE MODELS 51

4.3.1 Friedman's Model 52

4.3.2 Park's Model 59

4.3.3 Gate's Model 61

4.3.4 Howard's Model 62

4.3.5 Christenson's Model 63

4.3.6 Casey's Model 63

4.3.7 Broemser's Model 64

4.3 8 Work of Morin and Clough 68

4.3.9 Work of Shaffer and Micheau 69

4.3.10 Willenbrock's Models 70
4.3.11 Lomark Model 78
4.4 MONETARY VALUE VERSUS UTILITY VALUE 81
4.5 EXPECTED UTILITY VALUE MODELS 83

4.5.1 The Utility Function and its

Determination 84

4.5.2 Work of Howard 85

4.5.3 Work of Benjamin 88

4.5.4 Work of Swaim 90

4.5.5 Willenbrock's Expected Utility Value

Models 91

4.5.6 Work of deNeufville, Hani and Lesage 98

4.5.7 Work of Carr. R. 99

4.5.8 Criticism and Support to Utility

Theory 99

4.5.9 Work of C.W. Ibbs 100

4.6 BIDDING MODELS BASED ON CASHFLOW 103

4.6.1 Work of Fondahl and Bacarreza 104

4.6.2 Work of Bacarreza 105

4.6.3 Work of Foad Farid 111

4.7 CONCLUDING REMARKS 114

5 ANALYSIS OF INDIAN TENDERS 116

5.1 THE INFORMATION AND THE ASSUMPTIONS 116

5.1.1 Identity of Competitors 118

5.1.2 Collection of Bid Data 120

5.1.3 Collection of Data on Completed/

Ongoing Contracts 121

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5.2. THE COMPETITION 123

5.2.1 Number of Tenders and Price Range 124

5.2.2 Average Tender Value 124

5.2.3 Number of Competitors 128

5.2.4 Average Number of Appearances by a

Competitor 131

5.2.5 Success Ratio 134

5.2.6 Variability in Competition 140

5.2.7 The Range 143

5.2.8 Money Left on the Table (or Spread) 147

5.2.9 The Causes 151

5.2.10 Factors that Limit the Competition 152

5.3 PREFERENCES AND CONSTRAINTS 154

5.3.1 Preference for Particular Sector of

Project 155

5.3.2 Preference for Particular Owner 157

5.3.3 Preference on Job Size 157

5.3.4 Preference for a Particular Pattern of

Financing 158

5.3.5 Preference on Geographical Location 158

5.4 PROJECT DELAY 159

5.4.1 Certain Difficulties as Reasons for

Delay 160
5.4.2 Sources of Risk 167
5.5 TAX ON TURNOVER 167
5.6 INFLATION AND COMPENSATIONS FOR SAME 168
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6 SECTORWISE COMPOSITION OF PORTFOLIO 170

6.1 PROBLEM ENUNCIATION 170

6.2 FORMULATION OF THE MODEL 172

6.2.1 Mathematical Representation 173

6.3 INPUT DATA 175

6.4 SOLUTIONS FROM THE LP FORMULATION 182

6.5 SENSITIVITY ANALYSIS 184

6.6 CONCLUDING REMARKS 188

7 ANALYSIS OF PROJECT CASHFLOW, MARKUP

DECISIONS AND COMPENSATION FOR DELAY 189

7.1 CASHFLOW PLANNING 189

7.2 CERTAIN ASPECTS OF PROJECT CASHFLOW 190

7.2.1 Profitability and Rate of Return on

Investment 191

7.2.2 Capital Lockup and CAPTIM 192

7.2.3 Self-Financing Contracts 193

7.2.4 Forecasting Cashflow Under Indian

Conditions 195
7.2.5 De-composition Into Cost Components 197
7.3 ANALYSIS OF CASHFLOW OF PROJECTS AT PRE-
TENDER STAGE 202
7.3.1 Assumptions 206
7.3.2 Cashflow Profiles of Projects 212

7.4 ANALYSIS OF CASHFLOW OF A PROJECT DURING

IMPLEMENTATION PHASES 221
 7.4.1 Salient Factors Constituting the

Cashflow 224

7.4.2 The Shape of the Resultant Cashflow

Curve 227

7.4.3 Leeways Which Contribute to Contain

Deficits in Cashflow 227

7.5 FACTORS EXHIBITING GREATER SENSITIVITY 232

7.6 FAIR AND JUST INTERIM PAYMENT (FJIP) MODEL 234

7.6.1 Model Framework 236

7.6.2 Inputs Required 238

7.6.3 Numerical Example 238

8 MINIMUM MARKUP DECISIONS AND SUITABLE PRICING

STRATEGY 249

8.1 MINIMUM MARKUP MODEL 249

8.1.1 Model Framework 249

8.1.2 Inputs Required 252

8.1.3 Numerical Example 252

8.2 SUITABILITY OF EXPECTED VALUE BIDDING MODELS 259

8.3 SUITABLE PRICING STRATEGY FOR A PROJECT 260

9 CONCLUSIONS 270

SUGGESTIONS / RECOMMENDATIONS FOR FUTURE

RESEARCH 274

REFERENCES 276

APPENDICES 293