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2. Organizing for Project Management 2.1 What is Project Management? The management of construction projects requires knowledge of modern management as well as an understanding of the design and construction process. Construction projects have a specific set of objectives and constraints such as a required time frame for completion. While the relevant technology, institutional arrangements or processes will differ, the management of such projects has much in common with the management of similar types of projects in other specialty or technology domains such as aerospace, pharmaceutical and energy developments. Generally, project management is distinguished from the general management of corporations by the mission-oriented nature of a project. A project organization will generally be terminated when the mission is accomplished. According to the Project Management Institute, the discipline of project management can be defined as follows: [1] Project management is the art of directing and coordinating human and material resources throughout the life of a project by using modern management techniques to achieve predetermined objectives of scope, cost, time, quality and participation satisfaction. By contrast, the general management of business and industrial corporations assumes a broader outlook with greater continuity of operations. Nevertheless, there are sufficient similarities as well as differences between the two so that modern management techniques developed for general management may be adapted for project management. The basic ingredients for a project management framework [2] may be represented schematically in Figure 2-1. A working knowledge of general management and familiarity with the special knowledge domain related to the project are indispensable. Supporting disciplines such as computer science and decision science may also play an important role. In fact, modern management practices and various special knowledge domains have absorbed various techniques or tools which were once identified only with the supporting disciplines. For example, computer-based information systems and decision support systems are now common-place tools for general management. Similarly, many operations research techniques such as linear programming and network analysis are now widely used in many knowledge or application domains. Hence, the representation in Figure 2-1 reflects only the sources from which the project management framework evolves. 27 Figure 2-1: Basic Ingredients in Project Management Specifically, project management in construction encompasses a set of objectives which may be accomplished by implementing a series of operations subject to resource constraints. There are potential conflicts between the stated objectives with regard to scope, cost, time and quality, and the constraints imposed on human material and financial resources. These conflicts should be resolved at the onset of a project by making the necessary tradeoffs or creating new alternatives. Subsequently, the functions of project management for construction generally include the following: 1. Specification of project objectives and plans including delineation of scope, budgeting, scheduling, setting performance requirements, and selecting project participants. 2. Maximization of efficient resource utilization through procurement of labor, materials and equipment according to the prescribed schedule and plan. 3. Implementation of various operations through proper coordination and control of planning, design, estimating, contracting and construction in the entire process. 4. Development of effective communications and mechanisms for resolving conflicts among the various participants. The Project Management Institute focuses on nine distinct areas requiring project manager knowledge and attention: 1. Project integration management to ensure that the various project elements are effectively coordinated. 2. Project scope management to ensure that all the work required (and only the required work) is included. 3. Project time management to provide an effective project schedule. 4. Project cost management to identify needed resources and maintain budget control. 5. Project quality management to ensure functional requirements are met. 6. Project human resource management to development and effectively employ project personnel. 7. Project communications management to ensure effective internal and external communications. 28 8. Project risk management to analyze and mitigate potential risks. 9. Project procurement management to obtain necessary resources from external sources. These nine areas form the basis of the Project Management Institute's certification program for project managers in any industry. Back to top 2.2 Trends in Modern Management In recent years, major developments in management reflect the acceptance to various degrees of the following elements: (1) the management process approach, (2) the management science and decision support approach, (3) the behavioral science approach for human resource development, and (4) sustainable competitive advantage. These four approaches complement each other in current practice, and provide a useful groundwork for project management. The management process approach emphasizes the systematic study of management by identifying management functions in an organization and then examining each in detail. There is general agreement regarding the functions of planning, organizing and controlling. A major tenet is that by analyzing management along functional lines, a framework can be constructed into which all new management activities can be placed. Thus, the manager's job is regarded as coordinating a process of interrelated functions, which are neither totally random nor rigidly predetermined, but are dynamic as the process evolves. Another tenet is that management principles can be derived from an intellectual analysis of management functions. By dividing the manager's job into functional components, principles based upon each function can be extracted. Hence, management functions can be organized into a hierarchical structure designed to improve operational efficiency, such as the example of the organization for a manufacturing company shown in Figure 2-2. The basic management functions are performed by all managers, regardless of enterprise, activity or hierarchical levels. Finally, the development of a management philosophy results in helping the manager to establish relationships between human and material resources. The outcome of following an established philosophy of operation helps the manager win the support of the subordinates in achieving organizational objectives. 29 Figure 2-2: Illustrative Hierarchical Structure of Management Functions The management science and decision support approach contributes to the development of a body of quantitative methods designed to aid managers in making complex decisions related to operations and production. In decision support systems, emphasis is placed on providing managers with relevant information. In management science, a great deal of attention is given to defining objectives and constraints, and to constructing mathematical analysis models in solving complex problems of inventory, materials and production control, among others. A topic of major interest in management science is the maximization of profit, or in the absence of a workable model for the operation of the entire system, the suboptimization of the operations of its components. The optimization or suboptimization is often achieved by the use of operations research techniques, such as linear programming, quadratic programming, graph theory, queuing theory and Monte Carlo simulation. In addition to the increasing use of computers accompanied by the development of sophisticated mathematical models and information systems, management science and decision support systems have played an important role by looking more carefully at problem inputs and relationships and by promoting goal formulation and measurement of performance. Artificial intelligence has also begun to be applied to provide decision support systems for solving ill-structured problems in management. The behavioral science approach for human resource development is important because management entails getting things done through the actions of people. An effective manager must understand the importance of human factors such as needs, drives, motivation, leadership, personality, behavior, and work groups. Within this context, some place more emphasis on interpersonal behavior which focuses 30 on the individual and his/her motivations as a socio-psychological being; others emphasize more group behavior in recognition of the organized enterprise as a social organism, subject to all the attitudes, habits, pressures and conflicts of the cultural environment of people. The major contributions made by the behavioral scientists to the field of management include: (1) the formulation of concepts and explanations about individual and group behavior in the organization, (2) the empirical testing of these concepts methodically in many different experimental and field settings, and (3) the establishment of actual managerial policies and decisions for operation based on the conceptual and methodical frameworks. Sustainable competitive advantage stems primarily from good management strategy. As Michael Porter of the Harvard Business School argues: Strategy is creating fit among a company's activities. The success of a strategy depends on doing many things well - not just a few - and integrating among them. If there is no fit among activites, there is no distinctive strategy and little sustainability. In this view, successful firms must improve and align the many processes underway to their strategic vision. Strategic positioning in this fashion requires: • • • Creating a unique and valuable position. Making trade-offs compared to competitors Creating a "fit" among a company's activities. Project managers should be aware of the strategic position of their own organization and the other organizations involved in the project. The project manager faces the difficult task of trying to align the goals and strategies of these various organizations to accomplish the project goals. For example, the owner of an industrial project may define a strategic goal as being first to market with new products. In this case, facilities development must be oriented to fast-track, rapid construction. As another example, a contracting firm may see their strategic advantage in new technologies and emphasize profit opportunities from value engineering (as described in Chapter 3). Back to top 2.3 Strategic Planning and Project Programming The programming of capital projects is shaped by the strategic plan of an organization, which is influenced by market demands and resources constraints. The programming process associated with planning and feasibility studies sets the priorities and timing for initiating various projects to meet the overall objectives of the organizations. However, once this decision is made to initiate a project, market pressure may dictate early and timely completion of the facility. Among various types of construction, the influence of market pressure on the timing of initiating a facility is most obvious in industrial construction. [3] Demand for an industrial product may be shortlived, and if a company does not hit the market first, there may not be demand for its product later. With intensive competition for national and international markets, the trend of industrial construction moves toward shorter project life cycles, particularly in technology intensive industries. 31 In order to gain time, some owners are willing to forego thorough planning and feasibility study so as to proceed on a project with inadequate definition of the project scope. Invariably, subsequent changes in project scope will increase construction costs; however, profits derived from earlier facility operation often justify the increase in construction costs. Generally, if the owner can derive reasonable profits from the operation of a completed facility, the project is considered a success even if construction costs far exceed the estimate based on an inadequate scope definition. This attitude may be attributed in large part to the uncertainties inherent in construction projects. It is difficult to argue that profits might be even higher if construction costs could be reduced without increasing the project duration. However, some projects, notably some nuclear power plants, are clearly unsuccessful and abandoned before completion, and their demise must be attributed at least in part to inadequate planning and poor feasibility studies. The owner or facility sponsor holds the key to influence the construction costs of a project because any decision made at the beginning stage of a project life cycle has far greater influence than those made at later stages, as shown schematically in Figure 2-3. Moreover, the design and construction decisions will influence the continuing operating costs and, in many cases, the revenues over the facility lifetime. Therefore, an owner should obtain the expertise of professionals to provide adequate planning and feasibility studies. Many owners do not maintain an in-house engineering and construction management capability, and they should consider the establishment of an ongoing relationship with outside consultants in order to respond quickly to requests. Even among those owners who maintain engineering and construction divisions, many treat these divisions as reimbursable, independent organizations. Such an arrangement should not discourage their legitimate use as false economies in reimbursable costs from such divisions can indeed be very costly to the overall organization. 32 Figure 2-3: Ability to Influence Construction Cost Over Time Finally, the initiation and execution of capital projects places demands on the resources of the owner and the professionals and contractors to be engaged by the owner. For very large projects, it may bid up the price of engineering services as well as the costs of materials and equipment and the contract prices of all types. Consequently, such factors should be taken into consideration in determining the timing of a project. Example 2-1: Setting priorities for projects A department store planned to expand its operation by acquiring 20 acres of land in the southeast of a metropolitan area which consists of well established suburbs for middle income families. An architectural/engineering (A/E) firm was engaged to design a shopping center on the 20-acre plot with the department store as its flagship plus a large number of storefronts for tenants. One year later, the department store owner purchased 2,000 acres of farm land in the northwest outskirts of the same metropolitan area and designated 20 acres of this land for a shopping center. The A/E firm was again engaged to design a shopping center at this new location. The A/E firm was kept completely in the dark while the assemblage of the 2,000 acres of land in the northwest quietly took place. When the plans and specifications for the southeast shopping center were completed, the owner informed the A/E firm that it would not proceed with the construction of the southeast shopping center for the time being. Instead, the owner urged the A/E firm to produce a new 33 set of similar plans and specifications for the northwest shopping center as soon as possible, even at the sacrifice of cost saving measures. When the plans and specifications for the northwest shopping center were ready, the owner immediately authorized its construction. However, it took another three years before the southeast shopping center was finally built. The reason behind the change of plan was that the owner discovered the availability of the farm land in the northwest which could be developed into residential real estate properties for upper middle income families. The immediate construction of the northwest shopping center would make the land development parcels more attractive to home buyers. Thus, the owner was able to recoup enough cash flow in three years to construct the southeast shopping center in addition to financing the construction of the northeast shopping center, as well as the land development in its vicinity. While the owner did not want the construction cost of the northwest shopping center to run wild, it apparently was satisfied with the cost estimate based on the detailed plans of the southeast shopping center. Thus, the owner had a general idea of what the construction cost of the northwest shopping center would be, and did not wish to wait for a more refined cost estimate until the detailed plans for that center were ready. To the owner, the timeliness of completing the construction of the northwest shopping center was far more important than reducing the construction cost in fulfilling its investment objectives. Example 2-2: Resource Constraints for Mega Projects A major problem with mega projects is the severe strain placed on the environment, particularly on the resources in the immediate area of a construction project. "Mega" or "macro" projects involve construction of very large facilities such as the Alaska pipeline constructed in the 1970's or the Panama Canal constructed in the 1900's. The limitations in some or all of the basic elements required for the successful completion of a mega project include: • • • • • engineering design professionals to provide sufficient manpower to complete the design within a reasonable time limit. construction supervisors with capacity and experience to direct large projects. the number of construction workers with proper skills to do the work. the market to supply materials in sufficient quantities and of required quality on time. the ability of the local infrastructure to support the large number of workers over an extended period of time, including housing, transportation and other services. To compound the problem, mega projects are often constructed in remote environments away from major population centers and subject to severe climate conditions. Consequently, special features of each mega project must be evaluated carefully. Back to top 2.4 Effects of Project Risks on Organization The uncertainty in undertaking a construction project comes from many sources and often involves many participants in the project. Since each participant tries to minimize its own risk, the conflicts 34 among various participants can be detrimental to the project. Only the owner has the power to moderate such conflicts as it alone holds the key to risk assignment through proper contractual relations with other participants. Failure to recognize this responsibility by the owner often leads to undesirable results. In recent years, the concept of "risk sharing/risk assignment" contracts has gained acceptance by the federal government. [4] Since this type of contract acknowledges the responsibilities of the owners, the contract prices are expected to be lower than those in which all risks are assigned to contractors. In approaching the problem of uncertainty, it is important to recognize that incentives must be provided if any of the participants is expected to take a greater risk. The willingness of a participant to accept risks often reflects the professional competence of that participant as well as its propensity to risk. However, society's perception of the potential liabilities of the participant can affect the attitude of risk-taking for all participants. When a claim is made against one of the participants, it is difficult for the public to know whether a fraud has been committed, or simply that an accident has occurred. Risks in construction projects may be classified in a number of ways. [5] One form of classification is as follows: 1. Socioeconomic factors o Environmental protection o Public safety regulation o Economic instability o Exchange rate fluctuation 2. Organizational relationships o Contractual relations o Attitudes of participants o Communication 3. Technological problems o Design assumptions o Site conditions o Construction procedures o Construction occupational safety The environmental protection movement has contributed to the uncertainty for construction because of the inability to know what will be required and how long it will take to obtain approval from the regulatory agencies. The requirements of continued re-evaluation of problems and the lack of definitive criteria which are practical have also resulted in added costs. Public safety regulations have similar effects, which have been most noticeable in the energy field involving nuclear power plants and coal mining. The situation has created constantly shifting guidelines for engineers, constructors and owners as projects move through the stages of planning to construction. These moving targets add a significant new dimension of uncertainty which can make it virtually impossible to schedule and complete work at budgeted cost. Economic conditions of the past decade have further reinforced the climate of uncertainty with high inflation and interest rates. The deregulation of financial institutions has also generated unanticipated problems related to the financing of construction. 35 Uncertainty stemming from regulatory agencies, environmental issues and financial aspects of construction should be at least mitigated or ideally eliminated. Owners are keenly interested in achieving some form of breakthrough that will lower the costs of projects and mitigate or eliminate lengthy delays. Such breakthroughs are seldom planned. Generally, they happen when the right conditions exist, such as when innovation is permitted or when a basis for incentive or reward exists. However, there is a long way to go before a true partnership of all parties involved can be forged. During periods of economic expansion, major capital expenditures are made by industries and bid up the cost of construction. In order to control costs, some owners attempt to use fixed price contracts so that the risks of unforeseen contingencies related to an overheated economy are passed on to contractors. However, contractors will raise their prices to compensate for the additional risks. The risks related to organizational relationships may appear to be unnecessary but are quite real. Strained relationships may develop between various organizations involved in the design/construct process. When problems occur, discussions often center on responsibilities rather than project needs at a time when the focus should be on solving the problems. Cooperation and communication between the parties are discouraged for fear of the effects of impending litigation. This barrier to communication results from the ill-conceived notion that uncertainties resulting from technological problems can be eliminated by appropriate contract terms. The net result has been an increase in the costs of constructed facilities. The risks related to technological problems are familiar to the design/construct professions which have some degree of control over this category. However, because of rapid advances in new technologies which present new problems to designers and constructors, technological risk has become greater in many instances. Certain design assumptions which have served the professions well in the past may become obsolete in dealing with new types of facilities which may have greater complexity or scale or both. Site conditions, particularly subsurface conditions which always present some degree of uncertainty, can create an even greater degree of uncertainty for facilities with heretofore unknown characteristics during operation. Because construction procedures may not have been fully anticipated, the design may have to be modified after construction has begun. An example of facilities which have encountered such uncertainty is the nuclear power plant, and many owners, designers and contractors have suffered for undertaking such projects. If each of the problems cited above can cause uncertainty, the combination of such problems is often regarded by all parties as being out of control and inherently risky. Thus, the issue of liability has taken on major proportions and has influenced the practices of engineers and constructors, who in turn have influenced the actions of the owners. Many owners have begun to understand the problems of risks and are seeking to address some of these problems. For example, some owners are turning to those organizations that offer complete capabilities in planning, design, and construction, and tend to avoid breaking the project into major components to be undertaken individually by specialty participants. Proper coordination throughout the project duration and good organizational communication can avoid delays and costs resulting from fragmentation of services, even though the components from various services are eventually integrated. 36