Project report on construction

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CHAPTER ONE

INTRODUCTION

1.0 BACKGROUND INFORMATION

The performance of the construction industry has a major influence on the economic, infrastructure, agricultural and technological development of a country (R. Chudley, 1995). Construction is increasingly becoming highly technical and sophisticated with high standard of quality and specification. These coupled with clients demand for value-for-money requires the efficient employment of equipment which can largely improve productivity in the construction industry.

The general aim of every construction is to produce a structure that can provide the required functions at the most reasonable cost, within a given time frame and at the required level of quality. Mechanization is one of the ways by which these could be achieved. The fast developing construction industry now heavily depends on equipment to achieve the high demands of quality project delivery.

Equipment implies the machinery, tools (other than craftsmen's personal tools) used in the contractor's yard, workshop or site. Generally, equipment are introduced to contracts to increase the rate of output, reduce overall building cost, achieve high output standards often required by present day designs and specifications, eliminate heavy manual work thus reducing fatigue and carry out activities which cannot be done manually or do them more economically ( R. Chudley, 1995).

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The introduction of equipment to a contract does not however necessarily result in economic savings unless the contract work is so organized that machines are fully utilized or operate for continuous periods at full capacity that is about 85% of its on-site time, their use will not be economical. To be economic, equipment must be fully utilized and not left standing idle since equipment, whether hired or owned, will have to be paid for even if it is non-productive (R. Chudley, 1995).

Heavy equipment will be needed for excavation, haulage, lifting and transportation of materials and people during the construction of a project in order to meet all the client's specifications. Contractors stand to gain from the use of equipment in the form of increased output per employee, increased productivity from equipment leading to overall profits.

Unfortunately, performance of construction firms in the industry has been affected by several constraints with lack of access to finance arguably the most critical of these constraints. At least, it prevents contractors from procuring all necessary resources for their construction works including equipment (Eyiah A and Cook P, 2003).

It is against this background that this investigation has been conducted to find the equipment acquisition methods being used by Ghanaian contractors as well as the problems the contractors encounter when acquiring equipment for their construction.

1.1 STATEMENT OF PROBLEM

The highly technical and standardized nature of current construction designs and high demands in terms of quality coupled with often short contract durations undeniably demands the use of equipment. They play an increasingly important role in building as well as civil engineering operations and both time and a lot of money can be saved by acquiring and using them. Heavy equipment are needed for excavation, haulage, lifting and transportation of materials and people during the construction of a project thus performing an operation faster, more economically, safely and with a better quality and finish.

Notwithstanding such great achievable benefits, it requires substantial capital to procure equipment, set up plant management departments and even use the equipment. It often requires very large bank guarantees, collaterals, high interest rates on bank loans, sometimes cumbersome bureaucratic procedures to acquire funds to purchase plant or equipment. This is probably why most Ghanaian contractors still depend heavily on manual labour to execute their projects.

On large and complex projects of long durations, it may be practical to purchase plant or equipment for a specific job and resell at the end of the contract. The problem here is that fluctuations in prices on our current market may make it difficult to forecast costs with certainty.

Equipment holding firms often do not offer favorable and attractive conditions for the acquisition of equipment to encourage contractors to use equipment on the projects. Very few of the contractors can meet the required conditions before procuring most needed equipment. Again, equipment holding firms are usually found in the urban areas of our country which are almost always far away from most of the construction sites warranting high haulage costs from the plant depot.

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Purchasing a plant or equipment could also tell greatly on the finances of the firm as a very large sum of money may be locked up in purchasing the plant which then has to be worked at a good utilization level to recoup investments made into it.

Finally, purchasing equipment is sound investment if there is enough work ahead to keep it fully employed. Some estimates suggest the equipment must be working regularly for three to five years to recover the capital outlay. However the situation in Ghana is that of many contractors competing for very few projects. Construction firms cannot be assured of regular projects to fully utilize their investment in equipment therefore they rather do not invest in it all or when they do, it is very minimal.

All the aforementioned problems collectively contribute to the reason why most of the contractors are unable to acquire the necessary equipment for construction works and thus leaving construction in Ghana still very labour intensive.

1.2 AIMS AND OBJECTIVES

The main aim of this study is to investigate the existing equipment acquisition methods in use in the Ghanaian construction industry as well as the problems that the contractors encounter when acquiring equipment with the view to recommending better and more effective practices in the construction industry.

Specific objectives of the investigation are to:

* Find out existing equipment acquisition options used by the Ghanaian contractor.

* Identify problems faced by the Ghanaian contractor in acquiring equipment for construction works.

* Examine existing arrangements (if any) made between equipment hire and manufacturing companies and the construction companies.

* Recommending better acquisition options as well as solutions to some of the major problems the contractors face when they try to acquire equipment.

1.3 SCOPE OF WORK

A number of firms within the D1 and D2 of contractors by the Ministry of Water, Works and Housing and the Ministry of Roads and Transport in the Kumasi Metropolis will be identified, selected and studied.

The equipment items that will be covered under the study will include general equipments, earth moving, lifting, transporting and excavation equipments.

CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION: CONSTRUCTION EQUIPMENT

Equipment plays an increasingly important role in building as well as civil engineering operations, and both time and money can be saved by the efficient use of mechanical aids. Equipment implies the machinery, tools (other than craftsmen's personal tools) and other equipment used in the contractor's yard, workshop or site. These may range from small hand held power tools to larger and more expensive equipment such as mechanical excavators and cranes.

The aim of any construction activity or project is to produce a structure of the right quality and standard at an optimum cost within an acceptable time frame. The use of equipment for construction becomes necessary where using manual labour will not help achieve the project's objectives.

Generally, equipment are introduced to contracts for one of the following reasons:

* Increased production.

* Reduction in overall construction costs.

* Carry out activities which cannot be carried out by the traditional manual methods in the context of economics.

* Eliminate heavy manual work thus reducing fatigue and as a consequence increasing productivity.

* Replacing labour where there is a shortage of personnel with the necessary skills.

* Maintain the high standards required particularly in the context of structural engineering works

(R. Chudley, 1997).

2.1.2 SOME COMMON CONSTRUCTION EQUIPMENT USED DURING CONSTRUCTION.

Presented here is a brief description of some of the important construction equipment that may be used during the construction of a building project.

2.1.2.1 EARTH MOVING MACHINES

The equipment described here include the bulldozers, graders, scrappers etc that are used to move massive volumes of excavated materials during construction.

BULLDOZER

The primary earth-moving machine is the heavy-duty tractor, which when fitted with tracks to grip the ground and with a large movable blade attached in front, is called a bulldozer. The bulldozer as shown in fig 2.1 below may be used to clear brush, small trees, debris, remove boulders, and level ground. They may even be used as towing tractor or a pusher to a scrapper. They consist essentially of a track or wheel mounted power unit with a mould blade at the front. Many bulldozers have the capacity to adjust the mould blade to form an angledozer which can tilt the mould blade about a central swivel point. They become even very useful especially in civil engineering projects, which often require the moving of millions of cubic meters of earth. These bulldozers are however not appropriate for final leveling and cannot be used for loading thus requiring other equipment to load.

TRACTOR SHOVEL

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These are sometimes called loaders or loader shovels and primary function is to scoop up loose materials in the front mounted bucket, elevate the bucket and deposit the material into an attendant transport vehicle. Tractor shovels are driven towards the pile of loose material with the lowered bucket. The speed and the power of the machine will then enable the bucket to be filled. To increase their versatility, the tractor shovels can be fitted with a 4 in 1 bucket enabling them to carry out bulldozing, excavating, lifting and loading activities.

Like the scrapper, the tractor shovel is not suitable for work in rocks and waterlogged areas and will require a crawler tractor to work in the latter condition.

GRADERS

Somewhat similar to scrapers are graders which are self-propelled, wheeled machines with a long, inclined or vertically adjustable steel blade. Graders are primarily finishing equipment; they level earth already moved into position by bulldozers and scrapers. They are similar to the bulldozers in that they have a long slender adjustable mould blade, which is usually slung under the centre of the machine. The mould blade can be suitably adjusted in both the horizontal and vertical planes through an angle of 300 the latter enabling it to be used for grading sloping banks. This John Deere grader seen in Fig 2.2a below has a laser leveling unit mounted on its blade which constantly adjusts the height of the blade to ensure that the ground is made precisely flat.

The low motive power of a grader does not generally allow for use in excavations. A grader cannot load nor move spoils of significant quantity over a long distance. It is bulky in size and therefore not suitable for work in small and/or confined areas and corners.

SCRAPERS

A scraper is a machine that may be pulled by a tractor or may be self-powered and consists of a blade and a bowl or container. The bowl is lowered to cut and collect soil where site stripping and leveling operations are required involving large volume of earth. The soil may then be released so as to form an even layer of a predetermined thickness or be carried off for disposal elsewhere.

To obtain maximum efficiency, scrappers should operate downhill and as much as possible have smooth haul roads and hard surfaces broken up before scraping. Scrappers are not suitable for use in waterlogged areas and in rocky grounds. They cannot be used in loading and also would need transportation between sites.

[Microsoft Encarta 2006; R. Chudley, 1997]

2.1.2.2 EXCAVATORS

These form part of the main equipment items that are often used in construction. They are primarily used to excavate as well as load different types of soil. Each different type of excavator has specific soil conditions where it works best. Below is a brief description of some of the common excavating equipment found in construction. All of them can easily be classified under one of the following categories: Multipurpose, General or Universal and Purpose Made excavators.

MULTI-PURPOSE EXCAVATOR

Multi-purpose excavators like the one shown if fig. 2.4 are fitted with a loading and excavating front bucket and a rear backactor bucket. When in operation using the backactor bucket, the machine is raised off its axels by rear mounted hydraulic outriggers or jacks and in some models by placing the front bucket on the ground.

TRENCHER

A trencher is designed to excavate trenches at constant width with a high degree of accuracy and speed. It can cut trenches of widths between 250 and 450mm and up to 4.00m deep. It consists of a number of excavating buckets mounted on a continuous mechanism on a vertical boom. The boom is lowered into the ground to the required depth to be excavated. The spoil is then transferred along a cross conveyor to deposit the spoil along the side of the trench.

A trencher as shown in fig 2.5 is most suitable for long and deep trench excavation and it also gives a fairly accurate and clean trench width and would therefore not require further trimmings to sides of trenches it excavates.

A trencher cannot load materials it excavates and also unable to work in rock.

SKIMMER

Skimmers are used for surface stripping and shallow excavation work up to 300mm deep where a high degree of accuracy is required. They usually requires attendant haulage vehicles to remove the spoil and they also have to be transported between sites on a low-loader.

The restricted nature of the bucket movement does not allow high output rates as compared with other over site excavating equipment. A skimmer requires a large operational area and is therefore not recommended for work in small and restricted areas.

BACKACTOR

Backactors are about the most common excavating equipment used in construction. They are suitable for trench, foundation and basement excavations especially in restricted areas. They can be used with or without attendant haulage vehicles since the spoil can be placed alongside the excavation for use in backfilling. Unlike the face shovel, they excavate by moving the bucket towards the chassis of the machine. It then raises the bucket in a tucked position to discharge the excavated material through the front open bucket. They can also be used to load hard but broken down materials. They require a low-loader transportation between sites and trenches excavated using the backactor may need other equipment for trimming to obtain desired smooth edges. Shown below in fig 2.6a and b are pictures of a John Deere and CAT backactors respectively.

FACE SHOVEL

The primary function of this machine is to excavate against a face or a bank above its own track or wheel level. It is suitable for clay and can be used in excavating and even rock which needs to be loosened, usually by blasting prior to the excavation. A face shovel has the added advantage of loading materials excavated into dump trucks. It can also be used extensively for relocating spoils within a given radius or short distance and for heaping spoils for future use.

Face shovels like the one shown in fig. 2.7 above usually require attendant haulage vehicles for the removal of the spoil and a low-loader transportation between sites most especially in developed areas. They are also not suitable for deep excavations.

2.1.2.3 TRANSPORTING EQUIPMENT

These are mainly used for the transportation of personnel, materials, machines and equipment from one site to the other or from one location to the other within a relatively large site. They range from conventional saloon car to the large low loader lorries designed to transport other items of builders equipment between construction sites and the equipment yard or depot.

VANS

These transport vehicles range from the small two person plus a limited amount of materials to the large vans with purpose designed bodies such as those designed to carry sheets of glass. The vans can be supplied with an uncovered tipping or non-tipping container mounted behind the passenger cab for use as a 'pick-up' truck.

LORRIES

Lorries which are usually referred to as haul vehicles are available as road or site only vehicles. The road haulage vehicles have to comply with all the requirements of the concerning vehicle usage which among other requirements limits size and axle loads. The site only vehicles are not so restricted and can be designed to carry two to three times the axle load allowed on the public highways. They are also designed to withstand the rough terrain encountered on many construction sites.

Lorries specifically designed for the transportation of large items of equipment are called low loaders and are usually fitted with integral or removal ramps to facilitate loading equipment onto the carrier platform.

PASSENGER VEHICLES

These can range from a simple framed cabin which can be placed in the container of a small lorry or pick-up truck to a conventional bus or coach. These vans can also be designed to carry a limited number of seated passengers by having fixed or removable seating together with windows fitted in the van sides thus giving the vehicle a dual function.

DUMPERS

Dumpers are used for horizontal transportation of materials ranging from aggregates to wet concrete on and off construction sites generally by means of an integral tipping skip.

Highways dumpers or dumper trucks are similar but larger design and can be used to carry materials such as excavated spoil along the roads. A wide range of dumpers are available with variuos carrying capacities with hydraulic control for either a side, front or elevted tipping. They are designed to traverse rough terrain but they are not desinged to carry passengers. Shown above in fig. 2.8a and 2.8b are shown a standard site dumper and a dumper truck respectively.

FORK LIFTS

These are used for horizontal and limited vertical transportation of mterials positioned on pallets or banded together such as brick packs. They are generally suitable for construction sites where the building height does not exceed three storeys. They are available in three basic forms namely staright mast, overhead and telescopic boom (shown in fig. 2.9a-c) with various height, reach and lifting capacities.

HOISTS

Hoists are designed for vertical transportation of materials, passengers or both. Material hoists are usually mobile and they can be dismantled, folded onto the chassis and moved to another position or site under their own power or towed by a haulage vehicle.

Passenger hoists are designed to carry passenger passengers although they most can be capable of carrying the load of passengers as well as materials.

2.1.2.4 CRANES

Cranes are lifting devices designed to raise materials by means of rope operation and move the load horizontally. Crane types can range from simple rope and pulley to complex tower cranes but most can be placed within one of three groups namely: static (operate from a fixed position), mobile (operating position can be changed by cran under its own power) and tower (can be operated from a fixed position or rail mounted to become mobile) cranes.

Several forms of cranes can be identified. Some of these are listed below:

* Self propelled cranes

* Lorry Mounted cranes

* Track mounted cranes

* Gantry/Portal cranes

* Tower cranes

Below in fig. 2.10 is shown the different types of cranes used in the construction industry.

2.1.2.5 Concreting equipment

these equipment perhaps fall among the group of equipment that may be readily found on most constrction sites since concrete usually forms a large propotion of the materials used in construction.Concreting equipment can simply as classified under the following headings: mixing, transportation and placing.

CONCRETE MIXERS

These are used in mixing concrete especially in large volumes. Apart from the very large output mixers most concrete mixers in general use have a rotating drum designed to produce concrete without segregation of the mix.

Most small batch mixers are of tilting drum type with outputs up to 200 lit/batch. They are generally hand loaded which makes the quality control of successive mixes difficult to regulate.Medium batch mixers can achieve outputs up to about 750lit/batch and may be designed with a tilting drum mixer or as a non-tilting drum mixer with a reversable drum. These mixers usually have integral weight bacthing loading hoppers, scrapper shovels and water tank thus giving better qualtity control than the small batch mixers.

The pictures shown in fig. 2.11 and 2.12 are the very common 10/7 concrete mixer and 6m3 capacity ready mix concrete machine.

EQUIPMENT FOR TRANSPORTING CONCRETE.

Wheel barrows are the most common form of transporting concrete in small volumes. However for large volumes of up to about 600 litres, dumpers are more appropriate. Ready mixed concrete trucks are used to transport mixed concrete of volumes between 4-6m3 from a mixing equipment or depot to the site. Discharge can be direct into placing position via a chute or into some form of site dumper such as a dumper, crane skip or dumper.

VIBRATOR

After placing concrete in its formwork, excavated area or mould, the concrete must be properly worked around any insets or reinforcement and finally compacting the concrete to the required consolidation. This can be done to some degree satisfaction using tamping boards or rods but most appropritely using vibrators.

Poker vibrators consist of a hollow steel tube casing in which is a rotating impellar which generates vibrations as its heard comes into contact with the casing.

[Microsoft Encarta 2006; R. Chudley, 1997]

2.2 EQUIPMENT ACQUISITION

Generally, a construction company has two options in acquiring equipment: it may either own machinery and equipment or hire it. Management must decide early on whether the equipment needed on site is to be hired or purchased outright, if it is not already available within the company. 'Purchasing equipment is sound investment if there is enough work ahead to keep it fully employed. Some estimates suggest the equipment must be working regularly for three to five years to recover the capital outlay' [J.E. Johnston, 1981]. The decision to purchase will invariably have important financial consequences for the firm, since considerable capital sums will be locked up in plant, which must then be operated at an economic utilization level to produce a profitable rate of return on the investment .In recent years however, the growth of the independent equipment hire sector of the construction industry has greatly facilitated this latter option and approximately 50-60% of equipment presently used on projects is hired. Many firms however prefer to hire only those items of equipment which are required to meet peak demand or specialized duties [F. Harris and R. McCaffer, 2001].

2.2.1 ECONOMIC CONSIDERATIONS

The introduction of equipment to a project does not necessarily result in economic savings since extra temporary site works such as road works, foundations, hard standings and anchorages may have to be provided at a cost which may be in excess of the savings made by using the equipment. The site layout and circulation may have to be planned around equipment positions and accommodation. The full advantage of employing the equipment can only be realized if the equipment is well managed, both on and off the site, and this requires a thorough understanding of the economic aspects of using equipment and vehicles. For example, a crane will become expensive if the design does not allow a fairly continuous programme of work whilst it is on the site.

To be economic, plant must be fully utilized and not left standing idle since equipment, whether hired or owned, will have to be paid for even if it is non-productive. Full utilisation of equipment is usually considered to be in the region of 85% of on site time, thus making an allowance for routine daily and planned maintenance which needs to be carried out to avoid as far as practicable equipment breakdowns which could disrupt the construction programme. Many pieces of equipment work in conjunction with other items of equipment such as excavators and their attendant haulage vehicles therefore a correct balance of such equipment items must be obtained to achieve an economic result (R. Chudley, 1995; R.E Calvert et al, 1996).

2.2.3 EQUIPMENT POLICY

2.2.3.1 OWN ALL EQUIPMENT

The policy practiced by many enterprises is to purchase, or lease long term, most of the equipment needs and thereby provide availability at all times, with the added advantage of the prestige attached to demonstrating the use of owned equipment. However, much capital will be locked up in the equipment, which must become capable of generating a sufficient rate of return. A major disadvantage of this strategy is the problem of maintaining adequate levels of utilisation. Equipment holdings are usually built up to service a growing demand, and will become a heavy liability in the case of an economic recession. Any available work may then subsequently need to be undertaken to sustain the fleet, since equipment cannot easily be sold in a declining market.

2.2.3.2 HIRE ALL EQUIPMENT

Many specialist hire/rental firms offer the supply of equipment now on the open market. To take advantage of this facility avoids both the responsibility of maintenance and the tying up of capital. The equipment may be hired for a specified period and often times the equipment operator also is provided by the equipment supplier.

The main disadvantage of hiring is that the hire rate depends on market forces and suppliers are largely beyond the control of the hire, except for limited negotiation between competing firms.

2.2.3.3 A COMBINATION OF HIRE AND OWN

A mixed policy of owning and hiring equipment may be the preferred option. For example, regularly required items might be purchased and hiring adopted only to smooth out demand (Edwards D.J, 2003).

F.T. Edum-Fotwe (1990) writes that serious consideration should also be given to the extent to which the equipment is to be operated before an acquisition decision is made. He outlines the following factors concerning the level of operation of a equipment:

1. Acquire equipment new and operate to a down value and sell it.

2. Acquire second-hand equipment and operate to scrap value.

3. Acquire equipment new and operate to scrap value.

4. Acquire a second-hand equipment and operate to a down value and resell.

2.2.4 FINANCING OF EQUIPMENT

A firm, having decided to buy a equipment instead of hiring, has the following methods of paying for the equipment.

1. Cash or outright purchase

2. Hire Purchase

3. Credit Sales

4. Leasing

5. Hiring

2.2.4.1 CASH OR OUTRIGHT PURCHASE

When using this option, the buyer pays cash or immediately at the time of purchase, thereby providing tangible asset on the balance sheet. Obviously, this option is only possible if cash is available and therefore presupposes that profits have been built up from investors such as shareholder, bank loans, etc. Also, some large or technically unusual contracts sometimes include monies to permit the contractor to purchase the necessary equipment at the start of the project [F. Harris and R. McCaffer, 2001].

R. Chudley, 1997 simply identifies some of the advantages of outright purchase as:

1. Equipment availability is totally within the control of the contractor.

2. Hourly cost of equipment is generally less than hired equipment.

3. Owner has choice of costing method used.

J.E. Johnston, 1981 however advices that besides the purchase price of a equipment, consideration should be given to the following points:

1. Capital outlay and interest charges

2. The cost of maintenance and repairs

3. The cost of transporting equipment between sites

4. Insurance premium and

5. Standing time on site.

When examining the need to own equipment, the following points must be considered:

1. Will the item of equipment generate sufficient turnover to provide an adequate rate of return on the capital employed?

2. Is ownership of the equipment, rather than obtaining it by some other method, absolutely necessary for the business?

3. Is outright purchase the only way of acquiring the equipment? [F. Harris and R. McCaffer, 2001]

2.2.4.1.1 COST OF OWNING AN EQUIPMENT

The cost of owning and operating construction equipment is affected by factors such as the cost of the equipment delivered to the owner, the severity of the conditions under which it is used, the cares with which the owner maintains and repairs it and the demand for used equipment when it is sold which will affect the salvage value. In his report, 'Effects of equipment breakdown on civil and building construction works', Markus S. Clarke (2001) identified the costs involved in owning and operating equipment as:

i. Depreciation

When a unit of equipment is placed in operation, it begins to wear out. Regardless of the care in maintaining and repairing it, the equipment will wear out or become obsolete and has to be replaced. The owner of the equipment has to provide a reserve fund to replace it when it is worn out. Where the contractor fails to include an appropriate allowance for depreciation of his equipment in his estimate, there will be no funds available to replace the equipment when they become aged or obsolete.

ii. Maintenance and repairs

The cost of maintenance and repairs varies considerably with the type of equipment, the service to which it is assigned and the care it receives. The annual costs of maintenance and repairs is expressed as a percentage of the annual cost of depreciation or independent of depreciation and it must also be sufficient to cover the cost of keeping the equipment operating.

iii. Operating Costs

Construction equipment run on fuel and lubricating oil in order to perform operations and the amounts consumed as well as the unit cost of fuel and lubricating oils vary with the type of equipment, the conditions under which it is used and the location. The contractor determines the conditions which the equipment will operate so operating costs can be determined. These conditions include the extent to which the engine operated at full power all the time and the actual time the unit operates in an hour or a day.

iv. Investment Costs

This is the cost involved in owning equipment including money invested, interest on money invested, taxes of all types assessed against the equipment, insurance and storage. Insurance and taxes are paid on the depreciation value of the equipment.

2.2.4.2 HIRE PURCHASE

'Hire purchase is a contract whereby the acquiring company pays a regular charge and at some predetermined point after payment of a proportion of the agreed hire charges, the acquiring company buys the equipment for a nominal sum' [F. Harris and R. McCaffer, 1991]. The hire purchase option dismisses the need for large capital sums is avoided, and the repayments on the borrowed can be made progressively. Hire purchase however often involves high levels of interest.

The interest of the purchase company or owner in the asset is that of a security interest since the asset can be recovered upon breach of a term or terms of the hire purchase agreement by the hirer except that under the Hire purchase Decree of 1974 the owner can only recover the asset by recourse to the courts where the hirer has paid one half of the total purchase price. Thus, under a hire-purchase agreement, installment payments made by the hirer go to satisfy the purchase price of the asset and therefore are made with a view to owning the asset (Tshribi K., 1998).

2.2.4.3 CREDIT SALES

A credit sale is a sale in which the acquiring company takes the ownership or title of the equipment item immediately but the purchase price is paid in installments. These installments include the purchase piece, plus any financing charges the vendor makes. Credit sales, like outright purchase, attract capital allowances immediately and can be used in the same way as outright purchase.

2.2.4.4 LEASING

A leasing arrangement is basically different from either outright or high purchase in that the title theoretically never passes to the user or lessee. A lease may be defined as a contract in which the lessee obtains the use of a capital asset owned by another party (the lessor). Keystone Capital, a financial institution in America writes, 'One of the biggest reasons to lease business equipment is that it offers fairly minimal upfront costs. Leasing has now become very popular all over the world and especially in the developing world where small and medium sized businesses are predominant. Leasing enables business entrepreneurs to gain more benefits from the leased items rather than buying. It allows you to make the best use of the equipment without having to invest to own them. This lets you keep your capital in the bank while making important investments and transactions in your business', (www.keystonecapitalonline.com)

'Leasing construction equipment for your business is an excellent choice. According to industry research, approximately $3,401,620,772 of construction equipment is leased each year by businesses in the United States. These businesses lease construction equipment because they know that leasing offers numerous advantages over other types of financing, including tax deductions, balance sheet management,... customized solutions, better asset management, improved cash flow, flexible end of term options...', (www.directcapital.com). R.E Calvert et (1997) al also write that an excess of 60 percent of all equipment is hired in the UK by contractors.

Finally, leasing can lessen the burden that taxes have on your company's wallet. Depending on how your lease is structured, you may be able to fully deduct lease payments as a business expense, as opposed to depreciating the value of the equipment as if it were a capital expenditure. Leasing however is a regarded a fixed term contract so that lessee cannot return the leased asset in the event of a changed business needs. The lessee also has the burden usually of maintaining the leased equipment. This may become expensive especially if the lessee does not have in-house maintenance skills [R. J. Carter and P. Price, 1995].

There are several varieties of lease which may be designed to go well with the parties concerned.

a) Finance Lease

Also known as a capital lease or conditional sales, this type of lease is generally arranged by a financial institution which neither has any particular interest in the equipment nor offer technical support. It may be more suitable if you intend to keep the equipment at the end of the lease. The rental charges will cover the asset's capital cost, except for its expected residual value at the end of the lease, together with a service charge designed to meet the lessor's overheads, interest charges, servicing costs and an element for profit. 'The main advantage of this type of lease is that it gives you the option to purchase the equipment for a nominal fee and payment terms on finance leases tend to last close to the expected useful life of the equipment', www.buyerzone.com. The lessee has full use of the asset as though it were owned and at the end of the lease the asset is sold by the lessor yet not necessarily directly to the lessee. In any financial lease agreement, neither the lessor nor the lessee can terminate the agreement without legal penalties.

b) Operating Lease

Whereas a financial lease is generally offered by a financial institution, the lessors in the case of an operating lease are likely to be the manufacturers or suppliers of the asset, whose purpose is to assist in the marketing of the item. The charges here are frequently lower than those required by a finance lease because the type of asset involved would either have a good second-hand value, or be tied to a lucrative service agreement or supply of spare parts. Indeed, the profit expected by the expected by the lessor might well come from these latter services.

Clearly, this type of arrangement is most appropriate for large and/or technically sophisticated equipment items where the manufacturers have skilled personnel and are capable of carrying out the required services and maintenance. Most haulage truck manufacturers offer this method of trading when a healthy second-hand market exists [F. Harris and R. McCaffer, 2001].

A further advantage to the lessee is that the title remains with the lessor but unlike finance lease, no entry is required on the lessee's balance sheet. Consequently the capital gearing1 would remain unchanged and this could therefore be particularly convenient to a highly geared company, which

1Gearing is the ratio of the company's loan capital (debt) to the value of its ordinary shares (equity)

might otherwise find difficulty in raising loan capital for direct purchase or even hire purchase of the equipment item. The lease charges are considered as a business expense and so are include as costs in the profit and loss account. The lessor or the lessee can terminate the agreement at any time, on the basis that the lessor will be responsible for any damage occurring to the leased item. This type of Leasing is very close to a normal rent agreement.

2.2.4.4.1 Payment options
While fixed monthly payments are the norm especially in developing countries like Ghana, they are not your only option. Depending on your company's financial situation, your equipment lease financing can include one of several payment plans that may be more appealing. If your company's cash flow ebbs and flows with the seasons, you might want to consider a skip lease. A lease with this repayment structure allows you to skip payments during slow months without being penalized. They are ideal for recreational and agricultural businesses that rely heavily on certain times of the year for significant portions of their revenue.

Step-up leases provide a solution for companies with limited cash that are depending upon the acquisition of specific equipment to increase revenue. This type of lease recognizes that the company will be able to handle increased lease payments over time, and keeps payments low at first then ramps them up according to a pre-determined schedule.

An alternative to a step-up lease is a 60- or 90- day deferred lease. Just as its name implies, this lease allows you to defer your first payment for 2 or 3 months. Usually you will not have to present a down payment with this option (www.buyerzone.com/finance/equipment-leasing/buyers).

2.2.4.4.2 Ending your lease
Lease terms range anywhere from 6 to 120 months, although the majority fall between 12 and 60 months. The lease term that you decide upon will depend heavily on what you decide to do with the equipment at the end of your lease. Usually, you have four choices. You can:

* Return the equipment to the lessor with no future obligation.

* Renew the lease.

* Purchase the equipment for a nominal fee or fixed price agreed upon at the lease inception.

* purchase the equipment at fair market value

Before agreeing to any particular end of lease clause, carefully consider what state the equipment will be in at the end of the lease, and whether you'll want to obtain a newer model at that time.

2.2.4.4.3 BENEFITS OF LEASING

Keystone Capital (www.keystonecapitalonline.com), one of the premiere financial institutions in the United States and Direct Capital Corporation (www.directcapital.com) have both written on the benefits of leasing as follows:

1. Leasing Conserves Capital Strength

Leasing eases the strain on working capital because you can purchase the equipment and technology you need today while spreading your payments affordably across time. This allows you to reserve your capital for other day-to-day expenses. It converts a large cash sale price into a low, affordable, tax-deductible monthly payment.

2. Capital Conservation
'If it appreciates, buy it. If it depreciates, lease it'. Traditional bank lines are perfect for running the day-to-day operations of a business but not for funding long-term equipment acquisitions. Leasing provides an alternate source of credit and financing more suited for depreciating technology assets. Don't invest in depreciation.

3. In leasing, collateral is seldom required because the leased asset serves as security as the lessor retains ownership over the asset. In event of default, the lessor can repossess the asset, a relatively straight forward process in most countries.

4. Conserve Credit Lines
Leasing does not weaken your borrowing power because no money has been borrowed. Because a lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, making you more attractive to traditional lenders when you need them. Lease and your existing credit line remain healthy and available for the unforeseen.

5. Fixed rate lease payments
No variable interest rates here. Fixed payments enable a lessee to more accurately predict equipment costs and cash needs.

6. Leasing Overcomes Budget Limitations and Guards Against Obsolescence
Lease payments are often lower than purchase installments, making the most of your current budgets. This allows lessee companies to acquire all of the equipment needed to meet current demands, rather than being forced to work with outdated or inferior equipment.

7. Avoid Obsolescence
Buying promotes keeping equipment far beyond its useful life. Out-dated equipment is often stored away until it is less than worthless (sold for less than the costs of selling). Equipment leasing protects your company from having to keep obsolete equipment. Trade-in, add-on and upgrade capabilities and allows you to make the needed adjustments as your business grows.

8. Leasing Lessens the Impact of Inflation
Through leasing, you can offset inflation with fixed lease payments. You can acquire the equipment you need at today's prices and pay for it with tomorrow's, less valuable cedi.

9. Speed

Leasing allows you to respond quickly as your need for equipment and technology arises. You can be approved for financing within hours through minimal documentation and you can have the equipment you need in operation and producing profits for your business, quickly and without hassles.

10. Tax advantages

The Internal Revenue Service does not consider an operating lease to be a purchase, but rather a tax-deductible overhead expense and therefore does not charge VAT on leased equipment. Therefore, you can deduct the lease payments from your corporate income. Lease rental payments are made from pre-tax rather than after-tax earnings.

2.2.4.4.5 Leasing in ghana

Leasing companies are a relatively new phenomenon on the financial scene of Ghana. The activities of leasing companies are geared towards providing finance leases, mostly for industrial machinery, automobiles and office equipment. Capital and funding are usually provided by the corporate owners who frequently comprise of banks, insurance companies and other financial institutions.

Leasing companies play a very important role by providing short to medium term financing for development of private sector institutions which is not available through the traditional sources. In recognition of its importance to the economy and the need for statutory regulation, the Finance Lease Law of 1993, PNDCL. 331 was specifically enacted to streamline finance lease agreements. This law has given birth to such Non-Banking Financial Institutions like the Ghana Leasing Company Ltd., Leasafric Company Ltd. and Merban Finance and Leasing Co., Ltd. (Banking and Financial Law Journal of Ghana, Vol. 1 No. 1). Plant Pool Ghana Limited also provides operating type of leasing in Ghana. Ecobank Ghana Ltd recently introduced a leasing scheme called Ecobank Leasing to help entrepreneurs acquire their capital resources.

However, 'knowledge about leasing is considered to be low among the business community and the general public'; as Ken Tshribi (1998) would put it, 'leasing remains in its infancy in most developing countries'. Elsewhere 'in the developed economies, leasing is used to finance about one third of private investments' (Daily Graphic, November 7th 2006, pg. 16). This raises the concern and question; why are contractors in Ghana not taking advantage of the financing option of leasing as in the developed countries?

2.2.4.5 LEASING IN TANZANIA

The International Finance Corporation (IFC) with support of the Swiss Government's State

Secretariat for Economic Affairs (SECO) is implementing a 2.5 year project in Tanzania to develop and support the growth of financial leasing. The project, known as the Tanzania Leasing Project (TANZALEP) among other things, provides technical assistance and capacity building to the Government of Tanzania, in order for the Government to put in place appropriate and enabling legal, regulatory and taxation environment for financial leasing. In addition to its work with Government, TANZALEP provides leasing product/business development support to banks, prospective leasing companies, equipment supply companies, institutional investors, and micro leasing companies. It provides training and capacity building to professional associations, firms and regulators, and mobilizes domestic and international investment for leasing (Moyo V. Ndonde, 2006).

In addition to appropriate legal environment, TANZALEP is developing appropriate services for both established and prospective leasing companies while making available funding for leasing operations, creating awareness on the part of the public and enterprises, providing asset

management and monitoring skills and creating a lucrative secondary market for leased equipment,

among other things.

2.2.4.6 HIRING

Hiring and leasing are sometimes regarded as similar and for equipment items that are on hire for long periods the difference between the two methods of acquisition may be unclear. Short term hire of construction equipment is not usually regarded as leasing and the company hiring the equipment pays an hourly, weekly or monthly rate for the equipment. The period of hire may well be as short as one week or one month and therefore, the construction company is not committed to a long primary period, as it would be in the case of a finance lease.

The use short-term hire is widespread in the construction industry and within the industry, there exists a 'well-developed equipment hire industry to serve this market. Many construction companies who own their own equipment run an equipment division as a subsidiary offering external fire to other companies and the internal hire to their own construction division, which may be the parent company within the same holding group [F. Harris and R. McCaffer, 1991].

2.2.4.5.1 The advantages of plant hire

* Contractor's capital is not locked up in expensive pieces of equipment;

* Hiring costs can be paid monthly as the contractor is paid for work completed in interim monthly payments;

* Contractor does not pay for plant not required nor has any work for;

* Cost of maintenance, repairs and replacement is borne by the plant hire company;

* In some instances the plant hire company will provide the experienced and skilled

operative, therefore the contractor does not have permanent operative's wages to pay; and

* The contractor has no storage problems when plant is not being used as it is returned to

the hire company.

2.2.4.5.1 The disadvantages of plant hire

* Effective planning and programming of work schedules is required to minimize expensive;

* A suitable machine may not always be available when required, especially at short notice;

* The contractor still has to pay for the hire cost when work is aborted due to bad weather;

* The plant operator does not work for the contractor full-time and so there is no incentive; and

* Hire rates depend on market forces, which fluctuate and can be a cause of loss to the

idle time on hired plant (R. D. Buchan et. al, 2001).

2.3 EQUIPMENT ACQUISITION IN OTHER AFRICAN COUNTRIES

The equipment acquisition options and problem already discussed are not peculiar to only the contractors in Ghana. Just as in Ghana, governments and donor agencies have had to sponsor several programmes to mitigate some the of the difficulties contractors encounter.

Generally, contractors have been provided with equipment to enable the successful completion of specific projects (Bentall et al., 1999). In Zimbabwe, a local bank was selected to supply equipment after the Department of Roads and contractors had made the specification. A sponsored guarantee fund was set aside to compensate the bank in the event of default by contractors (Bentall et al,1999). In a similar scheme in Zambia, contractors made regular payments for equipment after which ownership was transferred to them (Bentall and Schultz, 1998). Some countries established Contractors Support Agencies (CSA) to take care of most, if not all, the problems of contractors. Typical of these was the National Construction Corporation (NCC) of Kenya. It consisted of a 'school', responsible for training, 'construction company', responsible for contracting jobs to contractors, and a 'bank', responsible for granting loans (Bentall and Schultz, 1998).

TANZALEP in Tanzania has already recorded remarkable success only after 3 years of its inception. The leasing market doubled between the years 2004 and 2006 while 20% of all construction equipment and well as 77% of transport equipment in Tanzania was acquired through leasing as of the year 2006 (SECO-IFC Leasing Project in Tanzania).

Ofori (1980) notes, 'not much can be achieved merely by lending contractors money ... It is necessary to conceive of contractor development programme as involving the provision of a package of services, of which finance is only a part, to the contractors'. Larcher and Miles (2000) were of the view that contractors should establish their own bank, indicating that peer pressure would prevent repayment defaults..

2.4 EQUIPMENT ORGANISATION OPTIONS

1. An independent equipment hire company:

This type of organization covers both the independent equipment hire company and the equipment hire subsidiary operating under the umbrella of a holding company which may or may not be a construction firm. The company will supply equipment to the market to provide a satisfactory rate of return on the employed capital although sometimes discounts may be offered to the parent company, in accordance with a policy towards a 'favourable' or important client.

2. Controlled equipment hire:

Few construction firms can build up sufficient and diverse equipment holdings to provide an independent equipment hire service. On the other hand, the equipment fleet of a construction company may ultimately become so extensive that, to maintain effective control and profitability, the holdings are incorporated into a subsidiary division. The first priority may be to serve the equipment needs of the parent company at a profit, but in order to maintain high levels of equipment utilization and thereby maximize profit; items may be hired out to other external users.

However, the tendency with this system is for the equipment to be hired out to the market when the rates are attractive, since there will be a demand for such services and the required utilization levels can be more easily achieved this way. Consequently, there is a danger that the needs of the parent company may be neglected, and items will not be available at the right time for the company's own construction contracts. As a rule of thumb, the ratio of 'hired internally' to 'hire externally' should not fall below 2:1.

3. Internal Equipment Ownership:

The dilemma of servicing two different types of client presented by a controlled equipment policy is eliminated when the activities of a equipment subsidiary are restricted to internal hire only. This system often results in equipment hire rates which bear little relationship to market rates, as the type of equipment items and utilization levels are dictated by the demands of the construction division. Normally, the equipment subsidiary is required to achieve a set rate of return on the capital employed. Sometimes, however, the targets cannot be achieved and the deficits must be covered by the parent company.

4. Low equipment ownership:

Some construction companies operate very small equipment holdings, on the grounds that achieving profitability from equipment ownership is relatively less rewarding than other construction activities. A small depot may be maintained to provide small items only and most of the problems of owning equipment like workshop facilities, experienced and mobile maintenance crews and administrative facilities, etc. are avoided. This system, of course, relies heavily on the facilities provided by equipment hire companies. However, the availability of specialist equipment items can influence the work load and contract type open to the company, and so could affect the success of this sort of policy. A major disadvantage of this system arises when market rates changes markedly between the time of tender for work and the actual hiring of the item on the construction project.

5. Unstructured equipment structure:

The final option is to have an unstructured organization, whereby individual contracts purchase their equipment requirements and are credited with resale values when the project is completed. This option is not very common in developing countries like Ghana and may usually confined to special items, e.g. piling hammer, which may be unlikely to be used subsequently by other general contracts.

[Harris et al, 1991; Harris F. & McCaffer R, 2005]

2.5 A BRIEF APPRAISAL OF THE BANK FOR HOUSING AND CONSTRUCTION IN GHANA

(It is worth stating here that the studies conducted by Eyiah and Cook (2003) were very much consulted in this section)

The Bank for Housing and Construction (BHC) of Ghana was one of several government owned banks originally created as Development Finance Institutions (DFIs) to provide support for targeted activities in the country (Burnett, 1994). It was established 'to provide credit for private housing schemes, expansion and modernization of immovable property, estates and industrial construction. It was also empowered to participate directly in such joint ventures by way of long-term finance, jointly or alone' (Buckley, 1996). At the time of its inception, the problems contractors faced in securing finance from established sources were somewhat well known. Apparently, they were considered for a special programme.

Conditions that were to apply, with a view to limiting the inherent problem with the conventional approach to lending, included:

  • appraisal of contractor's record to determine credit-worthiness;
  • study on the type of project so as to determine any further assistance (apart from finance) that the contractor would need;
  • agreement by the client and contractor that all payment certificates should be prepared in the joint names of the contractor and the bank; and finally
  • allocation of funds to contractors after presentation of documents such as invoices and payroll sheets.

An appreciable level of success was achieved at the initial stages of the programme, until the emergence of several inter-related problems. Paramount of these was persistent delayed payments due to contractors for works completed. Coupled with this, many of the beneficiaries lacked managerial and technical capability to make profit on projects in which they were engaged, or to secure more lucrative ones. Effort to address this latter problem had its own setbacks. While the assisting team, sponsored by the World Bank, was based in the regional capital (Accra), contractors who were to be supported came from all over the country with projects in different locations. These factors contributed to repayment default although, others did so deliberately. Inevitably, they were to provide collateral, hence abolishing a major objective of the programme. Notwithstanding, default payments became unbearable, prompting the bank to treat contractors with no preference. The capital base of the bank was thus totally eroded. Several factors are attributed to the recent liquidation of BHC but, arguably, the bank's involvement with contractors could be seen as the major factor.

Opinions on the practical and academic front, in Ghana on ways to improve the effectiveness of financing programmes are diverse. There is, however, a consensus that contractors should establish a bank, which would be responsible for all their problems including the provision of finance. Many are of the view that the sole responsibility of the government in programmes for contractors should be discouraged. The important role universities and polytechnics construction graduates could play in assisting contractors involved in any such programme is also acknowledged.

(Source: Construction Management and Economics - Alex Eyiah & Paul Cook, Financing small and medium-scale contractors in developing countries: a Ghana case study, 2003)

CHAPTER THREE

RESEARCH METHODOLOGY

Research Approach

The study followed the approach outlined below:

- Preliminary study/survey;

- Design and development of questionnaires;

- Sampling involving population definition and sample size determination;

- Pilot Survey;

- Field Survey; and

- Data Analysis based on results of field survey.

3.1 Preliminary Study/survey

A preliminary study was conducted by the researcher to acquaint himself with the current issues in the construction industry of Ghana concerning acquisition and selection of equipment. This was very essential to properly frame the aims and objectives of the study and also prepare a comprehensive questionnaire to address the aims and objectives of the investigation. The researcher interacted with some key players in the construction industry and also largely consulted published data and information found in magazines, newspapers, academic thesis, internet and textbooks.

3.2 Design and development of questionnaires

Questionnaires was carefully structured following the preliminary study to specifically achieve the aims and objectives. Multiple choice answers were provided for each question and an option of 'other, please state' where appropriate to make response quicker and easier. The language of the questionnaire was kept as simple as possible considering the background of the contractors so as to generate interest and understanding.

3.3 Sampling

Definition of population

The population that was considered was contractors in the classes D1-D2 classification of the general classification of contractors in Ghana in the Kumasi Metropolis. As shown in the table 3.3.1 below, all the ten (10) D1 contractors were selected with the remaining fifty (50) selected from the D2 contractors using purposive, convenience and snowball sampling method of selection to reduce the difficulty in locating contractors in the metropolis.

Table 3.3.1: Number of D1 and D2 contractors in Ashanti Region

(Source: Ministry of Works and Housing, 2007 and AESL, Kumasi)

The sample size was determined using the Kish formula developed in 1965. This is

(1+n1/N)

Where n=required sample size

N=total population size=85+10= 95

n1=S2/V2

Where V=standard error of sampling distribution

= 0.05

S2=the maximum standard deviation in the population sample

S2=P (1-P) =0.5(1-0.5) =0.25

P=the proportion of element that belong to the defined class

n1=S2/V2=0.25/0.052=100

N=100/ (1+100/95)=48.72

Add non-responsive rate of 10%=10/100 x 48.72

=4.87+49

=53.87

Therefore the minimum sample size is approximately 54

60 questionnaires were administered to the contractors.

3.4 Pilot Survey

Prior to administering the questionnaires to the contractors, they were pre-tested on a few pilot respondents like lectures in the Faculty of Architecture and Building Technology and Contractors working on KNUST campus. This helped in determining and rectifying weaknesses and ambiguities in the wording of questions, ease or difficulty in answering the questions, usefulness of data and the time requirement for completion of the questionnaire.

3.5 Field Survey

The questionnaire were administered personally by the researcher to the selected contractors and conduct face-to-face interviews where necessary and possible, to help the responden