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Business E-solutions for Small Construction Companies

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BUSINESS E-SOLUTIONS FOR SMALL CONSTRUCTION COMPANIES AND FREELANCERS

Sergiu Catinas

Florin Matei

Abstract.There is a direct correlation among number of employees who work in construction industry and the average productivity of the construction workers. A first notice when these two factors are compared simply resides from the annual charts that follow these two factors. It is quite obviously that the average productivity of the workers depends primarily on technologies used, but depends on some other factors as well. The link among technologies used and productivity is not a subject to discus in this paper. Even though it is well known that construction industry requires a big variety of skills it is well known that some of the construction jobs are completed by workers with multiple qualifications. Also a principle of productivity clearly states that productivity of a worker is grown once the area of qualification is restrained. Therefore, in order to create a better productivity of the construction workers it is necessary to create workers with super high qualification in one small area and allow movement of the working force among construction sites. Most of the construction company has a great deal of mobility, but the most sensitive problem remains the problem of getting together the needs of labor with the suppliers of labor services. The main purpose of this paper is to underline the needs of a better link among construction actors. Also the paper proposes an e-solution for a better connection of construction players through implementing/changing an internet based site and shows some of the proposed benefits.

Keywords: e-solution for construction business G14 A12 E60, construction average productivity D61 B22, construction companies’ mobility M54 C12, publically provides goods H44 D60.

1. Introduction

By definition the average productivity is defined as in (1).

Please note that an average productivity can be expressed with respect to marginal productivity as Saari1 said and as seen in as in figure 1.

Figure 1 average productivity and marginal productivity with respect to real output/input

As expressed by Harris2 the main economical factors that influence the productivity in construction industry are mortgage and accountants, fraud, cash flow, estimators and the cost engineers. By analyzing these factors and the influence of these factors over the total cost of a construction project, a solution is to be created in order to address the influence of factors like fraud and cash flow as well as the other three factors.

Out of statistics offered by US Department of Labor the average construction manager contractors and the number of construction output in 2012 in US are almost the same (450 000-number of construction managers and 480.000-number of output construction in US according to US Department of Construction). Also by considering the top 5 US contractors and the number of their projects ongoing over the number of the contractor’s company employers the rate is over 0.08 in all cases, according to ENR.Construction.statistics. This leads to the idea that the big general contractors don’t have more than 12 of their own employees on the site. More over the second observation is that the big general contractors use the working labor of the subcontractors in order to complete their jobs more than their own workers. An internet based solution in order to reduce the general cost of the construction project is the proposal introduced by the present paper. The solution presented tries to minimize the importance of the general contractors by implementing an internet based program that will allow small contractors and freelancers to bid for their project with no respect the general contractors. This system will bring significant benefits for small contractors and freelancers and will increase the average productivity of construction labors.

2. Main Concept

As expressed above, the main idea is to implement a system based on the internet application that allows creating a strong connection among actors from construction industry. As a historical data it is important to mention that similar attempts were made outside Romania, but this kind of projects are not very popular. Also a similar model was build for tracking industry in USA. The system proposed would generate business revenue for all three categories involved in the construction industry, being a “triple win” system. The winners would be the owner of the site through charging money for any contact established, the general contractor or owner of the construction site and the freelancers or contractors that execute jobs because they can find jobs for their own. Never the less a major winner for this system could be the government through a better control of the labor black market and the society in general because this system would develop very effective companies and freelancers with high standards of safety and quality. More over a quality control can be implemented through expressing a relevant history data of every participant and through offering solid warranties for executed projects.

3. Details about techniques of implementation

The internet page should provide valuable information about potential contractors or subcontractors. First this page would provide references wit previous jobs done so far by the contractors. This can provide solid knowledge about the quality, timing and safety rules applied by the contractors. According to this it can be created a scale ranging from 1 to 100 that would give a good view about an opportunity to create business relation with a specific contractor/freelancer.

The internet page proposed by this idea can create a good point of view about the payment conditions, contract forms and eventually any history data for the beneficiary institution/person. Very often the government has that data offered but the private entities are not capable of showing any data related to their capabilities of assuming contractual obligations. The owner of the internet page, which can be a private entity or the government can charge both the contractors/freelancers and the developers/private owners or government agencies. Due to a good administration of the internet page it is recommended for the government to create and own such a business. The charge can be enforced only when the contact is established and an extra charge can be enforced when a contract is signed through this internet connection. Once the need for a job is expressed in details by the developer an auction that can last for 10 days can be started in order to allow the contractors and freelancers to put their best offer online, similar with the e-bay system. The winner would have to make a written contract with the developer and enforce according to the terms established in the description provided by the developer and the applicable law. To mention that a similar system exists in Romania, but with no history data for none of the sides and not very popular. Also the actual system is not open for private jobs. More over the actual internet page called “www.licitatia.ro” is for contractors only and not for small enterprises or freelancers and sometimes the value of contracts is not affordable for small companies. The main idea for this site is to create opportunities for small companies to cooperate with big contractors. A great disadvantage for the internet page that already exists is that the winners of the auctions are most of the time big construction companies and the execution of the job is done through small contractors/freelancers by subcontracting the job. The main idea of this site is to allow the investor to create a working plan and graphic and according to that graphic to connect directly to small contractors/freelancers and decrease the cost of the labor.

4. Technical motivation for the propose

As expressed by Harris2 the main important economic factors for a construction project are: fraud, mortgage and accountants, cash flow, estimators and cost engineers.

Figure 2 Labour productivity growth in US, measured by GDP per hour worked (indexed)

Fraud can’t be expressed mathematically by any formula and can vary a lot from a project to another. The Romanian construction industry is marked by so called underground black market of workers/labors. The rate of construction workers in Romania that are not hired legally is over 28% according to INS Bucharest. Apparently these workers represents a cheaper work force for the employers, but the long term run shows a different situations when accidents on the site construction happened and in our country the percentage of workers injuries and fatalities is double among black market according to Business Inside Magazine statistics. Therefore is hard to deliver any precise formulas or data regarding fraud in Romanian construction industry or elsewhere but we surely know that black market in construction is significant.

For the mortgage and account factor the situation is expressed in detail by Nigrini4. The problem comes from the underestimation of the project and the lack of money to complete the jobs contracted. One of the solutions is implemented by creating smaller jobs and that is a main source of inspiration for the present paper and the idea proposed.

Cash flow can be defined5 as the movement of money into or out of a business/project and it has three aspects: operational cash flow, investment cash flow and financing cash flow. Also cash flow factor is one of the great advantages that can be obtained through introduction of the idea presented in this paper.

Estimators can get greater attention through introduction of the present idea. The error introduced by estimators is as Amos6 said in (2) and (3).

e(x)=\widehat{\theta}(x) - \theta, (2)

d(x) =\widehat{\theta}(x) - \operatorname{E}( \widehat{\theta}(X) ) =\widehat{\theta}(x) - \operatorname{E}( \widehat{\theta} ), (3)

Where \theta \ is the parameter being estimate and  \operatorname{E}( \widehat{\theta}(X) ) is the expected value of the estimator. Please note that the error, “e”, depends not only on the estimator (the estimation formula or procedure), but also on the sample.

Estimator engineers are engineers in charge with an estimation of the projects to be executed. The estimator engineers will have a greater implication by applying the present idea and their contribution should be linked to the estimators through trying to eliminate the errors margins as Amos6 proposed in the mathematical formulation expressed by (4) that shows how far, on average, the collection of estimates are from the expected value of the estimates.

\operatorname{var}(\widehat{\theta}) = \operatorname{E}[(\widehat{\theta} - \operatorname{E}(\widehat{\theta}) )^2] (4)

5. Example of the benefits of implementing the present idea.

Consider a large construction project in Romania, in the city of Cluj-Napoca of a total value 54.00 million euro. The general contractor that was award the contract was a big general contractor with good experience in similar jobs. The second bid offer was as big as 92.10 million euro and the beneficiary was the institution of prefecture. The project was to build a sport complex in the city of Cluj-Napoca. Due to a court decision the project was stopped in the construction phase for over 18 months. The court decision was issued as a complaint by the general contractor who made an offer of 92.10 million euro. The time spent from the moment of interruption due to the court decision and the moment of the re-awarding the job to a bidder involved big amount of financial losses for both of the general contractors. Not to mention the financial losses suffered by the contractors, but to mention the difference of the bids amount will result as a margin profit of 37.90 million euro. If the example above is not relevant for the profit margins obtained by general contractors let’s take the revenues of the top general contractors from US in 2012 and divide it by number of contracts completed by the same amount of time. This would generate revenue of 1.08 million dollars per project and considering an average medium project of 1.78 million dollars. These data are obtained from US Department of Construction Statistics. By applying the dates in our specific case we would obtain revenue of 19.87 million dollars. By considering dollars to euro ratio as 0.76, the revenue for our specific case would be 15.1 million euro. And this calculus does not include any losses due to the court decision that put a brake on the project. If the estimator engineers made a mistake according to (2),(3),(4) that error can be estimated from statistics as an average of 17% of the total value of the project after the project is finished according to Corps of Civil Engineers from US. In our specific case the average error of the estimator engineers for the project from Cluj-Napoca is 9.18 million euro. The difference of 5.92 million euro can be estimated as profit margin that can be linked to the present paper idea by creating small jobs to be done and the saving of the 5.92 million euro could be achieved. Please note that in the example above the cost of implementing the idea was not mentioned but according Brynjolfsson7 in the current practice the cost of IT development could not be more than 5 % of the total amount of the project, so a profit margin is still available.

6. Conclusions

As expressed above the main idea of this paper is to express the need and procedures of creating an internet page that allows the beneficiaries of the construction structures to create a working plan and implement this plan. This working plan is technically known as Gantt plan and contains dates regarding each article of work and labor needed and the time allocated for that process. The site would create an auction system for every job/article that needs to be done. This system would benefit the contractors and small freelancers, the beneficiary of the construction structures as well as the government agencies and the general welfare. This internet application would create a triple win situation for government, contractors and beneficiaries of the construction structures. Moreover, another benefit would be due to high specialization class of small contractors and freelancers and the safety measures that would be strongly estimated and evaluated. The internet page proposed is subject to have a special section reviews regarding safety measures enforced. Regarding the safety of the labors and workers the government can enforce in a more efficient manner the black market control. Obviously the government agencies would have a better idea in what specific areas of construction the number of accidents is bigger and can enforce better safety rules. Also by knowing the contracts signed the government can put a better hand on the quality of the work in the most sensitive areas and can control the construction sites on the exact time when the most sensitive work and companies are on the site.

References

[1] Saari, S., "Productivity. Theory and Measurement in Business",: European Productivity Conference, Espoo, Finland, 2006, pp. 44-69.

[2] Craig, C.; Harris, R., "Total Productivity Measurement at the Firm Level", Sloan Management Review, Feb-March 1973, pp13–28.

[3] Hollmann, John, K., "Total Cost Management Framework", AACE International, Morgantown WV, 2006, pp113–147.

[4]Nigrini, M., Forensic Analytics: Methods and Techniques for Forensic Accounting Investigations. Hoboken, NJ, John Wiley & Sons Inc., June 2011, pp 206-235.

[5]Strong, R., Portfolio construction, management, and protection, South-Western Cengage Learning, Mason, Ohio, 2009 , pp.527-537.

[6] Amos, S., "Skills and Knowledge of Cost Engineering,"-Fifth Edition, AACE International, Morgantown, West Virginia, 2004, pp 109-127.

[7] Brynjolfsson, E., "The productivity paradox of information technology".Communications of the ACM International, Mason, Ohio, 2003, pp 66–77.


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