Steel is the major material used in construction, according to research it cost 9-10% of structure, and 14-16% of whole construction price in average (Edzarenski, 2016). With this in mind, the fluctuation in the price of steel will cause a high uncertainty and may cause big impact on the construction. In a project with a variable like this, both client and contractor wanted to prevent themselves increasing financial input to the project (Winch, 2010). The client wanted to gain benefit by constructing a building with low price and good quality; on the other hand, the contractor asks for much more money during high uncertainty.
Our goal is to control the project in an appropriate price and also prevent further possible problems. The market should be fully researched since the beginning of the project to reduce uncertainty. That also including understanding of the market and the price of materials. In cases where prices differ through the project period, design and build contracts will be a good choice. The reason is that a design build (DB) contract “provides a design solution with high construability” (Eriksson, P.E. & Westerberg, M., 2011) and “provide flexibility for changes during construction” (Gordon,1994). The project will be design with preventing later problem for the contractor themselves, and is also changeable throughout the project when there is a difficulty with the price.
During the tendering phase, normally the contractor included the price of steel fluctuation when tendering. Manager should also be able to spot supplier that have price that is really off from the estimation. But there will also be a situation where the price difference is often more than the estimated. Contractor could face situation like bankrupt. The project could also be over schedule or quality is given up in order to decrease the price. To prevent the project from going towards a chaos because of the prices of raw material, the problem should be resolved before and during the contracting period.
During the contract designing period, hard and soft skills could be used to resolve this. A flexible contract or an Incentive contract (Winch, 2010) could make sure that the price is relevant for building the project. A possible method will be to setting up a standard price in the contractor, and a maximum price. When the prices are stable, the payment from the client stays the same as in the contract. In cases where the price goes above the standard, contractor could claim their lose within the period (for example price within a month). With a method to calculate price difference stated in the contract it insures the interest and fairness for both parties, with similar responsibility for both parties (Winch, 2010). This should be discussed and fully communicated by both before signing the contract, which make both client and contractor feel safe and lead to develop a better relationship with trust. It will improve the integrity trust (Zaghloul. R & Hartman, F ,2003), because the interest of both parties is looked after.
- Winch, G. M. (2010). Chapter 5; Forming the Project Coalition. In: Managing Construction Projects; An information Processing Approach. West Sussex, UK: John Wiley & Sons.
- Eriksson, P. E., & Pesämaa, O. (2007). Modelling procurement effects on cooperation
- Zaghloul, R., & Hartman, F. (2003). Construction contracts: the cost of mistrust. International Journal of Project Management, 21, 419 – 424.
- Gordon, C. M. (1994). Choosing appropriate construction contracting method.
- How Much Does A Steel Cost Increase Affect Construction? (2017, June 18). Retrieved October 06, 2017, from https://edzarenski.com/2016/09/18/how-much-does-a-steel-cost-increase-affect-construction/
Reflected by: Niels Franssen & Charitini Kougea