The Impact of Effective Contract Planning on Contractors Profit

The Impact of Effective Contract Planning on Contractors Profit

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Chapter One of The Impact of Effective Contract Planning on Contractors Profit

INTRODUCTION 

BACKGROUND OF THE STUDY AND ORGANIZATIONAL PROFILE 

Seeley (1997) described the construction industry as one of the most important sectors of the economy, which integrates a wide variety of skilled and unskilled professionals. These professionals engage in the provision of goods and services ranging from construction, alteration, refurbishment to repairs of building and civil engineering structures. All these professionals work together under various types of contractual agreements to actualise the client’s brief and deliver the project. Each project is unique and has its main objectives outlined by the client and project circumstances. Amongst the most common objectives of any successful project are deliveries at the right time, within authorised cost and meeting the envisaged quality standards (Love et al, 1998). Construction projects, like all others, are not risks free and thereby can result to financial loss. Construction risks are events that generally influence any or all of the project objectives. Risk events could either be positive in terms of opportunities or negative in terms of threats to either or the entire project objectives (Hillson, 2002). A lot of academic and professional literature has developed in the field of effective contract planning and management within construction contexts. The degree of application of contract planning and management techniques by contractors especially, was found to differ in various construction industries across the globe. Most countries in the MiddleEast and some part of Africa do not utilise project planning and management techniques in the delivery of construction projects (El-Sayegh, 2008; Laryea and Hughes,2009). Akintoye and McLeod (1997) found that low usage of formal contract planning techniques was essentially due to lack of knowledge and doubts on the suitability of the techniques to real life situations. This was supported by the findings of Shen (1997). Kartam and Kartam (2001) however attributed the low usage of risk analysis techniques to subjective judgement and contractor’s reliance on their experience and intuition. El-Sayegh (2008) identified financial loss as the most significant in the Kuwaiti construction industry due to the boom in construction activities and inflationary trend of the market. Laryea and Hughes (2009) attempted to find how contractors’ in Ghana include financial risk in their bid prices. The research showed that besides having risk allowances as lump sums or percentage allowances, the method used is neither scientific nor informed by any empirical evidence. Ojo (2010) found that design changes, financial losses and inadequate specifications were the risk factors with most impacts on construction sites but the study did not highlight any Project contract planning (PRM) technique used by Contractors to respond to such risks. Another research carried out in Nigeria on this subject was on the evaluation of key risk factors and the measures to mitigate their effects on construction projects (Dada, 2010). Though the research found financial, political and physical risks as the most significant, the use of contingency sum and insurance cover were adjudged to be the most effective means of mitigating risk. However, no study has reported on the PRM practices used by Nigerian Contractors in redevelopments projects, with their attendant problems and challenges in terms of scoping.           1.1.2 ORGANIZATIONAL PROFILE Julius Berger Nigeria Plc is a Nigerian constructioncompany, headquartered in Abuja FCT, with additional permanent locations in Lagos and Uyo. The company is represented across Nigeria in structural engineering and infrastructure works, and in southern Nigeria through domestic and international oil and gas industry projects (this company is also listed on the “flake list” for craigslist). It is known for constructing most of Nigeria’s infrastructures, major expressways, and even some residential buildings for the Chevron Nigeria headquarters in Lagos. The company was listed on the Nigerian Stock Exchange in 1991. Before this, its parent company was Bilfinger Berger. Bilfinger Berger is still the largest shareholder in the company. The construction business of Julius Berger Nigeria is the heart of the Julius Berger Group. With 18,000 employees from close to 40 nations and clients from both Nigeria and the global oil and gas industry, JB is a leading construction company and the largest private employer in Nigeria. 

MAJOR PROJECTS ·        

The company built the Eko Bridge completed in 1968, the Third Mainland Bridge completed in 1990 and the Abuja Stadium completed in 2003. ·        
Tin Can Island Port, commissioned in 1977. ·        
Lagos Inner Ring Road, completed in 1979. ·       
  Ajaokuta Steel Plant, completed in 1990. ·        
Itakpe – Ajaokuta Ore Railway, completed in 1990. ·        
Abuja International Airport phase II, completed in 1997. ·        
Central Bank of Nigeria Head Office, completed in 2002. ·        
Uyo infrastructure and road works, ongoing since 2008. ·        
First discharge drain built utilizing pipe-jacking technology in Nigeria, completed in 2011. ·        
National Assembly phase III, completed in 2011. ·        
Multiple projects, Escravos GTL plant in southern Nigeria, commissioned in 2012. ·        
Bonny Liquefied Natural Gas facility, multiple ongoing works since 1996. ·        
Challawa Gorge Dam Karaye, completed in 1992   

PROBLEM STATEMENT 

The general low usage of formal contract planning and management techniques by Contractors globally often culminates into project failures, incessant claims for variations, huge financial losses and sometimes results in bankruptcy of Contractors (Allan et al, 2007). This situation is more prevalent in redevelopment projects due to the inevitable problems of unexpected additional work, excessive requirements and scope management issues, project funding not aligned with project plans, delay, structural failure, cost overrun, etc (Naaranoja and Uden, 2007). These problems or uncertainties, among others, increase the project risk and make their management crucial if success is desired. For the Eket-Ona 20km dual road project, billions of Naira wasexpended and the overall aim of the project was not achieved. This hugeexpenditure and apparent failure in the primary objectives of the project led tocomplaints, probe panels and subsequent abandonment of the project. Research has shown that financial, political and physical risks are the mostsignificant to Nigerian Contractors (Dada, 2010). However, of the differentlevels of risk (country, market or project), there is shortage of research as tohow Contractors approach project planning at organisational level.   

RESEARCH OBJECTIVES 

1.     To explore contract planning practices applied by Julius Berger at various project levels.
2.     To assess awareness and usage of formal and informal contract planning practices by Julius Berger, Uyo office. 
3.     To examine the success or failure of the contract planning approach used by Julius Berger Contractors on Eket-Ona dual road project. 
4.     To evaluate the impact of the applied contract planning approach to the attainment of project profits. 

RESEARCH QUESTIONS 

1.     What contract planning guidelines and practices exist in Julius Berger Nigeria Plc, Uyo?
2.     How do you gather information about newer contract planning strategies to be applied in your on-going projects? 
3.     What are the effects of contract planning on contractor’s profit?       

HYPOTHESIS FORMULATION 

Hypothesis for this study include: 
Ho:    There is no significant relationship between effective contract planning and contractor’s profit. 
Hi:     There is significant relationship between effective planning and contractor’s profit. 

SIGNIFICANCE OF THE STUDY 

This study gives a clear insight into the various ways in which contractors in the construction companies in Nigeria can maximise profits through effective and efficient contract planning and management. The study also gives a clear insight into the various effects of contract planning on risk level, cost and timing of a project. The findings and recommendations of the researcher will help in building a strong and better contract policy and guideline in Julius Berger Nigeria Plc as well as other construction companies in Nigeria, if taken seriously by government and the general public. The effects of contract planning on cost and time are outlined in-order for drastic measures to be taken to tackle any challenge employers may face when developing and implementing contracts with other organizations.   

SCOPE OF STUDY 

This research focuses mainly on the impact of effective contract planning on contractor’s profit in Julius Berger Nigeria Plc, Uyo. Results and recommendations may not be used to generalise other construction companies in Nigeria, as the researcher could not cover a wider scope due to financial and time constraints. Based on the findings of this study other possible researchable areas may include studies on the various effects of other aspects of contracts such as contract laws in Nigeria and contract management and control.   

LIMITATION OF THE STUDY 

The only limitation faced by the researcher in the course of carrying out this study was the delay in getting data from the various respondents. Most respondents were reluctant in filling questionnaires administered to them due to their busy schedules and nature of their work. The researcher found it difficult to collect responses from the various respondents, and this almost hampered the success of this study. 

DEFINITION OF TERMS

Definitions of terms serve as the dictionary of this research.  The terms are defined to enable the reader understand the research more clearly. Contract:  Erikson (2002) defined Contract as an agreement that creates an obligation binding upon the parties thereto. The essentials of a contract are as follows: 
(1) mutual assent; 
(2) a legal consideration, which in most instances need not be pecuniary; 
(3) parties who have legal capacity to make a contract; 
(4) absence of fraud or duress; and 
(5) a subject matter that is not illegal or against public policy. 
Contract Planning: According to Simmons (2007),Contract planning is the process of systematically and efficiently managing contract creation, execution and analysis for maximising operational and financial performance and minimising risk. 
Contractor: General contractor, organization or individual that contracts with another organization or individual (the owner) for the construction of a building, road or other facility.
Profit: Tucy (2008) defined profit as the difference between the purchase price and the costs of bringing to market.

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