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THE CONSTRUCTION PROJECT ENVIRONMENT

Construction projects vary widely in terms of type, size, duration, and cost, which leads to multiple alternatives for project life cycle modeling and project delivery methods. The resulting project environment is of paramount importance as well as the context in which the construction project is initiated, developed, and completed. Its effects (usually causes of project complexity) should be closely monitored, controlled whenever possible, and accounted for as a risk source. The project is best treated as a subsystem within a larger system—the project environment.

This section describes the most common construction project life cycle strategic approaches and delivery methods and how they affect other aspects of the project. In light of those project delivery methods, this section discusses the relative influence of stakeholders on the project and its governance.

Projects and project management occur in an environment that is broader than that of the project itself. In construction projects, this includes the geographical environment in which the facility is to be installed or intervened. A distinction should be made between enterprise environmental factors (EEFs), which are covered in the PMBOK® Guide and this Construction Extension, and environmental management, which is a part of the Project Health, Safety, Security, and Environmental (HSSE) Management Knowledge Area presented in Section 14 of this Construction Extension. EEFs, such as organizational culture and structure, politics (internal and contextual to the organization), and available resources, may affect the project and its outcome. Environmental management manages the project's impact on the geographical (natural and sociocultural) environment.

2.1 Organizational Influences on Construction Project Management

While construction projects fit the generic life cycle structure described in the PMBOK® Guide from initiating to closing, the details of the construction project life cycle from conceptualization to closing may vary widely depending on factors such as the type of facility being built, the project delivery method, and the type of contract between owner (buyer) and contractor (seller). These decisions are usually made by the executive management of the owner's organization, based on the balance among the strategy, value, and risk of the project. The right choices are based on the management strength, required risk distribution, financial capability, and need of deliverables. These choices affect a wide range of considerations, such as:

• Project scope and phases;
• Number of stakeholders and interfaces—including cross-border interests—to be managed directly by the owner;
• Overall risk, risk distribution, and balancing among key stakeholders;
• Time and cost ranges for project implementation;
• Alternatives for funding, partnership, and collaboration for project implementation and level of bankability;
• Contracting strategy, number of contracts, and alternatives for contract types; and
• Regulatory requirements associated with the project and its product.

2.1.1Types of Construction Projects

Construction projects encompass a variety of types, goals, and solutions. Depending on the project goal, many solutions may be available. For example, in the case of a project to connect cities that are separated by a body of water (a river, lake, or bay), the solution may be to establish a ferryboat line, which requires construction of a port and parking facilities on both sides, or to build a bridge. The solution depends on legal due diligence, financial assessment, and environmental impact assessments. The site location may be different for each solution, and geological and hydraulic aspects may play a major role in the decision-making process. The new infrastructure is intended to alter the flow of traffic within both cities. The value of real estate in the surrounding areas may be positively or negatively impacted by the project; therefore, each solution involves a different set of stakeholders, and their approaches to the project may be proactive or resistant.

Construction projects can be classified using different approaches, for example, by type of facility (buildings, infrastructure, industrial projects) or by specialty (oil and gas, real estate).

2.1.2Project Delivery Methods

The project delivery method selected for a construction project is dependent upon the project environment. The choice is influenced by many factors, such as type and size of the facility to be built, federal and state mandates, the core business of the owner, the level of construction knowledge, and the time that can be dedicated to the project. For example, a property owner who is building a family house may:

• Use a do-it-yourself approach;
• Hire a crew to perform the work;
• Contract a construction company;
• Contract an architect to direct the construction company, with the architect acting as an inspector or advisor; or
• Use other arrangements.

The project delivery method will have a direct impact on the contracting strategy. This section briefly covers some delivery methods. Section 12 on Project Procurement Management discusses contract types.

Some of the most common project delivery methods include:

• Design-bid-build. The owner purchases the design of a facility, and uses this product to purchase the construction of the designed facility. The design contractor may be different from the construction contractor.
• Design-build. The owner purchases the design and building of the facility with a single contractor or contracted team based on concept design and or performance specification provided by the owner.
• EPC (engineering, procurement, and construction). EPC is a prominent delivery method in the construction industry. The engineering and construction contractor carries out the detailed engineering design of the project, procures all required equipment and materials, and delivers a functioning facility or asset to the client(s). Companies that deliver EPC projects are commonly referred to as EPC contractors.
• Self-performance. The owner does not hire a contractor, but instead performs the project directly. This delivery method is commonly applied in small maintenance projects.
• IPD (integrated project delivery). IPD can be considered a multiparty contract in which owner, architect, contractor, and eventually other key stakeholders sign a single agreement. In this agreement, risks and compensations are not assigned to an individual stakeholder, but rather to the team as a whole on the basis of the overall project performance.
• PPP (public-private partnership). Governments have been developing a set of project delivery methods generally known as PPPs. Within the realm of PPPs, the typical project delivery methods include concessions, BOT (build, operate, and transfer), and DBOM (design, build, operate, and maintain).

2.1.3Organizational Structures

The PMBOK® Guide establishes the most common types of organizational structures, ranging from functional to projectized organizations. In the context of construction projects, most owners (including owner support organizations such as project management consultants or insurers, for example) work in matrixed or composite arrangements, with designated project management roles and teams for construction projects. Team sizes and team members’ level of exclusive dedication to the project are dependent on project size, complexity, and strategic importance for the owner. Contractors usually work with strong matrixed or projectized structures due to the nature of the construction business, as discussed in this section.

Both owner and contractor organizations may include project management offices (PMOs). While the former tend to have controlling or directive PMOs, the latter have strong matrixed or fully projectized organizational structures and may use multiple PMOs of the supportive type as a natural complement to their organizational structures. Some contractors’ PMOs may have a pool of project managers and require compliance with some information and process standards, while others have directive PMOs acting as knowledge repositories for the entire project portfolio of the construction company. Some PMOs for capital projects may be more directive, as the owner's business is usually not directly related to the performance of construction projects, thus making it more effective to concentrate knowledge and expertise for construction project management in a specific group (the directive PMO). Other organizations (particularly government and public entities) usually operate as functional organizations and tend to have a supportive PMO. Figure 2-1 illustrates the correlation between type of organizational structure and type of PMO to help understand the organizational environment in which construction projects are performed.

In the planning or bidding phase of a construction project, contractors will benefit from studying the owner's organization, both under normal operations and when undertaking a project. Contractors should analyze the organization and design a project organizational breakdown structure that matches or resembles the owner's breakdown structure for the project. The owner's structure usually reflects a project management and execution strategy, so by matching it, the contractor may have an easier time aligning with the owner's strategy. This may improve communications because any role in a given structure should have a matching peer.

2.1.4Enterprise Environmental Factors

Enterprise environmental factors (EEFs) are defined and discussed in the PMBOK® Guide. As in other projects, EEFs influence construction project outcomes, for example, economic aspects, financial aspects, and site location.

2.1.4.1Economic Factors

Construction projects involve the application of raw materials (e.g., cement, stone, clay, aggregates, steel products, oil, and others) and finished goods (e.g., pumps, pipes, doors, and electrical cables). The project execution team collaborates and uses various combinations of those materials and goods according to design drawings and specifications in order to build the facility. Most of the cost of a construction project is related to human resource expenses and the purchase of goods and materials. Costs of machinery (e.g., cranes, tunnel-boring machines (TBMs), and other heavy equipment) may be significant depending on the machinery's use on the project.

The behavior of the local and national economy at the project location, as well as the behavior of the global economy, may impact project costs. For example, a governmental decision to facilitate credit for family houses may lead to an increase in real estate projects, causing prices of cement and sand to rise. An increase in oil prices may positively change the benefit-to-cost ratios of oil and gas projects, leading to an increase in the demand for piping and equipment, with a subsequent increase in prices. Labor unions tend to have greater influence in regions experiencing a heated economy, which leads to negotiations that favor workers. Owners and contractors that estimate time and cost for construction projects should be aware of the economic forecast in order to offer more accurate estimates.

Inflation may also be an issue, especially in fixed-price contracts. Omitting inflation in the contract or addressing it by means of poorly established escalation formulas are common sources for claims and disputes and may affect the project's total cost. Refer to Section 7 on Project Cost Management for details on inflation and escalation. The same applies for changes in foreign exchange rates. The contract should include provisions for these issues, which often arise in contracts covering expenses in foreign currencies.

2.1.4.2Financial Factors

Some construction projects may also be called capital projects because, among other characteristics, they are largescale and require significant funding and resource investments by the organization. Infrastructure projects such as roads, railways, and dams are common examples of capital projects in the public sphere. Capital projects are common in the corporate world as well, as firms will allocate large sums of resources in order to build upon or maintain capital assets. Construction projects usually require some form of financing; therefore, a major aspect of a construction project is its bankability and the degree to which the project (and its owner) is eligible for funding from financial institutions. Obtaining financing for the project is usually a major milestone and, in most cases, a go/no-go factor. It affects many of the project decisions and occurs early in the project life cycle. Financial management is discussed in Section 15.

Financial institutions are important stakeholders, and the financing contract may limit options or introduce constraints to the project. For example, some countries have government-owned banks that will finance the project for an amount equivalent to goods and services purchased from their country, which may limit the options for suppliers of those goods and services.

Financing usually occurs in the currency used by the financial institution. When the project is undertaken in a foreign currency, the associated exchange rate should be taken into consideration as a risk factor.

2.1.4.3Site Location Factors

A major decision in a construction project is choosing where the facility will be built. Factors may vary with the project location, even when the location is changed by a few meters. Some examples of those factors are:

• Brownfield (constructing in an existing facility) or greenfield (constructing at a new location);
• Geographical aspects such as site topography, soil conditions, presence of fault lines, amplitude of 100-year waves, weather patterns, and others;
• Site access, including logistics for bringing oversize and/or overweight machinery and equipment onto the site, as well as manpower and materials (especially in “moving sites” as in the case of pipelines, roads, etc.);
• Laws and regulations, including local taxes and import duties;
• Attitude of local stakeholders toward the project; and
• Labor availability and their level of qualification.

Some of these considerations may have a direct impact on the project cost or may require a change in the project location. The choice of the site is important because construction and environmental permits may be costly and time-consuming, and environmental issues may affect the project's bankability as well as its start date.

Contractors bidding for a construction project usually investigate the weather patterns, which are included in the contract as a price- and time-related assumption. Weather patterns worse than the ones foreseen in the contract may lead to consequences and possible a construction claim.

2.2 Project Stakeholders and Governance

A contractor executes construction projects on behalf of an owner, but other stakeholders may have active roles. While stakeholder management and project governance are project responsibilities for both the owner and contractor, many of the issues associated with construction projects (particularly their front end) are addressed by stakeholders who are not part of the project team, for example, business strategists, policymakers, financiers, civil servants in their regulatory role, planners, etc. Each stakeholder has views and performs actions (sometimes in opposite directions) that may critically shape the project.

2.2.1Project Stakeholders

The characteristics of some construction projects may affect stakeholder management. For example, construction projects:

• Occur in well-defined geographical locations;
• Require transporting important quantities of people, equipment, and materials in and out of that location on a daily basis;
• Produce noise and dust;
• Alter the local economy;
• Create a situation where people from various locations move into the neighborhood;
• May alter the local natural environment;
• May require relocating people from the neighborhood, with the economic, social, and cultural impacts that this involves; and
• May introduce social problems, such as violence and other issues.

2.2.2Project Governance

Project governance is the framework, functions, and processes that guide project management activities to create a unique product, service, or result to meet organizational strategic and operational goals. In construction, project governance establishes an overall integrated view of how the project should be executed in light of the relationship among the owner, the contractor, and other stakeholders.

When there is an association of two or more companies, such as a consortium or joint venture, there may be two layers of governance: within the association and within the project. In any case, the entity responsible for the overall project should ensure that requirements elicitation is properly performed.

When the contractor is a consortium, it is necessary to reach an agreement on how the project will be managed during the bidding stage, such as the roles, responsibilities, and levels of authority of each party.

When the public sector is involved as the owner in a project, such as in PPPs and cross-jurisdictional interagency or intergovernmental agreements or contracts, project governance assumes an even greater importance, because those projects are subject to judgment by the general public.

The organizational process assets of the owner and the contractor are often combined in construction projects. These provide the structure through which the objectives of the endeavor are set, as well as the means for attaining those objectives and monitoring performance.

2.2.3Social Responsibility and Sustainability

Social responsibility and sustainability are broad concepts and are usually approached with policies that are established at a strategic level within the organization. In construction project management, sustainability is the ability to use and dispose of natural elements, such as water, raw materials, and resources, in a way that ensures future generations will have access to those same elements. Social responsibility means taking responsibility for the impact of the project on society and stakeholders, including aspects of diversity, opportunities for minorities, and sustainability.

Adopting lean construction principles and good practices is important for sustainability. Lean construction is an operational development in design and construction, which applies lean manufacturing principles and practices to the design and construction process. Designing and applying a production system on site that minimizes waste of materials, time, and effort in order to generate the maximum value for the project stakeholders and the natural environment is a major consideration throughout the project life cycle. There are industry standards and certifications for best practices in sustainability. Owners should strive to incorporate sustainability in the design concept, with support from other stakeholders as needed.

Social responsibility and sustainability in construction require a clear strategy and a proactive approach. Communities and the society at large expect construction projects to be beneficial and to be executed with as small an environmental footprint as possible. In projects involving government institutions, society expects the project to be planned and executed within principles of honesty, fair competition, and responsible usage of public resources. In some countries seeking these principles, it has been established that all information relating to public procurement tenders are freely accessible to the public.

2.3 Project Life Cycles

Most construction projects have a life cycle consisting of conception, design, construction, commissioning, and closeout, although the industry practice is to break down some of those phases. The most common type of construction project is one that is performed outside of the owner's organization by a contractor company. Using an established set of obligations from both sides, most construction project life cycles are predictive or plan-driven, although some adaptive approaches, such as agile and lean construction, may be applied in certain cases.

The project life cycle varies depending on the perspective taken. Figure 2-2 shows an example of different perspectives in a project with a predictive life cycle. From the owner's point of view, the project life cycle starts when the owner formally decides to undertake the project; from the contractor's perspective, the life cycle starts when they decide to bid, and moving from the bid phase to the design, procurement, and/or construction phase occurs if the contract is awarded.

While construction projects are usually performed under a contract, many aspects are established early in the project life cycle when uncertainty is greatest, and additional changes may be difficult to implement when contractual provisions are affected. Contracts, which are drafted and agreed upon during the period of greatest uncertainty, should include provisions for fair and appropriate distributions of risk associated with emergent issues. Division of responsibilities and ownership of risks are examples of such aspects, and project costs may vary depending on the amount of risk transferred to the contractor.

Bringing in contractors early in the project life cycle may prove time-effective, but the degree of development of design information will affect cost and alternatives for contracting. For example, a contractor bidding on a project in which the quantities of concrete, steel structure, piping, tunneling works, and others are uncertain or unavailable may lead to a cost-plus-fee contract as the only alternative to balance risks and cost. The concept phase and the preparation for bringing contractors into the project are essential to ensure that constructability is factored in, which is essential to project success. This kind of situation, which is very common in the construction industry, is the root from which IPD is growing. It is also common for the owner to engage an experienced construction manager to provide integrated scheduling, cost budgeting, and risk management. These specialty services help in developing the construction contract, the contractual terms, and the risk transfer methodologies.

2.3.1Front-End Loading

In some industries with major capital projects, processes that have predictive life cycles are used in order to reduce risk and maximize the probability of success. These time-bound processes are known as front-end loading (FEL) or pre-project planning, which refers to performing solid planning and design in early stages (the front end of the project).

The FEL process includes decision gates (usually three) at well-defined milestones, where a go/no-go decision is made. The process is based on the premise that the ability to influence changes in design is higher in early stages, while the cost of changes is significantly lower. It adds some time and cost in the initial project phases, but those additions are minor when compared with the impact of time and cost required to make changes later in the project life cycle. Overall project risk is reduced and owners have a greater amount of strategic information, leading to better project-related business decisions. The application of FEL enables team members to think about all project subsystems and components; to be aware of various scenarios involving complexity, ambiguity, and risk; and to anticipate the process implementation framework. Table 2-1 provides an overview of the information that is usually developed before each stage gate.

Table 2-1. FEL Stage Gate Deliverables

2.3.2Adaptive Life Cycles

Adaptive life cycles (also known as change-driven or agile methods) are intended to facilitate change and require a high degree of ongoing stakeholder involvement. Adaptive methods are generally preferred when dealing with a rapidly changing environment, when the requirements and scope are difficult to define in advance, and when it is possible to define small incremental improvements that will deliver value to stakeholders.

Architectural and engineering design is iterative by nature. For example, an equipment data sheet is first issued in an as-designed or basis-of-design version, then in an as-purchased version; differences between the two versions may impact downstream activities such as early procurement, supply chain planning, and foundation design. Construction, on the other hand, is an activity of a deterministic nature. Changes in construction projects are directly affected by the degree of overlap between project phases. Depending on the project's objectives and aspects, such as ambiguity and complexity, the traditional predictive life cycle model may be replaced by a more concurrent one where phases may overlap, giving way to iterative, incremental, and adaptive life cycles. Under iterative and incremental life cycles, detailed design and planning may be done iteratively through a series of repeated cycles as the project progresses.