A QUANTITATIVE MULTI-CRITERIA CONSTRUCTION PROJECT EVALUATION SYSTEM AND APPLICATION IN CONTRACTOR SELECTION PROCESS Mrs.. Thesis Title A QUANTITATIVE MULTI-CRITERIA CONSTRUCTION PROJECT
INTRODUCTION
Background
The construction industry holds a key position both economically and socially
The construction industry significantly impacts the economies and labor markets of various countries worldwide It contributes to Gross Domestic Product (GDP), and in the United States, United Kingdom, Australia, Thailand, and Vietnam, its contribution ranges from 7% to 10% Notably, in the United States, the construction industry employs over 7 million workers, showcasing its job-providing capacity In developing countries like Vietnam, the industry contributes 9% to GDP and has attracted substantial foreign investment, highlighting its importance in these regions Therefore, the construction industry plays a pivotal role in both industrialized and developing nations, making it a subject of research and practical interest.
Located in Southeast Asia, Vietnam is one of the fastest developing markets
For the period of 2003-2008, the average growth of the Vietnamese economy was 8% annual Gross Domestic Product (GDP) At that time, construction industry increased dramatically with 20.93% of Compound Annual Growth Rate At the end of 2008, the total value of construction market was US$5.8 billion (Investment & Trade Promotion Center Hochiminh City, 2010) In 2009, the construction increased 11.36% compared to 2008, and contributed 6.7% to GDP The reason for this outstanding increase was that construction materials prices had fallen and interest rates were low That was a good time for construction projects underway In 2010, the construction sector grew 11.06% from 2009, contributed VND139,162 billion, accounting for 7.03% GDP (General Statistical Office of Vietnam)
Foreign Direct Investment (FDI) can be viewed as an indicator of the development of Vietnam's construction industry Over a twenty-year period, 1988- 2008, total FDI registered capital was US$7.3 billion in 396 projects Most of them concentrated in construction of apartments, offices and urban areas, as well as cement, steel and iron plants (Pham, 2008) In 2010, FDI in construction industry
The number of construction companies increased rapidly, accompanied by the dramatic increase of employees in the sector (Pham, 2008) However, there is a movement of employees from the residential sector to the non-residential sector
While employees of the non-residential sector grow annually, their counterparts in the residential sector decreased almost period except for the 2007 growth rate of 1.1%
Up until 2008, the number of employees reached 2,394 thousand persons, increased 5.6% from 2007 The establishment of construction companies every year and the reduction of market shares among state construction enterprises are two of the main causes (Pham, 2008)
Similar to VietnamĴT conditions, Thailand's construction industry has grown up speedily In recent decades, the construction industry has become more and more important, contributing to ThailandĴT economic development Two important indicators for the role of this industry are a contribution to GPD and the number of employees Before the economic crisis in 1997, the construction industry in Thailand was predicted to grow at 34 percent However, with the real estate collapse in 1997, construction completely stopped After the crisis, the construction industry began growing again in tandem with the recovery of the real estate sector (EMD, 2010) As described in Figure 1.1 construction GDP has increased continuously from 2003 to 2008
In 2001, it has recovered from THB154 billion and kept rising up to THB259 billion in 2008 According to the National Economic and Social Development Board of Thailand /&4%#ǰǰPGǰUIFǰDPVOUSZĴTǰ(%1ǰJOǰSFBMǰUFSNTǰXBTǰQSoduced by the construction industry in 2009 However, in the same year, construction activities in Thailand decreased due to declined investment in private construction as a result of political uncertainty and slack in property demand In 2008, the workers of the construction establishments in the Whole Kingdom were 364,694 persons in total In terms of employment, the number of employees totaled 335,150 persons (Thailand, 2009)
Figure 1.1 GDP of construction industry in Thailand from 2003 to 2009 (EMD,
Along with the great progress, the construction industry has faced many problems Time delay, cost overrun, under quality, and accidents have been the major problems in construction They cause serious consequences such as capital loss, project failure, reduction of profit-margin, and distrust of citizens in government projects, etc (Le-Hoai et al., 2008) Failures to meet contractual duration, allocated costs, and demanded quality have led to several unforeseen negative effects on the projects Due to poor management, the capital loss ratio in the basic construction represents up to 30 percent of the total construction capital in Vietnam (Uyen (2003) as cited by Nguyen et al (2004)) Tabics collected the information from the Ministry of Statistics and Programme Implementation of Indian about problems facing construction industry (Tabish and Jha, 2011) Time and cost overrun are two main concerns From their information, the number of delayed projects during the first quarter (January - March) of 2007 was 301 Their delays caused a cost overrun of Rs.300.58 billion, which was 26.09% of their initial sanctioned cost Approximately 17.3% of 417 government contract projects in Malaysia were delayed three month or abandoned in 2005 (Sambasivan and Soon, 2007) The construction sector in Thailand and Vietnam has not escaped the problems of delays and cost overrun, two primary problems that cause project failure (Ogunlana et al., 1996; Le-Hoai et al., 2008)
Project delays and cost overruns are prevalent concerns that have garnered significant research attention globally Researchers have particularly delved into the construction industries of Southeast Asia, with notable contributions from scholars such as Ogunlana et al., Kaming et al., Sambasivan and Soon, and Le-Hoai et al Their studies provide valuable insights into the factors contributing to these challenges in the region's construction sector.
1 2 3 6 6 1 6 5 9 8 economies including Thailand could occur due to the following problems: (1) insufficiencies or shortages mainly in the supply of resources in industry infrastructure;
(2) faultiness of clients and consultants, and (3) the incompetence or inadequacies of contractors Sambasivan and Soon (2007) found five major causes of construction delays in Malaysia including (1) improper planning; (2) site management; (3) inadequate contractor experience; (4) financial and payments of completed work and (5) subcontractors Le-Hoai et al (2008) pointed out the major causes which are (1) poor site management and supervision, (2) poor project management assistance, (3) financial difficulties of owner, (4) financial difficulties of contractor and (5) design changes From several studies, more than fifty percent of the problem causes belong to contractor responsibilities
The success or failure of the project depends on contractor selection Many previous researchers mentioned this correlation, such as Alarcon and Mourgues (2002), Mahdi et al (2002), and Cheng and Heng (2004)ǰ"DDPSEJOHǰUPǰ"MBSDPOǰBOEǰ.PVSHVFTĴTǰǰ PQJOJPOǰĶ$POUSBDUPSǰTFMFDUJPOǰJTǰBǰEFDJTJWFǰFWFOUǰGPSǰQSPKFDUǰTVDDFTTǰ (Alarcon and Mourgues, 2002) Cheng and Heng (2004) TUBUFEǰUIBUǰĶ$POUSBDUPSǰTFMFDUJPOǰJTǰPOFǰPGǰ the main decisions made from clients In order to ensure that the project can be DPNQMFUFEǰ TVDDFTTGVMMZǰ UIFǰ DMJFOUǰ NVTUǰ TFMFDUǰ UIFǰ NPTUǰ BQQSPQSJBUFǰ DPOUSBDUPSķǰ Because of the correlation between contractor selection and project success, a huge number of studies was conducted to develop a contractor selection method or model
5IFǰNBJOǰQVSQPTFǰPGǰUIFTFǰTUVEJFTǰXBTǰĶDPNNFOTVSBUFǰJNQSPWFNFOUǰJOǰUIFǰTVDDFTTǰ SBUFǰPGǰDPOTUSVDUJPOǰQSPKFDUTķǰ(Hatush and Skitmore, 1998)
The construction industry in almost all countries is facing the problem of unqualified or incompatible contractors to perform the projects, particularly in public projects For a long time, this major problem causes the failure of many projects in terms of intended expectations Cost overruns, schedule delay, under quality, conflicts, high- maintenance cost, and being rebuilt are common phenomena in projects worldwide
For these reasons, it is necessary to consider adding some extra parameters in the contractor selection process to reject inadequate contractors.
Statement of Problem
Along with the steady development in recent decades, the construction industry faces several problems which cause serious damage and loss of men and materials Despite the fact that many studies have attempted to solve these problems,
1 2 3 6 6 1 6 5 9 8 projects (stated by Hatush and Skitmore (1998)) The construction sector still faces problems related to cost overruns, time overruns, quality, safety, claims, and litigation
According to many researchers such as Ogunlana et al.; Kaming et al.;
Sambasivan and Soon; Le-Hoai et al (Ogunlana et al., 1996; Kaming et al., 1997;
Sambasivan and Soon, 2007; Le-Hoai et al., 2008), one of the main causes comes from contractors The problems of a contractor are site management and supervision, financial difficulties, improper planning and scheduling, inadequate contractor experience, inadequate resources, shortage of technical professionals, and hand over to subcontractors, etc Herbsman and Ellis (1992) stated that the current bidding system imposed on the public sector is one key factor that results in those failures
Inadequate or unqualified contractors have still eluded from the current bidding procedures to win the contract and perform the projects
Contractor selection models have evolved, offering two primary approaches: lowest evaluated bid price and multi-parameter methods Multi-parameter systems consider factors beyond cost, such as time and quality Secondary parameters, including safety, durability, and maintenance, are also crucial Among these, contractor past performance has been extensively studied and recognized as a significant parameter in contractor selection models.
Past performance is a very important criterion in order to select a good service provider This criterion is also considered in selecting a construction contractor to perform the project *UǰJTǰVTFEǰUPǰBOUJDJQBUFǰDPOUSBDUPSĴTǰQFSGPSNBODFǰJOǰUIFǰGVUVSFǰBOEǰ to clarify his competence to implement a contract For example, in contractor selection model using the multi-criteria utility theory, proposed by Hatush and Skitmore (1998), past performance holds a high ratio of 40% of the contractorĴT capability
$POUSBDUPSĴTǰQBTUǰQFSGPSNBODFǰJTǰconsidered an important criterion in many other contractor selection models (Birrell, 1988; Hatush and Skitmore, 1997; Hatush and Skitmore, 1998; Fong and Choi, 2000; Mahdi et al., 2002; Cheng and Heng, 2004;
1 2 3 6 6 1 6 5 9 8 considered past performance as one of eight criteria to select a contractor in their final model which consists of tender price, past experience and performance, financial capability, resources, current workload, and safety performance as well as client/contractor relationship They consider failure to complete contract, delay, cost incurred, and quality achievement in evaluating past performance
Although the contractorĴT past performance appeared in most of the contractor selection models, it is difficult to apply this criterion in developing countries It is difficult or impossible to require bidders to submit the evidence to show their failure, delay, additional cost, and poor-quality achievement To overcome this difficulty, Sonmez et al (2001) suggested assessment grades for this criterion subjectively in five MFWFMTǰXIJDIǰBSFǰĶ7FSZǰQPPSķǰĶ1PPSķǰĶ"WFSBHFķǰĶ(PPEķǰBOEǰĶ7FSZǰHPPEķǰ'SPNǰUIFǰ contractor evaluation process in Vietnam, shown in Table 1.1 CFMPXǰCJEEFSTĴǰQBTUǰ QFSGPSNBODFǰJTǰOPUǰDPOTJEFSFEǰ*OǰPSEFSǰUPǰFWBMVBUFǰUIFǰCJEEFSTĴǰDBQBCJMJUZǰDVSSFOUǰ CJEEJOHǰQSPDFTTǰIBTǰPOMZǰDPOTJEFSFEǰJOGPSNBUJPOǰSFMBUFEǰUPǰCJEEFSTĴǰFYQFSJFODFǰ'PSǰ example, they required the number of projects completed in the last three years, the scale of the projects that bidders have completed, but not specifically how good the completed projects were It is important to differentiate the two criteria, which are the numbers of past projects and how the contractor completed past projects, in the contractor selection process One contractor may pass the criterion of the number of projects that he has completed, but he may fail the requirement of the past performance criterion if he has completed projects late, over budget, in an unsafe environment, poor quality, and dispute Such kind of contractors should not be selected
Table 1.1 Bidders evaluation process in Vietnam
STEP1 Preliminary assessment (PASS/FAIL) STEP2 Experience and capacity assessment (PASS/FAIL)
1.1 Experience in construction 1.2 Experience in similar project 1.2.1 Number of pass projects within 3 years 1.2.2 Scale of at least 1 project more than a specific amount
3.1 Revenue in last 3 years 3.2 Cash flow guarantee from bank to provide credit for this package 3.3 Profit after tax
STEP3 Assessing the technical details (>p PASS, 0.95 (Good); > 0.9 (Acceptable) Used Incremental fit index IFI >0.95 (Good); > 0.9 (Acceptable) TuckerıLewis index TLI >0.95 (Good); > 0.9 (Acceptable) Used Comparative fit index CFI >0.95 (Good); > 0.9 (Acceptable) Used
RNI Similar to CFI but can be negative, therefore CFI better choice
General rule for acceptable fit Recommend
Parsimonious fit Parsimony-adjusted NFI PNFI Very sensitive to model size Parsimony-adjusted CFI PCFI Sensitive to model size
Parsimony-adjusted GFI PGFI Closer to 1 the better, though typically lower than other indexes and sensitive to model size
Others Goodness-of-fit index GFI >0.95 (Good); > 0.9 (Adequate) Used
Adjusted GFI AGFI >0.95 Performance poor in simulation studies
Hoelter 05 index Critical N largest sample size for accepting that model is correct
Hoelter 01 index Hoelter suggestion, N = 200, better for satisfactory fit
RMR Smaller, the better; 0 indicates perfect fit Standardized RMR SRMR