Applicability of Pareto principle for Quantity Surveyors

Pareto principle

Pareto is an Italian economist, who created a mathematical formula for describe the unequal distribution of wealth in Italy. He has found 80% of the wealth of Italy has owned by 20% of people. The principle also knows as the 80/20 Rule. Later many other experts have observed similar phenomena to Pareto principle in their own fields.

Following examples are described important of Pareto principle to various professionals/peoples.

· Project managers know that 20 percent of the work consumes 80 percent of the time and resources.

· Planning engineer knows that 80% of delays in a construction project arise from 20% of possible causes of the delays.

· Marketing manager knows that 20% of his marketing efforts generate 80% of his marketing results.

· Nimal knows that 80% of his expenses for 20% of items.

If the Project manager plans and perfume well that 20% of works, he will have a greater success.

If the Planning engineer plans well that 20% of causes, he will have a greater success.

If Nimal plans well his 20% items, he may be able to save more money.

Below Pareto graph represent Nimal’s expenses. It shows 80% of Nimal’s expenses is because of 20% of items, in namely for rent, foods, transport and liquors.

I have analysis the Nimal’s expenses with Pareto principle in one of my article titled “එදිනෙදා මුලය කලමණාකරණය 2(Day today financial management 2)”, that may worthwhile to read to you. You can access the article on www.kedapatha.info.

It is important to note that actual percentage may differ from 80% and 20%, but the spirit of the principle will remains true for most of causes. Now, let’s move to see the applicability of Pareto principle for Quantity Surveyors.

For Cost Planning.

Quantity Surveyor (QS) can be adopted the Pareto principle for various Quantity Surveying functions from Inception to Completion and even after the completion also.

One of key function of Quantity Surveyors during Design and Pre construction is “Cost planning”. There are two techniques use for cost planning. Those are;

ü Budgetary establishing

ü Budgetary distributing

Quantity Surveyor may establish the client budget in Option appraisal or Strategic Briefing stages*.

First step of Cost planning is establishing cost targets at the Outline proposal stage. In another way, establishing cost targets is the way of distributing, established budget. In Outline proposal stage QS can establish group element cost target.

Following is an example for a Group elementary cost plan at Outline proposal stage.

Budget – Rs. 300M

Group element	Percentage	Cost (M)
Substructure	7%	21.00
Superstructure	20%	60.00
Internal Finishes	12%	36.00
Services	40%	120.00
Fit out	21%	63.00

* Figures are not realistic figures.

Now let’s draw the Pareto graph for above cost plan.

According to the Pareto graph, 80% cost of the project is representing by three group elements (60%) namely Services, Fit outs and Superstructure.

In Detail design stage QS may produce an Elementary Cost plan.

Following is the Elementary Cost plan for the above project at Detail design stage.

Element	Percentage	Cost (M)
Substructure	7%	20.22
Frame	5%	14.77
Upper Floors	9%	27.52
Roof	1%	3.55
Stairs	1%	2.46
External Walls	1%	3.94
External Windows & Doors	1%	2.45
Int Walls & Partitions	2%	6.23
Int Doors & Screens	2%	6.57
Wall Finishes	7%	22.26
Floor Finishes	3%	10.14
Ceiling Finishes	3%	9.52
HVAC	11%	33.32
Plumbing & Drainage	6%	17.64
Fire Protection	1%	3.33
Electrical, AV Etc.	15%	45.07
Security	1%	4.12
Vertical Transportation	3%	10.06
Fit out	19%	56.83

Now let’s draw the Pareto graph for above cost plan

According to the Pareto graph, 80% cost of the project is representing by seven elements (37%).

In both Design and Pre construction phases, QS should ensure that the cost of the project should within the allocated budget, which is the main purpose of cost planning. In order to accomplish the purpose, QS have to continuously do cost checking and cost reconciliations.

After reconciliation, QS may come out with a smiley faceJ, when the cost of a particular element is less that the established target in the cost plan. However in some cases cost of a particular element may exceeds the target, which is not a cause to keep QS happyL.

In later case, QS have three options to overcome from terrible situation.

1) Ask client to increase the budget and change the cost target for the particular element. This option is not favour of the QS, since it may imply QS’s cost plan is erroneous.

2) Ask design team to review the design and bring it within the cost limit.

3) Share cost with some other elements which have cost saving.

In second option, Quantity Surveyor should advice to design team to pay more attention for first 7 elements (37%) out of 19 elements, which are representing 80% of the total cost. Changing an element from first 37% elements make greater effect to the project cost.

However design team may have to pay their attention for some other factors before review an element such as effect to other elements by changing a particular element. For an example, change the substructure design may effects to all other element and change the wall design may effects to finishes.

For Value Management (VM)

“Value Management is a service which maximizes the functional value of a project by managing its development from concept to completion and commissioning through the audit (examination) of all decisions against a value system determined by the client.”(Kelly, J & Male, S.2005. p.p.2)

The Institution of Civil Engineers (ICE) has identified the following sub-processes within the Value Management process.

1) Value planning - During the design and pre construction phase of a project.

2) Value engineering – During construction phase of a project.

3) Value reviewing – During use phase of a project.( After the practical completion)

Simply in the Value Management, VM team tries to find alternatives for current design without changing the function. Following are some example for value management;

· Replace custom made high capacity (1100CFM) exhaust fan with two nr law capacity (2 ´ 550CFM) interconnected exhaust fans. The alternative did not change the function; however there is a Rs. 30,000.00 Cost savings has been made for the client.

· Use isolated chillers sets instant of central chillier unit. This has made a Rs. 500,000.00 cost saving to the client which is 10% of the item cost.

Following Pareto graph has been drawn for a residential building during Tender documentation stage from the tender estimate.

According to the Pareto graph, 77% cost of the project is representing by five elements (33%), from Concrete Work to Electrical Installation.

Hence VM team should focus on those first five elements instant of others to get an effective VM result. Since the Quantity Surveyor as the cost consultant, plays proactive role within the VM team to achieve successful outcome.

VM team should do value management for;

· Concrete, but not for Metal work

· Floor, Wall & Ceiling finishes, but not for Drainage

* RIBA plan of work.

Phase	Stage
Preparation	Option appraisal
	Strategic Briefing
Design	Outline proposal
	Detail Proposal
	Final Proposal
Pre Construction	Production information
	Tender documentation
	Tender action
Construction	Mobilization
	Construction to Practical completion
Use	After Practical completion

References:

1. Envision. (?).Pareto Principle or The 80/20 rule. [Online]. Available from: http://www.envisionsoftware.com/Management/Pareto_Principle.html. [Accessed: 30^th April 2011]

2. Kedapatha. (2008). එදිනෙදා මුලය කලමණාකරණය 2. [Online]. Available from: http://www.kedapatha.info/2008/11/2.html. [Accessed 29th April 2011]

3. Kelly, J., Male, S. & Graham, D., (2004). Value Management of Construction projects. Oxford: Blackwell Publishing.

4. Projectsmart. (?). Pareto analysis step by step. [Online]. Available from: http://www.projectsmart.co.uk/pareto-analysis-step-by-step.html. [Accessed 10th April 2011]

5. RIBA. (2007). RIBA Outline Plan of Work 2007.[ Online]. Available from: http://www.architecture.com/Files/RIBAProfessionalServices/Practice/OutlinePlanofWork(revised).pdf. [Accessed 34^th April 2011]

6. Smith, J. & jaggar, D., (2007). Building Cost Planning for the Design Team.Oxford: Elsevier.

QS Crossword puzzle 1 - Answer

Winners : N.M Perera & Chamitha Rathnayake

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QS Crossword puzzle 1

Fill the following QS Crossword puzzle and send to admin on admin@qsonline.info before 30th of April 2011. First 5 winners will be received an e book which is important for Quantity Surveyors. Be hurry!!

DOWN

1. What is the unit of measurement for reinforcement

2. This error considers as a genuine error in the tender evaluation.

3. This procurement method may appropriate for a developer who have limited budget.

4. This FIDIC book is for turn key projects.

5. This survey may be carried out in dregging projects

8. Before many days, the contractor shall give the notice to the Engineer before any Plant or a major item of other Goods delivered to the Site.

13. What is the standard method of measurement applicable to Sri Lanka.

12 If plan length of a pier exceeds four times of their thickness, the pier should meausred as this.

16. What is the weight of a square metre in kilogram(Kg/M²) in A252 mesh reinforcement

ACROSS

1. Masonry Walls with diminishing thickness, is measured in this name.

5. This procurement method may appropriate for governments who haven't sufficient fund for some infrastructure projects like power plants.

6. Painting to general surfaces should be measured under this section in SMM 7.

9. Change of this may be a reason for a variation.

10. Within how many years a party should apply to high court for the enforcement of an award (Refer Arbitration act - Sri Lanka)

11. In which year arbitration act seconded in sri Lanka.

12. This is an employers risk.

14. This tendering method may appropriate for a housing project with 1000 similar units.

15. A Sustainable Flooring Material.

17. This liability applicable on both designers and contractors for 10 years beyond the end of the defect liability period of a projects in some countries like French, Qatar.

18. In which year FEDIC edition 3 was published .

Note: SMM 7 and FIDIC red book appicable for hints.

Click here to download excel version of the Crossword puzzle

PROFESSIONAL INDEMNITY INSURANCE FOR QUANTITY SURVEYORS

Generally

Clause no. 1.4 of conditions of engagement of Australian Institute of Quantity Surveyors (AIQS) has states “The Quantity Surveyor will exercise reasonable skill, care and diligence in performing its work”.

If a client get a loss because of the Quantity Surveyor (QS) fails to comply with aforesaid sub clause or similar one, QS is at a risk of being sued by the client.

Some examples for branch the sub clause;

1) Produce an unrealistic law estimate

2) Arithmetical errors in Bills of Quantities (BOQ)/Estimates

3) Certify an over payment.

The case of Commonwealth bank of Australia v Hollier, the QS was held liable to pay the Holliers, the difference between the variation that had been assessed and what the Court found should have been assessed plus interest. The QS get a fee for variation assessment is $3000 but he had to pay the damage of $70000+interest to Hollier. Actually the fee $3000 is a reduced fee while the actual fee is $30, 000; however the court did not consider any suggestion that the fee reduction entitled the QS to perform with less the reasonable care. Even advices without fee may cause for punishes by court under professional negligence.

In such situations QS may have to pay more than the consultancy fee as damage to a client. How QS can manage such big risk?

Most practicable way is use Professional Indemnity Insurance as risk sharing mechanism.

Professional Indemnity Insurance (PII)

PII is an Insurance scheme for Professional as a safe guard in their professional life to cover negligence or breach of contract. PII generally obtain by business professionals like QS who provide advice to their clients.

Some of professional Institutions like AIQS and Royal Institution of Charted Surveyors (RICS) have been recommend the PII for their members in code of professional conducts/regulations. Sub clause 3.13 in AIQS code of professional conducts states ”where holding themselves out to the public as practicing quantity surveyors, have and maintain appropriate professional liability insurance”. Also RICS members in private practice must have minimum indemnity insurance cover of £ 250,000 if their gross fee income does not exceed £100,000, and £500,000 for gross fee between £100, 000 and £200,000. Further it recommends a minimum £1,000,000 insurance if the gross fee exceeds £200,000.

Professional liability insurance should take few years beyond the end of job or service. Because every claims not arise just after the service, it may be few years later. Some laws have defined the liability of consultants beyond the completion/handover of the project.

Qatar Civil code article 219 states¹ liabilities for an “unlawful act” (which may or may not include one of negligence) expire three years from the day the injured party becomes aware of the loss or fifteen years from the commission of the unlawful act, whichever is sooner.” It means contractual liability is continues for period of fifteen years.

In addition that, according to latent damage act 1986 in UK, any court proceeding claiming damages must be commenced within six years from the bench of contract or from when the damage was suffered where a claim is made in tort. Because of such reasons RICS advises run-off cover for an absolute minimum 6 years.

Further, QS should take the PII not only for cover the damage awarded, also it should sufficient to cover interest and cost of the person making the claim.

Professional indemnity insurance is a “claims made” policy. It means, it cover the claims made/notified within the policy period but not claims arising out of a branch of duty within the policy period. Because of that the insured should notify the insurer as soon as possible after aware about any event which is likely to result in a claim. Also insurer does not liable for claims which the insured knew about before the policy was agreed. It is a liability of previous insurer. Because of that insured should notified to the insurer, any event which is likely to result in a claim before the end of each policy year, especially when changing the insurers.

Liabilities which are not cover from PII

Generally a Professional indemnity policy for QS is limited to a QS profession only. It would not cover project management or dispute resolution services. If QS want to include such special services to his Professional indemnity policy, he should discuss it with the insurance company.

Also some policies may cover claims for bench of contract and some are not.

Sometimes QS have to give collateral warranties to third parties, such as future buyers or tenants. Collateral warranties are not likely to be covered by PII policies. In such cases QS need to take advice from insurance company.

In addition that PII cover the damages only to client but not damages to third parties. Because of that it’s good to take public liability insurance (PLI) which concerns the damages to third parties.

Also there is an another liability of both designers and contractors as Decennial liability which is run beyond 10 year from date of hand over in some countries like Qatar, French and Egypt. Decennial liability is not falls within the scope of professional liability insurance. In some countries like French and Egypt it is a legal requirement that designers and contractors obtain insurance against decennial liability.

When enter in to sub consultancy agreement with a lead consultant, PII and PLI may be a mandatory condition.

How to minimize risk of negligence claims for QS

Quantity Surveyors can adopt good quality management system and professional guidance in their practice to deliver their service in high standard with reasonable skill, care and diligence. Also claims can be minimized by adopting a clearly drafted Conditions of Engagement. In addition that;

· Do not take assignments which are outside the field of competence.

· Consider collateral warranty carefully and check whether it is covered by the PII policy or not.

Q & A

1) What happened if the claimant insolvent before settled the claim?

Any claim made by insured against the insurer is automatically transferred to the victim. However if insured fails to comply with policy requirements, victim may not entitled to receive damage.

2) Is the PII only for consultants?

Generally in construction industry PII is obtained by consultants, who provide advice to their customers. But contractor also have to maintain PII if he is engaged in design process. For example In JCT conditions of contract, sub clause 6.11.1 requires the contractor to take a PII.

3) If insured provide false details when enter in to insurance agreement or fails to disclose information about risk, can the insurer treat the insurance contract as void?

Yes. Insurer can. The parties to an insurance contract owe each other a duty of good faith. If the insured doesn’t enter or perform the contract in good faith, insurer not bound to indemnify the insured, even the non-disclosure is innocent. However insured still entitled to recovers the premium he has paid.

4) Insured makes a fraudulent claim, but part of the claim makes honestly. Is the insured entitled to recover the damage, at least for honest part?

No. He is not. This also comes from good faith. Sometimes it may be reinforced by the insurance policy.

5) What are the Sri Lankan Insurance companies which are provide PII?

Asian Alliance Insurance and Union Assurance

Reference

1) Grose, M. and Warren, L., 2007. Decennial liability under the Qatar civil code. [Online]. Available at: http://www.clydeco.com/knowledge/articles/decennial-liability-under-the-qatari-civil-code.cfm[Accessed on March 2011]

2) Poulton, W., 2010. Historical and Emerging Risks. The Building Economic, September 2010, pp.26-31

3) ?,?., ?. Professional Liability and Indemnity. Royal Institution of Charted Surveyors

4) Royal Institution of Charted Surveyors, 2011. Professional Indemnity Insurance. [Online] Available at: http://www.rics.org/site/download_feed.aspx?fileID=672&fileExtension=PDF [Accessed on March 2011]