A MODEL OF CRITERIA SYSTEM FOR EVALUATION OF RATIONALITY OF CONSTRUCTION CONTRACTS

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1 A MODEL OF CRITERIA SYSTEM FOR EVALUATION OF RATIONALITY OF CONSTRUCTION CONTRACTS Sigitas Mitkus 1, Eva Trinkūnienė 2 The Department of Law, Vilnius Gediminas Technical University, Saulėtekio al. LT Vilnius, Lithuania 1 sigitas.mitkus@vv.vtu.lt; 2 eva.trinkuniene@st.vtu.lt Abstract. Construction contract is one of the steps of the construction process. In order to conclude acceptable and thought-out construction contracts, effective methodologies for their evaluation and comparison must be developed. In order to prepare such methodologies, it is necessary to analyse not only technical, organisational and economic aspects in construction but also legal aspects of a construction contract. Contract making has great influence on economic success of both parties. It is necessary to analyse provisions of the contract properly considering the criteria defining them: contractor s liabilities, provided guarantees, client s liabilities, contract termination and suspension, etc. Scientific literature increasingly pays attention to analysis of construction contracts. The fact is witnessed by extensive attention of various authors paid to increase of effectiveness in construction contract making. However, such an important issue as integrated evaluation of construction contracts remains almost untouched. Even when the construction contractor is selected and the price and work terms are negotiated, it s possible to choose at least several variants of contracts. Selection of the most favourable variant is a multiple criteria task, and a methodology must be created for its solution. The aim of this article is to develop a hierarchical model of criteria of a construction contract based on their functions. Construction contracts can be concluded, evaluated and compared on the basis of this model. Keywords: construction, contracts, multiple criteria, hierarchy, methodology, model 1. Introduction Construction is a complicated process with a number of stages, which must be appropriately adjusted and managed. The entity that commissions construction must make different multi-aim decisions at various construction stages. Most problems encountered during construction depend upon the selected contractor. Therefore, selection of a contractor is a very important stage implementing an investment project. Patrick Sik-Wah Fong and Sonia Kit- Yung Choi [1] have analysed methods of contractors selection and noted that some methods are nonexhaustive and tend to be biased: there is a lack of opportunities to evaluate abilities of a contractor and meet time, price, quality and security requirements at the same time. These authors have analysed possibilities to apply the Analytic Hierarchy Process (AHP) Method in contractor s selection according to different criteria. Management of construction works includes conclusion of contracts between the client and the contractor. Contract making has great influence on economic success of both parties, on their behavior in order to increase their profit and it can protect against possible loss. Scientific literature increasingly pays attention to analysis of construction contract. Construction contracts by various aspects were analysed by R. M. Skitmore [3]. His research work is described in different publications. R. M. Skitmore and Z. Hatush [3] analysed contractor selection using multicriteria utility theory, S. T. Ng and R. M. Skitmore [4] described client and consultant perspectives of prequalification criteria, D. Drew, R. M. Skitmore and Hing Po Lo [5] offered a bidding strategy model for use by contractors as part of a more informed approach in selecting which contracts to bid for; S. T. Ng, Kam Pong Cheng and R. M. Skitmore [6] examined the importance of Safety Performance Evaluation through a questionnaire survey conducted in Hong Kong and developed a Safety Performance Evaluation framework suitable for use in the construction industry and protocols for evaluating the safety performance at the organisational and project level.

2 Architects are not less important in the construction process. F. K. T. Cheung et al [7] claim that price cannot be the only criterion influencing the selection of an architect. Authors have compiled a questionnaire and made an expert research, which helped to determine criteria that influence architect s selection and the significance of the criteria. An architect was selected using AHP method. Multicriteria methods may be used not only for selection of contractors or architects. E. K. Zavadskas, L. Ustinovičius and A. Stasiulionis [8] have analysed possibilities to apply Electre III method evaluating the effectiveness of investment to commercial objects. The authors note that while evaluating effectiveness of investment to commercial objects, total effect of various criteria must also be evaluated: amount of construction works in commercial objects, trends, legal issues and available construction solutions. Maintenance of existing buildings is also important. It is expedient to make a multicriteria system for decision-making related to buildings maintenance. T. Vilutienė and E. K. Zavadskas [9] have presented a system of criteria, which helps to make decisions related to maintenance of residential houses. Evaluation was made using the following multicriteria methods: WSM (weighted sum model), WPM (weighted product model), AHP (analytic hierarchy process), ELECTRE and TOPSIS methods variation and the multicriteria complex proportional evaluation method. A model was introduced after the research. The model helps to organise management processes in buildings economy more effectively and to improve work quality. Possibilities to use various methods of the game theory while making decisions in the construction sector were analysed by E. K. Zavadskas, L. Ustinovičius, Z. Turskis, F. Peldschus and D. Messing [10]. Authors have created a software which enables calculations using simple min-max principle, extended min-max principle, Wald s rule, Savage criterion, Hurwicz s rule, Laplace s rule, Bayes s rule and Hodges-Lehmann s rule. Investment to construction or reconstruction of a residential house in Nida is provided as an example of this software. One more important issue in construction is selection of construction materials. E. K. Zavadskas, A. Kaklauskas and V. Trinkūnas [11, 12] have analysed systems of e-trading for construction materials and goods and have offered the model of an internet decision support system for trading in construction materials. The model is based on application of multicriteria evaluation methods. The construction industry is among the most important branches in every country s economy. The fact is witnessed by the attempts of various authors to increase effectiveness of construction solutions. Most of the above-mentioned authors solve different issues related to construction investment process. However, such an important question as evaluation of construction contracts remains unanalysed or almost unanalysed. Even when a contractor is selected and price and terms of work agreed, at least several contract variants are still available. Selection of the most favourable variant is a multicriteria problem, and a technique must be created for its solution. The aim of this article is to develop a hierarchical model of criteria of a construction contracts based on their functions. Construction contracts can be concluded, evaluated and compared on the basis of this model. 2. The Functional Model of the System of Construction Contract Provisions Preparation of a construction contract is a component of the construction process. An effective methodology for construction contract evaluation and comparison must be developed in order to prepare acceptable and thought-out construction contracts. In order to prepare such methodology, it is necessary to analyse not only technical, organisational and economic aspects of construction but also legal aspects of a construction contract. Management of construction works includes preparation of contracts between the client and the contractor. The number of construction contract provisions is so great that it is impossible to include all available information. In order to assess such a complex phenomenon with interrelated contract provisions as precisely as possible, it is necessary to develop a structure defining the interrelations between these provisions [13]. Provisions affect one another and are interdependent, i.e. they are hierarchically interdependent, thus the structure reflecting the set of provisions and their interrelations should be hierarchical as well. Using an expert method, provisions have been determined which influence construction contract contents: performance of construction works according to the contract and following the requirements specified in normative documents of construction; performance of construction works keeping to the environment protection and work safety requirements; permits for construction works; supply of the construction site with construction materials, equipment, spare parts and other constructions; contractor s duty to do all works independently, if not specified otherwise in the contract; a right to require recalculation of the contract price, if the factual price of the construction works increased over 15% due to circumstances not influenced by the contractor;

3 Fig 1. A model of construction contract provisions based on their functions client s duty to provide a land plot for construction in time; to obtain required construction permits; client s duty to pass to contractor buildings and equipment for use and to install temporary energy or water supply networks; allow to use buildings and temporary energy or water supply networks; client s duty to pay for all works performed before conservation; implementation of client s rights related to construction supervision and control; acceptance of constructions works; cooperation of parties; recognition of the building as suitable for use; quality guarantee terms; payment for construction works; contract guarantee, termination and suspension.

4 When construction contract contents are divided to separate provisions, which influence smooth construction process, in such way, we get a model (Fig. 1), which is broadly applicable in construction contract preparation. It is possible to distinguish the following advantages of a hierarchical structure: hierarchical structure may be used to describe how lower level priorities influence change of higher level priorities; hierarchy provides considerably more detailed information about lower level structures, functions and their influence on higher levels; when systems reflecting real situation are developed by means of hierarchy, i.e. by developing and later uniting models, their development is more effective than in cases when the system is made at once; a hierarchical system is both stable and flexible. Stability means that slight modifications in the hierarchy cause very small changes. Flexibility means that introduction of several new criteria does not change the essence of a welldeveloped hierarchy. The system of construction contract provisions may be also modelled considering the functions of contract provisions. Contract provisions are joined to subsystems and a hierarchical model of construction contract provisions based on their functions has been made and provided in Figure 1.This model is the most suitable for development of the methodology for multi-aim assessment of construction contracts. Such conclusion can be made due to the following reasons: experts find it easier to evaluate the significance of contract provisions when the provisions are grouped from a functional perspective; all construction contract provisions have equal legal power irrespective of the group to which they are attributed using any of the analysed classifications; however, the latter classification shows the real effect of a construction contract and its functions in the best way. During assessment or interpretation of evaluation results, different construction contract provisions may be treated differently. This, on its turn, may cause some misunderstanding, erroneous results or erroneous interpretation of the results. Therefore, it is very important to elaborate each construction contract provision. 3. Determination of Indicator Significance Using Expert Surveys In order to determine indicator significance in calculations more objectively, an opinion of a group of experts should be evaluated. For this purpose an expert group of 26 persons was formed during pilot calculations. A fragment of calculation results is shown in Fig. 2. The expert group consisted of lawyers, civil engineers and other specialists. The experts were surveyed by questionnaires. The questionnaire was prepared on the basis of the method of paired evaluation of indicator significance. The generalised calculations of survey results showed that the compatibility of expert opinions meets the requirements; therefore, it is possible to claim that indicator significances derived during the expert survey are reliable and can be used for typical evaluation of contracts. However, these indicator significances would change with changing economic situation and upon evaluation of specific requirements of a construction project; anyway they serve as a basis for initial calculations. During the pilot calculations, three contracts were evaluated using the indicator significances derived from the survey of the expert group. It was determined that the first contract meets the requirements in the best way, and the remaining contracts need to be improved. Therefore, a conclusion is drawn that calculations using the selected methodology provide yet another advantage, i.e. an opportunity to form an expert group for determination of criteria significance. 4. Possibilities to Implement the Hierarchic Model in Decision Support Systems One of the main aims of future decision support systems is use of IT to increase productivity of people working in the sphere of information processing in the age of information and to solve various problems of different complexity and structure. An employee can analyse only about 5% of the received information effectively in such situation and assistance becomes vital [14]. Such situation shapes a number of tasks for a decision support system. One of the most important opportunities to develop decision support systems is increase of their integration. First, a system must be developed inside the organisation, and such system with a simple user interface would provide access to and exchange of information among company s employers. A clear link between the decision support system and various data must be provided and it must facilitate installation of various means for resource allocation. In this case, accessibility of the system can be achieved by using standard graphic user interface. The main problem of decision support systems is an interface with additional means that is difficult to implement. From the perspective of a user of a decision support system, the main criteria when a system for work is being selected is the simplicity of its user interface.

5 Therefore, the ideas related to information presentation must be improved both by the developers and users. A proper evaluation of the form (charts, plans, diagrams), in which the information will be presented in the future, is important. Use of expert systems and other available AI forms in decision support systems determines the main direction. Knowledge bases determine the shape of a database or a model base, models of conclusion presentation determine the knowledge base management system, and there are attempts to develop a user interface in all EU languages. One of the issues that are important as well is a closer integration of decision support systems and software applications used in a company, thus increasing the level of usefulness of decision support and effectiveness of the work of a decision-maker as well. Fig 2. A fragment of the window with aggregated criteria significance and the priority list of contracts The consolidating function of a decision support system is an important component of future decision support systems. It is especially relevant in the sphere of communication. A possibility to connect to other networks is important to organisations, because it creates an opportunity for emergence of new and more global sources of information. The main problem here is security. Another opportunity to improve decision support systems is improvement of accessibility to documents and their management both inside and outside of an organisation. Proper presentation of knowledge creates conditions for a system to better reflect expert opinion. These possibilities enable knowledge acquisition; and it is essential in systems which are used in vital areas where especially valuable decisions are made. Technology helps a viewer to understand relationships between different elements and provides ways to learn to react to the available data effectively and efficiently. A common principle dominating in Europe is that contracts are valid despite their execution; however, laws sometimes provide for formal requirements, for example, contracts must be made in written. First, this legal requirement attempts to reduce the number of disputes, because contracts allow explicit determination of rights and liabilities of parties. Second, it is an attempt to guarantee movement of goods and services, because they make clear who must perform what actions, under what conditions and what limitations are applicable. Third, such formalities allow parties to know their rights and liabilities explicitly months and years after conclusion of a contract, because it is possible to store the contents of the document.

6 Considering a possibility to conclude electronic construction contracts, e-signature can be used, which has an effect similar to signing a written document. The author thinks that e-signatures are as authentic as handwritten signatures. EU Directive No. 1999/93/EC on E-signature specifies that member states shall grant secure e-signatures based on qualified certificates and created by secure e-signature development means. On the basis of the aforementioned provisions, a model of the Web-based Decision Support System for Construction Contract Preparation was developed. This model can help to implement the functional model of the system of construction contract provisions developed by the authors and other principle elements. 5. Summary and Future Perspectives Various authors offer different multicriteria decision-making methods for problem solving at various stages of an construction investment process: selection of a contractor and architects, evaluation of priority for building reconstruction, evaluation of buildings from the perspective of sustainable development, making of decisions related to building maintenance, selection of construction materials etc. Problem solving in many analysed systems is made by determining criteria which influence the solution and by applying special multicriteria decision making methods. Criteria and their amount usually depend on the nature of the problem being solved. This also influences the selection of mathematical methods. Currently there are many systems alleviating contract making and legal issue solving in the world. These systems are created by various authors, in different time and for different tasks, it is possible to distinguish one common feature: information and the sequence of problem solutions are detailed on the basis of certain principles. In order to reveal peculiarities of construction contract making, it is expedient to make a scheme showing construction contract provisions and their relationships in detail. The model of the construction contract provisions system based on functions of provisions helps to determine significance of contract provisions. Thus this model enables to create an internet based legal construction contract decision support system. Pilot evaluation helped to determine that the first contract if the most favourable to a client. The used software is perfectly adjusted to evaluation of AHP method; however, it has one significant drawback: it is intended for use in one company and has limited possibilities for web-based use. Since computer and information technologies are developing constantly, it is very important to foresee the possibilities to improve a decision support system. The vital task is to increase system s integration considering the trends of development of the aforementioned technologies and the purpose of a decision support system. This way a user can use the developed system without special training or with a minimum training, the need for additional software is lower, requirements to hardware are reduced, new and better conditions for electronic exchange of data are created and more functions (video conferencing, video and audio records, contract signing by electronic means, etc.) related to preparation of construction contracts become integrated. References 1. Sik-Wah Fong, P.; Kit-Yung Choi, S. Final Contractor Selection Using the Analytical Hierarchy Process. Construction Management and Economics, No 18, 2000, p Adriaanse, J. Construction contract law. 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