Identifying Factors Leading to Cost Overrun in Construction Projects in ...

Journal of Construction Engineering, Technology and Management ISSN: 2249-4723(online), ISSN: 2347-7253(print) Volume 5, Issue 3 www.stmjournals.com

Identifying Factors Leading to Cost Overrun in Construction Projects in Jordan Ghanim A. Bekr Applied Science University, Amman, Jordan

Abstract The problem of cost overrun in construction industry is common worldwide and the construction industry in Jordan is no exception. The main objective of the study reported in this paper was to identify the causes of cost overrun in construction projects in Jordan. A comprehensive literature review from various sources was made to carry out the study. A questionnaire survey was conducted to find the causes of cost overrun related to clients, consultant, contractor, financial management, resources and external factors. More than 100 respondents participated in the survey. The survey identified 15 most important causes of cost overrun from a list of 49 different causes. The most important causes were: Schedule delay (time overrun), frequent design changes, changes and additional works at owner request, mistakes and errors in design, inadequate planning and scheduling, inflation/ prices fluctuation, change in the scope of work (by owner), incomplete drawings/ detailed design at the time of tender, shortage of skilled site workers, construction mistakes and defective works. In general the study revealed that all parties share responsibility for the cost overrun in the construction projects in Jordan. Keywords: Cost overrun, construction projects, importance index, causes of cost overrun, management

*Author for Correspondence E-mail: [email protected]

INTRODUCTION The construction industry in developing countries, nowadays, is being faced by severe problems. The most common are low productivity, low quality, delay in completing the project at the right time, cost overrun and many other problems. As far as cost overrun is concern, most of the projects faced this problem when executed [1] and these overruns produce immediate effects on construction owners and country’s economy [2]. In general the construction in most of the developing countries like Jordan plays important role in economy and social growth. It is rapidly growing and consequently considerable amounts are invested. Growth in this sector is critical for growth in national income and it is among the largest sectors that generates employment within the country as well as a key indicator of the economy in this country. The Construction Industry in Jordan The construction industry in Jordan is one of the most important economic sectors. According to the Jordanian Ministry of

Planning and International Cooperation, the uniqueness of the Jordanian construction industry sector is its complexity with a number of other sectors, making it more sensitive to changes in the economic activities and social and demographic factors [3]. The construction industry, in 2012, came in the third place with a growth of (9.6%) after the manufacturing sector with a growth of (12%) and retail and whole sale, restaurants and hotels with a growth of (9.9%) [4]. The estimated volume of work for the construction industry in 2010, in both the public and private sectors was about 1.78 million JD. (About 2.5 M. USD). The growth of the construction industry in Jordan was due to several reasons. The main reasons are the prevailing political situation in the neighboring countries, low bank interest rates, and safe environment for investment [4]. Facilities given to the construction industry by banks in Jordan recorded historical level unprecedented by reaching to the 1,158 million JD to place the construction industry in second place after

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Cost overrun in Construction projects of Jordan

the trade sector [4]. In 2012, the percentage of contribution of the Jordanian construction industry in the overall production is 13.35% of the total contribution to economic sectors [5]. Definition of Cost Overrun In general cost overrun which is also called cost escalation, cost increase, or budget overrun is the excess of actual cost over the budget. Cost overrun can simply defined as when the final cost of the project exceeds the original estimates [6]. Also is defined as the difference between the original cost estimate of the project and actual construction cost on completion of the work [7]. Another definition of cost overrun given as the change in contract amount divided by the original contract award amount. This calculation can be converted to a percentage for ease of comparison [8].

THE OBJECTIVE OF THE RESEARCH The main objective of this study is assessing and evaluating factors contributing to cost overruns during the implementation phase of construction works in Jordan. These will be ranked in terms of occurrence, level of severity and degree of importance.

LITERATURE REVIEW There are many papers published and studies carried out in the subject of cost overruns in building and civil engineering projects. These studies carried out internationally and in the developing countries. As long as Jordan is one of the developing countries, more attention is given to the research works in these countries. Cost is considered as a prime factor for success of any project, in additional to time and quality. However, in previous projects cost overrun was very phenomenon worldwide. One study carried out showed that only 16% of the projects could satisfy the three performance criteria: completing projects on time, within the budged cost and quality standard [9]. Another study examined the records of more than 4000 construction projects and found that projects are rarely finished within the allocated budgets [10]. Also, it was observed that cost overruns were common place in construction industry worldwide [11–13].

Ghanim Bekr

In a global study on cost overrun issues in transport infrastructure projects covering 258 projects in 20 countries, it was concluded that 90% of projects face cost overrun and cost performance has not improved over time, as it is the same order of magnitude as years ago [14]. Cost overrun in construction projects can occur due to various causes. A number of researchers have investigated various causes of cost overrun in different countries. A study in Ghana considered 26 factors that cause cost overrun in construction of ground water projects [15]. The overall ranking results from the opinion of the three parties involved (Clients, contractors and consultants) indicated that the most important cost overrun factors are poor contractor’s management, monthly payments difficulties, material procurement, poor technical performances and escalation of material prices. In Nigeria, 42 cost overrun causes factors were investigated. It was found that lack of experience of contractors, fluctuation in the prices of materials, frequent design changes, non economic stability and high interest rates charged by banks on loans were dominant factors causing cost overrun [16]. In Kuwait, a study carried about the private sectors residential projects. The study revealed that contractor related issues, material related problems and financial constraints were major reasons of cost overrun [17]. In Malaysia, a study investigated large projects and found that cash flow and financial difficulties faced by contractors, contractor's poor site management and supervision, inadequate contractor experience, shortage of site workers, incorrect planning and scheduling by contractor were most severe factors while changes in scope of project and frequent design changes are least affecting factors on construction cost [18]. A study on UK’s construction industry identified 21 major factors causing cost overrun. The most influencing factors are: Changes in design, risk and uncertainty associated with the projects, inaccurate evaluation of time and cost, poor performance of subcontractors and complexity of works [19]. In another developed country (Canada), a


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Journal of Construction Engineering, Technology and Management Volume 5, Issue 3 ISSN: 2249-4723(online), ISSN: 2347-7253(print)

study carried out which aimed to find the reasons for cost and scheduled overruns in oil and gas megaprojects [20]. The authors' surveyed 87 international senior project managers and the conclusion regarding the main reasons for cost overruns. The main reasons found are: the lack of knowledge of the project and its complexity, inaccurate estimation of costs, the absence of a plan that copes with the changes in design and execution requirements and the lack of managerial strategies. Another study examined the factors influencing the cost overrun on high rise buildings in Indonesia. They found that the predominant factors influencing cost overrun are material cost increase of prices due to inflation, inaccurate material estimating and degree of project complexity [21]. Similarly, in Vietnam, a research found that the top five significant factors causing cost overrun in large construction projects are: Inadequate site management and supervision, lack of project management support, owner’s financial difficulties and changes in design [22]. Another study in Botswana, ten projects was investigated to assess their cost performance. The study found that the factors affect severely cost overrun are variations, measurement of provisional works, contractual claims and fluctuation in the cost of labor and materials [23]. In Palestine, the research conducted to investigate the statistical relationship between actual and estimated cost of road construction projects using data from Palestinian road construction projects awarded over the years 2004–2008. The study was based on a sample of 169 road construction projects. The findings revealed that 100% of projects suffer from cost diverge, it is found that 76% of projects have cost under estimation and 24% have cost over estimation. The discrepancy between estimated and actual cost has average of 14.56%, ranging from 39.3% to 98% [24]. Also in Palestine, it was found that the top five of 42 investigated factors causing cost overrun in construction projects in Gaza strip were: Increments of materials prices due to continuous border closure, delay in construction, supply of raw

materials and equipments by contractors, fluctuation in the cost of building materials, unsettlement of local currency and project material monopoly by some suppliers [25]. In Malaysia and through questionnaire survey in different projects at Klang Valley, it was found that main factors that contribute to cost overruns include inaccurate/poor estimation of original cost, construction cost underestimation, poor planning, inadequate project management, shortage of experience, poor contract management, increase of project's costs due to inflation, high cost of plant and equipment, increase in the prices of raw materials, unforeseen sites conditions shortage of fund and defects in the design [26]. Also in Malaysia, another study identified 58 factors of cost overrun allocated on 8 groups. The study revealed that: Contractor's site management, information and communication as the most severe contributors of the subject. The financial management found to be the least sever factor [27]. In Zambia, it was found that the major cause of cost overruns in road construction projects was the inclement weather [28].

RESEARCH METHODOLOGY A questionnaire survey has been designed on the basis of an extensive literature review of various causes of cost overrun. Questionnaires were used because of their convenience and cost and time effectiveness when compared with face-to-face interviews given that the population companies are scattered in various parts of Jordan. The questionnaire was carefully designed to avoid several shortcomings associated with questionnaire surveys including poor response rates, and problems relating to question construction and wording. Also it was designed so that it is easy to read and responses are easy to fill. The questionnaire was divided into two parts. The first included general information about the respondents and their roles, experience, and the types of construction they are involved in. The respondents were requested to indicate their response to the frequency of occurrence and degree of severity on 49 (the final list)


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well-recognized construction cost overrun factors. These causes were categorized into the following six groups of factors: Group 1: Client- related factors (8 factors) Group 2: Consultant related group (7 factors) Group 3: Contractor related factors (9 factors) Group 4: Financial management related factors (7 factors) Group 5: Resources (labor, material and equipment) related factors (11 factors) Group 6: External factors (7 factors) The form was designed so for each cause or effect on cost overrun , the respondent score ranges from 1 to 5 depending on the frequency of occurrence and the severity of the cause or effect on cost overrun of project as 5 = very high, 4 = high, 3 = medium, 2 = low and 1 = very low.

Ghanim Bekr

The population of the study was based on construction parties (clients, contractors and consultants) in projects located in the main cities of Jordan (Amman, Irbid, Zarqa and Aqaba). Prior to the final formulation of the final form, a pilot survey was conducted. The main purpose was to eliminate the less important questions and to check the clarity and feasibility assurance. The pilot study carried out through 9 engineers (three representing each party- clients, consultants and contractors) with experience of more than 20 years. The form was revised in accordance of the notes received. The forms were distributed to a wide range of engineering staff representing parties involve in the construction process (Clients, Consultants, and Contractors). Number of sets distributed and received is shown in Table (1).

Table 1: Number of Questionnaire Sets. Clients

Consultants

Contractors

Total

Number distributed

60

60

60

180

Number received

38

32

36

106

63%

53%

60%

59%

Response rate

DATA ANALYSIS Descriptive and frequency statistical analysis techniques were used to analyze the data collected in the survey. However, an advanced and accurate method is necessary to analyze the data in a systematic, fast and reliable way. For this purpose, the computer software Statistical Package for Social Science (SPSS 16) and MS Excel were selected. The data collected from the survey were analyzed using the frequency and severity index method [29]. Details of both frequency and severity index analysis are explained below. According to this reference, a formula as shown in equation (1) was used to rank factors affecting cost overrun based on frequency of occurrence as identified by the participants, which is called the Frequency Index (F.I).

Frequency Index  F.I  %  =

 a  n/N  X 5

(1) Where (a) is the constant expressing weighting given to each response (ranges from 1 for never up to 5 for very high occurrence), n is the frequency of the responses, and N is the

total number of responses. Similarly, a formula as shown in equation (2) used to rank cost overrun factors based on severity index as indicated by the participants, which is called Severity Index (S.I).

Severity Index S.I  %  =

 a  n/N  X (2) 5

Where (a) is the constant expressing weighting given to each response (range from 1 for no effect to 5 for very severe effect), n is the frequency of the response, and N is the total number of responses. Importance Index: The importance index of each cause is calculated as a function of both frequency and severity indices, as follows: F.I  %  x S.I  %  Importance Index  I.I  %  = 100 (3)

RESULTS AND DISCUSSION OF THE SURVEY Characteristics of the Respondents Respondents included are representatives of 38 clients, 32 consultants and 36 contractors. The majority of the respondents have experience of


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10– 20 years. The study covered both public and private sector projects. The participating clients included government ministries (Health, Youth and Sport, Municipalities, Housing and Public Works, Justice, etc.). Contracting companies, in general, included only high classified ones. Types of projects the participants are involved in are: Hospitals, sport facilities, public buildings, water supply, water treatment plants, housing complexes etc.

Causes of Cost Overrun Forty nine causes of cost overrun have been identified. Hierarchical assessment of these factors was carried out to determine the factors based on level of significant. It was assessed based on Frequency Index, Severity Index and then the Importance Index for each group of factors i.e. the client related factors, consultant related factors, contractor related factors, financial management related factors, resources related factors, and external factors. These are calculated for the three groups of respondents (Client, consultant and contractor). The significant factors considered for each group are those with Importance Index above the average of I.I. of the group. Table 2 summarizes the results of the survey.

The majority of the respondents are Civil Engineers in additional to Architectural, Electrical, Mechanical Engineers… etc. Most of the respondents hold a bachelor degree with minor proportion with postgraduate qualification.

Table 2: Importance Index for the Factors with Significant Effect. Causes of Cost Overrun

Probability of Occurrence

Degree of Impact

Total Effect

F.I

Rank

S.I

Rank

I.I

Rank

Changes and additional work at owner request

73.25

1

74.76

1

54.76

1

Change in the scope of the project (by owner)

71.32

2

71.21

2

50.79

2

Bureaucracy in tendering method

63.74

3

61.26

4

39.05

3

Inaccurate quantity taking off and errors in the bill of quantities

58.50

4

61.32

3

35.87

4

Frequent design changes

74.05

1

75.16

1

55.66

1

Mistakes and errors in design

72.00

2

74.64

2

53.74

2

Incomplete drawings/ detailed design at the time of tender

69.26

3

71.38

3

49.44

3

Lack of coordination at the design stage

65.61

4

66.41

4

43.57

4

Schedule delay (time overrun)

72.99

1

75.46

1

55.08

1

Inadequate planning and scheduling

71.95

2

72.63

2

52.26

2

Construction mistakes and defective works

68.35

3

67.14

3

45.89

3

Inaccurate time and cost estimates

63.50

5

64.97

4

41.26

4

Group 1: Client related factors -average I.I. = 33.93

Group 2: Consultant related factors -average I.I. = 42.12

Group 3: Contractor related factors -average I.I. = 37.50

Group 4: Financial management related factors –average I.I. = 32.57 Inflation/ price fluctuation

70.28

1

72.81

1

51.17

1

Monthly payments difficulties

67.14

2

64.51

2

43.31

2

Contractual claims such as, extension of time with cost claims

56.19

3

58.35

3

32.79

3

Shortage of skilled site workers

68.75

1

71.17

1

48.93

1

Late delivery of material and equipment

62.37

3

63.22

2

39.43

2

Change in material type and specification

63.03

2

61.34

5

38.66

3

Shortage of site workers

60.23

4

62.11

3

37.41

4

Low labor productivity

59.38

5

61.64

4

36.60

5

Obstacle from government or local authorities

46.17

1

47.35

1

21.86

1

Unforeseen ground conditions

41.76

2

40.09

2

16.74

2

Inaccurate site investigation

38.42

3

40.17

3

15.85

3

Group 5: Resources related group -average I.I. = 33.04

Group 6: External factors group -average I.I. = 15.75


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DISCUSSION OF RESULTS In additional to the results presented in Table (2) above, the study revealed that the 15 most

Ghanim Bekr

significant factors causing cost overrun in construction projects in Jordan are shown in Table (3).

Table 3: Top 15 Factors Causing Cost Overrun. Cost Overrun Causes

Importance index

Rank

Group

Schedule delay (time overrun)

56.70

1

Contractor

Frequent design changes

55.66

2

Consultant

Changes and additional works at owner request

54.76

3

Client

Mistakes and errors in design

53.74

4

Consultant

Inadequate planning and scheduling

52.26

5

Contractor

Inflation/ prices fluctuation

51.17

6

Financial

Change in the scope of work (by owner)

50.79

7

Client

Incomplete drawings/ detailed design at the time of tender

49.44

8

Consultant

Shortage of skilled site workers

48.93

9

resource

Construction mistakes and defective works

45.89

10

Contractor

Monthly payments difficulties

43.31

11

Financial

Inaccurate time and cost estimates

41.26

12

Contractor

Contractual claims such as extension of time and cost claims

40.56

13

Financial

Late delivery of material and equipment

39.43

14

Resource

Bureaucracy in tendering method

39.05

15

Client

Below is a general discussion of the results: 1. There are 8 client-related factors considered in this study. Three of them are among the top 15. These are changes and additional works at owner request ranked 3rd, change the scope of work carried out by owner ranked 7th and bureaucracy in tendering method ranked 15th. 2. In this study, there are seven causes of cost overrun related to consultant. Three of these factors are among the top 15 (table 3). These are frequent design changes ranked 2nd, mistakes and errors in design ranked 4th and incomplete drawings/detailed design at the time of tender ranked 8th. 3. This study considered 9 contractor-related causes of cost overrun. Four of these factors are among the top 15 (table 3). These are schedule delay (time overrun) ranked 1st, inadequate planning scheduling ranked 5th, construction mistakes and defective work ranked 10th and inaccurate time and cost estimates ranked 12th. 4. The study considered seven factors related to financial management. From table (3), it can be seen that three of them are within the top 15. These are: Inflation/prices fluctuation ranked 6th, monthly payments

difficulties ranked 11th and contractual claims related to extension of time and cost. 5. Eleven factors related to resources and their cost and availability are considered. Only two of them are among the top 15 shown in table (3). These are shortage of skilled site workers ranked 9th and late delivery of material and equipment ranked 14th. 6. The group of external factors contained seven factors. This group was considered by the three parties with low ranking. Therefore, none of these factors is among the top 15 shown in table (3).

CONCLUSIONS Cost overrun is a severe problem faced by the construction projects in Jordan. This is revealed from various factors which had been identified in this research. A total of 106 samples were analyzed statistically using Frequency Index, Severity Index and Importance Index on 49 causative factors of cost overrun. The most significant factors related to each group are presented in table (2) above. In additional, the 15 most significant factors causing cost overrun in Jordanian construction industry are shown in table (3).


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Among these 15 most effective factors, 4 of them are contractor related factors, 3 of them are consultant, client, and financial related, 2 of them related to resources and none are related to external factors. The main conclusions revealed by this study are:  The three parties (client, consultant and contractors) are responsible for the cost overrun in the construction projects in Jordan. Also the rank levels of cost overrun are not different from the views of the three parties. They generally share the same opinion.  Schedule delay (time overrun) ranked first cause to cost overrun with Importance Index of 56.70. Previous studies [29, 30, and 16] revealed that time overrun leads to cost overrun. This is true as all the factors causing delay and time overrun will, indirectly, cause cost overrun. Therefore, each day of delay costs the contractor additional losses such as overheads, cost of subcontractors and penalty. Other effects of delay are the costs of required materials and equipment may increase or decrease or the goods may run out from the local market then the cost overrun occurs.  Frequent design changes, additional works at owner’s request, and mistakes and errors in design ranked second, third and fourth with I.I.s of 55.66, 54.76 and 53.74 respectively. Any modification or mistakes in the design will affect the budget allocated to the project, the volume of required materials, type of required materials and labor. Sometimes design changes whether they are due to client or consultant cause a rework of already completed items, which means increasing project durations and losses of materials [25] and result in change orders causing extra cost [16, 21 and 23].  Improper planning and scheduling at construction stage was ranked 5th with I.I of 52. 26. This result was supported by several studies [18, 22 and 16]. Local contractors are often failing to come out with a practical and workable work plan at the initial planning stage. This failure is interrelated with lack of a systematic site





management and inadequate contractor’s experience towards the project. The consultant only checks and reviews the work program submitted by the contractors based on experience and intuitive judgment. Improper planning at the initial stages of a project manifests throughout the project causes delay and then cost overrun. Financial difficulties could also occur from the owner side where there is a delay payment of monthly valuation to the contractors. Mostly, projects are awarded to the lowest bidder with lack of supervision skills. In such cases, less consideration is paid to contractor’s plan, cost control, resource allocation (labor, material and finance).

RECOMMENDATIONS Considering the outcomes from the literature review and the survey, the following recommendations are suggested to manage the cost overrun risks associated with construction projects in Jordan. These recommendations are presented in three categories: Client, Consultant, and Contractor. Client  Appropriate funding level should be determined at the very inception of the construction project so that regular periodic payments may be made to contractor for work done.  Reduce change orders throughout the implementation phase to avoid the cost overrun.  Revise the bid documents (specifications, quantities take-off, drawings and design of the project) within the agreed schedule.  Check the resources of financial capabilities of the lowest bidding contractors before awarding the contract. Consultant  Consultant should review and approve design documents, shop drawings and time schedule to avoid delay then cost overrun.  Consultant should be flexible and reasonable when evaluating the contractor’s works. They should compromise between cost and quality of works.


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











The consultant should employ highly qualified personnel to provide the required instructions in the right time and to be able to answer any question raised by the contractor to avoid delay and then cost overrun. Consultants required to be sure that there are proper channels of communications and a good coordination among all parties to avoid any delay and then cost overrun. Contractor is required to concentrate on planning and scheduling tasks during the implementation by matching the available resources and time. Time schedule for material and equipment delivery to the site and usage of material in the site must be prepared in order to avoid shortage or lack of materials. Assigning adequate qualified number of staff for site planning and management, administrative and technical staff to make arrangements to complete the project at the right time and then to avoid cost overrun. It is recommended to closely monitor the financial spending of the project and payments because any problem in financial aspects will lead to cost overrun.

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Cite this Article Ghanim A. Bekr. Identifying Factors Leading to Cost Overrun in Construction Projects in Jordan. Journal of Construction Engineering, Technology and Management. 2015; 5(3): 25–33p.


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