STUDY ON COST OVERRUNS IN CONSTRUCTION

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ABSTRACT: Cost overrun is considered as one of the most important problems that encumber projects progress, since it reduces the contractor‟s profit leading ...
International Journal of Applied Engineering Research, ISSN 0973-4562 Vol. 11 No.3 (2016) © Research India Publications; http/www.ripublication.com/ijaer.htm

STUDY ON COST OVERRUNS IN CONSTRUCTION PROJECTS –A REVIEW U.Sindhu Vaardini 1, S.Karthiyayini 2, P.Ezhilmathi3 1, 2 Assistant Professor, Sri Ramakrishna Institute of Technology, Coimbatore 3 PG Scholar, Sri Ramakrishna Institute of Technology, Coimbatore ABSTRACT: Cost overrun is considered as one of the most important problems that encumber projects progress, since it reduces the contractor‟s profit leading to enormous losses, and leaving the project in great troubles. Construction cost is one of the peak criteria of success of a project throughout its lifecycle and is of high concern to those who are involved in the construction industry. All projects, regardless of size, complexity are saddled by targets and uncertainty. Mostly in developing countries construction projects are characterized by overruns in cost. Cost overruns occur in every construction project and the magnitude varies significantly from project to project. This leads to severe need of addressing the acute issue of construction cost overrun. This paper describes the state of art of the research on cost overrun factors in the construction projects. From the reviews, an attempt is made to cultivate a robust and practical schema for interpreting the overrun in project cost based on the factors. KEYWORDS: Cost Overrun, Construction Projects, Construction cost. projects had cost overrun. A cost overrun is 1 Introduction Construction industries play a vital role in a major problem in both developed and the development of the economic growth of developing countries (Angelo and Reina a country. In recent times, it has been 2002). Hence, problem of cost overruns is a witnessed that the construction industry has critical factor to be studied to alleviate the become one of the leading industries in the issue in the future. globe. The increasing complexity of the In developing countries the trend is more construction projects shows a greater severe where the cost overruns sometimes demand on construction managers to deliver exceed 100% of the estimated cost of the projects on time, within planned budget and project. The reason of overrun is due to poor with high quality. The major challenge faced management of the resources. It is essential by the construction industry in the to have control on cost performance of developing countries is the chronic problem projects to ensure if the construction cost is of cost overruns. within the estimated budget. Therefore, A cost overrun, also known as a cost project cost management is needed to keep increase or budget overrun, involves the project within its defined budget. unforeseen costs incurred in excess of Categories of project cost management estimated amount due to an underestimation include project resource planning, cost of the actual cost during budgeting. estimating, cost control and cost budgeting. According to a very comprehensive research Cost control has two important components done by Flyvbjerg (2002) in global namely, cash flow management and project construction, it was found that 9 out of 10 accounting for determining the projected

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final cost to consider the projections of future cost involving scope, time and quality. The aim of this paper is to review the past studies of factors influencing the causes of cost overrun in the construction industries. 2 Definitions of Cost Overruns Cost overrun can be defined as when the project objectives are not achieved within estimated budget (Avots 1983). Cost overrun is the excess of actual cost over budget. Cost overrun is the ratio of contract amount to the original contract award amount. This calculation can be converted to a percentage for case of comparison (Jackson’ 1990). 3 Factors Influencing Cost Overruns Morris (1990) investigated some factors that influence cost overrun of construction projects such as inadequate project planning, delay in construction, change in scope of the project, planning and implementation, supply of raw materials and equipment by contractors, resource constraint: power, funds, associated auxiliaries, foreign trade not ready and delay in decision making by government, failure of specific coordinating bodies. Elinwa and Buba (1994) performed a survey in Nigeria. Material cost, fraudulent practices, material price increment, high cost of machines and poor planning were found as the peak cause of cost overruns. Flyvbjerg (2002) investigated about the actual cost and estimated cost in public work project. His aim was to find if there is any difference between actual cost and estimated cost. He has undergone various methods and found that the difference between actual cost and estimated cost is due to technical

factors, economic factors, psychological factors and political factors. From factors he concluded that in every infrastructure project, the actual cost will be higher than estimated cost. He added that the cost under estimation occur not only by error and mostly by strategic misrepresentation. Bubshait and Al-Juwairah (2002) examined 42 main factors influencing the construction cost in Saudi Arabia. From identifying their degree of importance by using severity index for owners, consultants, contractors and combination of respondents, the study concluded that incorrect planning, poor financial control on site, inexperience in managing contracts, materials cost, are factors that contribute to high construction costs. Jackson (2002) performed a study on building projects in UK. Most important factors causing cost overrun are poor project planning and management, unexpected ground conditions, lack of information, design development, estimating method, procurement route, commercial pressure, time limit and external factor. Frimpong (2003) investigated 26 factors causing cost overruns in construction of Ghana groundwater projects and analyzed that the monthly payments difficulties was the most important cost overrun factor according to the contractors and consultants, while owners ranked poor contractor management as the most important factor. Despite some difference in the viewpoints among the three groups surveyed, there exists a high degree of agreement among the participants with respect to their ranking of the factors. On the whole, ranking results indicated the main factors are monthly

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payment difficulties, poor technical performances, material procurement, poor contractor management and escalation of material prices. A personal-interview survey of 450 randomly selected private residential projects owners and developers carried out by Koushki et al, (2005) in Kuwait and identified estimates of cost overruns and their causes. The three main factors influencing cost overruns are contractorrelated problems, owner‟s financial constraints, and material-related problems. They recommended that to minimize cost overruns by allocation of sufficient time and money at the design phase, projects owners should require availability of adequate funds and selection of a competent consultants and reliable contractor to carry out the work. Creedy (2005) analysed the main factors influencing cost overrun in Australian Highway projects. The major factors are change in design of various components, changes in contract tender price, quality increased measure, latent condition, remove and replacement of unsuitable material due to faculty design, change in design as environmental issue as per local condition. Omoregie and Radford (2006) studied the factors influencing cost overrun of infrastructure projects in Nigeria. The major factors of cost overruns imported materials and plant items, additional works, shortage of materials, inaccurate estimate, nominated suppliers and subcontractors, non-adherence to contract conditions, mistakes and discrepancies in contract condition, mistakes and discrepancies in contract conditions, design changes, weather, mistakes and discrepancies in contract condition and are

price fluctuation, financing and payments of complete works, poor contract management, schedule delay, changes in site condition and fraudulent practices. Le-Hoai et al. (2008) found the 5 significant factors influencing cost overruns in Vietnam such as financial difficulties of owner, poor site management and supervision, poor project management assistance, financial difficulties of contractors, design changes. Enshassi et al. (2009) analyzed the major factors causing cost overruns which includes fluctuations in the cost of building materials, increment of materials prices due to continuous border closures, delay in construction, supply of raw materials and equipment by contractors, unsettlement of the local currency in relation to dollar value, project materials monopoly by some suppliers, resources constraint, lack of cost planning/monitoring during pre-and postcontract stages, funds and associated auxiliaries not ready, design changes, improvements to standard drawing during construction stages and inaccurate quality take-off. A questionnaire survey was carried out by Ali.A.S. et al (2010) and the most serious factor contributed to cost overrun was inaccurate or poor estimation of original cost. The most significant method to control construction cost is proper project costing and financing. He concluded that the problem of cost overrun is not a small issue and it could cause serious problems to the construction industry. 15 causative factors responsible for cost overrun in MARA large projects were found by Memon, A. H et al (2010). The results showed that cash flow and contractors‟ poor

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site management and supervision, financial difficulties faced by contractors, inadequate contractor experience, shortage of site workers, incorrect planning and scheduling by contractors are the more significant factors affecting construction cost. From correlation analysis it was found that “Contractor's poor site management and supervision with incorrect planning and scheduling”, “Contractor's poor site management and supervision with inadequate experience”, “Incorrect planning and scheduling by contractors with inadequate experience” and “Frequent change in the scope of the project changes design” which have a strong positive correlation with each other. Olawale et al (2010) identified 21 major factors causing cost overruns in UK. The major factors are design changes, incorrect evaluation of projects time and cost, risk and uncertainty related with projects, nonperformance of subcontractors, conflict between project parties, fluctuation of rates, low skilled manpower, financing and payment, unstable interest rate, complexity of works, lack of proper training and experience of project manager, disagreement in contract documentation, lack of appropriate software, inflation of prices, contract and specification interpretation disagreement, dependency on imported materials, unpredictable weather condition, projects fraud and corruption, weak regulation and control and unstable government policies. Ameh et al. (2010) investigated on telecommunication projects and revealed the major factors such as lack of experiences of contractors, cost of materials, frequent

design changes, fluctuation in the price of the materials, economic stability, mode of financing, high interest rates charged by banks on loans received by contractors, payments and bonds including kickbacks and fraudulent practices. Comprehensive review conducted has resulted in classifying 35 common factors of cost overruns which were considered for future research to find the significance of these factors towards construction industries in Malaysia. Serdar Durdyev (2012) identified 40 factors in Turkey that causes cost overrun in construction of residential projects. The major factors are improper planning, inaccurate project cost estimation, high cost of needed resources, lack of skilled workforce, price of construction materials and high land prices. Kasimu M. A. (2012) found a qualitative research approach to obtain vital information of the major factors causing cost overrun in the building construction projects. The factors were ranked according to the degree of significance as assessed by the respondents and shows that the major causes of cost overruns are materials price fluctuation, lack of experience in contracts works, insufficient time, and incomplete drawings. Remon Fayek Aziz (2012) carried out a research in finding out the factors causing the cost variation in construction of waste water projects in Egypt. Hence he conducted a survey with experts and representatives of construction firms. 52 factors were identified from the questionnaire survey. Availability of raw materials, allocation of sufficient time, cost of design phase, fraudulent prevention, bulk material

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purchase and by applying short term goals were marked as vital factors to be considered to overcome cost overrun. He also added that there is much cost variation in owner originated project than contractor or designer originated category. 3 DATA ANALYSIS METHOD Various methods are used for analysing the factors as per the previous studies mentioned .The questionnaires were collected and analysed using various methods to find the most significant factors influencing the cost overrun. Following are the various data analysis methods,    

sampling error of the point estimate. As the value of P is unidentified, Sincich et al. recommended a conservative value of 0.50 to be used, so that a sample size, that is at least as large as required, be obtained. Using a95% confidence level, the unlimited sample size of the population, m, is approximated as follows: SS = (1.96)² * 0.5 * (1-0.5) --------------------------0.05²population Correction for finite SS SS = new SS −1 1+ PoP

Frequency Index Severity Index Importance Index Method Relative Importance Index

3.2 Index Analysis: Long Le-Hoai et al (2008) used following indices for analysis of the data collected from the respondents. • Frequency index: This index states occurrence frequency of factor responsible for delay and cost overruns. It is computed as per following formula: Frequency Index (F.I.) (%) = Σ a (n/N) * 100/4 Where a = constant expressing the weight assigned to each responses (ranges from 0 for Nothing happen to 4 for Always happen), n = frequency of each response, N = total number of responses. • Severity index: This index articulates severity of factor that caused delay and cost overruns. It is calculated as per following formula: Severity Index (S.I.) (%) = Σ a (n/N) * 100/4 Where „a‟ is the constant expressing weighting given to each response (ranges from 1 to 4 i.e., from rarely up to always), „N‟ is total number of responses and „n‟ is the frequency of the responses

3.1 Sample Size Determination: Wood and Haber (1998) defined the sampling as the process of selecting representative units of a population for the study in research investigation. A sample is a small proportion of a population selected for observation and analysis. The samples were selected randomly from contractors, consultants and owners. The following statistical equation was used in order to calculate the sample size for the respondents. SS = Z² * P² * (1 – P) ---------------------e² where SS = Sample size ,Z is the statistical value for the confidence level used, i.e., 2.575, 1.96, and 1.645, for 99%, 95%, and 90% confidence levels, respectively; P indicate value of the population proportion which is being estimated and e denotes the

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• Importance index: This index states the overview of factors based on both their frequency and severity. Importance index is computed as per following formula Importance Index (IMP.I.)(%) = [F.I. (%)* S.I. (%)]/100 •Relative Importance index: Chan &Kumaraswamy, 1997 used the Relative Importance Index method to calculate the relative importance of the various causes of cost overrun. ∑W RII = A∗N Where w = weighting given to each factor by the respondents and ranges from 1 for not significant to 5 for extremely significant, A = highest weight (i.e. 5 in this case), and N = total number of respondents. 4 Conclusion Cost overruns are one of the critical problems faced in the construction industry. A project may be considered to be a successful project only when it is completed within the budgeted cost. Based upon the various literatures reviews various factors causing cost overrun can be identified. And with the appropriate method of data analysis the most significant factors influencing the cost overruns can be analysed. Based on the reviews it was identified that poor climatic conditions, improper planning and scheduling, fluctuations in the material rate, lack of proper site management, monitoring and controlling, improper management of resources in construction project and poor financial control in site can yield to cost overruns. Future studies can be done on different types of projects like infrastructure projects, water supply, industrial and other specialized projects. And also various studies can be done to predict the actual cost

of a project based upon the significant delay factors by constructing a prediction model. References 1. A.Omoregie,D.RadfordInfrastructure delays and cost escalation: Causes and effects in Nigeria. Proceeding of sixth international post graduate research conference, 3rd, 7th April Delft University of technology and TNO, the Netherlands. 2. A.S. Ali*, S.N. Kamaruzzaman, 2010: Cost performance for building construction projects in klang valley. Journal of Building Performance, vol 1, issue1. 3. Abdulaziz A Bubshait; Yaser A ALJuwariah, factors contributing to construction cost in Saudi Arabia, Cost engineering; May 2002; 44,5:ABI/INFORM Global pg.30 4. Aftab Hameed Memon and Ismail Abdul Rahman 2011: preliminary study on causative factors leading to construction cost overruns. International journal of construction engineering and management vol 2, issue 1. 5. Aftab Hameed Memon, Ismail Abdul Rahman, Ade Asmi Abdul Azis*, 2012: Time and Cost Performance in Construction Projects in Southern and Central Regions of Penisular Malaysia, International Journal of Advances in Applied Sciences (IJAAS) Vol.1, No.1, pp. 45~52.ISSN: 2252-8814. 6. Aftab Hameed Memon, Ismail Abdul Rahman, Mohd Razaki Abdullah, AdeAsmi Abdu Azis, 2010: Factors affecting the construction cost

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performance in project management projects. Case of Mara large projects. 7. Ameh, O.J., A.A. Soyingbe and K.T. Odusami, 2010. Significant factors causing cost overruns in telecommunication projects in Nigeria. J. Construction Dev. Countries, 15: 49-67. 8. Angelo W. J. & Reina P.(2002). Megaprojects need more study up front to avoid cost overruns. Retrieved March 29, 2010, from http://flyvbjerg.plan.aau.dk/News%2 0in%20English/ENR%20Costlies%2 0150702.pdf. 9. Avots .I. (1983). Cost-relevance analysis for overrun control. International Journal of Project Management, 1, 142-148. 10. Bent Flyvbjerg, Mette Skamris Holm and Soren Buhl, 2002. Under estimating cost in public work project. Journal of the American planning association, vol 30, pp, 3144 11. Chan,D.W.M and Kumaraswamy, M.M(1996),”A comparative study of causes of time overruns in Hong Kong construction projects” International Journal of project Management, vol 15(1),pp.55-63 12. Elinwa, U and Silas Buba. Construction cost factors in Nigeria. Journal of construction engineering and management. Vol 119, No 4. (1993): 698-714. 13. Enshassi, A., J.Al-Najjar and M.Kumaraswamy, 2009. Delays and cost overruns in the construction projects in the Gaza Strip. J.

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residential projects in Kuwait. Construction management and economics (march 2005) 23,285-294 21. Remon Fayek Aziz * factors causing cost variation for constructing waste water projects in Egypt. Alexandria engineering journal, vol 52(1), pp , 51-66 22. Sebastian Morris, Cost and time overrun in public sector project. Economic and political weekly, vol 47, pp, 154-68 23. Serdar Durdyev *, Syuhaida Ismail and Nooh Abu Bakar, 2012: Factors causing cost overruns in construction of residential projects; case study of turkey. International Journal of Science and Management. 24. Simon Jackson, Project cost overruns and risk management in Greenwood, proceedings of association of researches in construction th management 18 annual ARCOM conference, New castle , Northumber university, UK, 2nd -4th September.

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