A CRITICAL REVIEW OF THE CAUSES OF COST OVERRUN IN CONSTRUCTION INDUSTRIES IN DEVELOPING COUNTRIES

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RESEARCH PROJECT TOPIC ON A CRITICAL REVIEW OF THE CAUSES OF COST OVERRUN IN CONSTRUCTION INDUSTRIES IN DEVELOPING COUNTRIES

ABSTRACT

Construction of building projects is an endeavour that involves capital expenditure, which is either borrowed or self-financed by clients. The expected outcome of such expenditure is value for money, which is usually dictated by project objectives of cost, time and quality. Project cost, as a project objective, is a crucial determinant of project success in the prevailing economic challenges being experienced globally. Construction cost overrun has become a reoccurring phenomenon in the delivery of building projects. The major thrust of this study was to make A CRITICAL REVIEW OF THE CAUSES OF COST OVERRUN IN CONSTRUCTION INDUSTRIES IN DEVELOPING COUNTRIES. The study adopted a MonteCarlo technique in simulating cost overrun using DiscoverSim® version 1.1 (SigmaXL, 2013) simulation and RiskAmp Microsoft Excel add-in software to analyse data obtained from literature review, review of project documents with contract sum of over Five Million Naira executed within Abuja city in addition to interview sessions with construction professionals.  The study revealed that significant cost overruns are mainly due to re-measurement and variation. The simulation result elucidated that less than 10% of building projects are completed below the initial contract sum in Abuja which could be due to the fact that projects tend to be initiated and executed without adequate project information such as client brief, design details and specifications. The study recommends the need for minimizing occurrence of re-measurement in building projects through provision of full design information prior to contract award, development of simulation model for specific project categories and establishment of a project cost overrun band that will enable a scientific measurement of project’s value for money benchmarked against initial cost estimated.

 

CHAPTER ONE

1.0    INTRODUCTION

      1.1    BACKGROUND OF THE STUDY

Globally, the construction sector is inundated with cost overruns in the delivery of building projects. This experience has brought about loss of clients’ confidence in consultants, added investment risks, lack of ability to deliver value to clients, and disinvestment in the construction industry (Mbachu and Nkado, 2004).It is of essence that the objectives of a building contract are met to the contentment of the parties involved. Cost, time and quality are significant, interrelated and interdependent targets for achieving the objectives/goals expected of building contracts (Ashworth, 1999, Gould, 2002). Thus, it is crucial to keep up a proper balance between the three so that project outputs are realised on time, within the financial plan and with the requisite quality (Akinsola and Potts, 1998). However, it is an admitted fact that in Nigeria, the majority of contracts suffer undue time extensions and /or additional cost to the client and /or inadequate quality of work (Oluwole, 2008b).

Project cost overruns can be either avoidable or unavoidable. Overruns due to design plan or project management problems are avoidable because they could have reasonably been foreseen and prevented (Shanmugam et al., 2006). However, there are some unavoidable costs such as those due to unanticipated events which cannot reasonably be prevented. Cost overruns may add value to projects when extra work is done with the intention of producing a better output. Overruns may also add value when they involve work that was omitted from design plans but clearly needed to be done. However, some overruns may not add value and represent wasted money if they do not result in a better product.

Cost overrun of a project refers to the actual ‘cost increase’ to the client during construction of a building project (Janaka, 1992). It is merely the difference between the value originally envisaged for the project and the value reflected in the final certificate. Cost overruns occur from overspending the allowances, making changes and encountering unforeseen problems. Proper planning can greatly reduce cost overruns.

Another study from Indonesia revealed the three most frequently occurring causes of cost overruns are materials cost increases due to inflation, inaccuracy of quantity takeoff and cost increase due to environmental restrictions (Kaming et al., 1997). But in general it is found that the variation was a main source of cost overrun and the design team believes that the client predominantly creates variations which lead to many problems in building contracts.

The causes for cost overruns differ from country to country. According to a study done in Kuwait by Koushki et al.(2005) the three main causes of cost overruns were identified as contractor-related problems, material-related problems and, owners’ financial constraints.

However, the design team must examine their activities critically and ensure that they do not mislead the client in an attempt to cover their own inadequacies. A major problem when cost overrun occurs in a project with no adequate provisions to manage is delay in payment and subsequent abandonment of projects. This breeds diversified hardship in project execution (Achuenu and Kolawole, 1998). Thus, an attempt to simulate cost overrun in construction projects is imperative to understanding the factors that lead to cost overrun in Nigeria construction industry.

      1.2    STATEMENT OF RESEARCH PROBLEM

This research work is fashioned after an existing research carried out by Shanmugam et al. (2006) which attempted to simulate a model of cost overrun in the Sri Lankan construction industry.  The research highlighted some factors that lead to cost overrun in construction projects in Sri Lanka and used Microsoft excel to simulate how the effects of these factors can be identified early in the project to aid decision in decision making. Although there may be some similarities between the construction industry in Nigeria and Sri Lanka; given that both are developing nations. Nonetheless, the research can be replicated in Nigeria because literature has indicated that the causes of cost overrun differ from country to country (Kaming et al., 1997; Koushki et al., 2005) and insufficient understanding of the causative factors of cost overruns also lead to poor quality proactive decisions aimed at mitigation the negative effects of cost overruns. The focus of this research is to make  A CRITICAL REVIEW OF THE CAUSES OF COST OVERRUN IN CONSTRUCTION INDUSTRIES IN DEVELOPING COUNTRIES (using Nigeria as a case study).

      1.3    NEED FOR STUDY

The major challenges facing the construction industry in developing countries like Nigeria is the chronic problem of cost overruns. Under normal circumstances a complete set of drawings and specifications should be made available to the Quantity Surveyor; who would prepare fully described and accurate bills of quantities for tendering purposes (Koushki et al., 2005). As one arbitrator once observed that, it is difficult to imagine a building contract, which proceeded to completion without delay or variation whatsoever (Odusami and Onukwube, 2008; Nwachukwu and Emoh, 2010). However, this does not mean that there are no building projects that have been completed within budget. The concern is that such ideal situations are rare (Chan, 2001).

There have been many research works on cost and time overruns (Kaming et al., 1997; and Cox et al., 1999). Again research has found that there are more building projects that had cost overruns than those which were completed within budget (Chan and Kumaraswamy 1996). The scenario of cost overruns has been blamed on the many factors that influence construction cost overruns (Kaming et al., 1997). The recent financial crisis globally brings to the fore the need to adequately manage construction cost at all stages of the project to avoid potential issues such as abandonment of projects and cost escalation.

In general, the results of this research work will aid clients especially the government which is the biggest player in the Nigerian construction Industry as an initiator and financier of construction projects to manage cost overrun. The significant impact of cost overrun cannot be over emphasized as many literatures have highlighted its effect on project execution.

      1.4    AIM AND OBJECTIVES

1.4.1AIM

The aim of the research is to make A CRITICAL REVIEW OF THE CAUSES OF COST OVERRUN IN CONSTRUCTION INDUSTRIES IN DEVELOPING COUNTRIES

1.4.2OBJECTIVES

To achieve this aim the following three objectives were set. They are to:

  1. identify factors influencing building construction cost overruns;
  2. analyse factors leading to cost overruns of building projects in Nigeria; and
  3. model the cost overrun factors of building projects in Nigeria.

      1.5     SCOPE AND LIMITATIONS

1.5.1SCOPE

The research scope covers cost overrun in building construction project in Nigeria and is limited to projects located within Abuja. Furthermore, the building types studied in this research was office complexes, hospitals, educational, commercial and residential buildings all with a construction cost over 5 million Naira. The decision to limit the data to projects above five million Naira is vested on the idea that such projects within the range of that contract sum cover various project elements. Furthermore, the data obtained from such projects would provide a reliable and realistic data suitable for generalizing cost overruns in building projects in Nigeria as they cut across the major types of projects predominantly undertaken in Nigeria. The data are to be collected from the building projects undertaken by contractors registered not lower than category C registration of the Federal Ministry of Works, which is the regulatory authority of construction in Nigeria. The categories are stipulated by the Federal Ministry of Works who grades Contractors based on the value of the project they can undertake based on their performance.

1.5.2 LIMITATIONS

Data collection techniques and research strategies have limitiations which the researcher was conscious of. In tandem with this, the potential limitiations to the conduct of this research as highlighted below were considered prior to commencement of the research.

  1. Availability of consultants to be interviewed
  2. Accessability of project documents
  3. Workload or schedule of employees involved in the case study
  4. Reliability of interview and review of project data as data collection technique.

In addressing these limitations, sugestions by letters of request were sent in advance to all employees to be involved in the research informing them about the possible questions to be asked during the interview and documents that will be accessed. This approach allowed for planning and adjustment of interviewees schedule to accommodate the interview sessions to be conducted as well as, facilitating the accessability of relevant data. In addition to this, the provision of potential questions to be asked facilitated the rate of response by the interviewee as it provided the interview with a feel of the scope of the interview questions prior to the interview and also simplified the use of semi-structured interview questions for the research.

To minimize the possibility of obtaining baised responses from the interview, employees of different firms involved in different projects were interviewed. This avoided the dependency on one source for research data. In addition to this, review of project documents was also conducted by correlating data from different project documents that contained information to ascertain the level and extent of cost overrun in the projects.

The numbers of building projects constituting the historical data used for the simulation model in this study are not adequate. A general distribution option is the Normal Distribution, with a minimum sample size of 30; preferably 100 (SigmaXL, 2013). This condition was not met in this study due to time, financial constraints and lack of access to adequate data of Final accounts of completed projects in Abuja.

The categories of building projects were limited to only four, thus the simulation model was developed for all four categories combined. However simulation models developed for specific category are likely to be more reliable and predictive than a combination of diverse building projects, which usually have divergent procurement procedures and components of cost overrun.

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