EFFECTS AND CAUSES OF COST OVERRUN ON BUILDING CONSTRUCTION PROJECTS


EFFECTS AND CAUSES OF COST OVERRUN ON BUILDING CONSTRUCTION PROJECTS  

Abstract

Many projects experience cost overrun and thereby exceed initial contract amount. In India the number of public building construction projects is increasing. However, it becomes difficult to complete projects in the allocated cost and time. Taking into account the scarce financial resources of the country, cost overrun is one of the major problems in  this research was carried out to dig‑out information on the factors that cause cost,­ overrun during construction and their effects on public building construction projects.

Questionnaire survey together with desk study was used to collect data on cost overrun. A total of 12 questionnaires from clients,  consultants and contractors were collected and a desk study of 10 completed public building construction projects were investigated and analyzed using both descriptive and inferential statistics. From the results it was found that  9 out of 10 public building construction projects suffered cost overrun. The rate of cost overrun ranges from a minimum of 0% to the maximum of 126% of the contract amount for individual projects. In this research it was found that the rate of cost overrun decreases with the increase in contract amount.

Respondents identified 29 causes of cost overrun. The important causes of cost overrun were found to be inflation or increase in the cost of construction materials, poor planning and coordination, change orders due to enhancement required by clients, excess quantity during construction.

Mean score analysis was used to evaluate whether consensus of opinions exists between groups of respondents (client versus consultant, client versus contractor and consultant versus contractor). From the analysis of the results it was found that consensus of opinion exists between respondents on the factors that cause cost overrun and on their rate of occurrence.

The most common effects of cost overrun identified by this research were delay, supplementary agreement, adversarial relations among stakeholders, and budget shortfall of project owners. It is hoped that these findings will guide efforts to improve the performance of the construction industry in the future.

Table of Contents

Table of Contents ...........................................................................................................     i

List  of Tables.................................................................................................................    iii

List of Figures...................................................................................................................     iv

Abstract............................................................................................................................    v

Chapter-1 Introduction........................................................................................     1

1.1 The study Overview …………………………………………………    1

1.2Construction Industry in India……………………………………….    2

1.3 Challenges of Construction Projects…………………………………     3

1.4Objectives of the Research …………………………………………..    5

1.5The Research Motivation……………………………………………..    7

1.6 Overview of the Research Process and Study ………………………...    7

Chapter-2 literature review..............................................................................9

2.1 General ………………………………………………………………    10

2.2Cost Overrun………………………………………………………...12

 2.2.1 Definition of Cost Overrun……………………………………13

2.3 Causes of Cost Overrun………………………………………... …...13

2.4 Effects of Cost Overrun……………………………………………...43

2.5 Cost Management……………………………………………………44

 2.5.1 Controlling Construction Costs………………………………...46

2.5.2 Phases in Building Construction for Cost Management ……….46

2.5.3 Construction Cost Estimate…………………………………….49

2.5.3.1 Project Stages for Cost Estimating……………………..50

Chapter-3 The research design and methodology........................... 53

3.1The Study Approach and Research Type……………………………54

3.1.1 The research type ……………………………………………..55

3.2 The study scope and limitation………………………………………55

3.3  Data source and collection…………………………………………..56

3.4 The Research Population…………………………………………….59

3.5Method of Analysis………………………………………………….59

3.6 Writing of the Research………………………………………………61

Chapter-4   Data analysis and discussion........................................    63

4.1Introduction…………………………………………………………63

4.2Questionnaire Response Rate………………………………………..64

4.3 Existence and Extent of Cost overrun………………………………65

4.4Relationship between Rate of Cost overrun and Contract Amount….67

4.5Causes of Cost overrun from Desk Study and

Questionnaire responses ……………………………………………..69

4.5.1 Identifying Causes of Cost Overrun based on

Rate of Occurrence……………………………………………….77

4.5.2 Identifying Causes of Cost Overrun based on Impact………….80

4.6 Tests for Agreements on Causes of Cost Overrun among

Stakeholders in the Construction Industry…………………………..84

4.7Effects of Cost Overrun………………………………………………86

Chapter-5 Conclusions And Recommendations...............................      90

5.1Conclusions………………………………………………………… 91

5.2Recommendations………………………………………………….. 93

5.2.1 Expected from Consultant……………………………………. 94

5.2.2 Expected from Clients…………………………………………95

5.2.3 Expected from Contractors…………………………………….96

5.2.4 Expected from Government……………………………………97

References...............................................................................................................    99

List of Tables

Table 1.1:    The Question and Answer Approach

Table 2.1:    Factors influencing Cost over Runs

Table 4.1:    Summary of number and percentage of questionnaires distributed, returned and response rate

Table 4.2:    Summary of project type, contract amount and actual cost, contract and actual completion time for building construction project.

Table 4.3:    Mean score of causes of cost overrun

Table 4.4:    Mean score of the rate of occurrences of the cause of cost overrun    

Table 4.5:    Impact of causes of cost overrun

Table 4.6:    Summary of correlation test on the ranking of causes of cost overrun.

.

List of Figures

Figure 2.1:    Construction cost estimate with changes in the project stage.

Figure 2.2:    Cost Time & Quality Triangle.

Figure 3.1:    Flow Chart of research methodology.

              CHAPTER I

INTRODUCTION

1.1.    The Study Overview

1.2     Construction Industry in INDIA

1.3     Challenges of Construction Projects

1.4     Objectives of the Research

1.5    The Research Motivations

1.6    Overview of the Research Process and Study

CHAPTER I

INTRODUCTION

1.1. The Study Overview

The construction industry has a great impact on the economy of a country. It is one of the sectors that provide crucial ingredients for the development of an economy. According to Chitkara, (2004), the construction industry in many countries accounts for 6‑9 % of the Gross Domestic Product (GDP.); and according to Bhimaraya, (2001), it reaches up to 10 % of the GDP of most countries. In  its percentage of GDP amounts to 3%, considerably lower than the  average  of 6% 2006]. The construction industry is a vital element of the economy and has a significant effect on the efficiency and productivity of other industry sectors. One cannot think of dispread investment in manufacturing, agriculture, or service sectors unless the   construction results of infrastructure facilities are in place. In some of the developing countries, the growth rate of construction activity outstrips that of population and of GDP [Chitkara,  2004].     1.2. Construction Industry in INDIA

India has a rich history of magnificent construction endeavors. The Taj-Mahal, Qutub Minar, Hawa-Mahal, Golkunda & Ranthambor-Forts, Meenakshi Temple are few examples of these expertise's. With the advent of modern civilization, especially during the late 19`s and early 20`s century, there have been some significant developments in this regard. Even though, the development of the construction industry  is slow, it plays a key role in the development of the national economy.

The role the construction industry plays in socio‑economic development is significant. It provides the basis upon which other sectors can grow by constructing the physical facilities required for the production and distribution of goods and services. The construction industry has a significant multiplier effect on the economy. An interrelationship between the construction industry and the broader economy largely emanates from three of the industry's characteristics namely:

⦁    The public sector is its major client;

⦁    It's large size, ability to produce investment or capital goods which contribute significantly to national GDP ;  and

⦁    It is a major source of employment, directly and indirectly by its multiplier effect.

Public construction projects are parts of the country's development initiative.  It shared considerable amount of the country's scarce financial resources. In  the general Budget, construction industry is the highest recipient of government budget in terms of government development program. Consequently, public construction projects consume an average annual rate of nearly 60% of the government's capital budget.     1.3. Challenges of Construction Projects

Construction Projects can be marvelous in their breadth and complexity from the Egyptian pyramids,  and Gothic Cathedrals to soaring skyscrapers and enormous bridges. It is obvious that the construction industry has special features that are not usually encountered in other industries. Usually in construction, when conditions in the field turn out to be more complex than what was anticipated in the planning and design phase, additional costs and time are needed. Any extremes can affect productivity level, damage materials and work in place. More over the industry, most of the time, is custom oriented, meaning that it is difficult to use mass production techniques. Because of all these factors and others, it is difficult to predict accurately how much money will be necessary to complete construction projects, creating a large facility takes a long time and usually involves a large capital investment. Cost overruns, delays and other problems tend to be proportionally monumental.

Cost is one of the primary measures of a project’s success. This is true, especially for public projects in developing countries   because public construction projects in these countries are executed with scarce financial resources. Most literature review on construction projects suggested that the common criteria for project success are generally considered to be cost, time and quality [Arditi  et al, 1997; Frimpong  et al‑2003]; Atkinson (1999) called these measures as the `iron triangle'. Songer and Molenaar (1997) considered a project successful if it was completed on budget, on schedule, conformed to user expectations, met specifications, attained quality of workmanship and minimized construction aggravation. Generally, a project is considered successful if the project is completed within a stated cost or budget, getting the project into use by a target date, meets the technical specification, and if there is a high level of satisfaction concerning the project outcome among the project participants.

Completion alone does not constitute success for the project owner. For the owner, much of the success of a project depends on many factors, the most important of which is project completion within specified cost parameters (i.e. within a specified budget). The second most important factor affecting success is on time completion as delays in completion of facilities often directly equate to financial losses due to lack of revenue from facility operation.

In  the present state of the construction industry falls short of meeting domestic and international quality standards and the performance demand expected from the sector. Construction projects have problems with construction techniques and management as well as limitation of funds and time. The critical problems are inability to complete the projects on schedule, low quality work and cost overrun. In general, most (if not all), construction projects experience time overrun and cost overruns during their execution phase. An examination of the records of more than four thousand construction projects showed that projects were rarely finished on time or within the allocated budget. Other researchers have also observed that time and cost overruns are common in the construction industry worldwide [Arditi, 1985].     1.4. Objectives of the Research

This study will be undertaken with the following main objectives.

1.    Identifying the main causes of cost overrun and their overall effects for public building construction projects.

2.    Identifying the related responsible party to the causes of cost overrun.

3.    Identifying the rate of cost overrun for various types of public building construction projects

4.    Identifying the relationship between rate of cost overrun and contract amount.

5.    Forwarding recommendations to minimize or to avoid cost overrun and frequency of its occurrence;  and hence to reduce its consequential effects on public building construction projects.

To assess the objectives, beneficiaries, and methodology of the research work it is diagnosed using a question and answer approach as shown in Table 1.1 below

Table 1.1: The Question And Answer Approach

No.    Question    Answer

I    Why has the research been established?    Most Construction projects in this country suffer time and cost overruns.

2    What does the research try to achieve?    To contribute knowledge on problems of cost overruns their causes and their overall effects.

3    What are the important issues for the research?    Methodology and literature review together with distribution of questionnaire and desk study on public construction projects.

4    Who will benefit from or  affected by this research?    Stake holders in construction industry and myself.

5    How can the research be done?    Literature review, distribution of questionnaires, and desk study on public building construction projects.

1.5. The Research Motivations

The initiation for the study of this research is largely due to personal observation and low performance of the construction projects in terms of cost and time. These include construction projects owned by the government and the private sectors. However, due to the limitation with regard to accessibility of data on private construction projects this thesis will focus on public building construction projects.     1.6. Overview of the Research Process and Study

This thesis will have the following broad categories.

         Chapter I: Introduction/The research background

Chapter II: Literature review

Chapter III: The research design and methodology

Chapter IV: The research analysis and discussions

           Chapter V: The research conclusions and recommendations

Chapter VI: Construction Site Photos

Each of the above chapters will contain the following contents as stipulated below.

Chapter I describes the research overview, its initiation and purposes. It also indicates the research objectives, how the research process is conducted and the contents of the research.

Chapter II covers the literature review part of the thesis; the literature review will include general information about cost, causes of cost overrun and their overall effects.

Chapter III covers the research methodology. The methodological approach consists of the overall research strategy; the research design, the analysis of the data and writing of the research paper.

Chapter IV contains the discussion and analysis part. It contains the findings on causes and effects of cost overrun; the rate of cost overrun on public buildings, the relationship between rate of cost overrun and contract amount and finally;

Chapter V in this part, the research conclusions and recommendations are presented. This will serve as an action guideline to stakeholders in the construction industry.

Chapter VI  Photographs of various probable causes of cost over run.

.

EFFECTS AND CAUSES OF COST OVERRUN ON BUILDING CONSTRUCTION PROJECTS



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