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Cost Overrun in Construction Projects

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Aim

The aim of the dissertation is to identify and explore the various causes of cost overrun associated with construction projects.

Objectives

  • Identifying the main causes of the cost overrun in the construction projects through literature review.
  • To identify the various measures of cost overrun in construction projects.
  • To examine the affects of the cost overrun by analysing the case of a construction industry.
  • Analysing the information from the literature review and case studies to provide further recommendation and suggestions to overcome the cost overrun effect.

Research Methodology

To achieve the above aims discussed above it is very important to do extensive research by studying books, journals, articles on internet. Qualitative method is the research method that will be the main research method used incorporating

Observations

Questionnaire

Case studies

Present dissertation the author has used two main research methods questionnaire survey, case studies. The author has prepared questionnaire with 18 questions and forwarded to 10 companies. The questionnaire survey provided valuable data that can analyse, useful for outcome of the research. The author has studied different case studies from India to identify various causes for failure of the project. Analysis on the case studies gives the idea of various measures to overcome cost overrun.

Introduction

Constructions are full of risks and include those that may relate to cost overrun, external commercial factors, design, construction and operation. In any construction projects the three primary factors that is time, cost and quality will be likely to subject to risk and uncertainty. This cost overrun can be minimised by the realistic estimation which can be anticipated from the experience and foresight. Managing project costs accurately and responsively is a challenging task for the design team, construction manager, builders and consultant. Effective cost management is dependent on following a consistent methodology, utilizing appropriate standards, concentrating efforts for maximum effectiveness and utilizing all the tools available. The major problem that arises in construction projects is that projects often overrun their cost estimate. This risk of the overrun of cost estimate occurs even with the projects where carefully constructed bottom up cost estimates completed to a very detailed level. In every construction projects the main problem where cost of the entire project is not getting most likely, is because of the usual way of constructing a project estimate at completion is that adding the estimates for all work breakdown structure components (WBS). By conducting a cost risk analysis provides a more accurate and realistic estimates of project costs.

Chapter-2

2. Literature Review

2.1 Definition:

The process of project of an infrastructure project when planned is the sponsoring department prepares estimates of time and costs or funds needed to complete the project. The expected date of the completion is also announced. But there will arise some different between the actual date of completion from the expected date. We define “time overrun” as the time difference between the initially planned i.e. expected dates of completion. Therefore, for each project we can define percentage time overrun as the ratio of time overrun and the implementation phase of the project. The implementation of the project is defined as the duration in which project is completed, i.e. the time between the date of approval of the project and the expected date of completion of the project. Similarly cost overrun is defined as the difference between the actual cost and the expected cost of the project. The actual cost is the cost that can be calculated only at the end of the project and the estimated cost is the estimated when the project is planned. The percentage of cost overrun is defined as the ratio of the cost overrun and the initially anticipated cost of the project (Ram Singh, 2009).

According to Lewis and Atherly 1996 a delay may have the direct cost implications in terms of an extended construction period. In other words delay leads to the cost overrun and the extended time will have extra expenses or loses by both parties of the project. When a delay can increase cost and reduce profits then organizations will have more considerations on bottom line (Lewis and Atherly 1996)

2.2 Causes of Construction Cost Overrun

The survey conducted by Iyer and Jha (2005), on the factors affecting the cost performance of Indian construction projects, including the extent of adverse climatic and economic conditions; unfavorable project specific attributes; top management support; monitoring; feedback, coordination, conflict and knowledge of the project participants; and reluctance to make timely decisions. Of these, coordination among project participants was found to be the most significant of all factors, having a maximum positive influence on the cost performance.

Semple et al. (1994), examined causes of claims, delays and cost overrun on twenty four projects in western Canada. The study identified the following as critical factors that lead to cost overruns are (1) contract variations and extras, (2) disputes, (3) soil and site conditions, and (4) delays. The author stressed the need by the industry practitioners (clients, contractors, professionals) to pay maximum attention to the critical factors in order to minimize cost overrun risks.

Chan et al. (1997), examined the principal and common causes of delays which leads to cost overrun in Hong Kong construction projects. The study identified the following factors (1) Poor site management and supervision, (2) unforeseen ground conditions, (3) low speed of decision making by project teams, (4) client-initiated variations and (5)necessary variations of work, as major cause of delay.

Flybjerg et.al. (2003), pointed out to cost estimates as highly, systematically and significantly misleading. According to Flybjerg et al. (2004), the causes for the cost overrun in the construction projects is as follows (1) The length of the project in the implementation phase, (2) the size of the project and (3) the type of project ownership.

According investigation carried by Assaf et al. (1995), on causes of delay in high rise building construction projects in Saudi Arabia, the most important causes are found to be as follows (1) Inadequate designs, (2) slow work progress on site, (3) late payment for completed works and (5) design changes by owners. Here from the above investigation it is proven that all these factors are caused by the lapses in human input factor.

N R Mansfield et al. (1994), investigated and examined the causes of delay and cost overrun in Nigerian projects. The investigation identified the following factors that are attributed to the overrun are finance and payments arrangements, poor or in experience contracting management, material shortages or excess of the materials, inaccurate estimating, and overall price fluctuations

The analysis according to Ram Singh (2009), has shown that there has been significant decline in the time and cost since from early 1980s in India. The investigation shows that major causes for the delays and cost overruns observed in India are deficient project planning process, use of inappropriate procurement contracts and faulty contract management. In regards to project type, the bigger projects are much more vulnerable to cost overruns. Ram Singh also stated that several kinds of organisational-cum-institutional failure also affect greatly to time and cost overruns.

The studies conducted by Elinwa et al. (2001) on the relative contribution of human personnel parties to the projects time overruns and cost overruns in Nigerian Construction industry states that the contribution of clients, contractors and others were 62%, 32% and 6%. The study stated that on the government or private sector projects the delays were at 89% with irrespective of project size. The study also identified the important factors of cost overrun and time overrun are mode of financing, payment delays for the completed works, improper planning and project time and cost underestimation.

Kaming et al. (1997), examined factors influencing constriction delays (time overrun) and cost escalations, in Indonesian cities. They identified project cost underestimation and project complexity as the main causes of project delays and cost overruns.

Chan and KumaraSwamy had conducted a survey on the factors causing the delays in Hong Kong construction projects and had classified them into two groups: (1) the role of the parties in the local construction industry (whether client, consultant or contractor) and (2) the type of projects. The result shows that five major causes for the delays and cost overrun were poor site management and supervision, unforeseen ground condition, low speed of decision making involving all project teams, client initiated variations and necessary variation of work.

Cost underestimation is the one of the main factors for the cost overrun in construction projects. According to the Flyvbjerg, (2003), the cost underestimation exists across 2 nations and 5 continents and it is global phenomenon. The explanation for the cost underestimation is in four types.

  • Technical
  • Psychological
  • Economic
  • Political

Technical Explanation:

Most studies in infrastructure projects that compare actual cost at the completion of the project and estimated cost at the initial contract explain as Forecasting Error in technical terms such as imperfect techniques, inadequate data, honest mistakes, inherent problems in predicting the future, lack of experience on the part of forecast, etc,. [Flyvbjerg, 2003].

Psychological Explanation:

Psychological explanations attempts to explain biases in forecasts by a bias in the mental makeup of the project promoters and forecasters. Politicians may have a Monument Complex engineers like build things, and local transportation officials sometimes have the mentality of empire builders in building roads, railways and bridges. The most common psychological explanation is probably “appraisal optimism”. According to this explanation, promoters and forecasters are held to be overly optimistic about the project outcomes in the appraisal phase, when the projects are planned and decided. [coated in Flyvbjerg, 2003].

Political Explanation:

Political explanations construe cost underestimation in terms of interests and power (Flyvbjerg, 1998). According to Flyvbjerg, 2003, one of the key questions for political explanations is whether forecasts are intentionally biased to serve the interests of project promoters in getting projects started. Cost estimation cannot be explained by the errors and seems to best explained by strategic misrepresentation i.e., lying. These questions of lying are notoriously hard to answer. For legal, economic, moral and other reasons, if promoters and forecasters have intentionally fabricated a deceptive cost estimate for a project to get it started, they are unlikely to tell the researchers and others that this is the case.

Economical Explanation:

Economic explanations say that cost underestimation in terms of economic rationality. Flyvbjerg, 2003, in his journal stated that there exist two types of economic explanation. One explains in terms of economic self-interest, the other in terms of public interest. In case of the economic self -interest, during the process of the project it creates the work for the engineers and construction firms, and many stakeholders who are directly or indirectly attached with the project make money. These stakeholders in directly involved in would influence the forecasting process of the project, which in turn influence the outcomes the ways that make it more likely that the project will be built. Stakeholders would likely increase in their revenues and profit by having the cost underestimation and benefits over estimation which would be economically rational for such type of stake holders. In case of the second term public interest, project promoters and forecasters may intensively underestimate cost in order to provide public officials with an incentive to cut costs and thereby to save the public's money. According to this type of explanation, the more cost estimate is the incentive of the wasteful contracts to spend more of the tax payer's money.

Hence the both types of the economic explanation account well for the systematic underestimation of the costs.

Several researchers on the subject of construction cost overruns have come out with significant findings that factors that leads to time overrun (construction delays), will eventually leads to cost overrun. From the above literature it is also found that the size of the construction project is also one of the main reasons which influence the cost overrun. The researchers stated that the main factor leading to delays have been always studied alongside those leading to cost overrun.

2.3 Cost overrun in India

Background

Cost overrun is becoming common in infrastructure projects. Through the various analyses it is found that the time delay and the cost overrun are the main reasons for the poor project performance. Morris and Hough found 63% of 1778 different types of projects funded by the World Bank between 1974 and 1988, experienced significant cost overrun. kamrul Ahsan and Indra Gunawan, (2008), in studies conducted on the time and cost performances in Asian countries had found out only few projects i.e. 13% are completed within time and budgeted cost. In contrast more projects are time delay and cost over run on an average amount of over spending U.S. $73million, i.e. 22% average planned cost. The case study conducted by the Standish group (2004) for IT projects the has found that the average cost overrun was 43%, 71% of projects were over budget, over time and under scope and the total waste was estimated at U.S. $5 billion per year in U.S.A alone. In-accuracy in cost estimates is also one of the main factors for the cost overrun in the construction projects. According Flyvbjerg (2002), the under estimation of costs in construction were almost 9 out 10 projects. For randomly selected projects, the likelihood of actual costs being larger than estimated cost is 86%. The likelihood of the actual costs for the construction projects is being lower than or equal to estimated cost is 14%. The actual cost of the projects on average is 28% higher than the estimated cost. The best example for the above case is Suez Canal was constructed at costs three times of the estimated cost with 1,900 percent (Flyvbjerg et al, 2002). The Kakkad hydro -electric projct could be commissioned in time in 1986 itself, 8 years after its construction started. Accounting for general price inflation during this period , thecapital cost of this project by 1986 would be atmost only rs 39.66 crores, savings as much as Rs. 113.86 crores, almost enough to construct 3 more similar plant, or to add to the system capacity y another 140 MW at the nominal cost of Kakkad project in Kerala (Kannan and pillai 2001).

The ultimate motive in undertaking the project is to make profit. These profits may be measured in different ways and the most familiar profit is money. The goals of the others in making the project may be to make work, to improve living standards, in produce of the products to the others who require it or in scarce, to obtain votes for the political carrier and many others. The ultimate result should be the positive outcome during the construction of the project or in the life of the project.

Every project has to undergo several stages starting from the planning of the project, approval, awarding the project to the actual construction and so on. The project life cycle has been divided into three phases they are development phase, construction phase, and operation and maintenance phase. For every project during the development phase the project authority will approves the time and funds needed for the completion of the project. Then after the approval of the project the construction phase will start with the signing of a contract between the sponsoring department and the contractor. Generally the contractor of the project will be selected through the tender or bidding process. For some projects contractor will be for only procurement process. During the construction phase it is very important for the timely completion of the project, so there should be the active cooperation between the sponsoring authority, the contractor and other departments. The project success i.e. whether the project can be delivered on time and on cost depends on how well all the activities of the projects, departments of the projects and individuals concerned are coordinated. The failures among the contractor activities will cause delays in the project and cost overruns. For the ease of exposition, it is helpful to divide the set of possible causes in the following subgroups (Ram Sing, 2009).

2.3.1. Technical and Natural Factors:

It is a complex problem for the estimation of the time and cost for an infrastructure projects, though the techniques for the estimation have been sophisticated there are many imperfect estimations. The contractors and the authorities of the project will better understand about the materials requirement and the necessary changes in the project as the work on the project starts. For example, during the construction phase of the road project, an unexpectedly poor quality of soil may make the changes in the design and quality of the bitumen, from what was initially planned. Because such changes the project may require extra time as well as funds. But in some cases the sudden changes may turn in favor of the project and the parties may find the excessive funds and time. Similarly natural factors like floods and so on also impact the cost and time and as well as destroy the project assets. The natural factors also make favorable conditions in saving the construction time and cost. However, one would expect the effects of the technical and natural factors to be random without any bias. Also form the above discussions the time delay and cost overrun is expected to come down over the years. Therefore if the decline in the time delay and cost overrun is expected to be statistically significant, we attribute the decline to the technical and natural constraints. Time and cost overrun. Hence, the Design changes, unforeseen geological and weather condition during the construction phase are the major causes of the cost overrun. (Ram Singh, 2009)

2.3.2 The Contractual Failures.

As explained earlier the contractor enters the project mostly through bidding in implementation or construction phase by signing the contract with the sponsoring department. Thus for a project to be successful, mostly depends on the implementation of the activities by contractor and the joint and timely efforts of the sponsoring authority and the contractor(s). The actual initial construction or procurement contract is signed between the employer and the contractor is on a particular date. The contract agreement specifies the activities that are performed and delivery of the goods at the project execution by the contractor. In general, contract known as “complete-contingent-contracts which can ensure that the project is completed on time and within budget. These types of contracts are assumed to give the each and every detail of the activities that are performed by the contractor in each possible case during the construction phase. But in real case scenario, however, this is difficult to explain the every work which unfolds in construction phase during the initial phase of the contract. Moreover it does not explain the complete every relevant aspect of the project activities. The bounded relationship of the parties along with the technological constraints makes the contract very difficult in specifying the every aspect of the project till last detail, this is because of the nature of different states require different modifications in the assets to be built. This happens commonly for the contracts of the infrastructure projects because of its complex nature of the activities. Therefore the procurement contracts of the infrastructure projects will be incomplete nature. The need for the future works arises once when the contractors starts the work. For example, on a railway project it may be necessary to have more of manned-crossings or railway-over-bridges than were planned initially. These unplanned additional works requires more funds and also in some cases it takes more time. Therefore, from the above discussion the contract incompleteness is also a cause of the cost overrun in some cases. This contractual incompleteness increases with the increase in the project size. Bigger the project size the complexity also increases. As the complexity of the project increases it is very difficult to provide the each every detail in the initial contract. However the initial contract should be kept with less incomplete. A proper planning for the technical, materials and the activities aspects of the project can enable the parties involved in the project to make the detail initial contract properly and once the proper detailed initial contract is made the contractor may have the scope to make some allowance for the future works by keeping the initial contract with less incomplete. In contrast, the poor planning may lead to the bad estimation of the time and cost and so will be the initial contract. The process of project planning in India is infamous for its ad-hoc and lackadaisical approach. The detailed project reports and feasibility are prepared for the formality purpose and hence they are sloppy. This leads to the incomplete initial contract for the infrastructure projects. Thus this leads to sever problems for the complex projects, because, a lackadaisical planning will produces only sketchy estimates of time and cost. So, in these cases the initial contracts for the complex projects will inevitably omit many more detailed works of the project, which leads in cost overrun in the construction phase of the project. Neither the contractors nor the officials find these contracts are lack of details. From this the major cause which is leading to cost overrun in India is because of the contractual failures caused by the poor contracting processes and inferior project planning (Ram Singh, 2009). The example for the faulty planning techniques and construction made the cost and time overrun of the project in the Kerala state hydro project in kakkad where the leakage in the tunnel had costs the project extra 15 Lacks to repair the damage.( Kannan and pillai 2001).

2.3.3 Organizational failures:

As discussed from the above literature, for the successful completion of the infrastructure i.e. timely and efficient execution the project should have active participation of the all parties involved in the projects and as well as among various ministries. However, the government sector projects are inherently weak in the desired efforts from the people involved in the projects. There will be conflicts at each and every stage of the project with the individual and the social objectives. The wages and rewards given by the government for the working organization are not as effective from the view point as a motivation. Therefore, the government infrastructure projects have to face many sources of failures within the organization. These projects mostly in need of the several other organizations joint effort. In India different departments are responsible for different projects. For example, project implementation of power lines, water lines, sewer lines and environmental clearances and other such activities are performed by the different departments. Execution of the activities is highly dependent on the timely and joint efforts of the department. However the interdependence of efforts is that it will be easy for one department to pass the blame on others. So the infrastructure projects particularly India is vulnerable to these inter-organizational failures. In the project implementation stage as explained earlier several departments were involved in performing there concerned role. After all, the activities like land acquisition, shifting of utilities, etc., are performed by the state government. This says that if the project is span across more than one state, the project has deal with particular department in each state. Therefore the project which is spanning more than one state will have more chances to inter-organizational failures. If these projects are statistically causes the delay in time and cost overrun, then the project which are spanning across multiple states should experience the cost overrun and time delay. Most construction projects in government sector are Roads, Rail ways and urban development sector. The projects should need permission from the central and state government for the environmental clearance. When compared other sectors, these projects require more active cooperation of the several departments such as land acquisition, shifting of power lines, water lines, sewer lines etc. Hence the projects in these sectors are having more chances of the organizational failure. Thus projects in road, rail ways and urban development sectors will exhibits more time delays and cost overrun (Ram Singh, 2009). Kannan and Pillai 2001, in their studies on the cost and time overrun in Kerala Projects suggested that main cause of the cost overrun is due to the human resource management and labours strike.

According to the Auti, et,al. (2008), there has been several changes which should be made to the quality and standards, personal interests, low transparency and corruption . This also suggests that changes should be made in government policy and the way public sector projects are carried out.

2.3.4 Economic Factors:

In India the projects are located in some states and the economy of the state also impacts the cost overrun of the projects. That is the states having the good transportation facilities, power and telecommunication infrastructure to easily execute the project. This shows that project with more economic factors like good infrastructure will face less cost overrun and time delays and vice versa. The income level of the state will also affect the project cost and time (Ram Singh, 2009).

2.3.5 Inflation:

The inflation is defined as the rate of increase in the price level of the materials than they are in an economy (Adamson, 1996). Thus because of the inflation the materials cost will be increased than they during the initial contract, thus increases the estimated cost of the project. The affect inflation may cause the loss in profit to the contractor and project overrun cost to the project sponsor by the nature of process and the return of the work undertaken during the construction process. For example the kakkad(Kerala, India), hydro electric plant which has the time overrun 13 years as in 1999, when it was finally commissioned, the cost escalation of this project was 725 percent over the above estimates i.e. 8 times more than the actual cost the author says the cost escalation of this project is because of the price inflation(Kannan and pillai 2001 ).

2.3.6 Quality of the materials

The low quality materials cause higher construction costs than expected because of lack of standards in the materials. This results in the loss of materials and poor management system (Thungphanich, 1997).

2.3.7. Shortage in materials

Shortages in basic materials like sand, cement, stones, iron and brick causes major delay in the construction. The non availability of the machinery at the right of the construction process is also major cause for the delay in the construction.

The following table shows that the various sectors which went the time overrun and cost overrun in India. These are the delays and the cost overrun during the years April 1992- September 208

S. No.

2

SECTORS

3

Total no. of projects completed

4

% of projects with Time overrun

5

% Time overrun (as % of implementation phase)

6

% of projects with Cost overrun

7

Cost overrun as a %age of initial cost of all projects

8

% Projects with cost but not time overrun

1

Atomic Energy

11

90.91

84

27.27

84

09

2

Civil Aviation

43

90.70

60

41.86

-01

00

3

Coal

92

60.87

28

22.83

-17

03

4

Finance

1

100.00

303

100.00

133

00

5

Fertilizers

16

62.50

25

25.00

00

13

6

I & B

7

100.00

190

42.86

09

00

7

Mines

5

80.00

45

0.00

-26

00

8

Steel

41

80.49

51

19.51

49

05

9

Petrochemicals

3

100.00

74

33.33

14

00

10

Petroleum

119

78.99

33

20.17

-11

03

11

Power

101

62.38

41

47.52

26

05

12

Health and Family Welfare

2

100.00

228

100.00

265

00

13

Railways

120

98.33

83

83.33

84

00

14

Road & Transport

147

86.39

47

53.74

08

05

15

Shipping and ports

60

95.00

78

30.00

01

02

16

Telecommunication

60

90.00

109

16.67

-55

00

17

Urban Development

22

100.00

54

40.91

99

00

Total/Overall projects

850

82.35

56

41.06

21

03

Source: Ram Singh, 2009.

2.4. Measures for the cost overrun

2.4.1. Cost Estimates:

For any project the most important aspect in order to meet the funds of the project is the cost estimation. Small misleading in the cost estimation will lead to the project cost overrun or under run.

Kerzer (2006) have explained about the factors which are affecting the process of the estimation and which results in the faulty estimation for the construction. The factors such as Misinterpretation of statement of the works, Omission or improperly defined scope, poorly defined or overly optimistic schedule, inaccurate work break down structure, applying improper skill levels to tasks, failure to account of risks, failure to understand or account for cost escalation and inflation, failure to use correct estimating technique. The important aspect to be considered is that many of the above factors which are affecting the cost estimation of the construction cannot be found until and unless the cost control system is implemented within the project.

Kerzer (2006) also explained various types of measures in estimating and their accuracy in the cost overrun, they are as follows.

(1) Order -of-magnitude estimates: There is no necessary of any engineering data for these types of estimates. Hence they are prepared without any engineering data and mostly they are based on the past experience. The accuracy of this estimate is + 35%.

(2) Approximate estimates: These are prepared without the detailed engineering data and these estimates are mostly based on the similar type of the project having similar scope and capacity. The degree of accuracy of this estimate is + 15%.

(3) Definitive estimates: These are based on the detailed engineering data, the degree of accuracy for these estimates is +5%.

2.4.2 Cost control measure:

According to Ashworth (2004), the cost control of any construction project should start at the inception stage of the project and should not be finished until the project has been hand over to the client. Even there is no need for the cost control if the final cost is still likely to be agreed, the cost control should be performed throughout the life of the building. In order to make the cost control more effective regular cost control meetings should be held to discuss the regular budget updates and then discussing the areas of improvement if needed.

The key tool for the project managers and project team involved in the projects is to execute the whole process of the project with the procedures of the project control and documentation during the whole process of the project (Hendrickson, 2000). Project control team serves the basis for the identification of slippage of the project plan rather than suggesting and finding areas of the savings.

Cost control process can be implemented within the projects by using the preliminary data such as construction plan and associated cash flow estimates as a baseline reference for the subsequent project monitoring and controlling. The final or detailed estimate provides reference for the assessment of financial performance during the project. To extent that costs are within the detailed cost estimates, then the project is thought to be under financial control. Overrun in particular cost categories signal the possibility of problems and give an indication of exactly what problems are being encountered. (Hendrickson, 2000).

According to Griffith and Watson (2004), cost control is a management function and for the construction managers to perform this task efficiently and effectively they require timely, high-quality information to be encapsulated within decision making process.

Griffith and Watson , (2004) have suggested to use the concept of ‘Plan, Do, Check and Act (PDCA) control cycle' by this cycle we can establish the project objectives and determine the various for reaching the goals (Plan), implementing the plans (Do), checking the effects of the implementation (check), after this taking the corrective action (ACT). Thus this plan can be implemented for the cost control or overall control of the project. According to the PDCA, plan involves production of control programs, allocation of project budget, cash flow analysis and planning of the quality assurance system. The above planning is made as per the confirmation of efficient and effective utilization of the 5 M's such as materials, manpower, machinery, money and management. The Do phase of the cycle involves deployment of plan with the engagement of 5 M's. The next step in the cycle will be ‘Check' it involves continuous monitoring the planned activities and determine the extent of relative variance and appropriate cost centers, after this phase the next step will be Act which involves preparation of contingency plans with incorporation of appropriate considerations of 5 M's employing the corrective action which is passed from the check stage.The cycle suggested here is continuous cycle and it may implemented at all stages of the project right from the inception to completion stage of the project, which will bring continuous improvement for the project delivery within the confinement of time, cost and quality.

2.4.3. Cost Management

Cost Management is the process required to ensure that the project is completed within the given budget that is the project cost management starts with the client's objectives and ends when the objectives have been met. Cost Management is done in order to ensure the best value in construction with the wisest use of the resources in the project. The project manager should estimate project at all stages that is from preliminary sketches, up through construction documents to get the estimated margins of the project and accordingly should make the plan for allocating of resources in order to ensure that the project is within the budget and should make cost control at necessary places. For many projects in order to achieve maximum benefits in terms of cost and time the projects are driven by some special types of systems such as management cost and control systems. Project cost control provides management with cost related information for making decision with a view to complete the project with specified quality, on time and within budget costs (Bill, et al,2006).

2.4.4. Essentials of Cost Management

The most Challenge task in any construction project for the design team, contractors, sub contractors, construction managers and consultant is the managing of project cost accurately and responsively. The experiences and researches had shown that the project should start at the right time to finish in the right time. The essentials of the cost management for the construction projects comprises of the following three steps.

  1. Accurately define scope, user expectations, and budget from outset.
  2. Assure that scope, user expectation, and budget are all in alignment.
  3. Maintain a balance and alignment over the time through the completion of time.

The maximum problems in the alignment are caused by disconnect of the scope, budget and expectations. This alignment problem usually results from ineffective planning, incomplete planning, shortage or inconsistence in the material requirements. To solve this problem solution for the planning and programming should be required for the project.

2.4.5. Cost Management Considerations

Effective cost management for the construction project is dependent on the following a consistent methodology, utilizing appropriate standards, concentrating effort for maximum effectiveness and utilizing all the tools available. Key considerations are as summarised in more detail as follows. (Michael D.Dell'lsola)

Utilize Standard Format

In order to communicate the information from project phase to phase and project to project it is essential to have Standard format. The most common format, Master Format, is based on trades/crafts and materials and works well for perspective specification. Uniformat, is another standard format that was originally developed in the 1970s and was updated in the last few years is an elemental or systems based format that responds better to the issues of design phase cost management. The use of Uniformat as a primary format is strongly encouraged (Michael D. Dell'lsola).

Focus on cost drivers:

For any project it is very critical to concentrate attention on the true cost drives, that is increase in quality or performance will always accompanied in increase in cost. In order to avoid unnecessary costs in the construction the cost management should have to focus more like using Pareto's principle of cost distribution (Michael D. Dell'lsola).

Emphasize planning, Programming and early design

Cost management of the project should concentrate on the planning, programming of the project and the early design decision process where the changes are made without any major disruption to the project. When the problem surface during the design process, at that time the cost management should recognise that the project should require re-planning and re- programming, not just re-design (Michael D. Dell'lsola).

Attention to the relationship between Quality and Cost

There is no linear relationship between the cost and quality. If the relationship were linear the decision making would be simpler because increase or decrease in quality would be followed by comparable increase or decrease in cost. The fact in many building projects is where the modest increase in the quality of the building systems will result in substantial increase in cost. High quality or high cost items are extremely sensitive and extra attention is needed (Michael D. Dell'lsola).

Consider life cycle costs

Future cost implication on the project should be considered because spending more initially might result in beneficial payback over the life of the project. Likewise, the unnecessary investment in quality or performance may have an extremely poor payback. There is a probably best life cycle choice for any system (Michael D. Dell'lsola).

Identifying and managing risk and contingence

Every project decision contains risk; but from the cost perspective some decisions are much riskier than other are. So the decision making should need more focus and attention either in terms of contingency planning and identifying the alternate approaches that help to mitigate the risk (Michael D. Dell'lsola).

Use historical cost information wisely

The one of the most important factor in cost management is collection of the historical data wisely. The various methods of getting the information of historical cost include experience from the previous projects, published cost data, information from the organisations. This historical cost data should be used with caution. The cost information has been changing in early cost estimates has largely based on the historical cost while later estimates may be priced in detail from a complete quantity survey. Regardless from historical cost or quantity survey, great care should be taken that the sources are reliable and the “comparables” are in fact comparable. It should be considered clearly that technical basis, market conditions, time frame and exclusion/inclusions associated with historical cost information. A factor as seemingly “method of measurement” can be the main source of dramatic error if it is not interpreted in constant manner. The experience shows that the data collected for the cost estimates from the historical data and solely depending on this data for budget may lead to severe problems and there is no rational excuse for not maintaining accurate historical data on “in- house” project (Michael D. Dell'lsola).

Utilize effective cost estimating

There is no substitute for sound cost estimating, whether provided from internal sources, outside consultants or constructors. Furthermore, the accuracy of any estimate is only as good as the information on which it is based and the validity of assumption that is invariable must be made from those estimates, especially for early stage of estimate. To improve the accuracy and validity of estimates these steps should follow.

(1) Clearly document the estimate; (2) promote a clear understand among all parties of anticipated level of detail and format; (3) assure buy-in by all parties involved in the estimates; (4) properly evaluate the market factors, contingencies and major risks and (5)   allow adequate time to prepare the accurate estimate.

2.4.6. Methods for the optimizing the cost overrun

A truly successful project is one that has been implemented in accordance with its budget and time, schedule, and which significantly contributes to the fulfilment of its agreed objectives [3]. The success and failure of the project will be determined on the delivery of the products and the services on time and in budget. Since the cost overruns are of great magnitude in several projects, the projects are in need of some methods in optimization of the cost overrun.

Some methods for optimizing cost overrun which were used in construction sectors are:

  • Factor Analysis
  • Fuzzy Model Analysis
  • Measure Miles Analysis
  • S-Curve Management
  • Simulations

2.4.7. RISK MANAGEMENT:

‘‘Every project plans including estimates are ‘'living document'' and are therefore subject to change. Changes are needed in order to prevent or rectify unfortunate situations. These unfortunate situations can be called as project risk''. (Kerzener 2006)

Risk management is the important factor throughout the life cycle of the project which is to be implemented for successful project management. Above listed cost overrun factors are mitigated by implementing proper risk management process within the project to avoid the cost overrun. Risk management involves six steps in the risk management process such as 1) Identification of risk 2) Quantifying the risk 3) Prioritizing risk 4) Developing strategy for managing risk 5) Project sponsor/Executive review and 6) Taking Action.

By conducting the risk analysis makes the project to determine the most likely cost for the total project and this will also compute the contingency needed for the project with different measures of protection against cost overruns. By conducting this risk analysis the project manager will become aware of most risky elements in the projects which lead to better risk management strategies. But in most construction projects as a result of improper assessment of risks and uncertainties, the building contracts did not meet the set cost targets of the project

3. Research Methodology
3.1 Introduction to Research Methodology:

This chapter introduces an overview of basic research, research processes and research methodologies. The literature review will provide the base information and describe the research methodology; which will be approached during the dissertation. Furthermore, the discussion in a study that is being reported, the focus of review is on hypotheses that may serve as leads for further investigation in order to change to a new system.

3.2. Definition of Research

Research is a human activity based on intellectual investigation and aimed at discovering, interpreting, and revising human knowledge on different aspects of the world. Research can use the scientific method, but need not do so. It employs well designed method to collect the data and analyses the result. It disseminates the findings to contribute to generalize able knowledge.

3.3. PURPOSE OF RESEARCH:

  • Exploring, describing, predicting, explaining, or evaluating new phenomenon
  • Re-produce results from previous studies
  • Explore and analyze more general issues.
  • Quantitatively synthesizing a body of research
  • Construct or create new procedures or systems.
  • Strengthening a theory, verifying predictions
  • Investigate existing situations or problems.
  • Generate new knowledge.

3.4. Research Methods used by the scholars:

There are a number of available kinds of research as follows:

3.4.1 Action Research:

1. AR is an approach to research that aims both at taking action and creating knowledge or theory about that action.

2. Action research (AR) is a generic term, which covers many forms of action-oriented research, and indicates diversity in theory and practice among action researchers, so providing a wide choice for potential action researchers as to what might be appropriate for their research question.

3.The four characteristics of the Action research are

  • AR focuses on research in action, rather than research about action
  • AR is participative
  • AR is research concurrent with action
  • AR is both a sequence of events and an approach to problem solving
  • AR works through a cyclical four-step process of consciously and deliberately: planning, taking action and evaluating the action, leading to further planning and so on.

3.4.2. Case Research Method:

Case research has consistently been one of the most powerful research methods in operations management, particularly in the development of new theory.
Case research, that is research based on analysis of a limited number of cases to which, at best, only limited statistical analysis can be applied, is widely used in Europe but is less common in North American operations management (Drejer et al., 1998)
There are several challenges in conducting case research: it is time consuming, it needs skilled interviewers, and care is needed in drawing generalsable conclusions from a limited set of cases and in ensuring rigorous research.
Unconstrained by the rigid limits of questionnaires and models, it can lead to new and creative insights, development of new theory, and have high validity with practitioners - the ultimate user of research.

Many concepts and theories in Operation management, from lean production to manufacturing strategy, have been developed through field case research

3.5. Similarity between Case research and Case Study approach:

Case research in operation management is based on analysis of a limited number of cases to which, at best, only limited statistical analysis can be applied. Case research has consistently been one of the most powerful research methods in operations management, particularly in the development of new theory. Unconstrained by the rigid limits of questionnaires and models, it can lead to new and creative insights, development of new theory, and have high validity with practitioners, the ultimate user of research. Many concepts and theories in Operation management, from lean production to manufacturing strategy, have been developed through field case research. Case research enriches not only theory, but also the researchers themselves.

Case study approach helps in highlighting only one case in which it identifies and analyses issues concerned with the case, responsibilities, relationships and stages of development. There will be no scope of development of the new theory as in the case of Case Research. Case study approach is a method in which the situation has been occurred in the past and learning from its mistakes and drawing to a conclusion.

3.6. Two types of Data Analysis

a) Qualitative Methodology, b) Quantitative Methodology

a) Qualitative analysis: The aim of qualitative analysis is a complete, detailed description. No attempt is made to assign frequencies to the linguistic features which are identified in the data, and rare phenomena receives (or should receive) the same amount of attention as more frequent phenomena. Qualitative analysis allows for fine distinctions to be drawn because it is not necessary to shoehorn the data into a finite number of classifications. Ambiguities, which are inherent in human language, can be recognised in the analysis.

The main disadvantage of qualitative approaches to corpus analysis is that their findings can not be extended to wider populations with the same degree of certainty that quantitative analyses can. This is because the findings of the research are not tested to discover whether they are statistically significant or due to chance.

b) Quantitative analysis: Statistically reliable and generalisable results. In quantitative research the features are classified and counted, and even construct more complex statistical models in an attempt to explain what is observed. Findings can be generalised to a larger population, and direct comparisons can be made between two corpora, so long as valid sampling and significance techniques have been used. Thus, quantitative analysis allows discovering which phenomena are likely to be genuine reflections of the behaviour of a language or variety, and which are merely chance occurrences. The more basic task of just looking at a single language variety allows one to get a precise picture of the frequency and rarity of particular phenomena, and thus their relative normality or abnormality.

However, the picture of the data which emerges from quantitative analysis is less rich than that obtained from qualitative analysis. Quantitative analysis is therefore an idealization of the data in some cases. To ensure that certain statistical tests provide reliable results, it is essential that minimum frequencies are obtained - meaning that categories may have to be collapsed into one another resulting in a loss of data richness.

Both qualitative and quantitative analyses recently moved in social science towards multi-method approaches which tend to reject the narrow analytical paradigms in favour of the breadth of information which the use of more than one method may provide. In any case, as Schmied (1993) notes, a stage of qualitative research is often a precursor for quantitative analysis, since before linguistic phenomena can be classified and counted, the categories for classification must first be identified.

3.7. Main Types of Qualitative Research

Case Study: Attempts to shed light on a phenomenon by studying in depth a single case example of the phenomena. The case can be an individual person, an event, a group, or an institution

Grounded Theory: Theory is developed inductively from a corpus of data acquired by a participant-observer

Phenomenology: Describes the structures of experience as they present themselves to consciousness, without recourse to theory, deduction, or assumptions from other disciplines

Ethnography: Focuses on the sociology of meaning through close field observation of socio cultural phenomena. Typically, the ethnographer focuses on a community

Historical: Systematic collection and objective evaluation of data related to past occurrences in order to test hypotheses concerning causes, effects, or trends of these events that may help to explain present events and anticipate future events. (Gay, 1996)

3.8. Comparison between the Interview technique and questionnaire survey

The comparison between the interview technique with the questionnaire survey with its limitations and advantages are as follows:

3.8.1Interview Techniques:

  • For interviews only a small number of subjects is required
  • Selected sampling is used for interviews when the target is for specific groups of subjects
  • Interviews can provide more in-depth qualitative data than responses from questionnaire surveys. Time constraints, for only limited people to interview. There may also be the problem of subjectivity or bias when dealing with respondents face-to-face. Analysis may also be a problem as you cannot produce quantitative data from such a limited number of respondents.

3.8.2. Questionnaire surveys:

  • A larger number will be required for questionnaire surveys especially where the results are based on statistical testing
  • For a questionnaire survey try to obtain as many subjects as possible since only a small percentage will return the query
  • Questionnaire surveys are used to obtain data which may be of a qualitative nature but also provides quantification of results and the application of an empirical method - they provide the evidence to test the theory. Questions may be either open (allowing respondents to freely give their comments) or closed (limiting responses to specific criteria selected by the researcher)

Advantages of questionnaires

  1. This method is cheaper than an interview or other methods of research
  2. They do not require as much effort compared to verbal or telephone surveys or interviews, and often have standardised answers that make it simple to compile data.
  3. This method is familiar to most people
  4. Can reduce bias by a uniformed question presentation, not get influenced by the researcher's opinion, there are no verbal or visual clues to influence the individual.
  5. It is less intrusive than other methods
  6. Respondents can take their own time
  7. Usually anonymous and confidential
  8. Large amounts of data can be gathered

Disadvantages of questionnaires

  1. This method may have a low response rate
  2. The individual may not have the ability to answer the questions, may not understand the questions or the language it is written in, may not be able to read, may be illiterate or disabled.
  3. Questions may not reflect the respondents actual concerns

3.9.Research Methodology used for the Proposed Dissertation:

Present dissertation is based on the concept of questionnaire and Case Study method in analysing the causes of the cost overrun in construction Projects. Case study approach helps in highlighting only one case in which it identifies and analyses issues concerned with the case, responsibilities, relationships and stages of development. There will be no scope of development of the new theory as in the case of Case Research. Case study approach is a method in which the situation has been occurred in the past and learning from its mistakes and drawing to a conclusion. A questionnaire was prepared with 18 questions which will be identified as the causes and measures which affects the cost of the project. Present questionnaire has been sent to 10 different construction companies' staff (Architects, Engineers, Surveyors and proffessors) to grasp the knowledge from their experience. The present questionnaire is made with kind of questions to obtain what are the factors that are effecting the cost of the project with the background of Indian construction industry.

Chapter 4

Covering letter

I am currently undertaking M. Sc. in Project Management in construction in the University of Salford. The aim of my dissertation is to identify and explore the various causes of cost overrun in construction projects in India. Cost overrun is the common problem in construction industries in many parts of the world. They are the critical issues and concern the all parties involved in construction projects. The main objectives of this study is the

  • Identifying the main causes of the cost overrun in the construction projects through literature review.
  • To identify the various measures of cost overrun in construction projects.
  • To examine the affects of the cost overrun by analysing the case of a construction industry.

The result of this study may be beneficial to enhance the profitability of the construction projects. The summary of the survey results may give the valuable information about the problems causing the cost overrun of the project and where to invest to make the project free from the cost overrun problems.

4.1.Survey questions:

1. Is the size and value of the project being large leads to the cost overrun(Ram Sing 2009, Kaming et al, 1997)

  • Yes
  • No

Answer: 65% of the respondents have agreed that the value and size of the project leads to the cost overrun and rest other think it's not the factor leading to cost overrun. It has been found that in some large projects are complex than smaller projects. As complexity of the project increases there exist problems like difficult in providing detailed initial contracts and also there is lot of chances of materials missing out. Thus these kinds of problems will lead to excessive cost overrun during construction. It also explained that contractual incompleteness increases with the increase in project size.

2. Rank the following from 1 to 4 ( 1 being most critical factor) critical factors that lead to cost overrun

  • Contract variations
  • Disputes
  • Soil and site conditions
  • Delays
  • Any other critical factor please specify--------------

Answer

45% of the people thinks' delays as most critical factor. 27% says soil and site conditions as critical factor.15% says contract variations as less critical. Remaining says disputes as no impact on cost overrun. The other critical factors specified by some experts are Market fluctuation, rehabilitation and compensation, raw materials availability, lack of proper project managers, inexperienced engineers.

3. What are the main factors that cause delay in the construction of the project in your company

  • site management and supervision
  • poor, unforeseen ground condition
  • low speed of decision making involving all project teams
  • client initiated variations

Answer:

Study indicates that delays along with cost overruns are too frequent and too large. They are inflicting huge but largely unnecessary cost on the economy. If there are delays in the project, all the inputs will be more expensive and automatically causes an increase in the project cost.42% of the people thinks' the low speed of the decision making involving all project teams as the cause of delay.27% of the experts feels that client initiated variations are the main cause for the delay in the construction of the projects.23% of the people feel that site management and supervision as the main factor that cause delay in the construction projects. Remaining people thought poor, unforeseen ground conditions as the main factor.

4. In your organization the actual to date cost information gets updated frequently (Please click more than one option if applicable)

  • No, we don't update regularly
  • Yes, we update regularly
  • Yes, we update weekly
  • Yes, we update monthly
  • Others please specify ----------------

Answer

The cost information reports are the reliable documents as they are required by the project team to illustrate all the happenings on the construction site and also include any change orders. These reports help in indicating the work progress in comparison with the bills of quantities.65% of respondents say that in their organization the cost information gets update regularly.15% says yes, that the cost information gets updated weekly and15% says yes they update cost information monthly. Remaining says no, we don't update regularly

5. Rate the following items which cause frequent reworks and made cost overrun

  • Change drawings and specifications
  • Failed quality Specifications
  • Damaged after work was completed
  • Others please specify---------------

Answer:

The study says that non-conformance costs are high for certain failure events. The problems related with change drawings and specifications, failed quality, damaged after work was completed incurred high additional costs. It is expected that a failure event for an activity which lies on a critical path and that requires expensive reworking will increase the cost of failure higher than a non critical activity. The effect of frequent reworks n construction activities can therefore be related to delays and cost overrun.39% says the change drawings and specifications in response to the client specifications are primary reason for the frequent reworks and made cost overrun. 36% says failed quality specification is the main reason for the frequent reworks. Remaining says damages after the work were completed as the main cause for the frequent reworks.

6. What extent does the cost overrun due to inaccurate estimating of the cost plays (N R Mansfield et al, 1994)

  • Inaccurate estimate was the only reason
  • Inaccurate estimate was the biggest reason
  • Inaccurate estimate was one out of several reason
  • No effect due inaccurate estimation

Answer

Majority of the project cost are based on the initial estimation, the improper estimation of the initial project cost may lead to the insufficient funds and may lead to the various factors that lead the cost overrun.72% says inaccurate estimate was one out of several reasons. Remaining 28% of people says that inaccurate estimate was the biggest reason.

7. What extent does the conflicts between the all parties of the project such contractor, sub contractor and sponsor/owner effects the project (Iyer and Jha, 2005)

  • Conflicts is the only reason
  • Conflicts plays a major role
  • Conflicts was one out of several reasons
  • No effect due to conflicts

Answer

62% of people agree that the conflicts play a major role. 35% says conflict was one out of several reasons. Remaining people say no effect due to conflict.

8. What are the types of factors which affects the process of the


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