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Caused Of Employer Related Cost Overrun Construction Essay

Paper Type: Free Essay Subject: Construction
Wordcount: 3936 words Published: 1st Jan 2015

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Project Management Institute, project management is defined as application of knowledge, skills, tools and techniques to project activities to meet project requirements. Project management is needed to control on cost performance of project to avoid cost overrun.

A construction project is hard to achieve their target within the budget and time. Most of the construction projects were delay and over budget because of such factors as project complexity, environment, economic, material, project parties and statutory regulations.

“For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?” Luke, 14: 28; quoted by L. Cost of a project is hard to predict and manage. Cost overrun is a very common problem facing by construction industry. Cost always related between the contract amount and the actual cost. Contract amount is agreed by the employer and the contractor during signing contract stage. Actual cost is the final cost of a completed construction project.

Cost overrun is defined as the amount of the actual cost exceeds the initial contract amount. [Wideman, 2002]. Cost overrun is also defined as the change in contract amount divided by original contract amount. [Jackson, 1990]. Cost overrun occurs when the difference between the final cost and the original cost of a completed project.

2.2.2 High-rise residential building

A high- rise building is a tall building used as residential or office. A high- riise building normally has a minimum of 12 floors. And architectural height is in the range between 35 to 100 meters. House is basic requirement for all, the increase in house demand due to the increased in population. The demand of house is increasing but with the limited of land for development landed residential in major city areas in Malaysia such as Kuala Lumpur, Penang and Johor Bahru, has resulted the increase in development of high-rise residential building.

2.3 cause of cost overrun

In a construction project, cost overruns have internal and external factors. Internal factors of cost overruns are cause by employer, contractors and consultant. External causes of cost overrun include causes that come from the weather, labors, inflation and etc.

Kasimu, M. A (1997) studied the factors that causes cost overruns in building construction project in Nigeria. The causes of cost overrun come from project participants and external factors. Project participants were employer, contractor and consultant. Client’s factors include cash flow problem and variation order while contractor’s factors were planning problem and site material problem. External factors of cost overrun include Acts of God, government, political and disputes. Kaming, et al, (1997), studied the factors influencing construction time and cost overruns for high- rise project in Indonesia. The major causes of cost overrun were fluctuation of material cost, inaccurate in obtaining construction materials and complexity of project.

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According to User’s Guide, (2005), changes in design, site condition, inflation, exchanges rates change, mistake of contractor and poor management were the causes that affect the cost change of the construction project.A. E. Barinov, (2007) studied factors affecting cost overrun in the world economy’s large invest projects. For all types of large projects, the following causes can be affecting the construction cost were legal risk, management, environment requirement and changes in price.

According to a study made in Turkey by Arditi, et al, (1985), the major sources for cost overrun were change in material price, construction delays, poor material estimates, soil condition and inaccurate cost estimates. According to the research of Jahren, et al, (1990), found the factors affect the cost overrun were size of the project, type of delivery method, quality of contract documents and level of competition. Large projects become more complex than what was planned.

Steward. (1982), pointed out the uncontrollable or unmanageable factors influence the cost. They include government control, labour availability, design changes and accuracy of cost estimates. According to Robert F. Cox, (2007), five causes identified by project owner for cost overrun were, poor planning, orders change, drawing mistake and communication.

Mansfield, Uhwu and Doran, (1994), in developing countries, the proper phasing of construction projects is important to avoid the economy become “overheated”. The demand will exceed the supply and cause the fluctuation of cost of construction materials and leads to shortage of construction materials. This will gives additional costs to a project.

2.4 Cost overrun responsibilities

Ahmed et. Al (2003) found out four group factors that influence the cost and related to whether contractor is responsible for additional cost and time to complete the project.

2.4.1 Employer responsible

The factors were lack of working experience, lack of communication with contractors, variation order. For example, employer change design during construction period influence contractor can’t complete the project within the time and budget due to additional works and demolish is need. Additional time (extension of time) will be claim by contractor and additional cost (loss and expense) will be responsible by employer.

2.4.2 Contractor responsible

The factors were construction mistake, lack of experience workers and poor site management. All problem that happening at construction site are responsible by contractor. No additional cost can be claim and responsible by contractor, no extra time will be given and penalties against contractor.

2.4.3 Consultant responsible

The factors were slowness in making decisions and supervision, incomplete document, and lack of experience. Contractor can’t start his work without instruction of Consultant. For example, with incomplete document, contractors have to stop his works and waiting approval or instruction of consultant. Additional time (extension of time) and additional cost (loss and expense) will be given to contractor but no penalties charged to contractor.

2.4.4 Act of God

The factors were poor site, weather, and economic conditions. Weather and economic are uncontrollable and can’t be predict. No parties are taking responsible for it. Only extension of time given to contractor but no additional cost and penalties charged to contractor.

2.5 Factors of cost overrun

There are many factors influence construction cost. There are categories into two kinds of factors for cost overrun in the construction project which are internal factors and external factors. Internal factors that cause a project cost overrun are related to employer, contractor and consultant. Other factors such as government, political, Act of God and economic were external factors (Ahmed et al., 2003).

2.5.1 Internal factor Caused of employer related cost overrun Variation orders

According to Odeh and Battaineh (2002) stated that the factor of variation orders caused the project cost overrun. Variation orders are very common in all types of construction project. Employer always change the design during construction phase, at the same time is the increase on construction cost. A variation order is a major cause to time and cost overrun. [Jahren and Ashe, 1990]. It is because contractor can’t continue his work until the latest Architect Instructions issue by architect. Contractor can’t done his work on time. When a project is almost complete but the employer change some parts of design and instruct contractor do the additional work. Rework and demolition are effects of changes in construction which cause additional cost. Lack of knowledge

Koushki, et al. (2005) found that most of employers are lack of knowledge in construction project which high influence to the causes of overrun. Fresh employer hard to solve the problem immediately because lack of knowledge in the construction which is strange to him. Some of work could not progress due to employer slowness in making decisions. Mistake always happen because of no experience, rework is need. Finally, it causes the cost over budgeted. Financial problem

According to Arditi et al, (1985), the lack of finance to complete a project or delays on payments by employer can causes a serious problem. Employer is not preparing sufficient cost for project. This financial problem cause reducing productivity, increase absenteeism and affecting employer profitability. If the costs of a project exceed the original cost, construction works have to delay until additional cost can be pay. Contractor may claim for interest rates if delays on payment. The contractor may even stop work if problem on cash flow. Employer Interference

According to Long, et al. (2004), employer interference lead to causes of cost overrun in construction project. Some of the employer instruct contractor to carry out additional work without architect instruction or approval. After the contractor complete the work but found that was a problem and reworks and demolitions are needs. Contractor can claim for the additional costs for Loss and Expense for the reworks and demolitions. Finally it will affect the whole project cost overrun. Caused of contractor related cost overrun Poor site supervision and management

According to Long et al, (2008), poor site supervision and management cause problem of cost overrun in construction projects. Poor site management reflected the inability and weakness of contractors. A contractor should have ability to control the site worker so the project can run smoothly. Some of the contractor did not cooperation with their site staff due to lack of communicated. A lot of problem could be arising due to communication problem between contractor site staff or employer. Contractor and site staff should solve the problems by discussing with each other. Finally, additional works are required and the project influence cost overrun. Lack of experience

According to Chan and Park (2005), contractors are lack of experience was cause of cost overrun in construction project. Contractors are selected based on their experience, price and their reputation in producing a high standard work within on time and within budget. Most of the contractors are lack of experience on financial management. Some of the contractors are bankrupt during construction period because the distribution of cost did not plan well. Additional costs are need for the employer to the new contractor for the remaining work. Inaccurate cost estimate

Long, et al. (2004). Costs estimates are important to avoid cost overrun occur in construction project. Cost estimate errors can serious problem to the cash flow. Inaccurate of cost estimate include inaccurate measurement from architect drawing, incorrect material price and mistake in arithmetic. Due to error in cost estimate, the original cost estimate will be exceeded and insufficient fund for the some work and influence delay. Even though the cost had been claimed, but re- measurement works are require and additional cost is need. The effect of inaccurate cost estimate can cause loss of profit to employer and cost overrun to project. Financial management

According to Ogulana, et al (1996), mentioned that the financial problem of contractor as a contributors to causes of cost overrun. Poor financial management always affect the project can’t complete within budget and time. Contractor always can’t estimate their cost properly because of lack of experience. This may cause insufficient cost to continue the construction work which no material can be used. The contractor likes to delay payment to sub- contractor due to sub- contractor did not complete their work on time. At the same time, sub- contractor deny to work and influence delay. Finally, delay will cause the construction project cost overrun. Caused of consultant related cost overrun Poor or mistake in design

According to Ogunlana, et, al. (1996) stated that the poor design could lead to cost overrun. It is important to have a good designer, mistake in design usually caused by low ability designer. Design is very important to a project, a project will cause cost overrun without a good design. The error in design which fond during the construction period and could cause cost overrun. It is because the whole construction works needed to demolish and rebuild. Inexperienced consultant

According to Long, et al. (2004) mentioned that lack of consultant experience lead to a project cost overrun. Experience of consultant is important to producing a high quality project within the budget and on time. Inexperience consultant will causes to improper management, poor administration and design. For example, some architect will facing a lot of problem during design stage due to lack of experience. It will cause a poor design drawing and delay on drawing issue. Finally, the demolition and rebuild works need to carry out or the works can’t process on time and it will influence the project cost overrun. Poor project management

According to User’s Guide, (2005), poor project management as contributors to cause of cost overrun in construction project. Project management team play an important role in a project. Poor management were lack of planning, poor communication, lack of control and poor problem solving. Poor cost estimating and time scheduling will cause contractor delay of work progress and error on construction works. Extension of time could be claim by contractor and additional cost for the demolition and rebuild works. Incomplete document

According to Ogunlana, et al. (1996) mentioned that the factors of incomplete document as contributors to causes of cost overrun in a construction project. The contractors have to stop the works if error or undetailed in drawing was found. Contractors can start the work only the correct drawing and architect instructions was gave by architect. Finally, measurement work is need and demolition could be carrying out. Consultant will cost money to fix the problem and affect the project cost overrun. Caused of manpower related cost overrun Shortage of skill worker

According to Chan and Kumaraswamy (1996) studied the shortage of skill worker is the main factor that cause the construction project cost overrun. Skill worker is worker who has special skill and ability on specific job such as painter, carpenter, plasterer and etc. Recently, fewer amounts of skill worker but high demand on it and caused work need to slow down. Instead of finding high salary skill worker, employer more interest to hiring foreign workers. Foreign worker is worker who is unskilled and no experience on construction. Those foreign workers could do a lot of mistake and error during construction stage. Finally, additional cost is need to fix those mistake and affect the project cost overrun. Productivity of worker

According to Ogunlana, et al. (1996) mentioned the productivity of workers cause a construction project cost overrun. Productivity of labour depends on age, skill, experience, attitude and motivation of workforce. High experience and skillful workers always lead to high performance of work at site. Other than that, attitude of a worker will affect the productivity because work could not finish due to lazy workers and worker may simply finish the work. Finally, the progress work delay and it will also cause the project cost overrun. Causes of material/equipment related cost overrun Shortage of construction materials/ equipment

According to Chan and Kumaraswamy (1996) studied that the factor shortage of material was one of the causes of cost overrun in the construction project. Sometimes the demand of construction material may exceed the supply of the local market. The progress of construction may delay if the site workers are ready but without materials. Thus, contractor needs to import these construction materials from oversea. These import construction materials are expensive and delay in delivery. These materials have been not estimate in the original cost and finally lead to cost overrun for the project. Fluctuation in price of construction materials/ equipment

According to Long et al (2008), price fluctuation causes cost overrun where it is hard to estimate the cost of materials. If the materials are import from oversea and the price will cause by foreign exchange rate. Contractor won’t expect to buy the expensive materials but the construction can’t to proceed. Cost of machineries will also influenced by current market. For example, when the petrol/ spare part of machineries increasing, the rental cost of machineries also increasing. Finally, those cost will exceeds the cost estimated and cause project cost overrun. Poor quality of material and equipment

According to Koushki, et al. (2005) stated that factor poor quality of material as contributor to causes of cost overrun. Poor quality of material which means the contractor import the poor quality or purposely using wrong material to construct. The contractors cheated by supplier or purposely use the poor quality material to earn more profit from employer. After site staff done the inspection and found the problems, contractor need to demolish and rebuild. Cost for demolish and rebuild will affect the project cost overrun.

2.5.2 External factor Poor site condition

According to Nega (2008) identified Poor site condition identified factors of poor site condition as factors of external related cost overrun. The site condition only can be determined until excavation is completed. Sometimes, the site conditions are ignored by preliminary examination and condition change due to weather conditions or sub- soil condition. The poor site conditions on sub surface require redesign of project with expensive cost. The machinery and supplies are hard to move in and out due to change of site of condition. Finally, the costs of project are increase. Fluctuation on material price

Accordinf to A. E. Barinov (2007) mentioned factor fluctuation on material price as causes of external related cost overrun. Fluctuation depends on supply and demand of consumer. For example, China held Beijing Olympic in years 2008 and large amount of aluminum were required. The price rate of aluminum was increase due to high demand on aluminum for China. Thus, the contractor was bought the more expensive aluminum while exceed the original cost which leads to cost overrun. Poor weather condition

According to Odeh and Battaineh (2002) stated that one of the causes of cost overrun was weather condition. Weather condition refers to the “Act of God”. They include war, earthquake, fire, revolution and etc. when these problem arise, they will lead to cost overrun to construction project. Normally, all of the external construction activities can’t process due to poor weather condition. For example, the concrete slab failed to cast because of raining. Finally, site workers need to recast it and additional costs are required. It automatically influences the cost of the project. Government

Pleiades (2007) studied that the factors government as a contributors to causes of cost overrun. Factors of government include legal regulatory and political. Large construction projects always influence by legal document. Any change of legal law can lead to delay of the project. if the political of a country was unstable, demonstration may be held and crime cases will be increase. Thus, safety of construction workers could be threated and materials in site will be stolen. It can lead to suspension of the project and additional cost for lost materials.

2.6 effect of cost overrun

Reputation, profit/investment, time overrun, disputes, litigation, abandonment, termination of contract

2.6.1 Time Overrun

According to Mbachu and Nkado (2004) mentioned that the most significant effect of cost overrun is time overrun. a construction project could not process due to insufficient fund. Time overrun it mean a project could not complete on time by contractor under contract. Time overrun include excusable delays and non- excusable delay. The fault party must take responsibility to pay the compensation to relevant parties. Excusable delays it means time overrun due to employer, consultant fault and “Act of God”, no penalties against to the contractor. For example, the construction project could not complete on time due to poor weather condition, contractor entitle to claim addition time (Extension of time). Non- excusable delays it mean project time overrun due to contractor fault and contractor must take responsibility to all loss and expense. For example, the construction project delay due to poor site supervision, no extension of time given to contractor and employer entitle to claim loss and expense from contractor.

2.6.2 Reputation

According to Mbachu and Nkado (2004) stated that the cost overrun could damage a consultant firm or developer firm. Reputation is the most important assets of firm. Damage to a firm reputation can causes lost in revenue and value. Reputation can be a corporate trust. For example, a construction firm has completed a project but exceeds the budget and time. In this situation, employer could loss of confidence on them and may no longer co- operation on future. The constructions firm may lead to bankruptcy if they having a worst reputation and no projects for them all the time.

2.6.3 Project abandonment

According to Mbachu and Nkado (2004) mentioned that cost overrun could bring about project abandonment. Project abandonment it means whole construction works force to stop until the problem was solved. For example, cost overrun influences the employer bankruptcy or insufficient fund pay to the contractor while contractor would not works without any payment. Finally, whole of the project could be abandonment due to the bankruptcy of employer. On another case, the contractor not to take responsibility for cost overrun and escape. Hence, the contractor could not claim loss and expense and lead to bankruptcy and influence the project abandonment.

2.6.4 Profit

According to Mbachu and Nkado (2004), cost overrun resulting loss profit to the employer. Cost overrun it means added costs over cause less returns on investment. For example, any mistakes in constructions and additional costs are needed to solve the problem. After that, the construction cost was exceeds the original cost estimate and total profit automatically will decrease.

2.6.5 Disputes

According to Mbachu and Nkado (2004),

2.5 effects of cost overrun

2.6 cost overrun mitigation


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