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The common term used for budget overruns or cost increase is the cost overruns. Budget overruns are the extra actual costs compare to the budget which was not considered before the construction project started or during the contract was signed depending on the decision made in estimating the costs. In other words, it is the excess in actual costs that was underestimated when working out the budget. The actual costs are the real costs calculated at the time of completion of project. It should be noted that sometimes the accuracy in budget overruns increases as time gets close to project completion.
The budget overrun is determined either in percentage or ratios. If the estimated cost of the construction of a building was £12 million and the actual cost is £24million. In terms of percentage the budget overrun would be 100% and in ratio will be 2.0.
The common issues that are observed in most of the construction projects are the budget overruns and the late completion of the project. In order to find out the solutions to these issues, it would be better to refer to the past projects with budget overruns and late completion.
The first step in using the appropriate projects would be to compare the budget overrun for different areas. An observation was done to see whether the cost underestimation or budget overrun changes by huge amount in different geographical areas i.e. Europe, North America and the rest of Geographical areas (See Table 1). Where average cost escalation is the mean of actual costs minus the mean of budget costs for a type of project.
Cost Overrun in Different Locations
Table 1 shows that cost overrun does matter when choosing projects from different geographical locations. The difference in cost estimation is quite huge for a type of project in different locations except rail. For rail project the difference is about 6.6 percent in terms of cost escalation which is not bad. In addition the no of projects are also close i.e. 23 and 19. As it can be seen from table 1 that no observation was conducted in other geographical locations for road and fixed link, therefore nothing can be said about them. However enough data is presented for rail and road projects.
Overall it can be concluded that the data available is not sufficient in analyzing the importance of using various locations. However it is observed that the projects should be chosen from specific locations to tackle the future difficulties that might occur in similar projects.
Cost Overrun over time
Figure 1 shows the Graph of budget overrun against the time. Each points on the represents the specific project. This is to illustrate whether the cost overrun in projects has improved with time.
It can be seen from figure 1 that the project suffers losses all the time. There is no single pattern on whether it has decreased or increased with time as the points are scattered randomly. However it is concluded that methods used might have improved from past projects but the budget overrun is still not decreased with time. The budget overrun is same in previous years compare to 1998.
So far the data from previous projects are discussed in terms of cost overrun, time and various locations. In order to find out the problems that occurred in past projects, it is decided to use the projects from Europe.
The cost overrun for the channel tunnel project was calculated to be 80% that is more than the estimated cost. This was due to many difficulties observed in construction of channel tunnel.
Boring machines were used from UK and France side to make three tunnels in less time. These tunnels were made for the rails and services.
Due to economical difficulties, the project was transferred to private company. The company informed the public to raise money for the channel tunnel. The following statements were shown to the public.
As there are always risks present in this type of project. The methods that would be adopted are tested and suitable for this project. The budget includes 10% should be enough to account for the unpredicted problems that might occur during the construction of the Euro tunnel.
Tunneling was started in 1988 and six years later the construction of tunnel was finished. Before construction (in 1985) the cost was estimated to be 4650 million pounds. At later stages the cost was increased due to economics. The cost overruns became eighty percent. In terms of ratio it will be approximately 1.8. The real costs at completion calculated from the budget overrun and budget cost is 8370 million pounds. This was mainly due to the prices of construction gone higher with the time.
The shares in 1987 were £3.50 for each share which was increased in 1987 to £11.00 per share. Delays and budget overrun in construction affected the share prices.
When the construction reached peak, more workforces were required. For this reason three million pounds or more were spent on daily basis. It can be seen that another factor affecting the budget was the increases in labor cost which was not predicted before the construction.
Ten people were killed during the construction of the channel tunnel. These deaths created more problems. Everyone involved in the construction got worried. Construction was ceased for about two years as the safety procedures had to be updated before further constructions. This introduced extension of completion date.
The ground was investigated and based on the survey of ground it was assumed that it would be dry for drilling. In reality this was not the case. The water drain out off the ground when the drilling was done up to some extent causing risks to workers. But the cover made of metal for tunnel boring machine saved workers from the falling of rocks.
At this stage new technique had to be adopted to put the concrete slab in an efficient way. The machines could not be moved to the right position as the slope angle got larger than before. Also the wet surface was not allowing the movement of machines with wheels. Batteries of high capacity, the engine powers was turn to 30% more, etc were the solutions to these problems.
More than 100 machines had to be upgraded to meet the requirements for new conditions on the ground. This caused delays and increase in cost. In addition a new planning had to be introduced to keep the project running. Even here the budgeting cost was affected as such increase in cost could not have been considered when the initial cost was estimated for the tunnel's construction. This problem could not be seen before as survey was conducted and the results showed a dry condition of the ground.
The forecast proposed by the London and Continental Railways Limited overestimated the no of passengers for the year 2004. The estimated number of passengers using the service was 66% less than the real. This was really important for the construction of Euro tunnel as it was aimed to recover the costs of construction.
The wembley stadium project was aimed to be completed on May 2005, but due to unpredicted problems that occurred during the building of the stadium caused delays and budget overrun.
Initially it was planned that the final match of FA cup in May 2006 would be played in Wembley stadium. Due to the unexpected delays, the match was played in other stadium.
Firstly it was noticed in August 2004 that the project would be facing some delays and also the budget overrun might occur. The contractor was aware of the problems but could not show as the shares in market would be affected. But when the cost overrun and delays were found, then the price of shares went down to a low value. Those people who invested in Wembley stadium faced losses.
In 21 April 2006 it was reported that the construction of Wembley stadium was delayed by Ten months. This caused the addition of £180 millions to the budget overrun. About 600 altered designs made the project behind the schedule.
The following details will summarize the activities during the construction of Wembley stadium:
In May 1998 the design work began for the construction of stadium. After one year, the main contractor (Multiplex) was assigned for his job in Wembley stadium's construction. Then the bid of £396 millions was refused by a client (Wembley National Stadium Limited) causing delays. Then the main contractor submits the bid with less amount compare to the amount that was refused. This time the amount was £326.5 millions. The construction began in September 2001. In December 2001 the subcontractor who specialized in steelwork left his job in Wembley stadium. In February 2002 another subcontractor offered to get the position of a previous specialist in steelwork. In January 2003 new subcontractor does not complete the steelworks. This caused delays in project and then in July 2004 the subcontractor quits from his placement.
Finally the Construction was completed in March 2007. The project completion was Ten months late due to the disputes between a subcontractor (Cleveland Bridge) and the main contractor.
According to the contractor, the subcontractor did not meet the deadline as the project was complex in terms of steel design. The subcontractor (Cleveland Bridge) claimed that there were not enough details on the method of erection. It required analysis of the arch design. The changes in design of the arch needed more time and money.
Initially the contract was based on a fixed price. When the Cleveland Bridge was replaced by another subcontractor (Hollandia), the prices of steel were increasing with time. For this reason no agreement could be made on the prices of steel. At that time the budget overrun was estimated to be 75 million pounds.
The steel rafter placed at the top displaced by some inches. The workforce left the stadium at that time. This worried the workforce to work in a stadium and caused more delays in completing construction of the stadium.
The sewer was not placed properly which buckled from the vibration in the ground. It only affected the budget not the time.
The actual cost at the completion was 798 million pounds but the cost estimated before the construction equal to 757 million pounds. The cost overrun is therefore 5.4%.
The moral of the story is that the detailed information was required before the construction. If the details were sufficient then delays and cost overrun would have been minimized to an extent.
Scottish Parliament Building
The construction of the parliament was aimed to be finished in 2001 which started in June 1999. Due to the difficulties, new techniques and designs caused delays and increased in cost escalation.
The initial budget considered for the construction of parliament was maximum £40 millions. The cost of specific location and design of the parliament was not known in first budget.
Some of the electricity will be induced by the renewable energy, meaning that the energy will be from natural resources. It is cheap and won't produce any pollution such as noise pollution, air pollution, etc.
The insulation used can be dangerous in the summer season as the heat induced inside by electrical equipments will need to be cooled. This issue is resolved with the help of expensive computerized system.
Various designs for the building were presented to the public. The chosen design costs more than what was included in the initial budget. The budget increased to £55 millions max. Assumption was that the location for the construction will be empty land.
When location was selected, the estimated cost went up as the demolition was required and also cost of the land, Archaeologist, etc had to be included. The cost increased by £54 millions that is the budget became double of the previous estimate. Later the cost increased to £195 millions.
More space was needed for the construction of parliament plus the design was altered as well. Therefore this increased the cost overrun and introduced more delays to the project. The timetable for the construction had to be updated in order to avoid more delays. Again the cost at this time was estimated to be £241 millions i.e. 23.6% increased in costs compare to previous budget (£195 millions).
It was decided to use more advanced materials in order to secure the building against explosions that might occur in future. This added £54 millions more to the previous estimates so the total will be £295 millions
Delays in works were seen in project due to problems occurred during construction and finally the project completed before October 2004. The actual cost of construction on completion was calculated to be £414 millions.
Overall the project was finished late by about 3 years compare to the completion date suggested before the start of construction. Also the cost overrun of the project was approximately 935%. In terms of ratio the budget overrun was 10.35.
British Library project
One popular project that has occurred within the history of a construction project running over cost and completion was the British Library project in St Pancreas London. The British Library officially opened in year 1998 when it was due to open in year 1995. At around £511 millions at the end of the project it was nearly three times the overall budget predicted for the project. With cost overrunning in such manner can only be prevented with poor management and preparation of the project.
One cause of the budget overruns and the late completion was problems associated with the politician and the government agency management team. They went on continuously alternating the projects personnel and the core responsibilities of individuals involved in the completion of the project. Other issue that allowed and influenced the cost to overrun was the contractual arrangement used. This system adopted a cost-reimbursement approach, which only gave the consultants and contractors a small finical incentive to keep within the cost limits.
DISCUSSION AND EVALUATION
The first part of this paper looked at the variation of budget overruns with time and in different locations.
Cost Overrun in Different Locations
The cost overrun was analyzed for different locations. These locations were investigated were categorized in to three. Two were for developed continents (Europe and North America) and the other one was for the undeveloped or developing continents (rest of the world). Similarities were present in developed countries in terms of costs overrun but the available data for the developing continents were significantly different to the developed continents.
Cost Overrun over time
The difference between the developed continents and developing continents is due to many reasons. The developing continents use old techniques as they don't have advanced techniques. The economy is low in those continents. The cost of machines used is high compare to the developed continents. The cost of workers might be less in developing continents but the lack of experience will affect the duration and cost of projects. The materials needed for the construction will be expensive as compared to developed continents. In order to find the causes of problems and find the ways to resolve them, it would be advantageous to look at the specific locations.
The results from the observation of past transport infrastructure projects showed that the no improvement has been made in cost overrun with time. The cost overruns are still highly significant. One can argue on the techniques being improved with time. By looking at it in terms of cost overruns, the techniques might have been improved with time but it did not make any difference to the cost overruns of projects. Therefore it can conclude that the new technique needs to be cheap as well as accurate enough to cope with the construction.
This document looks at the construction projects in Great Britain.
The main problems in channel tunnel project are as follow:
Inadequate survey of the ground
Unsatisfactory safety procedures
Cost of construction increased with time
Number of workers was underestimated
The methods of ground investigation should be consistent and the results should be verified in future projects. More detailed information is needed for the ground investigation.
The safety hazards should be updated and workers should be aware of the risks.
In order to reduce the effect of economy on the prices of construction, the project needs to be finished as early as possible.
More workers should be considered when calculating the budget especially for the peak time.
The main issues involved in Wembley stadium were:
Fixed Price Contract
Communication between main contractor and subcontractor
Economy increased with time
Inadequate methods during construction
Fixed price contract doesn't seem to be a reasonable choice of contract. Material such as steel prices that is hugely required in construction is affected by the Economy.
The subcontractor should be aware of everything that will benefit him in carry out future works. In this project the details of analyzing steel was required by a subcontractor. Everyone involved in the project should understand the coordination of each in the project.
As the economy increased with time, it proved that the cost estimate for the future is unpredictable. Therefore to minimize the overestimation, it is better to either update the budget quickly with time or include more cost by taking the economy into account.
Those works completed in construction should be inspected to avoid future problems. It will be too late if the problem occurs in later time because it will take more time and cost will be greater in future problems. Like in this case the steel rafter was displaced and the sewer buckled causing delays and budget overruns.
Scottish Parliament Building
The following problems were seen in construction of Scottish Parliament:
Location was unknown
Design of Structure was not known
Less space for the building to be built
More materials for security
The first thing that should be considered for the construction is the type of area. Feasibility study and concept design is required before any construction. If the area is not known then it is hard to predict the cost of construction. As for this project the assumption was that the site will be an empty land. But when the location was selected, then it was found that demolition was needed before the construction. Therefore it caused delays and cost overruns to the plan of construction. There are two ways to include such unexpected costs. Either adds the cost of demolition to the budget if the location of site is unknown or Find the location and then estimate the overall cost of budget.
Obviously the second option would be suitable in underestimating cost overruns. The calculations will be more accurate compare to the first option (Adding cost of demolition without knowing the site).
The budget calculated initially underestimated the cost of the structure. Later the design of the selected structure was complex. This means more works were needed leading to high costs and delays in project.
The design of the prototype is as important as the location of the site. Again the design of the structure has to be known when calculating the budget. This can increase the accuracy in estimating the costs of construction.
The size of the area of design building was nearly doubled; therefore new changes had to be included in construction. To avoid this type of recurrence in other project, detailed designs of the building are required in advanced. This will make the constructions go smoothly.
Demand for bombproof material was another issue in construction. Such materials should be mentioned before the construction of the structure to minimize delays.
British Library project
Each project has their own reasons relating to the budget overruns and late completion and the problem that have arise in the construction of the British Library is slightly obscene as it involve the politician and the government agency. These parties are more interested in the political issues of the project and not the project itself, which may have caused them not managing the project in the best interest and therefore continuously changing the team responsibilities. To avoid such recurrence in other projects a management team has to be in place that can choose a team before start of construction that they are happy with. The management team would have to be well prepared and organised well in advance if any changes are to be made to avoid any time delay. They should have clear communication with the project personnel and the individuals making sure they know and are fulfilling their responsibilities. Many governments used a fixed price as for British Library project the government adopted a cost-reimbursement format for the contract. This contract is desirable because in most cases the government assumes the cost risk but the system in this case was not a great advantage for the contractors and consultant. For similar project a different procurement route should be selected.
Comparing Past projects from Great Britain
Note that only 4 projects are compared from Britain. It is evident from Table 2 that the worse projects would be Scottish parliament and British Library. The duration of delay in British Library is greater than others. In addition the overrun in costs is highly significant in Scottish Parliament than the rest of projects.
It shows that the location of the site and design which was not known in Parliaments project for working out the initial budget overrun made high difference to the project in terms of costs. This did not happen in other projects.
In terms of budget overrun and delays, Britain has not improved in 19th century. The reliable planning and appropriate method should be adopted to overcome these issues.
Communication and increase in economy were dominant in almost all the construction projects in UK. As the economy is unpredictable, therefore the type contracts used in construction should be able to cope with the economy. Fixed price contracts should not be the first choice when considering the economy.
It does not matter whether the project is small or not. The cost overrun is not proportional to the cost of the project. Therefore the projects should not be classified into big and small projects when finding out the recurrence of causes in other projects.