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Chapter 1: Introduction.
The delivery of any project is considered successful, when it achieves its predetermined goals and objectives. The performance of any construction project is measured or benchmarked by three aspects i.e. time, cost and quality. Any variations to these three aspects may lead to the failure of the project. Cost of the project, its duration and the value achieved from the project is an important issue, particularly for public funded projects. As these types of projects are sponsored by tax payers, hence it becomes necessary to provide better value for their money in terms of services or facilities. Increased duration means the tax payers and the overall economy of the country have to wait for facilities such as infrastructure and services. This will make hurdle for the progress of economy of that country.
The simplest definition of the cost overrun in the construction project is an overrun which occurred rather than presumed cost. The researcher's findings suggest that most of the public funded projects across the globe suffered from the phenomenon of cost overrun. The study of Flybjerg et al (2002, 2003 and 2004) had covered 23 countries across five continents and found as infrastructure projects often suffer from the cost overruns. For the successful delivery of the project without any cost overrun, it is necessary to investigate the various causes of cost overrun and as per various causes, preventive measures are to be implemented to avoid cost overrun.
There is an internal relationship between the type of the project i.e. size and purpose of project, type of risks involved in the projects and the phenomenon of cost overrun. Most of the mega projects are more susceptible for the cause of cost overrun due to various reasons such as, longer duration, variety of risks involved and influence of stake holders. Every cost escalated project has unique causes of cost overrun particular to that project, which mostly depends upon the location of the project, culture of construction industry at that location and type of project etc. Various researchers have found out the cause of cost overrun particular to their case studies. These causes of cost overrun are further subcategorised as technical causes and non technical causes. Majority of technical causes found are inaccurate cost estimates, poor project management and improper risk management.
Even though there are various causes of cost overrun for different projects, same measures can be implemented for any projects to take care of cost overrun. Though there are various case studies for successful projects and unsuccessful projects in aspects of cost overrun, the case study of construction of terminal 5, Heathrow is explained here as it is one of the successful project delivery without any cost overrun due to various measures and innovative strategies adopted by BAA during the project management. The case of Wembley stadium is considered for finding the causes of cost overrun as a failure project, which led the contractor to the huge amount of loss of profit.
Cost overrun has various impacts in a construction industry such as prolonged duration of projects, budget shortfall, supplementary agreements, loss of reputation for client, contractors and consultants and adversarial relationship among the stake holder due to failure of the project. As said above, most of the public funded projects were suffered from the cost overrun. It is necessary to attain the effective measures for cost overrun for the successful completion of the projects, which will be helpful for the socio-economic progress of that country.
Every country across the globe it may be developed or developing, is trying to make life of the citizens easier by providing or enhancing the infrastructural facilities. History shows that most of the infrastructural projects are prone to cost overrun with effect of delays or suspension of the projects, leading to deceleration in achieving infrastructural facilities for the tax payers or that country.
In order to realise every nation's development dream and to leap towards the respective aspiration, every professional of construction industry will have to opt for successful project delivery without any cost overrun, sticking to time constrain and with optimum quality. This fact gives the much needed motivation for the research.
The aim of the research is to investigate the major causes of cost overrun in construction projects and measures to avoid cost overrun.
- To build clear understanding of the causes and measures for the phenomenon of cost overrun.
- To study some practical evidences to compare causes found for failure project and measures taken for successful project.
- Analyse the information obtained from study (literature review and case studies) and provide results to facilitate further recommendation and suggestions for avoidance of cost overrun.
1.5 Research questions:
- What are the major causes of cost overrun?
- What are the various measures to avoid cost overrun?
1.6 Breakdown of the dissertation:
This chapter gives the summery of the various contents which were covered in the research.
For better achievement of aims of research every topic will be covered in the chapters, following are the introduction of all chapters
- Chapter 1:- Introduction
- Chapter 2:- Review methodology
- Chapter 3:- Literature review
- Chapter 4:- Case study
- Chapter 5:- Finding and analysis
- Chapter 6:- Conclusion
This chapter covers the preliminary introduction to the topic with purpose of study, aim, objectives, research questions and breakdown of the dissertation.
This chapter explains about the methodology followed to execute the study with explanation about research strategy, literature review, case study, research design, methods of data collection etc.
This chapter covers the literature review with description about cost overrun, megaprojects, causes and measures for the cost overrun.
This chapter gives the evidence of real life case studies, to get better idea of causes for failure and measures for success of project. Case study of terminal 5, Heathrow is studied to understand successful delivery and case study of Wembley stadium is considered for causes of failure of project.
This chapter covers the knowledge gained from the studies and analysis in the form of future recommendation to avoid the cost overrun in construction projects.
This chapter covers the introduction for conclusion, objectives and their attainment, limitation and strength of the study, which will be benefited from the study and the future recommendations.
Chapter 2: Review Methodologies
Sekaran (1992) defined research as ''an organized, systematic, data based, critical, scientific inquiry, or investigation into specific problem, undertaken with the objective of finding answers or solution to it.''
This chapter explains the methodology and the techniques, which were used for achieving the objectives explored in the Chapter 1. For doing so it will first discuss about the research design process, theoretical and practical explanation about selecting structured literature review and case study approach. It also elaborates about the actual design of the case study and details surroundings the selection of the case study. These detailed explanations involve the formation of questionnaire about the case study, overview of case study and discussion of the related issues. After this the section describes about the data collection methodology which was utilized in this investigation.
2.2 Research strategy
A Research strategy is a plan containing the ways of finding out the answers of the research questions. For framing the research strategy it is necessary to define the objectives of the research and accordingly the research strategy can be developed.
Flyvbjerg (2006) and Bell (2005) explained about the strategy, study and the situations. Accordingly, the problems under study and the situation will decide the strategy. Also the approach of information collection does not depend on one method. Methods are opted for feeding required data to produce complete piece of research. Various methods are used to examine a subject which eventually increases the validity of the theory.
Yin (2003) had elaborated five different strategies, which will support the research, accordingly,
- Experiments: Experiment will be helpful when there will be degree of control over the iterative trials and researcher is focused on current events. This will help to find out the conclusions by interrelating the cause and the effects of the variables in the research, which can be achieved by manipulating and control of external factors.
- Survey: A survey is a structured questionery which is to be questioned to the people. This will be the alternative for the experiments when there is no need of the control over circumstances of the event. The quality of the data by this method is lower than the other methods because the behaviour or approach of the person facing the questionery will affect the survey result.
- Case study: It involves thorough observations of few individuals. Data collection may involve inspecting the events, interviews and finding records.
- Archival analysis: It involves the thorough analysis of collected documents, archives, which may be journals, books, web pages etc. Here archival analysis is considered literature review.
- History: History is similar as archival analysis as it does not require control over the response of the events, only difference is as archival analysis focuses on the current events while history does not. History is practical when there is no control over the behaviour events and investigator does not focus on contemporary events.
From the various methods stated above the author has considered case study and literature review as the potential methods for the research under study. Specifically case studies of construction of Terminal 5, Heathrow and construction of Wembley stadium have been adopted for the proper understanding of the topic.By adopting the recommendations and similar conditions in context to the research, the study under view plans to follow broad range of methods such as qualitative and some elements of quantitative techniques. To accomplish this research project, both case study and literature review approaches will be used.
There are various reasons apart from as stated above for the adopting literature review and case study approach. One of the reasons will be the problem of biased selectivity in reviewing the literature and bias in reporting which reflects author's bias. In addition to that, there may be difficulty of generalization of data on the basis of individual cases as interpreted by Flyvbjerg (2006).However the combination of the data from the literature review in context with case studies and further analysis will greatly improve the quality of this research and with anticipation, will not produce any barriers at the analysis and interpretation stage.
2.3 Literature Review
Bouner (1996) explained about the various reasons for giving time and efforts for the literature review before approaching towards the research project. Accordingly
- To identify gaps in the literature
- To avoid reinventing the wheel
- To carry on from where others have already reached
- To increase your breadth of knowledge of your subject area
- To identify seminal works in your area
- To identify opposing views
- To put your work in to perspective
- To identify information and ideas that may be relevant to your project
- To identify methods that could be relevant to your project
On the basis of the above reasons literature review can be defined as a survey of the scholarly articles, relevant books and other academic sources (Dissertation, conference proceedings) in context with the research subject, providing details, critical analysis and summery. Literature review can be done by adopting various steps one by one as
- Define the topic
- Compile a list keywords
- Identify resources
- Search results
- Screening results
- Organize findings
- Data extraction and
2.4 Case study
Feagin et al (1991) defined case study as an ideal methodology when a holistic, in-depth investigation is needed. Yin (2003) explained about the case study as ''when the phenomenon under study is not readily distinguishable from its context.' According to Flyvbjerg (2006) case study is beneficial in view of developing and analyzing the hypothesis but not limited to these research activities alone. He elaborated the case study as a perfect choice for achieving the greatest possible amount of information on a given problem or phenomenon. Yin (2003) recommended about the data collection for the formation of the case study, accordingly data obtained from the multiple resources, approaches will add value and strengthen the case study. Yin (2003) identified six sources of case study evidences namely 'documentation, archival record, interviews, direct observations, participating observations, and physical artefacts'. Due to certain limitations including time and lack of funds, this research will make use of only documentation and archived materials. Data from the two separate case studies was collected to get near to the aim of the research and trying to find literal replication to support the findings of the research. The propositions directed and shaped the collection and analysis of data in each case study. Yin (1994) given recommendation to be followed for methodology for a case study which has four stages;
- Design the case study protocol:
- determine the required skill
- develop and review the protocol.
- Conduct the case study;
- prepare for data collection
- distribute questionery
- conduct interview
- Analyze case study evidences:
- analytic strategy
- Develop conclusion, recommendations, and implications based on the evidence.
Yin (1994) intimated that case study designs are not variants of other research design he proposed five components of case studies:
- A study's questions,
- Its propositions, if any,
- Its unit(s) of analysis
- The logic linking the data to the propositions, and
- The criteria for interpreting the findings (Yin, 1994, p.20).
The stage of analysis is a critical factor in case study because it is a system of action rather than individuals or group of individuals. Case studies will be isolating, focusing on one or two issues which will be helpful to understand the system being examined. Multiple case studies will adopt the logic of replication. Each individual case study consists of a "whole" study, in which facts are gathered from various sources and conclusions drawn on those facts. The topic of cost overrun is vast because to understand or to investigate the various causes of cost overrun it is necessary to go thoroughly to the every phase of the project, right from its inception to completion stage. Hence the time available to write dissertation on such huge and vast topic is limited, so instead of writing two much case studies, emphasize is given on two case studies such as successful project as a project T5 and failure project as a Wembley stadium. Why case study of project T5 and Wembley national stadium? The answer is, Terminal 5 project considered here to understand the successful project delivery without any cost overrun and the Wembley stadium is considered for finding and comparing the causes of failure of project.
2.5 Research Design
''A deliberately planned arrangement of conditions for analysis and collection of data in a manner that aims to combine relevance to the research purpose with economy of procedure'' (Cook et al 1981).The purpose of the research design is to map the process of research, i.e. research design is used to frame the research, by mapping all the major parts, components, and activities involved to achieve the objectives involved in research project. Various parts and components of the research are samples or groups, measures and activities such as methods of assignment are to be addressed to central research questions. Before planning research design the very first step is identification of the research objectives and then the research questions are then asked and accordingly strategies are to be identified. While fixing the strategy about research design, researcher needs to overlook and decide about the usage of viable and accessible source of information with the help of currently available tools and methods. The data should be collected in view to get assist to the identified problems or reveal some unknown aspects of the research problems. As research strategy is decided by focusing on aims and objectives of the research, all the data collected should be eventually related within the scope of the research. Efficient collection of data requires through understanding and clear definition of the problem and opportunities surrounding the research subject. (See Figure No 2.1)
2.6 Methods of Data collection
Various sources of data which were used for data collection is below
- Science direct
- Wiley interscience
- Google scholar
- e-Library, University of Salford
- EBSCO host
Other potential sources of information are textbooks, journals available at library, University of Salford.
While searching the appropriate article for collection of the data, it is observed that the same article is appeared in most of the resources. As research aim is in context with the overall construction projects, most of the articles found based on public projects and it is difficult to find the article for private projects. Also it is observed that there are very less articles purely on the topic of cost overrun, most of the articles combined cost overrun and time overrun.
The research methodology is explained here as a process by which the aims and the objectives of the research have been achieved. For finding out and going near to the answers of the research question is achieved by following the research strategy, which includes adoption of the literature review and case studies with justification adoption of case studies for the particular research. Finally the research design described about the collection, segregation and extraction of data from the authentic sources.
Chapter 3: Literature review.
A construction project is a unique undertaking for essentially a single purpose which is defined by scope, quality, time, and the cost objectives. The cost and the quality objectives are met by the use of limited resources (Ahuja et al 1994).
One of the client's main requirements in respect of any construction project is the assessment of its expected cost (Ashworth, 2004).The importance of cost control as explained by Ashworth (2004) is to limit the client's expenditure within the amount agreed, to achieve a balanced design expenditure between various elements of buildings and to provide the client with a value-for-money project. The value-for-money may be the satisfaction achieved by client in sense of optimum quality and in time possession of the project. For any construction project which may be small or large, the first initiative is to prepare the cost estimates. After this stage the cost control measures are to be implemented during the project life cycle to limit the client expenditure within the amount agreed. This will be the theoretical explanation which seems easier rather than the implementation of the various measures because, the various factors such as forces of inflation, economic uncertainties and the error prone human input are influencing during the project lifecycle. In construction industry, there are very rare projects which are completed as per the estimated cost and on scheduled time. The projects which are completed on its estimated cost are exception rather than the norm. As said above the construction project has to go through the many phases during the project life cycle. By the transformation along with the duration it will affected by the various factors such as geological conditions, weather and many other parameters which will be unknown during the planning stage of the project. Accordingly the variation in prices, quantities and many other parameters like that prevent accurate cost estimates. Also as the project progresses towards its completion lots of new things will be propping up which eventually change the estimated cost of the project. World recession has generally produced a shortage of funds for capital purposes and construction in general. This has been coupled with high inflation and interest charges, resulting in the costs of construction soaring to high level. (Ashworth, 2000)
3.1 Type of project, risk, cost:
Kerzener (2006) explained the rules and the guidelines about the execution of the large construction projects. According to that, such projects involves vast number of people often for short or intense period of time and continuous organizational restructuring may be necessary as each stage of the project goes through the different life cycle phase where the matrix and project organization form may be used interchangeably. As stated above every project must satisfy the aim of the client by proper utilisation of the time and resources. For successful completion of such projects the contractor and his organization should be prepared with all the required qualities. There may be various factors within the organization which are found to be critical in concern with the success of the project such as training in the project management, rules and procedures clearly defined, communication at all levels, quality front end planning etc. Kerzener (2006) explained about the behaviour or approach of the some of the companies and the mega projects. According to this, many companies dream about winning the mega projects rather than recognizing their own capacity such as, lack of availability of on site and skilled workers, lack of properly trained supervisor staff and last but not least, unavailability of raw materials. As a result of such problems, company immediately assigns its employees who may have experience of such project or they may be new to such projects, who eventually face working stress from the execution of the project consequently reducing their efficiency. Such situation will create confusion and delay for the project execution which results in increase the completion cost of the project. Mega projects are not always as glorious as people think they are .Organizational stability, accompanied by moderate growth rate, and may be more important than the quantum steps to the megaprojects. In short megaprojects should be left to those companies that have the facilities, expertise, resources, and management know-how to handle the situation (Kerzener 2006).
Flyvbjerg (2005) explained about the characteristics of the large infrastructural projects as
- Such projects are inherently risky due to long planning horizon and complex interfaces
- Technology is often not standard
- Decision making and planning are multi actor processes with conflicting interest
- Often the project scope or ambition level will change significantly over time
- Statistical evidences shows that such unplanned events are often unaccounted for leaving budget contingencies sorely inadequate
- As a consequence, inappropriate information about costs, benefits, and risk is the norm
- The result is cost overrun and/or benefit shortfalls with majority of projects.
Every construction project differs from the various types of risks such as social/institutional, technical and market related risk. International Program in the Management of Engineering and Construction (IPMEC) has conducted a study about the various types of the risks with the project. Miller et al (2008) have given examples of a various type of the projects such as, oil platform are technically difficult, but typically they face few institutional risks because they are built out of focus of the public attention. Hydro electric power project are tedious in concern with engineering but very difficult in view of social acceptability. Nuclear power projects have all technical, social and institutional risks. A road and tunnel project present high level of technical risk as rock information usually hides big surprises which may eventually affect the cost and length of the project. Here author has explained about the various types of the projects and risks related with that project. These risk factors are the major catalyst for the causes of the cost overrun and time overrun during the project which eventually drags project towards the failure.
Miler et al (2008) explained about the one of the aspects of the risk which he calls as the 'Turbulence'. This is not the type of the risk which occurs in the construction project but it is observed in many of the construction engineering projects. Turbulence refers to the way that consequences of events are compounded in unforeseen ways, even if the initial event lies within the range of possibilities that was known in advance, but often more seriously in the case of events that are truly surprises (Miler et al 2008).In the face of such difficulties the project may get stuck, the parties which are working for the project may leave the project hence again there may be the possibilities to restart the project which may take re-approval of procedure and renegotiation to complete the project. This eventually creates delay and cost overrun in the project.
Thus here we can find that the type of project, size of the project, and risks involved with the projects are interrelated with the possibility of the overrun of the cost of the project.
3.2 Cost overrun:
Arditi et al (1985) conducted a survey to investigate the causes of the cost overrun in Turkey. For his study he considered the various government projects between the periods of 1970-1980. According to him various causes such as
- Increase in material cost and wages
- Inflation burden
- Shortage of materials and variation in the price index of the material cost, and lastly most important
- Delay in construction and errors in the initial estimates are the major causes of the cost estimates.
As per Arditi et al (1985) the effect of the cost overrun is not only limited up to the construction industry of the turkey but also it had shown its effects to the economy of the that country. Author also stated about the worst situation of the project delays. According to him many of the time situations may arise that many of the completed activities such as casting, fabricating, exterior works of the projects get worn out during lag period and it has to be reinstated after re-approval and restart. Here author tried to explain about extra expenditure which will be spent for the reinstatement of the damaged work due to the project delay which automatically adds up a cost for the project. Author has found occurrence of cost overrun in various stages of the project such as preconstruction and construction phase. Author has not suggested any recommendations for avoiding the cost and time overrun for the projects. Only thing the author has made comment about is the practice of the public agencies regarding their estimating and the payment practices. It shows that there are chances for the minimization of the cost by adopting proper and correct estimation technique and payment procedures.
Various studies have been observed in the Nigerian construction industry. Dlakwa and Culpin (1990) conducted survey to investigate the various causes of cost and time overrun for the various projects during the third quarter of 1988. Dlakwa and Culpin (1990) has considered only the construction phase particularly near to completion time of the project for finding and identifying the various reasons for the cost overrun. The author here explained about the significance of completion stage, as there is maximum amount of money of the clients is invested at the completion stage as compared to conception stage of the project. Author has interpreted survey results, according to which there are five major causes for the cost overrun,
- Fluctuation in labour, material and plant cost
- Construction delay
- Inadequate preplanning
- Deficiencies in the initial estimates
- Unforeseeable circumstances.
Author has recommended about the relationship, trust among the various stake holders such as agencies, contractors and consultants which were involved in the public project, for that reason he suggested various factors such as disagreement on the contract clauses and specifications and enforceable circumstances has to be given prime importance to avoid cost overrun.
Mansfield et al (1994) carried out survey for the recently completed highway projects during 1992. The author here explained about the construction industry of one of the developing country and impact of construction industry on the economic growth of the country. Author insisted about the cost effectiveness within the project planning and project management for the development of the economy of the particular country. Author has explained about the current practices of the contracts which were used in the Nigeria. Hence it is observed as even though there are various forms of the contracts are used by public clients, the greater emphasis was given on the fixed-priced contract. Author conducted survey among 50 construction professionals ranging from contractor, consultant and client organization. According to his survey cost overrun attributed to finance and payment arrangements, poor contract management, material shortage, inaccurate estimating and overall price fluctuations in developing countries. The lack of proper phasing of construction projects can contribute to the economy becoming 'overheated'. This gives rise to project-cost overrun, with consequential effects on inflation and a decline in efficient activity in the industry. Other factors which can be identified as usually being responsible for project delays and excessive costs are excessive bureaucratic checking and approval procedures, unclear definitions of contract terms by the client, and insufficient geotechnical investigations at the feasibility stage. (Mansfield et al 1994).The author here recommended various suggestions to avoid cost overrun in construction project.
- Detailed project analysis before authorization
- There should be special provision of planning and controlling of the project by qualified and experienced persons, latest monitoring and reviewing technique should be used for the performance evaluation and comparison with the project targets
- Clients should be capable to hold adequate funds before commencement of the project and procedure for the payments of the submitted bills of the contractor is to be improved.
- Effective material management procedure is to be implemented
- The existing project management system is to be improved by institutional strengthening and man power development.
Dada and Jagboro (2007) emphasised from their studies about the evaluation and assessment of the pre construction project risk which could be used subsequently in terms of financial administration of the contract. Authors have analysed the risk factors involved in the various procurement systems and identified their relative impact on the project cost overrun. For evaluation of the impact of the risk factor on the project cost, 57 completed projects within the Nigeria have been surveyed. The percentage of project cost overrun due to impact of risk factors on the various procurement methods assessed are
- Project management-30%
- Management contracting-25%
- Traditional method-16%
- Direct labour-13%
- Design and Build -9%.
Al-Momani (1996) interpreted the survey for the 125 school projects during the period of 1984 to1994 within the Jordan construction industry where he found that cost overrun results of up to 30% of the original contract price. Various causes of such cost overrun observed due to variation orders, incompetent project brief, faulty project specifications and design. Author has recommended suggestions about the improvement of the construction industry such as implementation of project managements by the experienced professionals which eventually control the finance of the project and which will help to avoid the cost overrun and failure of the project.
Kaming et al (1997) conducted survey among the projects and the project managers who are working on the high rise buildings in Indonesia. According to him the occurrence of the cost overrun within the Indonesia construction industry is very common and it is considered as more severe problem than the time overrun for the projects. He interpreted various predominated factors for the time overrun such as
- Design changes
- Poor labour productivity and
- Inadequate planning and resources shortages.
For the cost overrun the various causes such as
- Increase in material cost due to inflation
- In accurate material estimating and
- Degree of project complexity. Considering both time and cost overruns together, the most important factors that influence them are: materials cost increases due to inflation, inaccuracy of estimates, and lack of experience of project type. (Kaming et al 1997).Author here recommended for area of improvement such as implementation of the project management skill within the project.
Enhassi et al (2009) identified the various factors which causes the cost overrun in the construction projects within the Gaza strip. This literature may be considered as the exceptional case as above mentioned geographical area is affected by the various situations such continuous border closers, strikes and war like situation. Author assessed the various factors causing the cost overrun and the relative perception of contractors, consultants and owners are compared on the basis of listing of previous studies elsewhere together with the other factors arising from the special conditions in the Gaza strip. Author considered and compiled a comprehensive list of causes of delays and cost overrun through the literature review and considered 66 contractors, 27 consultants and 31 owners for the survey. His study represents that there are 110 delay factors and 42 cost overrun factors which are influencing the Gaza strip. Among the 42 cost overrun factors author revealed top ten factors that causes cost overrun as perceived by the contractors, consultants, and the owners are
- Increment of the material price due to continuous border closer
- Delay in construction ,supply of raw materials and equipments by contractors
- Fluctuation in the cost of building materials
- Unsettlement of local currency in relation to dollar value
- Project materials monopoly by some suppliers
- Resources constraint: funds and associated auxiliaries not ready,
- Lack of cost planning/monitoring during pre-and post contract stages
- Improvements to standard drawings during construction stage
- Design changes and
- Inaccurate quantity take-off.
Author here recommended various suggestions for the avoiding the cost overrun such as
- Material management, resource scheduling
- Implementation of quality control systems, which eventually control on the quality of the project work and reworking of the defective work which will save the construction time and automatically cost of the project will get controlled.
- Contractor here recommended for the implementation of the project management policies by the experienced professionals, a perfect policy is to be followed to monitor quality. time and value for the project.
- Relationship and trust is to be developed among the various stake holder of the project which will create confidence among the owner for getting understanding of the various parameters such as specifications, bid documents, drawings bill of quantities etc which will be helpful to avoid future disputes and conflicts.
Kaliba et al (2007) presented study on the major causes of the cost escalation and schedule delay for the road projects between the periods of 2006 to 2007 which were constructed in Zambia. Author has collected data by using the structured interview, quaternary survey, literature review and the cases studies of the road construction projects in the Zambia. The studies reveal that there are eight major causes of cost escalation that predominately affect road construction projects in Zambia accordingly
- Bad weather, mainly heavy rainfall and floods
- Scope changes
- Environmental protection and mitigation cost
- Schedule delay
The others were local government pressures, technical challenges and inflation. Author has recommended various suggestions for the avoidance of cost escalation and schedule delay, one of them is use of efficient project management tool and practises. Other directions are
- Project timing and scheduling: Projects are to be planned and scheduled as per the climatologically and weather dependent situations of the regions. Procurement processes should be embarked on appropriate time, proper scheduling of the material is to be planned so that there will not be any scarcity of the materials during the worst weather situations
- Scope definition: Scope of the project from the inception to completion is to be clearly and deeply defined. Scope changes often lead to project overrun, excess work and claims which eventually increase cost of the project. Proper project management system is to be implemented for the scope definition.
- Proper costing and financing: Proper costing is essential in every project, accurate systems and procedures are to be followed for non-defective estimates so that client can arrange funds accordingly. Cost and value engineering principles must be applied at all stages of the project.
- Communication: Effective communication system is to be implemented for the proper flow of the information within the project team.
- Competent personal: Project management system is to be implanted by the experienced professionals
- Capacity building and Legislation and good corporate governance: Strike and labour disputes can be controlled through the use of adequate and appropriate legislation. The government should update, enact and effectively enforce laws that would ensure that the work force is not ill-treated by their employers (Kaliba et al 2007).
Flybjerg et al (2003) conducted survey for cost impact in transportation infrastructural projects within the Danish construction industry. Author emphasised on the infrastructural investments in terms of actual cost, cost benefits and the risks. Accordingly, author has found that there are very less projects which are fulfilled in terms of the cost invested in that project. Author has reviewed different project types, different geographical regions across the globe, different historical periods and presented that the substantial cost overrun is predominant everywhere rather than exception. Author conducted same study across twenty nations, on five continents and concluded that the cost overrun is the global phenomenon in the construction projects. Flybjerg et al (2003) presented from his study that the cost escalation as highly, systematically misleading. Large cost escalation combined with large standard deviations which transforms in to greater financial risk. Author found that these types of the risks intentionally ignored during the initial stage of the project to the detriment of social and economic welfare.
Flybjerg et al (2004) conducted one more study which emphasized on the dependence of the cost overrun on the various project parameters such as
- The length of project - implementation phase
- The size of the project and
- Type of project ownership.
Cost overruns were found to be strongly dependent on the length of the implementation phase; of the project development cycle. Flybjerg et al (2004) also highlighted the importance of human input (professional accountability) in the problem of the cost overrun. Author compared cost overrun for three types of the project ownership.
- State owned enterprise and
- Accordingly other public ownership study revealed that public ownership is problematic whereas private ownership is effective in curbing cost escalation and is far from reality. Accountability mattered more to cost overrun than the type of ownership.
Centreline solution Inc. (2004) explained in their presentation titled '10 major causes of project failure' that the success of any project as a successful project or failure projects is decided by the satisfaction of the stakeholders which are involved in that project. A project is considered as failure project if it does not meet the expectation of the stakeholders. The impacts of the project failure are very adverse which leads to various factors such as cost and time overrun, degradation in the quality, frustration among the employees due to hectic work stress as project is to be executed within the boundary of cost and time. Hence employees are thinking about the input they are feeding in the project and unexpected output from the project which eventually make them to think about the job satisfaction. Project failure also leads to lowering the corporate value of the firm, low public opinion, and negative media campaigns about the firm. Many of the time it is observed that failure in the execution of the projects drift the firms toward closure. Centreline Solution (2004) has found 10 various reasons for the project failure. The presenter here also recommended the possible solution for the various factor of the project failure. Reasons and solutions are explained as below
- Lack of change management: It is observed that whenever there is an order for the change in scope, the result is always more than the work expected which eventually increases time and cost of the project as there are no methods to handle such situation for the project. Presenter recommended 'adopting change management process' which will be possible by documenting the change management process followed by the project team.
- Poor Communication: Poor communication will be one of the major truths of the failed projects. Many of the time the team members of the project do not have the prerequisite information whenever there is need and necessity of information. Such situation creates delays in the activity completion and which eventually increase the project duration, unable to escalate issues or changes and formation of the sluggish project report.
- Inadequate resources: Many of the projects fail due to the reasons such as there is no pre-commitment of resources to the project. The project is not supported and there is no analysis and documentation of all skillets required. Various problems which prop up due the inadequate resources such as, activities take longer time to complete, which takes the project towards time overrun and cost overrun, dead line get missed. Problem of inadequate resources can be nullified by documenting resources and skillsets required to complete the project, scheduling the project with the allocated resources and pre-assign the required resources to the team of the project.
- Poorly defined requirements: Many of the projects involved do not have clearly documented client needs which cause various problems such as client or the customer will not be happy with the work and more money spent to cure the problem. This problem can be removed by processing the careful briefing and documenting the customer need.
- Inaccurate estimates: Defective estimates can be produced due to improper estimating methods, lack of confidence, and scope work is not understood. Due to inaccurate estimates the project executer may have to agree unrealistic timeline or budget. It will be difficult to do all the activities in the time allocated.
- Poor risk management: Due to poor risk management, unexpected events may cause delay for the project which eventually causes cost overrun and time overrun.
- Poorly defined deliverables: The projects where the milestones or deliverables were not measurable and the work or the product has no limit, the client will keep on demanding his choices which will cause the project cost exceed than the estimated. Hence to avoid this, targets and the deliverables must be clearly defined and measurable.
- Similarly there are three more factors which are responsible for the project failure such as
- over optimism,
- No time for project management,
- Implementation of improved project management skill-set needed.
Flyvbjerg (2002) explained about the cost overrun in the transportation infrastructure project in which he studied the various parameters such as occurrences and the extent of the cost overrun in the transportation infrastructure projects, their significance. Author also explained about the behaviour and the policy of the decision maker about the transportation infrastructure development projects. Every construction project has cycle from its conception to completion as it progresses along this path with convenient changes. Author explained about the behaviour and ignorance of the project promoters about hiding of project cost and risk in order to make total project cost appear low to approve the project. Many of the times environmental and safety concerns, geological risks are initially ignored for getting the project approved but if the project lives on, the ignored things will be boomerang the cost of the project. Many of the project components and risks are presented one after another or one slice at time in order to make costs appear low as long as possible. (Flyvbjerg 2002).Author found that error of underestimating cost is significantly much more common and much larger than the error of overestimating costs and underestimation of costs at the time of decision to build is the rule rather than the exception for the transportation infrastructure projects. Flyvbjerg (2002) conducted study about the type of the projects and the relative cost estimation about the project. Accordingly rail projects have highest percentage of cost overrun as compared to tunnel, bridge and the road projects. Author also commented about the parameters such as complexities of technology and the geology of the project and accordingly tunnel project has larger cost estimation as compared to bridge and road projects. Flyvbjerg (2002) interpreted as cost underestimation has not decreased over time, it is the same as it was10,30 and 70 years ago even though techniques and skills for estimation and forecasting costs of transportation infrastructural project have improved over time.
Flyvbjerg (2005) explained about the cost overrun and benefit shortfall problems. Accordingly they create the problem of allocation of excess unnecessary fund for the project which will be the waste of the capital fund. Cost overrun sometime causes delay in the project completion because securing additional funding to cover overruns often takes time. In addition to this, the projects which are paused due to excess cost overrun are to be reapproved and renegotiated to get started, which eventually causes the delay for the completion of the project. Accordingly benefit shortfall will be the additional consequence of delays because delays result in later a opening date which gives extra month or years without the revenue. Because many infrastructure projects are loan financed and have long construction period, they are particularly sensitive to delays, as delays results in increased debt, increased interest payments and longer payback periods (Flyvbjerg 2005).Author has studied the various causes of the cost overruns for the transportation infrastructure construction projects and grouped the various causes of the cost overrun under the three different headings of explanations such as 1)Technical explanation 2) Psychological explanation and 3) Political economic explanation. Under the technical explanation author has pointed out the various parameters such as imperfect forecasting techniques, inadequate data, honest mistakes, inherent problems in predicting future, lack of experience on the part of forecaster. Author also suggested about the remedial measures to control this by developing better forecasting model, better data collection, more experienced forecaster. In concern with psychological explanation about the cost overrun and benefit shortfall, author interpreted that, many of the times the planners and the project promoters makes decisions based on the over expected gaining of the project rather than rational analysis of weighting of the gains, losses and probabilities. In such situations the benefits from the project are exaggerated and costs are under estimated. They involuntarily spin the scenario of the success and overlook the potential for mistakes and miscalculations. As a result planners and promoters pursue initiatives those are unlikely to come in budget or on time, or to ever deliver the expected results (Flyvbjerg 2005).Author explained about the political and economical issue which is affecting the cause of the cost overrun. According to this, it is the issue related to the politics and the power. In some of the cases the project promoters and the planners deliberately and strategically over estimate the benefits and under estimate the cost to achieve the project irrespective of the competition and the project will get approved and funded.
Office of Government Commerce, United Kingdom (OGC, 2005) has given the directions for the construction industry, who were involved with the delivery of government projects. OGC (2005) has given the eight common causes of the failure of the project along with the check list of questionery beneath the each cause. These check list itself gives suggestions or recommendations for the avoidance of the failure of the project. Eight common causes of failure project are as follows
- Lack of clear link between the project and the organisation's key strategic priorities, including agreed measures of success
- Lack of clear senior management and Ministerial ownership and leadership
- Lack of effective engagement with stakeholders
- Lack of skills and proven approach to project management and risk management
- Too little attention to breaking development and implementation into manageable steps.
- Evaluation of proposals driven by initial price rather than long-term value for money (especially securing delivery of business benefits).
- Lack of understanding of and contact with the supply industry at senior levels in the organisation
- Lack of effective project team integration between clients, the supplier team and the supply chain.
Recommendations for the successful project delivery as suggested from the checklist questionery provided by OGC (2005) has given emphasis on various aspects on project management such as
- Clear communication between the project team, understanding of the priorities and plans for the project by the project team.
- Study of the relevant projects and implementation of lessons learnt from the previous relevant projects 3) Analysis of the effect of any slippage in time, cost, scope or quality.
- Getting authentic approval for the project before proceeding for the project.
- Implementation or adoption of strategy for the stakeholder management.
- Implementation of perfect project management by the skilled and experienced professionals with distribution of roles and responsibilities among the project team.
Various researchers' studies for the construction cost overrun revealed that the factors which are responsible for the project delay or time overrun are most likely responsible for the transformation of the project cost overrun. Accordingly, the factors responsible for the time overrun need to be always critically analyzed alongside with the factors leading to the cost overrun. Even though the scope of this report is limited up to the cost overrun factors it will be adding the value by noting the various parameters for the time overrun for the construction project.
3.3 Comparisons for different cost overrun factors form various researchers' findings:
Various researchers from the different parts of the world have studied the various types of the projects to analyze the factors causing the cost overrun. By comparing the various causes of the cost overrun which were found in a different economic environment are helpful to summarize and categorize the causes under the different headings. This section identifies nine research finding by 1) Arditi et al (1985)-Turkey. 2) Dlakwa and Culpin (1990)-Nigeria 3) Mansfield (1994)-Nigeria 4) Dada and Jagboro (2007)-Nigeria 5) Al-Momani (1996) - Jordan 6) Kaming et al (1997) Indonesia 7) Enhassi (2009)-Gaza strip 8) Kaliba et al (2007)-Zambia and 9) Flybjerg et al (2004) - Denmark. are used for the purpose of comparison of global economic factors on the issue of cost overrun causal factors.
Majority of cost overrun causes which were observed in the seven out of the nine cases listed above can be classified as the technical parameters and non technical parameters. Mostly observed technical parameters which are predominately responsible for the cause of cost overrun are
- Delay in the construction due to poor project planning
- Errors in the initial estimates
- Design, scope changes
- Unforeseeable circumstances
- Insufficient geotechnical investigations at the feasibility stage.
- Inadequate preplanning.
Majority of non technical parameters which will be affecting the project cost are
- Type of the project ownership
- Increase in material cost and wages.
- Inflation burden.
- Shortage of materials and variation in the price index of the material cost.
- Excessive bureaucratic checking and approval procedures
- Unsettlement of local currency in relation to dollar value
- Project materials monopoly by some suppliers
- Resources constraint: funds and associated auxiliaries not ready.
3.5 Measures to avoid cost overrun.
3.5.1 Accuracy in cost estimation.
Cost estimates are the important source for any projects. Small mistakes in the cost estimates lead the project towards failure. In concern with public projects this tool is of prime importance because, if the decisions are made on the basis of misleading information or erroneous cost estimates, the social and economical welfare of the society will negatively undermined.
Kerzener (2006) explained about the various type of the estimate and percentage of their accuracy, accordingly,
- Order-of -magnitude estimates: These types of estimates are prepared without any engineering data. It has +-35 % accuracy. Mostly these types of the estimates are based on past experience
- approximate estimates: These are prepared without the detailed engineering data and degree of accuracy is +-15%. These types of the estimates are based on the similar type of the project having similar scope and capacity
- Definitive estimates: These are based on the detailed engineering data; the degree of accuracy for such estimate is +-5%.
Kerzener (2006) explained about various factors which will be affecting the process of preparation of the estimates and which eventually results faulty estimates for the construction projects. Various factors such as
- Misinterpretation of statement of works
- Omissions or improperly defined scope 3) 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. Many of the above stated factors can not be found out unless and until cost control system is implemented within the project.
Ashworth (2004) explained about the early estimates. Accordingly early cost estimates are approximations and contain some amount of uncertainty. Estimates in the projects are considered as a prediction or an approximation which provides information for the decision making such as bid or no-bid or decision to build. An estimate will be considered accurate if the various costs during running of the project are same as estimated. As stated above estimates come with uncertainties; very basic stage for the cost control will be that the estimates are to be prepared with the control of uncertainties. The degree of the accuracy and uncertainty during procedure of preparation cost estimates and the various factors which influence the accuracy of the estimates may be considered as the risk. Ignorance of the above stated factors during the preparation of estimates will divert the project from the achievement of its goal of time, cost and quality. Author also suggested preventive measures to be taken to ensure the reliability of cost estimates as
- Improvement in preliminary information system such as design or concept supplied by the architect and client
- Better ways of quantifying the data available at design stage, and correlating this with cost,
- Checking of operational estimating, cost modelling.
3.5.2 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 risks''. (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 identification are performed by the project managers by analysing the data which is provided by the information system of the project team and using the various tools such as
- Decision support system
- Expected value measures
- Trend analysis/projections
- Independent reviews and audits.
Risk management involves six steps in the risk management process such as
- Identification of risk
- Quantifying the risk
- Prioritizing risk
- Developing strategy for managing risk
- Project sponsor/Executive review and
- Taking Action.
3.5.3 Cost Control Management.
''Cost control of a construction project, or any type of the project, should start at the inception stage and not finish until the project is handed over to the client. Even when the final cost is still likely to be agreed, and there is need for cost control of recurring cost in use throughout the life of the building'' (Ashworth 2004)
''Cost control is a management function and for construction manager to perform this task efficiently and effectively they require timely, high-quality information to be encapsulated within decision making process.''(Griffith and Watson, 2004)
Project execution with the procedures of project control and documentation during the project will be a key tool for the project managers and project team involved in the projects. These tools solve the purpose of recording financial transactions as well as giving managers an indication of the progress and problem associated with project (Hendrickson, 2000)
Project control system serves the basis for identification of slippage of the project plan rather then 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 base line reference for subsequent project monitoring and controlling. The final or detailed estimates provide reference for the assessment of financial performance during the project. To the extent that costs are within the detailed cost estimate, then the project is thought to be under financial control. Overruns in particular cost categories signal the possibility of problems and give an indication of exactly what problems are being encountered. (Hendrickson, 2000)
For controlling and monitoring the project, the detailed cost estimates are typically converted to a project budget which is subsequently used as guide for the management.
Griffith and Watson, (2004) suggested to use the concept of 'Plan, Do, Check and Act (PDCA) control cycle' (see figure No 2.1). By this cycle we can establish the project objectives and determine the various options for reaching the goals (plan), implementing the plans (Do), checking the effect of the implementation (Check), after this taking the corrective action (