Effects and Causes of Cost Overrun in Building Construction Projects
Chapter One
Objective of the Study
General Objective
The main objective of the study is to identify the major Causes of Cost Over-run in Construction Project: The case of Royal Buildings.
Specific Objective
The specific objectives of the study include the following:
- To assess the extent of cost overrun in building construction projects with respect to the project original duration and contract amount.
- To evaluate the existing problems associated with construction projects completion cost
- To identify the responsible bodies those, contribute to critical causes of cost over runs
- Atlast, to forward recommendation about minimization or avoiding cost overrun
- To identify the internal factors responsible for construction projects cost overrun
- To identify the external factors responsible for construction projects cost overrun
CHAPTER TWO:
REVIEW OF THE LITERATURE
Theoretical Review
General concept of cost overrun
Every project is constrained by cost, time and quality, why because almost all projects fail to meet them. Especially the first two are the most important constraint that a project driven companies or anyone who is undertaking a project should give additional attention too, hence delay or increment in one of them cause direct impact on the other. The inability to complete project on time and budget continue to become a chronic problem worldwide (Ahmed et al.2002). The success criteria for projects may differ from one to another but the commons are completing the project with the predefined schedule, with the estimated cost and finally with the requirement defined by the owner. Construction project is mainly undertaken to deliver a product or facility and this industry is growing from time to time here in Nigeria but it faces many problems among those one is cost overrun problems. Construction projects are undertaken considering for the future, it can’t be said that it will be free from uncertainties’ so the project may fail due to weather conditions, owners requirement not been met and others like project complexity increases. So this days project been completed with incurring an extra cost. Studies show that in developing countries when the project is completed, the actual cost exceeds the original contract price by 30% (Al-monani, 1996). Cost overrun of 50 to 100% were common (Flyvbjerg et al.,2003). Construction and engineering projects are risky venture: 40% are late; 50 over budget; 30%fail to meet expectations of users’ (Tony, 2017). There have been many factors identified by many researchers for the cost overrun. There are different stakeholders who are involved in the project mainly client, consultant, contractor, sub- contractor, government and society, and have their own reasons which can be held responsible for project cost overrun. Unfortunately, construction projects regularly are making news headlines, not for being remarkable engineering accomplishments that will support and stimulate economic growth and social integration of communities, but rather for being poorly managed and often over budget. A significant number of construction projects routinely overrun their cost estimates. According to the work of Flyvbjerg et al. (2002), infrastructure projects are reported to have an 86% probability of outrunning their set cost targets. Love et al. (2012) and Odeck (2004) on the other hand found that overruns could be as high as 70% and 183% more than the initial estimates respectively. The global audit and professional services firm, Ernst and Young, reviewed the performance of 365 infrastructure projects delivered in the oil and gas industry and found that at least 64% of the projects were faced cost overruns.
Definitions of cost overrun Cost overruns
A project cost is the total cost that the project to be implemented will incur until its finished and this cost is estimated by using different techniques, Top-down or analogous, Bottom-up and Parametric approach at the project appraisal phase. Project cost overrun occurs when the final cost incurred is greater than the budgeted cost. A cost overrun also known as cost increase or budget overrun, involves unforeseen costs incurred in excess of estimated amount due to an underestimation of the actual cost during budgeting.
Several authors have defined cost overruns differently. For instance, Al-Najjar (2002), has defined cost overruns as the change in contract amount divided by the original contract award amount. However, Zhu and Lin (2004) are of the view that cost overruns are the excess of actual cost over budget and also called it cost increase or budget overrun. Choudhury (2004) have defined cost overruns to be the difference between the original cost estimate of project and actual construction cost on completion of works of a commercial sector construction project. Matty Siemiatycki (2015), the common definition of cost overrun in most studies is a change in cost relative to the final estimate provided when the approval of or “go decision” was made until the construction is completed. Widman (2002) defined it the amount by which actual cost exceed the baseline or approved costs.
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CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter outlines the method used to conduct this research. The chapter starts by defining the research approach and research design used for this research. Following that the target population for the study, the sample size, sampling techniques are discussed. Furthermore, the data source, data collection methods, instruments, and methods of data analysis are covered.
Research Approach
Research approach is the methodological approach that a researcher follows to understand and address the statement of the problem. There are three type of research approach: qualitative research approach, mixed method research approach and quantitative research approach. The qualitative approach deal with multiplicity of reality and use content analysis, but quantitative research approach states reality is single and objective. Mixed research approach employs both research approaches in which reality is context based and pragmatism.
This study is a quantitative in nature as it examines the effect of independent variables on dependent variable. The findings and conclusion of the study will depend on the utilization of statistical data collected and analyzed using SPSS version 26.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS, AND INTERPRETATION
Data presentation
This chapter presents the analysis, discussions, and findings on causes of cost overrun in a construction project. This was guided by the objectives to present empirical evidence to agree or controvert. The researcher administered questionnaires to collect the data that was analyzed using SPSS to be able to come up with the results presents here. Descriptive statistics have been used to describe respondents’ characteristics. The further regression analysis has been used to determine the impact the independent variables have on the dependent variable. The researcher issued 30 questionnaires and had a return rate of 30 or hundred percent (or 100%) response rate).
Questionnaire Return rate = 30 X 100/100 = 100%.
CHAPER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
This chapter is the final chapter which is divided into three sections. The study’s key findings are summarized in the first section, conclusions are presented in the following section, and recommendations are made in the final section based on the findings and conclusions that may apply to the construction sector.
Summary of Findings
The objective of this study was to study the causes of cost over-run in a construction project of the accommodation and training center construction project of the KAIZEN institute with a specific objective to
- To assess the extent of cost overrun in building construction projects concerning the project’s original duration and contract
- To evaluate the existing problems associated with construction project completion
- Identifying the responsible bodies that, contribute to critical causes of cost
- To forward recommendations about minimization or avoiding cost overrun
Based on the study objectives, research question, and hypotheses, questionnaires measuring research variables were developed and organized. From the 30 questionnaires distributed, 30 (100%) valid questionnaires were collected and used for analysis. Participants in this study were construction site professionals. Project managers, civil engineers, accountants, and others with organizational experience from less than 1 year to 15 years were the professionals who participated in completing the questionnaire. The collected data were analyzed using the Social Science Software (SPSS) statistical package. A simple regression analysis was used to test the hypothesis.
Descriptive analyzes were calculated and presented in the table. before applying the regression
Assumption tests such as analysis, linearity, and normal distribution were performed. We analyzed respondents’ opinions on prevalence, causes, and effects using descriptive statistics such as frequency, percent mean, and standard deviation, and ranked them using the Relative Importance Index (RII). Based on descriptive statistical analysis, most respondents agree that the problem exists and occurs frequently at the Royal Buildings.
Based on data obtained from the descriptive analysis, the most important causes and effects of cost overruns are ranked using the Relative Importance Index (RII), and the most frequently assessed causes of cost overruns are poor contract management and examined its impact. After testing all assumptions, a regression analysis of project cost overruns was performed and found that cost overruns have a significant impact on project performance with R2 = 0.787, F–ratio = 16.62 & sig= 0.004 < 0.05, and p-value < 0.01. Finally, based on the results of the ANOVA table the alternative hypothesis was accepted.
Conclusions
Cost overruns have the adverse effect of impacting the financial viability of the project. The problem of cost overruns is exasperated when the necessary funding to cover increased costs cannot be arranged promptly. Delays in arranging the funding necessary to cover cost overruns will only increase costs further, which can get the project into trouble and eventually cause the project to end and never a start.
The objectives of the study have been successfully identified. Most of the factors that cause cost overrun were identified, among these factors most important factors that contributed to the cause of cost overrun include poor contract management, the procurement process being ambiguous and without planning, lack of timely decision and corrective actions, Slow response from the management of the project, the complexity of the project, escalation of materials price and inflation in the cost of construction materials, escalation of exchange rate and inadequate experience staff and poor labor productivity within the project team are the main cause of the project cost overrun. As the regression analysis showed there is a strong, positive, and significant relation between the cause of the cost overrun and project cost.
Recommendations
Aligned with the above conclusion, the researcher proposes the following recommendations that should be considered by the institute
- There are factors which can be controlled and improved by the company however, there are also factors which are beyond the control of the contractor like currency exchange, economic instability, transportation cost, labor cost, delay in progress payment, incremental price of materials and complexity of the construction project.
- Efficient contract management, site management, and inspection should be developed.
- The procurement process should be done properly and with the appropriate planning
- The responsible parties must estimate costs realistically because increment is a reality of life in the modern world.
- Carrying out identifications of factors for cause of cost overrun and then identifying the significance and importance of each of the identified the most sever cause prior to planning to address these causes for effectiveness.
- Escalation in material price should be considered during planning and
- The recruitment of the employees needs to do with the proper qualification and the selection process has to be done with
- The project managers have to give timely and appropriate decisions regarding the matters which occurred during the
- The project manager must keep up to date with today’s life and manage the projects
Based on Ibbs et al. (2001) suggestion of having a systematic approach to managing project change, it is advised to have a balanced change culture, recognize the change before its occurrence, evaluate the change, and implement approved change with continuous improvements.
REFERENCES
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- A Guide to the Project Management Body of Knowledge (2000). Project Management Institute. Newtown Square, Pennsylvania USA.
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