Analysis of Construction Project Cost Overrun by Statistical Method

Abstract

Most of the construction projects suffer from cost overruns due to a multiplicity of factors. The present work is carried out on studying significant factors causing cost overruns in construction projects. A questionnaire for the survey has been prepared by Authors based on 45 common factors for cost overruns identified from literature review and discussion with experts. These factors are related with Owner, Contractor, Consultant, and Management, Material, Equipment, Labor and External. The cost overrun methodology presented in this study gives statistical method which is used in construction sector for computing impact of project cost overruns. The finding of the paper will help the project manager to act on critical causes and further try to reduce cost overrun of project.

Introduction

I. INTRODUCTION

Throughout the world, the business environment within which construction organization operate continues to change rapidly . It provides huge employment to the people and plays very significant role in country economy. Project cost overrun is most common problems in the construction industry. Project overruns due to time and cost result in delays during project execution. In developing countries project overruns is a serious where implementation of project faces many uncertainties. It result in wastage of scare financial resources, delays in providing facilities, development and also make construction costlier. With globalization and technology driven economic growth all over the world, a scientific and systematic approach to project management becomes imperative to ensure that project objectives are attained within the constraints of time and resources.

To study the factors affecting cost overruns of construction projects a questionnaire has been prepared. The feedback was taken from respondents in Pune and Pimpri chinchwad  region of Maharashtra in India. The Statistical method is carried out to understand the perception of construction’s professionals in project towards factors influencing construction cost. An ordinal scale of measurement is applied for data measurement in questionnaire survey. Data is collected using develop structured questionnaire. The ranking of factor is calculated based on relative important index value.

II. LITERATURE REVIEW

Cost overrun is defined as excess of actual cost over budget. Cost overrun is also sometimes called "cost escalation," "cost increase," or "budget overrun” . A list of cost overrun factors and contributing to the cost overrun associated with buildings, roads and bridges construction is prepared based on literature review. A number of studies have been carried out to determine the causes of cost overruns in construction projects. Shambalid Ahady, Sakshi Gupta, R.K.Malik (2017) it was founded that causes of cost overruns like poor planning for implementation, Inadequate project formulation, Lack of proper contract planning and management, Lack of project management during execution . Dhanashree S Tejale (2015)” It was observed the factors for cost overrun are the Material shortage, Shortage of labor, Late delivery of materials and equipment, Unavailability of competent staff , Low productivity level of labors, Quality of equipment and raw material. For effective and efficient cost control of construction projects the Authors recommends that material management, resource planning and management, and proper financial management may be adopted. Abdussalam Shibani, Kumar Arumugam  (2015) The researcher found  cause of cost overrun by undertaking survey in his local areas on small scale and he also suggested to do it in large scale to get most accurate causes of cost overrun in construction project. Ashwini Arun Salunkhe,Rahul S. Patil (2014) After studying this report ,the conclusion was time and cost overrun have been a major recurring problem in construction industry.As the project is running on many number of factors & participant, these all are having individual causes. But the important participants like owner, contractor, and consultant have more influence on project performance. Ismail Abdul (2013) found significant factor causing cost overrun in construction project are shortage of labour low productivity level of labours, lack of experience of contractor and subcontractor , equipment breakdown, financial difficulties by contractor, unclear and inadequate detail drawing, design change.

III. RESEARCH METHODOLOGY

The research methodology for present study has adopted questionnaire survey to identify significant factors influencing cost overruns in construction projects. To identify cost overruns factors, literature reviews, discussion with experts were carried out. From existing literature on the construction industry it was possible to identify certain major effects of cost overrun on project delivery. A questionnaire was then drawn up. As the outcome of review 40 factors of cost overrun were identified.

These questionnaires were distributed to Owners and Contractors of construction Industry. The data from the questionnaire was analyzed statistically. The perspective of owner and contractor has been analyzed to rank the causes of cost overruns based on their Relative important index . Relative important index method was used for arranged in order of rank assessment of factors and found out the top most significant factors of cost overruns.

The questionnaire was designed so that it is easy to read and responses are easy to fill in. An ordinal scale of measurement will be applied for data measurement in questionnaire survey. These sections were designed to obtain the responses on a ordinal scale that indicates the relative importance of various cost overrun. Ordinal scale use in this study will be adopted from (Enshassi et al. 2009) i.e Extremely Significant (E.S); Very Significant (V.S); Slightly Significant (S.S) and Not Significant (N.S). However, abbreviation replace with numbers i.e 1 for not significant (0%); 2 for slightly significant (25%); 3 for moderately significant; 4 for very significant (75%) and 5 for extremely significant (100). will be adopted to understand the perception of personnel of the owner and contractors involved in handling construction projects. For reliability of data Authors decided the minimum experience of respondents (owner and contractor) as 5 years. The questionnaire has been given personally to the respondents and communicated to fill without hesitation or with no bias.

In the study Relative Important index (RII) have been employed and calculated for ranking of causes of cost overrun in the construction project. The RII is used to rank the different causes. These rankings make it possible to cross-compare the relative importance of the factors as perceived by the two groups of respondents (i.e. owner and contractors). Each individual cause’s RII perceived by all respondents should be used to assess the overall rankings in order to give an overall picture of the causes of construction cost overrun in construction industry.

All the numerical scores of each of the identified factors were transformed to relative importance indices to determine the relative ranking of the factors. Higher the value of RII, more important is the cause of cost overrun.

IV. DATA COLLECTION

As discussed earlier questionnaire survey have been carried out among the two major participants namely Government and Private representative from construction projects firms. The respondents involved in the survey had several years of experience (more than 5 years minimum) in handling various types of projects such as buildings, roads and bridges. Total 50 sets of questionnaires were distributed, 36 responses were received. Table-1. shows brief Summary of survey conducted. The respondents are senior employees of their companies and holding executive and managerial position. The reliability of the survey results is expected to be high because all the respondents are top-level experienced management officials in their organizations.

TABLE-1. PERCENTAGE OF QUESTIONNAIRE DISTRIBUTED AND RESPONSES RECEIVED

V. DATA ANALYSIS AND DISCUSSION OF RESULTS

The summary of cost overrun factors and relative important index (RII) of respective factors is given in Table-2. RII value was calculated as (Enshassi and Mohamed 2009 ; Desai and Bhatt 2013) with the following expression.   

RII = ΣW / A x N

Where,

W = Weighting given to each factor by the respondents and ranges from 1 to 5 where '1' is 'not significant' and '5' is 'extremely significant',

A = Highest weight ( I.e. 5 )

N = Total number respondents

A. Ranking of Cost Overruns

The ranking of reasons  of cost overrun for construction projects has been done based on relative important index (RII) value calculated for each group of respondent .( i.e. Owner and Contractor and also the overall respondents.)

Table-3 shows the top most significant factors of cost overrun ranked by overall respondents.

TABLE-2. TEN MOST IMPORTANT CAUSES OF COST OVERRUN.

From the analysis of results, it was found that escalation and fluctuation of material prices are ranked high by both respondent     owner and contractor. These Factors are elaborated in more detail as follow.

B. Escalation and Fluctuation of Material  Prices

It is rank 1st in overall ranking.  Price fluctuation can generally be defined as the rise or fall of price of goods, materials and  services on the markets. Price fluctuation can occur at any market, i.e at international markets, local market and/or at the  labour market. A contractor who tenders at a fixed price runs the risk that he may later have to pay more formaterials and labor than the prices and wages current at the time of his tender .

There are many causes of the recent material price fluctuations in the construction industry. They involve both domestic and international  market forces, as well as aspects of the construction industry that make it particularly vulnerable to average cost fluctuation.

The reasons  for fluctuation are several, the major ones being:

1. Supply and demand  imbalances
2. Exchange rate changes - If there is depreciation in the exchange rate, then exports will become cheaper abroad, but imports will appear to be more expensive. Firms will be paying more for their overseas raw materials leading to increase prices of domestic economy.
3. Imported inflation: In a global economy, firms import a significant proportion of their raw materials or semi-finished products. If the cost of these imports increases for reasons out of domestic control,then once again firms will be forced to increase  prices  to pay the higher raw material costs.
4. High Energy and Transportation Costs

C. Poor Site Management

It is rank 2nd in overall ranking. Construction management (CM) is a professional service that uses specialized, project management techniques to oversee the planning, design, and construction of a project, from its beginning to its end. The purpose of Construction management is to control a project's time / delivery, cost and quality.

D. Site Management 

Means the management of physical barriers and methods and non- physical means to   limit human and environmental exposure  to contamination at and/or emanating from a site, as well as the implementation of any necessary monitoring, reporting,  certification and/or operation and maintenance of a remedy, after the issuance of a notice of completion. Failure of  site management leads to delay in project completion, which increase the project cost because fluctuation of market price daily.

E. Project Over Time Cost

It is 3rd  in overall ranking. Delay is one of the most general, major and serious issues affecting the time factor in construction projects in civil engineering. Time overload is a crucial factor, even with technical  advancements and improved understanding of project management by project managers, time overrun is a critical factor. The explanations for the delay in projects are different. Delays are caused by factors such as “postponement of material delivery to the site, malfunction of equipment, political problems, and several weather conditions. Delays in some circumstances make the situation much more difficult. Recognizing the delay causes and selecting precise and correct measures to minimize the detrimental effect of delays on the length of projects is important for a thorough evaluation.

F. Cash Flow of Project

It is 4th in overall ranking. Cash flow has an impact on every aspect of the construction project implementation process. A lack of funds can lead to project and business failure. Contractors must compare actual income and expenses to predicted values during the construction process. If these figures change, the contractor should adjust the schedule and update the project plan as soon as possible to accommodate the new situation. If the contractor had a solid understanding of cash flow forecasting, they could manage cash flow more efficiently and correctly during the construction process, avoiding unnecessary expenses.

G. Poor Communication And Coordination By Owner And Other Parties

It is 5th in overall ranking. According to the Project Management Institute (PMI) more than half of all  project budget risk is due to ineffective communications and improper time management of project communications. Poor communication or miscommunication often results in increased costs.

An additional zero on a material amount can wreak havoc with a budget. There are many other ways in which communication can break down. For example, if a change in building material is not communicated in a timely fashion, you may have to eat the cost of the material ordered in error. Sometimes, the terminology can be the culprit. For example, the designer’s name for a material may not be what you call it. 

Misunderstandings can also lead to tasks not being executed properly. When that happens, revisions can cause budget overruns as well as time delays. 

This paper has highlighted factors and the need to reduce cost overrun by owner and contractor. Owner should facilitate payment to the contractors in order to overcome delay, cost overrun and claims. There should be adequate contingency allowance in order to cover increases in material cost. Quality materials should be of a greater interest for contractors in order to improve cost, time and quality performance. This can be done by conducting quality training and meetings that are important for performing an improvement. Contractors should make available source of finance during construction project, adequate and proper materials procurement and developing human resources in the construction industry through proper and continuous training programs about construction projects cost. These programs can update participant’s knowledge and can assist them be more familiar with project management techniques and processes at all levels of managerial people should participate in important decision making. There should be continuous coordination, cooperation, relationship and flow of information between all the people involve through project life cycle for resolving problems and developing project performance. Contractor should sequence the work according to schedule and also should have Cost Engineer in their projects to successful control cost

VI. APPENDIX

Table-3 Ranking Of Causes Of Cost Overrun

VII. ACKNOWLEDGEMENT

The satisfaction that accompanies the successful completion of any task would be incomplete without the mention of people whose ceaseless co-operation made it possible, whose constant guidance and encouragement crown all efforts with success.

I am thankful to my Paper guide Prof. Sumit Thakur, Prof. Sushma Awad, P.G co-ordinator for the guidance, inspiration and constructive suggestions that are helpful for me in the implementation of this Paper.

I am also thankful to the faculty and staff of the department of civil engineering, RMD Sinhgad technical institute campus, Pune for their help and support.

A construction project is deemed successful when it is finished within budget, on schedule, and according to its standards and specifications. Although similar in nature and objectives, construction projects can vary drastically in scope, timelines, environment, complexity, conditions, management structures, and budget. Without a system to centralize information and ensure alignment between stakeholders, variances in these factors can trigger massive disruption. For example, if your contractor overlooks a specific logistics or labor dependency, their timeline could end up being completely inaccurate, leading to bottlenecks and delays.

Conclusion

The present study identified and analyzed causes of cost overrun in construction industry in Pune and pimpari Chinchwad region. It was observed the factors for cost overrun are the Escalation and fluctuation of material prices, Poor site management , Material shortage, , Late delivery of materials and equipment,, Low productivity level of labors, Quality of equipment and raw material. For effective and efficient cost control of construction projects the Authors recommends that material management, resource planning and management, and proper financial management may be adopted. An attempt is made to capture the variables that best explain the occurrence and non-occurrence of cost overrun in construction projects. Statistical method could assist the decision makers in identifying factor causing cost overrun for better project development to avoid the delays and complete the project on planed schedule time.

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Copyright

Copyright © 2022 Saurabh T. Daundkar, Mr. Sumit Thakur, Mrs. Sushma Awad. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.