Modelling Of Cost Overruns In Building Projects

Modelling Of Cost Overruns In Building Projects
Abstract
Construction of building projects is an endeavour that involves capital expenditure, which is either borrowed or self-financed by clients. The expected outcome of such expenditure is value for money, which is usually dictated by project objectives of cost, time and quality. Project cost, as a project objective, is a crucial determinant of project success in the prevailing economic challenges being experienced globally. Construction cost overrun has become a reoccurring phenomenon in the delivery of building projects. The major thrust of this study was to identify, analyse and model the factors that contribute to building construction cost overruns in Abuja. The study adopted a Monte-Carlo technique in simulating cost overrun using DiscoverSim® version 1.1 (SigmaXL, 2013) simulation and RiskAmp Microsoft Excel add-in software to analyse data obtained from literature review, review of project documents with contract sum of over Five Million Naira executed within Abuja city in addition to interview sessions with construction professionals.
The study revealed that significant cost overruns are mainly due to re-measurement and variation. The simulation result elucidated that less than 10% of building projects are completed below the initial contract sum in Abuja which could be due to the fact that projects tend to be initiated and executed without adequate project information such as client brief, design details and specifications. The study recommends the need for minimizing occurrence of re-measurement in building projects through provision of full design information prior to contract award, development of simulation model for specific project categories and establishment of a project cost overrun band that will enable a scientific measurement of project’s value for money benchmarked against initial cost estimate.
Chapter One
1.0 Introduction
1.1 Background of the Study
Globally, the construction sector is inundated with cost overruns in the delivery of building projects. This experience has brought about loss of clients’ confidence in consultants, added investment risks, lack of ability to deliver value to clients, and disinvestment in the construction industry (Mbachu and Nkado, 2004).It is of essence that the objectives of a building contract are met to the contentment of the parties involved. Cost, time and quality are significant, interrelated and interdependent targets for achieving the objectives/goals expected of building contracts (Ashworth, 1999, Gould, 2002). Thus, it is crucial to keep up a proper balance between the three so that project outputs are realised on time, within the financial plan and with the requisite quality (Akinsola and Potts, 1998). However, it is an admitted fact that in Nigeria, the majority of contracts suffer undue time extensions and /or additional cost to the client and /or inadequate quality of work (Oluwole, 2008b).
Project cost overruns can be either avoidable or unavoidable. Overruns due to design plan or project management problems are avoidable because they could have reasonably been foreseen and prevented (Shanmugam et al., 2006). However, there are some unavoidable costs such as those due to unanticipated events which cannot reasonably be prevented. Cost overruns may add value to projects when extra work is done with the intention of producing a better output. Overruns may also add value when they involve work that was omitted from design plans but clearly needed to be done. However, some overruns may not add value and represent wasted money if they do not result in a better product.
Cost overrun of a project refers to the actual ‘cost increase’ to the client during construction of a building project (Janaka, 1992). It is merely the difference between the value originally envisaged for the project and the value reflected in the final certificate. Cost overruns occur from overspending the allowances, making changes and encountering unforeseen problems. Proper planning can greatly reduce cost overruns.
Another study from Indonesia revealed the three most frequently occurring causes of cost overruns are materials cost increases due to inflation, inaccuracy of quantity take-off and cost increase due to environmental restrictions (Kaming et al., 1997). But in general it is found that the variation was a main source of cost overrun and the design team believes that the client predominantly creates variations which lead to many problems in building contracts.
The causes for cost overruns differ from country to country. According to a study done in Kuwait by Koushki et al. (2005) the three main causes of cost overruns were identified as contractor-related problems, material-related problems and, owners’ financial constraints.
However, the design team must examine their activities critically and ensure that they do not mislead the client in an attempt to cover their own inadequacies. A major problem when cost overrun occurs in a project with no adequate provisions to manage is delay in payment and subsequent abandonment of projects. This breeds diversified hardship in project execution (Achuenu and Kolawole, 1998). Thus, an attempt to simulate cost overrun in construction projects is imperative to understanding the factors that lead to cost overrun in Nigeria construction industry.
1.2 Statement of Research Problem
This research work is fashioned after an existing research carried out by Shanmugam et al. (2006) which attempted to simulate a model of cost overrun in the Sri Lankan construction industry. The research highlighted some factors that lead to cost overrun in construction projects in Sri Lanka and used Microsoft excel to simulate how the effects of these factors can be identified early in the project to aid decision in decision making. Although there may be some similarities between the construction industry in Nigeria and Sri Lanka; given that both are developing nations. Nonetheless, the research can be replicated in Nigeria because literature has indicated that the causes of cost overrun differ from country to country (Kaming et al., 1997; Koushki et al., 2005) and insufficient understanding of the causative factors of cost overruns also lead to poor quality proactive decisions aimed at mitigation the negative effects of cost overruns. The focus of this research is to identify, analyse and model factors that contribute to cost overrun in building projects in Abuja using Monte Carlo simulation methods..
1.3 Need for Study
The major challenges facing the construction industry in developing countries like Nigeria is the chronic problem of cost overruns. Under normal circumstances a complete set of drawings and specifications should be made available to the Quantity Surveyor; who would prepare fully described and accurate bills of quantities for tendering purposes (Koushki et al., 2005). As one arbitrator once observed that, it is difficult to imagine a building contract, which proceeded to completion without delay or variation whatsoever (Odusami and Onukwube, 2008; Nwachukwu and Emoh, 2010). However, this does not mean that there are no building projects that have been completed within budget. The concern is that such ideal situations are rare (Chan, 2001).
There have been many research works on cost and time overruns (Kaming et al., 1997; and Cox et al., 1999). Again research has found that there are more building projects that had cost overruns than those which were completed within budget (Chan and Kumaraswamy 1996). The scenario of cost overruns has been blamed on the many factors that influence construction cost overruns (Kaming et al., 1997). The recent financial crisis globally brings to the fore the need to adequately manage construction cost at all stages of the project to avoid potential issues such as abandonment of projects and cost escalation.
In general, the results of this research work will aid clients especially the government which is the biggest player in the Nigerian construction Industry as an initiator and financier of construction projects to manage cost overrun. The significant impact of cost overrun cannot be over emphasized as many literatures have highlighted its effect on project execution.
1.4 Aim and Objectives
1.4.1 Aim
The aim of the research is to develop a model of cost overrun of building construction projects in Abuja.
1.4.2 Objectives
To achieve this aim the following three objectives were set. They are to:
- Identify factors influencing tbuilding construction cost overruns;
- Analyse factors leading to cost overruns of building projects in Nigeria; and
- Model the cost overrun factors of building projects in Abuja.
1.5 Scope and Limitations
1.5.1 Scope
The research scope covers cost overrun in building construction project in Nigeria and is limited to projects located within Abuja. Furthermore, the building types studied in this research was office complexes, hospitals, educational, commercial and residential buildings all with a construction cost over 5 million Naira. The decision to limit the data to projects above five million Naira is vested on the idea that such projects within the range of that contract sum cover various project elements. Furthermore, the data obtained from such projects would provide a reliable and realistic data suitable for generalizing cost overruns in building projects in Nigeria as they cut across the major types of projects predominantly undertaken in Nigeria. The data are to be collected from the building projects undertaken by contractors registered not lower than category C registration of the Federal Ministry of Works, which is the regulatory authority of construction in Nigeria. The categories are stipulated by the Federal Ministry of Works who grades Contractors based on the value of the project they can undertake based on their performance.
1.5.2 Limitations
Data collection techniques and research strategies have limitiations which the researcher was concious of. In tandem with this, the potential limitiations to the conduct of this research as highlighted below were considered prior to commencement of the research.
- Availability of consultants to be interviewed
- Accessability of project documents
- Workload or schedule of employees involved in the case study
- Reliability of interview and review of project data as data collection technique.
In addressing these limitations, sugestions by letters of request were sent in advance to all employees to be involved in the research informing them about the possible questions to be asked during the interview and documents that will be accessed. This approach allowed for planning and adjustment of interviewees schedule to accommodate the interview sessions to be conducted as well as, facilitating the accessability of relevant data. In addition to this, the provision of potential questions to be asked facilitated the rate of response by the interviewee as it provided the interview with a feel of the scope of the interview questions prior to the interview and also simplified the use of semi-structured interview questions for the research.
To minimize the possibility of obtaining baised responses from the interview, employees of different firms involved in different projects were interviewed. This avoided the dependency on one source for research data. In addition to this, review of project documents was also conducted by correlating data from different project documents that contained information to ascertain the level and extent of cost overrun in the projects.
The numbers of building projects constituting the historical data used for the simulation model in this study are not adequate. A general distribution option is the Normal Distribution, with a minimum sample size of 30; preferably 100 (SigmaXL, 2013). This condition was not met in this study due to time, financial constraints and lack of access to adequate data of Final accounts of completed projects in Abuja.
The categories of building projects were limited to only four, thus the simulation model was developed for all four categories combined. However simulation models developed for specific category are likely to be more reliable and predictive than a combination of diverse building projects, which usually have divergent procurement procedures and components of cost overrun.
Chapter Five
5.0 Summary Conclusion and Recommendations
5.1 Summary
The major thrust of this study was to identify, analyse and model the factors that contribute to building construction cost overruns in Abuja. The study adopted a Monte-Carlo technique in simulating cost overrun using DiscoverSim® version 1.1 (SigmaXL, 2013) simulation and RiskAmp Microsoft Excel add-in software to analyse data obtained from literature review, review of project documents with contract sum of over Five Million Naira executed within Abuja city in addition to interview sessions with construction professionals. Significant data was obtained from the research which could aid in understanding cost overrun in building projects. The conclusions and recommendations drawn from this study are presented in this section of the project.
5.2 Conclusion
Generally, the results of this study reveals and confirm the established facts that cost overrun occurs in all types of building projects.
- Financial resources are so scarce in developing countries like Nigeria, hence, cost related issues in the Nigerian construction industry are sensitive issues. Therefore, carrying out a research in this area will have a paramount importance in understanding cost overrun which is a prerequisite to minimizing or to avoid cost it occurrence in the construction industry.
- In the domain of construction, cost overruns from tender Bill of Quantities (BOQ) to final account are common in Nigeria in almost every project. Main reason for this is tendering with very limited or inadequate information. In the requirement of design the scope and complexity of the project should be clearly defined, no matter how much changes are subsequently made in the design. However, it should be noted that change is not always a threat, but can be an opportunity to save cost and make the client’s money more valuable when it is managed effectively.
- The aim of this study is to identify and analyze cost overruns in building projects in the Nigerian construction industry. The factors affecting the cost overruns were identified and quantified. Probability distribution was established for each factor identified. The simulation model was developed to quantify the cost overruns.
- As highlighted in the literature, cost overrun is a phenomenon that occurs due to many factors influenced by different reasons. The results indicated that occurrence of cost overrun may be influenced by design changes during construction stage, improper management and ineffective communication, lack of information about the actual design during the tendering stage and inaccurate quantities of tender BOQ.
The findings of this research revealed that although all factors may occur in a single project, the influence of each factor on the overall project cost overrun of the projects surveyed in this study differs as highlighted below
- Variation accounts for 37% of the total cost overrun
- Re-measurement accounts for 26% of overall cost overrun of all projects surveyed.
- Adjustment of PC sum stood at 20% of the total cost overrun
- Fluctuation accounts for 10% of the total cost overrun
- Other factors accounts for less than 10% of the total cost overrun
- Factors leading to cost overrun of buildings does not follow a common pattern in relation to their effect on the total cost of a particular kind of building
In addition the simulation model provided insight on the occurrence of cost overrun in Nigeria as highlighted below
- Simulation result indicated that less than 10% of building projects are completed below the initial contract sum in Abuja.
- For process optimization in building cost overrun, re-measurement is the principal factor to be considered.
- Only about 20% of building construction cost overruns will be within the 10-15% specification limits of cost overrun as revealed by the results of the simulation using the upper and lower limits of overrun.
5.3 Recommendations
The following recommendations are proffered in attempts to minimize the occurrence of cost overrun as revelled from the interview results
- Clarification of client needs in terms of specification and designated use of the proposed building project.
- Proper briefing prior to award of contract
- Notwithstanding early project planning and consideration of all possible design solutions, value engineering during project execution will go a long way in minimising cost overrun in projects.
Further study of cost overrun in construction projects will go a long way in understanding the phenomenon and improve project delivery in terms of client’s expectations and attainment of project objectives. Thus, the following recommendations are highlighted below
- Further studies in building projects cost overrun with more categories and larger dataset to validate the findings of this research
- Simulation models developed for specific project categories which may be considered more pragmatic
- Further investigation of re-measurement as identified as a key risk factor and contributor to project cost overruns which needs to be managed during planning phase and project execution phase in a project delivery which will aid the project team in avoiding or minimizing it’s occurrence of factors that instigate the occurrence of re-measurement.
- Formulation of an acceptable cost overrun band to be used as a benchmark by policy makers in project certification and determination of performance in terms of value for money expended on a building project.
In general, the results of this research work will aid clients especially the government which is the biggest player in the Nigerian construction Industry as an initiator and financier of construction projects to manage cost overrun. The significant impact of cost overrun cannot be over emphasised as many literature have highlighted its effect on project execution.
5.4 Contribution to Knowledge
This research work has contributed to the knowledge and understanding of cost overrun in building projects by
- Indicating that not all projects experience cost overrun. Cost savings can be achieved through effective management of the project as eluded by results of the interview sessions.
- Highlighting that factors leading to cost overrun do not necessarily have a determined pattern of influence on the overall project cost. The result brings out the divergence of impact of factors leading to cost overrun on the final cost of the building projects studied.
- Modelling cost overrun in building projects using more recent modelling software DiscoverSim (SigmaXL, 2013). Although this research work was modelled after a similar research conducted by Shanmagum et. al (2002), the use of a more recent and robust software in modelling the cost overruns provides additional resources to the study of cost overrun in building projects.


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