A Survey Of Cost Estimating Practices Of Construction Contractors

Project and Seminar Material for Quantity Surveying QS

A Survey Of Cost Estimating Practices Of Construction Contractors


Abstract


Cost estimating is a key activity in quantity surveying profession and in contractor’s organisation. The research work is to investigate into current cost estimation practices of contractors in Akwa Ibom state. The objectives were to identify the techniques used in cost estimating by the construction contractors, identify the causes of inaccuracy in construction contractors cost estimates and determine cost estimating risks influencing construction project estimates. Relevant literature on current cost estimating practices of construction contractors were reviewed and an exploratory field survey was undertaken to examine the objectives of the study.

A total of 159 questionnaires were distributed to construction contractors, of which 127 completed questionnaires were returned, representing a 81.41% response rate. The data obtained from field survey was analysed using mean item score. The study shows that group decision making, expert judgment and reserve analysis are the most frequently used technique of construction cost estimating employed by contractor.

The major causes of inaccuracy in cost estimating are unforeseen change in prices of materials, Lack of experience on similar project and instability of market condition. The result also shows that the major risk factors in construction cost estimating include variations in labour productivity data, estimator’s deficiency and error in design and specification. The study recommends that construction contractors and estimators should ensure that a frequent market survey are done for material and labour before estimating is done.


Chapter One


Introduction

1.1 Background of the Study

The growing need for construction of all types coupled with a tight monetary supply has provided the construction industry with a big challenge to cut cost. For all major works, it is wise to know beforehand the probable cost of construction (Dutta, 1989 and Lock, 2003). The estimated cost of construction works may be required to ascertain the level of funding and to determine project viability (in the case of commercial properties). It is also useful for managing cash flow and to prepare tender prices (Kelly et al; 2002). Preliminary cost estimating is therefore an attempt to give an approximate estimate of the cost of construction at a very early stage so that a client is aware of his financial commitments before embarking on detail design (Jagboro, 1995; Ferry et al,1999). It is a technique employed during the formative stages of a capital expenditure programme when there is lack of verifiable information for the initial evaluation of a project.

Ashworth and Hogg (2007) affirmed that because estimates will always be subject to some degree of error, the typical degree of accuracy expected in the construction industry is +10%. According to Ashworth (1996), the difference between an early price estimate of a consultant and the accepted tender from a contractor represents an inaccuracy. The purpose of a preliminary cost estimateis therefore to anticipate the amount of the contractor’s tender. The disparity between a preliminary estimate and a tender sum therefore remains the major index for measuring the accuracy of the Quantity Surveyor’s estimate. Therefore, preliminary cost estimates must be as much as possible close to tender sums for accuracy to be achieved.

The importance of accurate preliminary cost estimates to construction projects cannot be over emphasized. According to Odeyinka and Lowe (2002), in spite of the quantity of research efforts, accuracy of pre-tender forecasts is still a major problem largely due to risks and uncertainties inherent in construction. However, Dysert (2006) argued that by nature, an estimate involves assumptions and uncertainties and is therefore associated with some level of error.

According to Mendelson and Greenfield (1996) the remaining part of the twentieth century would involve corporations, institutions and government in a race to survive. The attendant dwindling economic fortune of nations economies around the World have geared up the participant in these sectors (the client in particular) to take up the challenge of ensuring efficient use of their resources to obtain value for money in terms of performance. The total cost of construction in normal circumstances is expected to be the sum of the following cost: Materials, Labour, Site Overheads, Equipment/Plant, Head office Cost and Profit but in many parts of the world particularly in Nigeria, there are other costs to be allowed for.These costs according to Mbachu and Nkado (2004) have obvious negative implications for the key stakeholders in particular, and the industry in general. To the client, high cost implies added costs over and above those initially agreed upon at the onset, resulting in less returns on investment. To the end user, the added costs are passed on as higherrental / lease costs or prices. To the consultants, it means inability to deliver value – for – money and could tarnish their reputation and result in loss of confidence reposed in them by clients. To the contractor, it implies loss of profit through penalties for non- completion, and negative word of mouth that could jeopardize his/her chances of winning further jobs, if at fault. The proposed work will investigate and report the other costs to be allowed for, which are the basic factors affecting construction cost in Nigeria and also proffer solutions to how construction cost can be minimized.


1.2 Statement of the Problem

The demand for more construction of all types, coupled with a tight monetary supply has provided the construction industry with a big challenge to cut costs. The problem of high contract costs of all aspects of construction is becoming obvious. Consequently, substantial increases are being observed in projects.

This substantial increase has brought about loss of client confidence in consultants, added investment risks, inability to deliver value to clients, and disinvestment in the construction industry. The unit cost in practice by most estate surveyors and valuers especially in Nigeria is either done by calculated guesswork or face value. Most times the unit cost is obtained from ‘experience’ having carried out similar valuations on comparable properties (Aihie, Ikuabe, 2018). Determining the unit cost of construction or cost estimates for valuation from experience as against resorting to the services of qualified quantity surveyors at the end of the day leads to the property being overvalued or in most cases undervalued.


1.3 Aim and Objectives of the Study

The aim of the study is survey of cost estimating practices of construction contractors.

The objectives of the study are as follows:

  1. To identify the techniques used in cost estimating by the construction contractors.
  2. To identify the causes of inaccuracy in construction contractors cost estimates.
  3. To determine cost estimating risks influencing construction project estimates.

1.4 Research Question

  1. What are the techniques used in cost estimating by the construction contractors?
  2. What are the causes of inaccuracy in construction contractors cost estimates?
  3. What are the cost estimating risks influencing construction project estimates?

1.5 Significance of the Study

An assessment of the study would enable Clients, Contractors and Consultants give an economic approach to construction work such that they would be able to identify the dominating factors leading to high construction cost in Nigeria. The application of the solutions proffered to minimizing construction cost would restore client’s confidence in consultants, reduce investment risks, and generally boost the viability and sustainability of the industry.


1.6 Scope and Delimitations

The scope of this research is limited to survey of construction cost estimate and proffering solutions on how to reduce construction cost in Nigeria. The study is limited to projects in the Akwa ibom metropolis of Nigeria because there is easy access of information in the Akwa ibom metropolis by the researcher. Target respondents for this study are the principal actors in the construction industry namely: the Client, the Consultant and the Contractor.


1.7 Definition of terms

Cost:

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.

Cost Estimate:

A cost estimate is the approximation of the cost of a program, project, or operation. The cost estimate is the product of the cost estimating process. The cost estimate has a single total value and may have identifiable component values.

Construction:

Construction is the process of constructing a building or infrastructure. Construction differs from manufacturing in that manufacturing typically involves mass production of similar items without a designated purchaser, while construction typically takes place on location for a known client.

Construction Company:

A construction company is a capital-intensive business. You may need to rent or buy heavy equipment, or purchase materials in bulk. A solid business plan can outline your assets, and make the case for your new construction company to access funding from investment sources, from private interests to SBA loans.

Contractors:

A contractor is a person or a company that seeks to do business by obtaining contracts and carrying them out. Being a contractor is similar to being a business owner – you negotiate your deals, work for yourself, have your clientele and are rewarded on your own merits.

Practices:

Practice or practise is the act of rehearsing a behavior over and over, or engaging in an activity again and again, for the purpose of improving or mastering it, as in the phrase “practice makes perfect”. Sports teams practice to prepare for actual games. Playing a musical instrument well takes a lot of practice.


Chapter Five


5.0 Conclusion and Recommendations

5.1 Conclusion

Conclusively, the survey of cost estimating practices of construction contractors as opined by the three key players in the construction industry is cost of materials. Since Quantity Surveyors are cost experts they are in the unique position to examine these factors and take care to estimate, include contingencies in the budget, plan for, and mitigate the adverse effects of these factors on the project cost. Contractors should give an economic approach to construction work such that they would be able to identify the dominating factors leading to high cost estimates of construction in Nigeria and apply the proffered solutions to minimizing same so as to restore client’s confidence in consultants, reduce investment risks, and generally boost the viability and sustainability of the industry.


5.2 Recommendations

The following recommendations are deduced from this study:

  1. Much focus should be placed on the major factors affecting construction cost in order to reduce the cost of construction cost, enhance construction performance and generate confidence within the construction industry.
  2. Quantity Surveyors should become more alive to their responsibilities as cost experts ensuring that they make use of correct estimation methods.
  3. There should be thorough crosschecking of estimates based on updated price information in order to avoid any wrong estimation.
  4. There should be proper coordination and communication among various parties working on the project in order to improve management, control problems and reduce any avoidable delay.
  5. Contractors should come up with a clear plan and strategy before starting a project. Early project planning and scheduling of labour, equipment and cash, combined with a good bidding strategy, will help to obtain efficient work at a proper price.
  6. Contractors should take responsibility to make use of the proffered solutions to minimizing cost of construction.

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