Analysis Of Factors Influencing Cost Overruns In Indian Construction Projects

The performance and growth of the construction industry of any country play a vital role in the economic growth of the county itself. Such is the importance of the actions and performance of the construction sector. Thus, it is critical to be aware of the factors hindering its growth. However, the success of the construction projects depends on two major factors i. e. , efficient time and cost performances. The effects of delay in the completion of the projects eventually have a direct influence on the overall budget of the project. Hence cost management proves to be a key for the project’s success.

The main objective of this paper is to analyse the cost related issues, which has increased considerably in construction projects across India and provide suggestions to overcome those issues. Various studies were carried out on projects that hauled midway due to cost overruns and the factors that caused overruns were listed down to prepare a questionnaire. The questionnaire was distributed to all participants involved in a construction project like the contractors, consultants and the owners, after which a statistical analysis of the data was performed. The most significant factor influencing the cost overruns was determined by implementing a method called relative importance index. The factors such as high cost of transportation, changes in the materials used in construction and escalation of expenses of the construction materials were found out to be the major factors that result in cost overruns in the construction projects. The result of the study highlighted significant recommendation to reduce cost overrun and also time overrun, that directly leads to an increase in cost.

Factors influencing cost overrun

Cost overrun or cost escalation was defined by Shanmugapriya and Subramanian (2013) as the difference between the actual cost of the project and the estimated cost on completion of the project. As per the studies carried out by Shanmugapriya and Subramanian (2013), infrastructure projects across Nigeria, Vietnam, Gaza, and UK were considered and factors causing budget overrun in those projects were listed down.

Nigeria

• Shortage and fluctuation in material prices.
• Faulty project management.
• Time delay due to adverse climatic conditions and design changes.
• Variations in site conditions.
• Improper estimation.
• Disagreements in the contract agreement.
• Improper work carried out by the nominated contractors and sub-contractors.

Vietnam

• Incompetent supervision and management of the site.
• Inadequate support from the project management team.
• Financial difficulties of the clients, contractors, and sub-contractors.
• Time delay due to design changes.

Gaza

• Inflation in material prices due to frequent border closures.
• Delay in the construction process.
• Delay in supply of necessary equipment and materials by the contractor.
• Incompetency of the supplier, causing resource constraints.
• Insufficient allocation of funds.
• Improper cost management strategies in pre and post-contract stages.
• Changes in design and defective estimation of the resources required.

United Kingdom

• Frequent alteration in designs.
• Liabilities and ambiguities affiliated to the construction project.
• Improper estimation of time and cost required for completion of the project.
• Inadequate participation of the subcontractors.
• Complex nature of the works involved.
• Misunderstandings between the participants of the project.
• Disagreements and confusions caused between the project participants with regards to the contract agreement.
• Inflation of material prices.
• Improper allocation of funds for the project.
• Incompetent project managers and labours.
• Inconsistent weather conditions.

Methodology used

With the factors causing cost overrun across the world listed down, a questionnaire survey was adopted to determine the significant factors that will cause budget overrun in the Indian construction industry. The questionnaire prepared for the survey was based 5 on 54 factors, to determine the significant factors. These factors identified from various literature reviews were studied in further and were discussed with the experts in Indian construction Industry before formulating the questionnaire. The questionnaires were distributed to various participants of the Indian construction Industry like the owners, contractors and design consultants. Participants involved in the process were experts in their own fields and had several years of experience in various construction projects in India. Each respondent was asked to rate the factors on the scale of 1 to 5, with 1 being least significant rating and 5 as the highest significant rating.

Reliability analysis

The degree of reliability of different scores given by a respondent for a single factor is generally determined by reliability analysis. The ‘Cronbach alpha’ value was used to determine the reliability of the data collected. Reliability of the data is considered to be high and low when the Cronbach value of the data is greater than 0. 7 and lesser than 0. 3 respectively.

Relative Importance Index (RII) T

he ranking of the factors based on the questionnaire survey carried out was calculated using the Relative Importance Index method. RII = ∑????????????×1005 (1) where, a is the weight given by the respondents n frequency of each response N is the total number of responses Based on the RII of the responses, the factors were hierarchically ranked depending upon the level of significance.

Relevance

As discussed earlier, efficient cost management in the construction sector is one of the major factors to be considered in order to address the economic growth of the nation. The cost considerations are constantly involved throughout the construction process, right from project planning to handing over the structure to the client. In the construction projects, time and cost are two proportional factors, where time directly equals money. Delays in project result in the extension of work, causing budget overruns, resulting in a decrease in the overall contribution of the construction sector to the country’s growth. Thus, there has always been a necessity for statistical cost analysis of construction projects to assist the clients and contractors in decision-making scenarios, which in turn assists them in the successful completion of the project. To establish the relevance of the above-discussed work of Shanmugapriya and Subramanian (2013), it is important to understand cost engineering.

Cost Engineering is defined by Xu et al. (2012) as that aspect of engineering where the decisions and experiences from the past are used in the scientific analysis and techniques to mitigate or solve the problems in cost estimation, planning, scheduling and management of the engineering projects, and in the profitability analysis of the projects. It is the method used to determine the future cost of the activities involved in a project. The research of Shanmugapriya and Subramanian (2013) explains the major factors causing cost overruns and their effects on the construction projects. The data collected by conducting a survey in the Indian construction Industry was analysed to determine the most significant factors. The work basically performed an affordability analysis with the past data, to help the investors and the owners to devise investment strategies over 8 the lifecycle of the infrastructure. The end results of the literature work clearly indicate that, of all the factors that were listed, there were a few factors that caused significant setbacks to achieve the cost related goals of a construction project. It can be certainly inferred that the most common or repeated factor causing an increase in cost might not necessarily be the most significant factor. Hence, it is highly critical to understand the factors that cause overruns, in order to take actions to mitigate them. Thus, addressing the uncertain nature of project life cycle cost and affordability analysis, which are the key aspects of cost engineering.

Moreover, the ultimate objective of cost engineering is to identify and mitigate the factors causing overruns in any engineering project. As suggested by the study, if the factors that were determined to be the significant causes of budget overrun are addressed with adequate caution by the participants i. e. , the owners, contractors, and consultants, while making decisions, one can say that the project will end up as a success from everyone’s perspective. Thus, the literature work provided by the authors appear to be relevant in extensive addressing the cost engineering philosophies such as identifying the elements causing setbacks and postulating efficient mitigation strategies to achieve cost related objectives in a project.

Applicability

The improvement of economic productivity of the construction works depends largely on the application of cost management strategies. Since the result of the above-discussed study states the significance of each factor, it can be applied to devise 9 strategies to manage the expenditures in real time projects. Shanmugapriya and Subramanian (2013) describe that it can be done by three parties namely,

• Contractors
• Owners
• Consultants.

Application - contractors

The contractors hold the key to material related cost inflations in the project. Hence, they must be aware of the of the materials used and their prices. Procurement of the materials must be done before the commencement of a particular work to avoid cost overruns due to time delay. However, to avoid extreme financial scenarios, the contractors should have enough cash with them before beginning a project. Adequate and experienced professionals must be employed by the contractors to enable effective communication in planning and technical stages, and to supervise the quality of work carried out at the site, in order to avoid cost overruns due to reworks.

Application - owners

Owners can apply the results of this analysis and sort out the areas that require to be focused, such as the revision of contract documents. So as to avoid the delays that may be caused in case of misunderstanding between the project participants. The owners must provide adequate funds to the contractor, to avoid budget overruns due to delay in work. Since overruns are caused by the improper estimation of cost and time required for completion of the project, owners must act realistic in determining and levying the funds and duration. Owners contribute to the overruns by altering the design at various 10 stages of the project, which can be a significant factor. Thus, the owners can owners can use the result of the above-discussed work and avoid cost overruns.

Application - consultants

Similar to the owners and contractors, consultants can identify the factors that cause cost overruns from their side. Consultants must review all the design drawings and payments of the contractor to prevent cost overruns in the project. They can be assisted but technical and management team, in order to answer the questions put forth by the contractors and to make decisions regarding the cost and designs of the structure.

Potential usefulness

The potential usefulness of the research methodology implied in this study can be witnessed through the result of the survey carried out. The factors causing cost overruns at the highest degree were determined using certain methodologies like the reliability analysis and the Relative Importance Index. The factors were grouped into eight categories and by the use of reliability analysis and Relative Importance Index methods, the ‘percentage agreement’ was found. Thus, determining the significance of the causes. The factors that were found to have a significant impact on the cost of the project on completion were not the most repeated factors. Hence, helping the project participants to realise that the least repeated factor might as well be the factor that causes budget overrun of the highest degree. This compels the project team i. e. , owners, contractors, and consultants to communicate about the prominent issues and make investment decisions, considering the efficiency of the completed project. In turn, better communication between the participants helps in the formulation of dynamic work plan strategies to reduce budget overruns.

This study also helps in the realisation of the fact that the factor-group with the highest significance for one group of participants might differ from the other. As it can be seen in the literature work, high transportation cost was ranked first overall while it was ranked 11th, 6th, and 8th by the contractors, owners, and consultants respectively. Whereas, cost overruns due to wastage on site were found to be the least significant factor but it was ranked 3rd, 6th, and 19th by the contractors, owners, and consultants respectively. Through the paper by Shanmugapriya and Subramanian (2013), it can be understood that the three key participants of the construction industry view the industry and the problems associated with it from their own vantage points. Hence, there will definitely be an apparent bias in the responses to the questionnaire and so, necessary actions need to be taken to get a fair degree of neutrality in the decisions, which can be achieved when participants with a high level of experience are involved in the decision-making process. Hence, through understanding the paper, the value of sorting out the “priority” list for the works to be done, can be realised. In can also be said that it has a direct influence on the potency of the overall project, in any engineering stream. Thus, the paper by Shanmugapriya and Subramanian (2013) portraits the potential usefulness of the reliability analysis and the Relative Importance Index (RII) methods in cost engineering.

Conclusion – for better outcome

Although the authors of the paper have explained the criticality of the research that was implied, the research methods when applied in the project itself does not assure the efficiency or the success of the project. In order to ensure the inevitability of the 12 success, the complications associated with the cost management process has to be dealt with. The impact of these issues can be minimised by observing the process with absolute insight and by following subsequent conclusions, as explained by Chan and Kumaraswamy (1997).

Dynamic management of site by the collaborated efforts of contractors and the consultants underlines order at the site. The professionals involved in the project from both the sides must be well accomplished at both technical and organisational levels so that the time taken for training programmes can be shortened. Thus, reducing the time delay and increasing cost efficiency.

The consultants should be provided with accurate site information before the commencement of the project. This assists the team to develop a definite design of groundworks and foundation for the particular site. This reduces cost related vulnerabilities as the repercussions of unforeseen site conditions is avoided.

It is vital to define the roles and responsibilities of the individuals involved in the project and a culture that enables communication between all teams involved must be promoted in order to assist the decision makers to decide ‘the best’, for the project.

Value management techniques can be made use of during the development of conceptual designs, allowing contingency for the inevitable variations. The contingency allowance quantified by risk analysis techniques limit the variations involved to an absolute minimum, thereby reducing the cost of the project on completion.

The differential standpoints of participants must be taken into consideration and a comprehensive system must be adopted to minimise the effects the clash of opinions amongst the parties involved. As the clash may cause significant cost overrun by time delay, a strategy that is formulated to brief the client after obtaining the consultants’ recommendations and the contractors’ inputs might prove to be apt for such scenarios.