MODELLING OF COST OVERRUNS IN BUILDING PROJECTS

MODELLING OF COST OVERRUNS IN BUILDING PROJECTS

ABstract

A building construction project is an undertaking that involves borrowing or self-funded investment by the client. The expected result of such expenditure is usually cost-effective, determined by the project objectives of cost, time, and quality. Project cost as a project goal is a key factor in determining project success given the common economic challenges experienced around the world. Construction cost overruns have become a recurring phenomenon in the execution of construction projects. The primary focus of this study was to identify, analyze and model the factors contributing to 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
INTRODUCTION

BACKGROUND OF THE STUDY

Globally, the construction sector is inundated with cost overruns in the delivery of building projects. This experience has resulted in loss of client confidence in consultants, additional investment risk, inability to add value to clients, and failure to invest in the construction industry (Mbachu and Nkado, 2004). It is imperative that the objectives of the building contract are met to the satisfaction of the parties involved. Cost, time and quality are important, interrelated and interdependent objectives for achieving the expected goals/objectives of a construction contract (Ashworth, 1999, Gould, 2002). It is therefore important to maintain the right balance between the three so that project results are delivered on time, within budget and with the required quality (Akinsola and Potts, 1998). However, it is an accepted fact that the majority of contracts in Nigeria suffer from unreasonable time extensions and/or additional costs for clients and/or poor quality of work (Oluwole, 2008b).

Project cost overruns may or may not be avoidable. Overruns due to design planning or project management issues are avoidable as they were reasonably predictable and avoidable (Shanmugam et al., 2006). However, there are some unavoidable costs that cannot reasonably be avoided, such as costs due to unforeseen circumstances. Cost overruns can add value to a project when additional work is done with the intention of achieving better results. Overruns can also add value for work that was left out of the design plan but clearly needs to be done. However, some overruns add no value and can be a waste of money if they don’t lead to a better product. Project cost overrun refers to the actual “increase in costs” to the customer during construction of a construction project (Janaka, 1992). This is simply the difference between the originally intended value for the project and the value reflected in the Certificate of Completion. Cost overruns occur when tolerances are exceeded, changes are made, or unexpected problems occur. Proper planning can significantly reduce cost overruns.