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COST OVERRUN IN PAKISTANI CONSTRUCTION INDUSTRY

Abstract

1. The construction industry is dynamic in nature due to the increasing uncertainties in

technology, budgets, and development processes. Nowadays, building projects are becoming

much more complex and difficult. Cost is among the major considerations throughout the

project management life cycle and can be regarded as one of the most important parameters

of a project and the driving force of project success. Despite its proven importance it is not

uncommon to see a construction project failing to achieve its objectives within the specified

cost. Cost overrun is a very frequent phenomenon and is almost associated with nearly all

projects in the construction industry. This trend is more severe in developing countries where

these overruns sometimes exceed 100% of the anticipated cost of the project.

2. This study attempts to identify the major cost overrun factors in the construction sector

of Pakistan, which can serve as the way forward for future work in coping with these

overruns.

Introduction

3. Cost has its proven importance as the prime factor for project success. Most of the

significant factors affecting project costs are qualitative such as client priority on construction

time, contractors planning capability, procurement methods and market conditions including

the level of construction activity. A project otherwise completed may not be regarded as a

successful endeavor until and unless it satisfies the cost limitations applied to it. In spite of its

proven importance it is not uncommon to see a construction project failing to achieve its goal

within the specified cost. Cost overrun is a very frequent phenomenon and is almostassociated with all projects of construction industry. Cost overrun can be simply defined as

when the final cost of the project exceeds the original estimates. It is believed that

construction projects experience an increase in cost of about 33% on average. The trend is

more severe in developing countries where these overruns sometimes exceeds 100% of the

anticipated cost of the project. Low quality materials cause higher construction cost than

expected because of the loss of materials during construction.

4. In Pakistan, construction sector is an important sector. Although not working to its

fullest potential, it still is of prime interest to the country. Growth in this sector is critical for

growth in national income as it isamong the largest sectors that generates employment within

the country as well as a key indicator of the economy of Pakistan. As many other developing

country, Pakistan is facing also cost related issues among which cost overrun is quite

prominent. There are several factors that are responsible for these cost overruns. This paper

attempts to identify the major factors of cost overrun in construction sector of Pakistan and

can serve as the way forward for future work in coping with these overruns.

5. Objectives and Scope. The study has been conducted to identify the issues

involved in cost overruns in construction projects in Pakistan. In this regard certain factors

have been identified through the study and their importance and impacts have beendiscussed. In total twenty five (25) factors were short-listed to be made part of the survey

questionnaire and the survey was conducted with representatives from local Managerial

executives / general contracting firms. Furthermore, some recommendations and mitigation

measures have been suggested to strategically cope up with these factors. This study project has

four main objectives:

a. Assess the current state of Pakistan construction industry through quantitative

research with specific reference to the status of construction management

education, research and practice.

c. Devise a framework to standardize the construction industry practices for

achieving improved performance on cost, time, quality, productivity and safety.


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d. Capacity building of academia, industry, owners and government in the area of

construction management so as to improve the overall efficiency and

productivity of the construction industry.

The general objectives were met through accomplishment of several specific tasks.

6. Research Tasks. The following research tasks were completed.

a. Define the project failure criteria

b. Identify the factors affecting construction project success

c. Develop structured questionnaire

d. Collect data

e. Analyze data

f. Develop guidelines for CSFs

7. Research Methodology. The methodology of the study is follows:

a. A thorough literature review was done and also the expert opinions from localsinvolved in the business were taken, through which a number of cost overrun

causes were identified in the local construction industry scenario.

b. Questionnaire consisting of two parts A and B was developed. In Part A

personal Information of the respondent was asked. Part B was aimed to obtain

information about causes of cost overrun in Pakistan construction industry, it

was asked to rate those initially identified twenty five (25) factors according to

their severity level on the given scale.

c. A survey was conducted through postal mail and personal interviews in which

respondents were asked to rank and score these factors according to their

experience. _______ x construction firms were approached for these surveysout of which ______________ responses were received with the response rate

of ____________%.

d. Assessment of feedback from questionnaire survey was made. Analysis is

discussed in detail in the following section, on the basis of which

recommendations to construction industry of Pakistan were made.

8. Cost Overrun Factor Analysis. From the initial analysis top ten factors of cost

overrun, on the basis of severity impact scoring received, were selected for the further in

depth analysis. It is evident that both internal and external aspects of business setting are

present as the prime contributors to cost overruns. Cost is affected by a large numbers of

factors because of the fact that construction is a multidisciplinary industry and its work involve

many parties such as the owner and various professionals, contractors and suppliers. For the

purpose of analysis the identified top ten cost Overrun factors have been arranged into three

broad categories as follows:-

a. Macro Economic Factors

(1) Fluctuation in prices of raw / manufactured materials

(2) Contractor-related factors

(3) Poor cash flow during construction

b. Management Factors(1) Poor project (site) management/ planning

(2) Slow decision making

(3) Lack of proper quality control

c. Business and Regulatory Environment

(1) Inappropriate government policies

(2) Lowest bidding procurement method

(3) Long period between design and time of bidding/tendering

(4) Cost estimation errors

9. Factors other than qualitative. We see numerous projects being completed

over and above the budget and schedule. Is this the result of incompetence on the part of the


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estimators and schedulers? Unequivocally, the answer is No! Why, then, does it happen?

There are, of course, many factors affecting estimates and schedules, other than

contemplative and rational deliberation, measurement, and calculation, and they are as

follows:

a. Pressure from owners to minimize costs and schedules. This is not

inappropriate: where money and time are limited, people can be very innovative

and, conversely, where money and time are unrestricted, people have a

tendency to be profligate.

b. Intentionally tight project budgets and schedules. These are

designed to pressurize project management in hopes of minimizing project

costs and schedules, often accompanied by financial incentives for the

contractors. Assessing whether estimated costs and schedules are excessively

tight, can be determined by comparison with other similar projects and by

comparing the values with those in cost estimating handbooks.

c. Contractors that estimate and bid low are more likely to win work;

accordingly they are so inclined. Still, this does put them under pressure toachieve the accepted values.

d. Lack of knowledge or insufficient knowledge. If a project incorporates a

significant part or parts of it related to lack of knowledge, there is a tendency for

things to go awry.

10. The Three Blind Mice. Is there any way to judge the vulnerability of a project to

cost and schedule overrun and to quantify how much more it might cost and how much

longer it will take to complete? There certainly seems to be a relation between overruns and

the following factors, all of them related to lack of knowledge or insufficient knowledge, what

might be termed the three blind mice of projects:-a. Remoteness. Remoteness is certainly a factor in making a project

subject to cost and schedule overruns. When projects are in remote locations

the efficiency of logistics, the availability of services, and the efficiency of

construction come into play. It is difficult for estimators and schedulers to

properly assess these factors and include them in preparing cost estimates and

schedules, perhaps because they are not familiar with them. How much

allowance should be made for remoteness?

b. Unconventionality. Unconventionality is certainly a factor in cost and

schedule overruns. While incorporating new processes and methods is

sometimes essential to even make a project viable, it does increase

vulnerability. Of course, when new processes or methods are incorporated they

are generally well tested and well thought out, but, even so, they have a

tendency to go awry, often as a result of unexpected interactions with other

well-established processes and methods. We suggest adding 50 percent to

both cost and schedule in the most extreme circumstances.

c. Schedule. Overruns Schedule overruns are usually closely related to cost

overruns, but this is not always the case; it seems that schedule overruns occur

even where cost overruns do not occur. Schedules do not incorporate

contingencies, they are set to follow projected work sequences and equipmentdeliveries, and including extra time for possible upsets and delays is not

rational. But delays usually occur; if they are minor it is often possible to catch

up, usually by working extra time; but just as often the cumulative effect of

delays is such that it is not possible to catch up, and most projects exceed the

projected time by about 10 percent as a matter of course. Such delays,

unrelated to specific problems related in previous paragraphs, also add cost,

generally about one percent of the project total cost per month of delay.

11. Recommendations.

a. Macro Economic Factors.

(1) Control on prices may or may not be even under the control of

Government being a global issue, therefore, only counter measure what


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we can ensure is the timely completion of project to avoid extended

inflations and recurring costs.

(2) Selection of appropriate contractor and half the job is done. The main

contractor and subcontractors start their main duties when the project

reaches the construction stage. The variables include contractor

experience, site management, supervision and involvement of

subcontracting, contractors cash flow, effectiveness of cost control

system, and speed of information flow.

(3) Complete economical road map must be prepared on the basis of factual

availability / expected cash flow and not on wishful thinking.

b. Management Factors. Project management action is a key for project

success and by using the management tools, the project managers should be

able to plan and execute their construction projects to maximize the projects

chances of success. The variables in project management include adequate

communication, control mechanisms, feedback capabilities, troubleshooting,

coordination effectiveness, decision making effectiveness, monitoring, projectorganization structure, plan and schedule followed, and related previous

management experience.

c. Buisiness and Regulatory Environment. Various researchers support

environment as a factor affecting the project success. Environment can be

described as all external influences on the construction process, including

social, political, and technical systems. The attributes used to measure this

factor are economic environment, social environment, political environment,

physical environment, industrial relation environment, and level of technology

advanced.

6. Conclusion. Results indicated that the majority of cost overrun factors (88%)

lie in medium severity impact zone (with a rating between 5 to 7.5 out of 10), signifying that

major attention needs to be given to these factors as they collectively cause considerable

cost overrun. It is evident from the findings that both internal and external aspects of business

setting are present as the prime contributors to cost overruns. The top ten cost overrun

factors found were: fluctuation in prices of raw materials, unstable cost of manufactured

materials, high cost of machineries, lowest bidding procurement procedures, poor project

(site) 500 management/ poor cost control, delays between design and procurement phases,

incorrect/ inappropriate methods of cost estimation, additional work, improper planning, and

unsupportive government policies. An additional finding is that medium sized construction

firms experience a greater percentage of cost overruns owing to their tendency to assume

greater risk for the purpose of business development. Major recommendations include:

stabilizing cost of materials, increasing supply of materials and machinery, more involved

cost estimation processes, vigilant project planning, close observance and documentation of

cost variation trends in the sector and the country, adoption of alternative procurement

strategies such as design-build contracts, and best value procurement.

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