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MODELLING OF COST OVERRUNS IN BUILDING PROJECTS IN ABUJA

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    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.

    TABLE OF CONTENTS

    TABLE OF CONTENTS
    CERTIFICATION ……………………………………………………………………………………………………. III
    DEDICATION ………………………………………………………………………………………………………….. IV
    ACKNOWLEDGEMENTS ………………………………………………………………………………………… V
    ABSTRACT ………………………………………………………………………………………………………………. VI
    TABLE OF CONTENTS …………………………………………………………………………………………. VII
    1.0 INTRODUCTION ……………………………………………………………………………………………. 1
    1.1 BACKGROUND OF THE STUDY …………………………………………………………………………. 1
    1.2 STATEMENT OF RESEARCH PROBLEM …………………………………………………………….. 3
    1.3 NEED FOR STUDY ………………………………………………………………………………………………. 3
    1.4 AIM AND OBJECTIVES ………………………………………………………………………………………. 4
    1.4.1 AIM ………………………………………………………………………………………………………….. ….4
    1.4.2 OBJECTIVES ………………………………………………………………………………………………… 5
    1.5 SCOPE AND LIMITATIONS …………………………………………………………………………………. 5
    1.5.1 SCOPE ………………………………………………………………………………………………………….. 5
    1.5.2 LIMITATIONS ………………………………………………………………………………………………. 6
    2.0 LITERATURE REVIEW …………………………………………………………………………………. 8
    2.1 CONSTRUCTION INDUSTRY ……………………………………………………………………………… 8
    2.1.1 CONSTRUCTION INDUSTRY IN NIGERIA …………………………………………………… 9
    2.1.2 CHALLENGES OF BUILDING PROJECTS …………………………………………………… 11
    2.2 COST OVERRUN ……………………………………………………………………………………………….. 13
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    2.2.1 CAUSES OF COST OVERRUN ……………………………………………………………………. 14
    2.2.2 EFFECTS OF COST OVERRUN …………………………………………………………………… 18
    3.0 RESEACH METHODOLOGY ……………………………………………………………………….. 20
    3.1 RESEARCH STRATEGY …………………………………………………………………………………….. 20
    3.2 RESEARCH TECHNIQUES ………………………………………………………………………………… 21
    3.2.1 RESEARCH SAMPLE ………………………………………………………………………………….. 21
    3.2.2 DATA COLLECTION ………………………………………………………………………………….. 22
    3.2.3 DATA ANALYSIS AND PRESENTATION …………………………………………………… 22
    4.0 DATA PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS ……… 28
    4.1 DATA PRESENTATION AND ANALYSIS ………………………………………………………….. 28
    4.1.1 GENERAL INFORMATION ABOUT RESPONDENTS ………………………………….. 29
    4.1.2 ANALYSIS OF PROJECT COST OVERRUN ………………………………………………… 29
    4.1.3 FACTORS INFLUENCING BUILDING COST OVERRUNS ………………………….. 33
    4.2 DISCUSSION OF RESULTS ……………………………………………………………………………….. 45
    5.0 SUMMARY CONCLUSION AND RECOMMENDATIONS …………………………… 49
    5.1 SUMMARY ………………………………………………………………………………………………………… 49
    5.2 CONCLUSION ……………………………………………………………………………………………………. 49
    5.3 RECOMMENDATIONS ………………………………………………………………………………………. 51
    5.4 CONTRIBUTION TO KNOWLEDGE…………………………………………………………………… 52
    APPENDICES …………………………………………………………………………………………………………… 62

    CHAPTER ONE

    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
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    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
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    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
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    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.
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    1.4.2 OBJECTIVES
    To achieve this aim the following three objectives were set. They are to:
    a) identify factors influencing tbuilding construction cost overruns;
    b) analyse factors leading to cost overruns of building projects in Nigeria; and
    c) 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.
    6
    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.
    a) Availability of consultants to be interviewed
    b) Accessability of project documents
    c) Workload or schedule of employees involved in the case study
    d) 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.
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    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.

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