CHAPTERII

LITRATURE REVIEw

2.1 Introduction

This chapter provides a literature review, which is divided in two different sections

Thelst section discusses how cost overruns are critical in construction projects and the way in which this
problem is perceived as "business-as-usual and not an exception.

This section will also review the main causes of cost overruns while the 2nd section will be about cost
control process its definition, purpose & techniques. 2.2 Cost overruns

Cost overrun is defined as excess of actual cost over budget. Cost overrun is also sometimes called "cost
escalation, "Cost increase," or "budget overrun. (Zhu et al 2004).

Cost overrun is defined as the change in contract amount divided by the original contract award amount
.This calculation can be converted to a percentage for ease of comparison (Jackson' 1990). "Cost overrun
= Final Contract Amount - Original Contract Amount"

Choudhry (2004) defined the cost overruns as the difference between the original cost estimate of
project and actual construction cost on completion of works of a commercal sector construction project.

For the purpose of this research cost overrun is defined as the difference between the final actual cost
of a construction project at completion and the contract amount, agreed by and between the client (the
project owner) and the contractor during signing of the contract. 2.2.1 Cost Overruns as a Rule not an
Exception

Cost overruns are common in different type of projects and locations. In addition, cost overruns have
become a norm, rather than an exception in the construction industry (Baloi and Price, 2003).

As stated by Avotos (1983), it is normal to expect that the final cost of a project exceed the initial budget
by 10-20 percent.

However, Morris and Hough (1987) summarized 40 reports about cost overruns in different types of
projects and they concluded that approximately 50 percent of construction projects present cost
overruns, these overrun values are usually between 40 and 200 percent.

Angelo and Reina (2002) pointed out that cost overrun is one of the main problems in construction
industry, this problem may found in both developing and developed countries. This problem is quite
serious.

2.4.2 1dentifying factors that influence cost overruns

This section identifies the factors that influence cost overruns. Four factors were identified from the
existing research findings Morris et al (1990), Kaming et al (1997) and Chimwaso (2001). These are;
design changes, inadequate planning, unpredictable weather conditions; and fluctuations in the cost of
building materials.

There are some factors contribute to cost overrun in construction industry which are found from the
researchers' study, the main 13 factors are as following

1- Inaccurate or Poor Estimation of Original Cost

Peeters and Madauss (2008) stated that the biggest factor that contributes to overruns of budget is
inaccurate estimation of original or initial cost of a project.

2- Inflation of Project Costs

Harrison (1981) stated that inflation of project costs cause increasing of costs.

Inflation of materials, cquipment, and labors costs may vary geographically within a country, from
country to country, and contracts of subcontractors with suppliers may involve different inflation
protection terms that agreed with a client.

As intlation goes up, interest rates will go up and the costs will increase to0o.

3- Improper Planning

According to Frimpong (2003), improper planning and management experience limitation always causes
the project progress to be slower and take more time to complete the project and as a result project
indirect cost increases. 4- Fluctuation in Price of Raw Materials

Price fluctuation causes cost overruns in most cases where it is hard to estimate the cost accurately. 5-
Unforeseen Site Conditions

Nega (2008) found that actual site conditions of a project are not usually determined until excavation is
completed , the unexpected conditions on sub surface sometimes require fundamental redesign of
projects with high expense.

Changes of site conditions become a problem for machinery and supplies to move in and out of the site,
this also increase costs required. 6-Mistake in Design

According to Long et al. (2008), mistakes in design or poor design are caused by the low competence
designer, the unrealistic design when it was found after the start of the construction project, it could
lead to cost overrun. 7-Construction Cost Underestimation

In order to get project approval for the project, some parties have deliberated underestimating of costs
for their project. It is quite serious Situation that occurred on

Some projects (Nega 2008). 8-Frequent Changes in owner brief. 9-Omissions and errors in the bills of
quantities. 10-Contractual claims, such as, extension of time with cost claims.
11-I Force Majeure.

This term covers a range of events which are also commonly referred to as "Acts of

God". They include revolution, war, earthquake, fire, and other such risks. Where they do occur, they
will normally lead to significant delays and cost overrun to construction projects. 12-Lack of experience
for contractors 13-Unsuitable construction equipment's and methods 2.3 Cost Control

The cost control is a process that should be continued through the construction period to ensure that
the cost of the building is kept within the agrecd cost limits.

The cost control can divide into two major areas; the control of cost during design stages the control of
cost by the contractors once the construction of project has started. 2.3.1 Statement of Facts in Cost
Control

As stated by Roger (2000), he said that Cost Control is a broad set of cost accounting methods and
management techniques with the common goal of improving business cost-efficiency by reducing costs,
or at least restricting their rate of growth. Cost

Control is used in business to monitor, evaluate and the most important to increase the efficiency of
specific areas within their operations.

According to Nunnally (1998), cost control of a project involves the measuring and collecting the cost
record of a project and the work progress. It also involves the comparison of actual progress with the
planning. The main objective of cost control of a project is to gain the maximum profit within the
designated period and satisfactory quality of work.

Kwakye (1997) states the main purpose in cost controlling for a construction project should be active
controlling of final costs for owner, and not just to record and registering the payment.

2.3.2 The main aims of the cost control

The cost is from the main branches of Project management.

The cost management is divided into following parts (PMBOK, 2004, 159): 1. Cost Estimating 2. Cost
Budgeting 3. Cost Control

The cost estimating is an approximation of the resource cost in currency to complete the planned set of
activities including the variation and risks.

The cost budgeting aggregates the estimates into the activity level, this allows the cost control and
measurement of the project's performance. The civil construction projects are typically very expensive
and usually owner pays some amount of the work according to realized work during the project. The
cost budgeting is very important for keeping the project's cash flow in the positive side.
The cost control focuses to search the cause for negative or positive variance between budget and
realized result. The cost control is an important part for risk control and learning. (PMBOK, 2004, 157-
178)

In Construction Cost control aims to the following: 1-To limit the client's expenditure to within the
amount agreed. In simple terms this means that the tender sum and final account should
approxXimately equate with the budget estimate. 2-To achieve a balanced design expenditure between
the various elements of the buildings. 3-Cladding, insulation, finishing, services and other elements of
the building will be properly related to the class of building and to each other. 4-To provide the client
with a value-for-money project. This will probably necessitate the consideration of a total-cost
approach.

2.3.3 Measurement of Project Performance

Navon (2005) defined performance measurement asa comparison between the desired and the actual
performances. For example, when a deviation is detected, the construction management analyzes the
reasons for it.

The reasons for deviation can be schematically divided into two groups:

A-Unrealistic target setting (ex: planning).

B-Causes originating from the actual construction (in many cases the causes for deviation originate from
both sources).

Navon (2005) stated that performance measurement 1s needed not only to control current projects but
also to update the historic database. Such updates enable better planning of future projects in terms of
costs, schedules, labor allocation, . .etc.

Cost performance can be measured through a cost performance index (CPI) computed as (Kuprenas,
2003).

CPI=BCWP/ACWP

Where:

BCWP = budgeted cost of the work performed.

ACWP = actual cost of the work performed.

From previous cquation:

If CPl value of one mcans, the cost was as planned (at the budget valuc)

IfCPI value above one means, the project was below its budget.

If CPI of less than one means, the project exceccded its budget.
2.3.4 Projeet Resources and Controls

Resource inputs at the project site which produce outputs in the form of work include: men, materials,
machinery and money. The success of a project depends upon the performance of these input resources
when controlling costs (Hendrickson 1998).

The clients should do everything to avoid unnecessary delays as it is one of the leading causes of cost
escalation. 2.3.4.1 Control of Materials.

One of the big problems on most building sites is the large amount of materials wastage due to varying
circumstances (Butler 1982), According to Hendrickson (1998), wastage of materials can take place
during the procurement process, storage, and during utilization, wastage during procurement can result
from one or more of the following causes: buying materials of wrong specitications, buying more than
the actual, buying of short-life materials.

Wastage during storage can occur due to the following reasons: damages and breakages during
handling, deterioration due to incorTect storage, incorrect maintenance and short-shelf life.

Most problems relating to material wastage revolve around requisitioning and ordering, receipt and
checking of deliveries from suppliers, offloading and handling, storing and protecting, and issuing,
distributing and use of materials.

2.3.4.2 Control of Labor cost

Labor productivity achieved at the site for a given work provides a measure of the laborer's efficiency
and effectiveness and the level of sitc organization. It shows the total time for which the laborer was
employed at work, the time he was productive on work and the time he remained unproductive
(Chitkara 2005).

According to Chitkara, (2005) cost control process involves accounting of actual productivity, and
comparing with the standard, analyzing the causes for variations taking remedial measures for
improvement.

Raina (1999) emphasizes the need for close supervision and good working relationship.

Construction progress can be achieved only through the attainment of effective man- hour effort and
the meeting of scheduled mile stone dates. Effective manpower management can reduce labor costs
and thereby increase profits for company.

Labor costs are hard to be controlled, can be tracked by time cards.

2.3.4.3 Control of equipment cost

The selection and utilization of equipment in a project must be an integral part of the total plan. The
type and number of the equipment required in any project depends on the nature of the project. It
affects significantly on construction cost.
Construction equipment' s are Hard to be controlled due uncertain costs, it is can be tracked Iike labor
costs using time cards. 2.3.5 Cost Control methods or systems frequently used by contractors

Overall Profit or loss

The Contractors waits until the Contract is finished then compares expenditure and revenuc

The system is only suitable for very small contracts of short durations.

Profit or Loss at valuation dates

In this method, the total costs to date are compared with valuations gross of retentions. it is not suitable
for contracts which involve significant set up costs which are distributed over the unit rates.

Unit Costing

In this system, costs of various types of work, such as concrete casting, arce recorded separatcly. The
costs, both cumulatively and periodically are divided by the quantity of work of each type. This provided
unit costs that can be compared with those estimated in the tender.