DEPARTMENT OF PROJECT PLANNING AND MANAGEMENT

THE EFFECT OF UNPRIDICTABLE PRICE FLUCTUATION OF

CONSTRUCTION MATERIAL ON CONSTRUCTION PROJECT PERFORMANCE

BY

ASRES KEBEDE

ADVISOR- SOLOMON TSEHAY (Ph.D.)

A thesis submitted to YOM Post Graduate College Hawassa in

partial fulfillment of the requirements for the Degree of Master of
Science in Project Planning and Management.

Hawassa
November
2021
 STUDY ON THE EFFECT OF UNPREDICTABLE
PRICE FLUCTUATION OF CONSTRUCTION
INPUT MATERIAL ON CONSTRUCTION
PROJECT PERFORMANCE

ASRES KEBEDE

APPROVED BY THE BOARD OF EXAMINERS

ADVISOR

INTERNAL EXAMINER

EXTERNAL EXAMINER

CHAIRMAN
 Acknowledgements

I would like to start my acknowledgement by thanking God who gave me the strength and the
wisdom to go through those challenges to successfully accomplish the hard work of this study with
his boundless help in each and every steps of my thesis work.

My deepest gratitude goes to my advisor Solomon Tsehay (Ph.D.) for his guidance while
conducting this study starting from selecting the title and giving feedback on each stage of the
study sharing his experience and knowledge to help me accomplish this study successfully and for
his constructive comments and ideas as well as his precious time in reviewing this work, and
tolerating me with great patience when I delay the thesis work.

My special gratitude should also go to Mr. Tiruneh Sisay (college dean) who helped me by creating
good working environment with our advisor and supported me by alarming to successfully
complete the research work.

It would be selfishness not to thank the organizations and people who took part in my research
work by responding to my research questionnaire and interviews which served as a back bone of
my research work.

Last but not least, my special compliment goes to my family for their continuous support and
prayer during this work, especially my beloved wife Mss. Meseret Bogale Boko for her unlimited
help and commitment.

i
Table of contents

Acknowledgments………………………………………………………...……………. i
List of Tables…………………………………………………………………………………………………………………………………………………………….. IV

List of Figures................................................................................................................................................................... v
Abbreviations.................................................................................................................................................................vi
ABSTRACT...................................................................................................................................................................... vii
1. INTRODUCTION...........................................................................................................................................................1
1.1 Background...........................................................................................................................................................1
1.2 Focus on the Construction Sector..........................................................................................................................2
1.3. Statement of the problem......................................................................................................................................3
1.4 . Research Motivation......................................................................................................................................4
1.4 Research Goal..................................................................................................................................................4
1.5. Objectives of the Study........................................................................................................................................4
1.6 Research Questions...............................................................................................................................................4
1.7. Scope and Limitation of the Study.......................................................................................................................5
1.8. Research Gap........................................................................................................................................................5
2. LITERATURE REVIEW...................................................................................................................................................6
2.1 The Project Concepts.............................................................................................................................................6
2.1.1. The Project Definition...................................................................................................................................6
2.1.2. Civil Engineering Projects.............................................................................................................................7
Theoretical review.......................................................................................................................................................7
2.2. The Theory of Performance..................................................................................................................................7
2.2.1. Construction Projects and Performance.........................................................................................................8
2.2.2. Construction project performance measurement models.........................................................................9
2.2.3 Factors affecting performance of a construction project.................................................................................9
2.2.4 Performance Measurement Theory........................................................................................................11
2.2.5. Measurement of Project Performance..........................................................................................................12
2.2.6. Problem of Performance in Construction Industry.......................................................................................13
2.3. Definition of Terms............................................................................................................................................13
2.4. Price in Relation to Contractors..........................................................................................................................14
2.4.1. Price Fluctuation..........................................................................................................................................14
2.4.2. Inflation and the Construction Industry.......................................................................................................15
2.4.3. Differential Price Changes...........................................................................................................................16
2.5. Effects of Price Fluctuation................................................................................................................................16
 2.6. Price Estimation Methods and Setting of Prices.................................................................................................16
2.6.1. Basic components of pricing........................................................................................................................16
2.6.2. Cost component...........................................................................................................................................16
2.6.3. Profit component.........................................................................................................................................17
2.7. Pricing techniques..............................................................................................................................................18
2.8. Risks in Pricing..................................................................................................................................................20
2.8.1. Principles of management of risk and uncertainty.......................................................................................20
2.9. Types of Construction Contracts........................................................................................................................21
2.10. Minimizing the Adverse Effects of Price Fluctuation........................................................................................22
2.10.1. Improved financial utilization of contractors.............................................................................................22
2.10.2. Improved contract procedures...................................................................................................................22
2.11. Empirical Review.............................................................................................................................................23
2.12. Synthesis of the review.....................................................................................................................................25
3. RESEARCH METHODOLOGY...................................................................................................................................26
3.1 Research Type.....................................................................................................................................................26
3.2 The Study Approach............................................................................................................................................26
3.3 The Research Base..............................................................................................................................................26
3.4 Research population and sampling......................................................................................................................28
3.4.1. Data sources, data collection instruments and procedures...........................................................................28
3.5 The research process......................................................................................................................................29
3.6 Design of Research Instruments....................................................................................................................29
3.7. Piloting the research instruments........................................................................................................................30
3.7.1 Reliability of research instruments...............................................................................................................30
3.8 Writing the research............................................................................................................................................31
4. ANALYSIS AND DISCUSSION.......................................................................................................................................32
4.1. General...............................................................................................................................................................32
4.2. Method of Data Analysis....................................................................................................................................32
4.3. Time Value of Money........................................................................................................................................33
4.4. Assessment on the General Market Price Fluctuation and Pricing......................................................................33
4.4.1 Domestic contractors and the market price fluctuation..........................................................................33
4.4.2. Market survey and pricing...........................................................................................................................37
4.5. The effect of the unpredictable price fluctuation................................................................................................42
5. CONCLUSIONS AND RECOMMENDATIONS................................................................................................................45
5.1. Conclusions........................................................................................................................................................45
5.2 Recommendations...............................................................................................................................................47
List of Tables

Table 3.3 Concepts, indicators, and variables assessed in the research.........................................................27

Table 4.1 Summary of questionnaire distribution and response rate..............................................................32

IV
 List of Figures

Figure 4.1 Nature and occurrence of price fluctuation of construction input material..................................34

Figure 4.2 Price fluctuation pattern of construction material..........................................................................36

Figure 4.3 Market price data collection methods adopted by contractors.......................................................37

Figure 4.4 Pricing methods adopted by contractors.........................................................................................39

Figure 4.5 Contractors who predict price fluctuation and who do not.............................................................40

Figure 4.6 Methods adopted by contractors to accommodate anticipated price fluctuation............................41

Figure 4.9 Effect of price fluctuation on project performance........................................................................43

V
Abbreviations

BaTCoDA = Building and Transport Construction Design Authority

MOF = Ministry of Finance
GDP = Gross Domestic product

CSA = Central Statistics Agency

SCC = Standard Condition of Contract

ECCA = Ethiopian Construction Contractors Association
NCB= National competitive bidding
ICB= International competitive bidding

PPA= Public Procurement Agency

MoWUD = Ministry of Works and Urban Development
SME= Small and Medium Size Enterprises

VI
 ABSTRACT

Even if there are a lot of problems that the construction industry is facing in recent years, the price
fluctuation of construction input material is the one which is hindering the performance of a
construction project in the project life time letting the stake holders of the construction sector
especially the contractors who are the main actor of the sector. It has been common problem in all
over the country and affecting the domestic contractors to the significant level. In addition to the
above, it is affecting the project cost, time and quality due to unpredicted price fluctuation the
sector is facing in every stage of the project.

The research is about analyzing and showing to what extent the effects of unpredictable price
fluctuation of construction material on the project performance of domestic building contractors
from the contractor’s perspective. We developed and found out variables of the study concepts
through literature survey. Questionnaire based studies and interviews are used to analyze the
problem. Recommendations that would reduce adverse effects of price fluctuation are forwarded.

The research result shows that the problem of price fluctuation occurs in an unpredictable manner
with increase in price by more than 50%. Contractors lose portion of their expected profit by at
least 2.43% of contract amount. To accommodate at least some portion of any future fluctuation
contractors introduce some risk factors in their pricing. The proclamations in the general condition
of the contract supports request for compensation for few construction input materials and that
highly affected the main actor of the sectors. Moreover, contractors get compensation only for
portion of the price increase of inputs. Project delay was found to be one of the major effects of
price increase and delay caused by the contractors is also affecting themselves by making them
vulnerable to effects of price increase.

Finally, based on the analysis of the results, recommendations for contractors and other stake
holders have been proposed that enables to minimize the adverse effect of price fluctuation on
contractors and favors the construction industry for better performances.
Vii
 CHAPTER -1
1. INTRODUCTION

1.1 Background

Ethiopia is still a developing country; and there is a huge development activity yet to be undertaken. One of
the key factors to ensure a desired level of economic growth in a developing country like ours is achieving a
significant amount of investment by the private as well as the public sector. In this development activity the
infrastructure development sector is the one in which the construction industry is a front line role player.

This research work focused on the effects that could result on the project performance of construction
contractors as a result of unpredictable price fluctuations.
Construction is an incessant activity across the globe. In most countries, construction activity constitutes 6-
9% of the gross domestic product (GDP) and constitutes more than half of the fixed capital formation as
infrastructure and public utilities capital works required for economic development [Chitkara 2003].
In Ethiopia the construction sector faced and facing several problems and challenged with it and hindered
the growth of the industry holding the sector for years without significant change in handling the
construction projects.
The underlying problems of the construction sector can be classified into two main categories. The first is
related to the consequences of the fact that the sector is not viewed and planned in an integrated manner, but
rather, operates with fragmented, unrelated and often conflicting components (Wubishet, 2004). The second
problem is related to deficiencies and market price fluctuation of the inputs required for the construction
(Gebre-Michael, 2002 in Asteway, 2008).

This research has a contribution to observe the effect of unpredicted price fluctuation of construction input
materials on the construction project performance. This helps to notice attention to specific areas of
improvement. This research work also attempted to review the way weather or not the contractors consider
the future unpredicted price fluctuation while filling the price in the BID document, current price fluctuation
trend on major construction input materials, the effect of the unpredicted price fluctuation and proposed
recommendation particularly with focused on building construction projects. It is anticipated that the
findings of this thesis will contribute towards of unpredicted price fluctuation and their effect on the
construction industry as well as increasing the awareness of construction managers and all parties involved
in construction BID to how to handle the bidding process with the consideration of unpredicted price

1
fluctuation in general to avoid or minimize the impact of the unpredicted price fluctuation on the
performance of the project.

1.2 Focus on the Construction Sector

The fragmentation of the construction industry in Ethiopia primarily undermined the importance of
the construction sector for the development of the country. Furthermore infrastructures involving
civil works were identified in most sectorial development programs of developing countries. The
government policy has clearly showed importance to education, health, hydropower and road
development programs through its commitments for a decade. These four sectors represented those
sectors whose linkages (sector wide), and for the development initiatives of the country, were
very vital.

However, infrastructure projects were dispersed among sectors and viewed as support to them. For
instance MoWUD, which was acting as the main umbrella, was dealing only with building
construction projects, and this was acknowledged to cover only the lowest category of the
Construction Industry. MoE run its construction projects (whose share of the capital budget is
about 50%) with a small engineering unit at its lowest management level. Ministry of Health does
similarly. Civil works in different sector are handled remained on each stake holders, to mention
some of them, the civil work in the water sector largely remained in the Ministry of Water and
irrigation resources. Construction projects related to the communication industry were fragmented
among road, airport, railway, and telecommunication sectors. Energy sector has also exhibited
similar approaches. This has made the sector less valuable and fragmented the real contribution of
the sector to the country. As a result, clear GDP or other contributions were not fully accounted
for. In addition, the domestic capacity of the construction industry could not be materialized.
Furthermore, the total picture of the construction industry and its development could not become
visible. These sectors deal their construction projects independently which had resulted in a
fragmented and de-capacitated construction industry so far and resulted in poor project
performance. Above all these, its importance to development was acknowledged through other
sectors. This fragmentation did not only make loose sight of integration as a whole, but also the
views of each sectors as a support element undermined the construction industry development
[Wubishet Jekale 2004].

2
So, any intervention applied to enhance the sector’s problem, the domestic contractors would
eventually become beneficiary, or vice versa. A generalized relationship of actors in the
construction industry.

1.3. Statement of the problem

Today’s construction projects require modern construction technique, technological equipment’s, qualified
professionals and large amounts of modern construction materials. Therefore, too much amount of money is
required and invested to implement the project. In addition, this much money is fall under risk since
construction business is risky one. Unless the project is not successfully implemented in quality, cost and
time, the failure of it may cause serious damage (moral as well as financial) among the contracting parties.

A project is a unique process, consisting of a set of co-ordinated and controlled activities with an assumed
start and known finish dates, undertaken to achieve an objective confirming to specific requirements including
constraints of time, cost and resources (Lockyer and Gordon, 1996). Abebe (2003) stated that in project
management the above constraints have been identified as the triple constraints which are managing quality
cost and schedule (time) simultaneously.

Even if the construction sector contracting the civil work which is below the engineering estimate, with no
price fluctuation also the contractor is suffering with low project performance resulting in the project delay,
compromising of the project quality and most of the time loss. If we see the major construction input
material like cement, reinforcement bar, aluminum profiles, different section of steel profiles and finishing
materials, it is observed more than 60% increase in price(CSA of Ethiopia, 2020) when compared to last
year which is unpredicted and difficult to manage the project and will impact the project performance.

However, the progress of individual industrial building construction projects performed in Hawassa
industrial park in their own report showed that the projects are not completed within the planned time,
budget and also within specified quality( Indochine, 2020). The researcher found that price fluctuation as a
big problem, which hinders project's progress, and also it decreases the contractor’s profit leading to huge
losses leaving the project in a big trouble and result in low project performance.
Therefore it is mandatory and vital to exert the utmost effort to complete such study, to analyse earlier
mentioned factors and to deal with all the limitations from all sides and so giving specific priorities in order
to mitigate unpredicted price fluctuation of construction input material in bidding process and in the
execution phase of the construction projects. Therefore, this study focuses on the problems related to

3
unpredicted price fluctuation of construction input material on the project performance of building
contractors and recommends the mitigation plan to cope with the problem.

1.4. Research Motivation

What motivated me to conduct this research was mainly due to the prevailing unpredicted and
erratic price fluctuation of materials and less satisfactory practice of compensation for the same in
the construction industry of Ethiopia.

Even if the above mentioned issues are prevailing in the construction sector, especially after
COVID 19, the price escalation become daily challenge of the sector and affected the project
performance of the contractors negatively. As the result of the above situation, the contractors
engaged in construction project suffer the most and forced to loss due to the above situation.

The researcher motivated to understand the effect of price fluctuation of construction input
materials on project performance of construction contractors in depth and recommend the way to
cope with this challenge.

1.4 Research Goal

This research is aimed to study how the performance of construction contractors is affected by
unpredictable price fluctuations and seek for possible means of minimizing the resulting adverse
effects, particularly on domestic contractors engaged in building construction.

1.5. Objectives of the Study

The objectives of this particular research are to lead to the attainment of the research goal, being:
 To assess the effects of unpredicted price fluctuation on construction projects performance.

 To identify mitigation plan to minimize and reduce the unpredicted price fluctuation impact for
contractors involved in building construction projects.

1.6 Research Questions

4
i. What are the effects of unpredicted price fluctuation of construction input material on construction
projects performance?

ii. What is the mitigation plans to minimize and reduce the impact of unpredicted price fluctuation of
construction input materials on construction project performance?

1.7. Scope and Limitation of the Study

The scope of the study is bounded by three main characteristics which are location, sector and project
management aspect. In terms of location this study will cover only a single country, Ethiopia. Only
Contractors who work in this country will be participated in the survey especially contractors located in
Hawassa. Among the various sectors in the construction sectors this study will focus on building
construction and it does not include all other types of construction sectors.
From different project management aspects price fluctuation is chosen as the main focus of the study.
Regarding this area, the scope of the research is limited to assess the effects of price fluctuation specifically
on construction project performance, to identify price fluctuation problems and methods to
manage/administer price fluctuation for project success by taking under consideration the fluctuating
construction material market. Due to time and budget constraint, the study will be limited to cover only
building construction firms and focuses on price escalation part of price fluctuation.

1.8. Research Gap

Even if more studies has been conducted in the construction sector regarding the effect of price fluctuation of
construction input material around the world in different time, few studies has been conducted as per the
knowledge of the researcher which are related to the this studies in Ethiopia. To mention that, one study carried
out in the effect of price fluctuation on construction contractor’s capacity (M.Sc. thesis by Asteway Yigezu,
Department of construction management, Addis Ababa University, 2008). Since by looking the gap that no
studies have been done focusing on the effect of price fluctuation on the construction project performance,
specifically on building contractors around Hawassa motivated the researcher to conduct this study.

5
 2. LITERATURE REVIEW

Under this section we will look at literature review of different scholars on project, project performance and
price fluctuation which are the core concept of the research work.

2.1 The Project Concepts

Projects are often implemented as a means of achieving an organization’s strategic plan [PMBOK 2004].
Almost all civil engineering constructions are undertaken in project form having a predefined cost,
completion time and quality.

2.1.1. The Project Definition

In this research, projects are understood with these three major identifying characteristics [Wubishet Jekale
2004]: projects are unique, projects are temporary and a project is a component of a certain program.
Projects are Unique: - The project uniqueness is understood very well in different literatures. PMI, 2000
and PMBOK, 2010 recognized uniqueness of a project as associated with the creation of a new product or
service, which has never existed before, in some distinguishable way from all other similar products or
services. Others put it differently as a project is a non-routine, non-repetitive, one-off undertaking and
involving a constantly new and unknown activities or processes.
Projects are Temporary: - This characteristic is related to the timing of the project, which focus a transient
relationship between project and parent organization covering two aspects: limited resources, and the
lifetime of the project organization.
Resource and Requirement Constraints: Projects are constrained by resources largely acknowledged as time,
cost and quality requirements. Projects have to be ready within a certain completion time. Finance, which is
an incomparably scarce resource in Developing Countries as opposed to their counterparts in the developed
nations, creates considerable importance attached to cost constraints when compared to the others two.
Projects are Components of a Certain Program: That is, projects are usually established for achieving a
predetermined specific goal. All processes in project management are, therefore; conducted to achieve this
goal. The goal of every project may also differ among the parties involved. That is, the goal owned by the
project owner is different from the goal owned by the project doer. As our concern is in the construction
business, the goal owned by the construction contractor by far differs from the goal owned by the client or
6
the project owner. The goal of the contractor is definitely of making or maximizing profit from that
particular project and building its capacity in different aspects. Whereas the goal of the project owner or the
client is different from that of the contractor and is dependent of the nature of the project; public
construction project, business oriented project or military nature [Wubishet Jekale 2004].

2.1.2. Civil Engineering Projects

Civil engineering projects involve several stages: inception/briefing, designing, tendering, construction and
commissioning. In fact, there are detailed activities to be accomplished to progress from one stage to the
next. This approach of treating civil engineering projects as linearly progressive is recently facing strong
arguments from some professionals. They argue that civil engineering projects should have cycles, rather
than progress linearly. The cycle of civil engineering works is similar to the linear approach discussed above
except that it includes maintenance after commissioning and the cycle continues.

Whichever approach one follows for civil engineering works, the parties who take part in the whole process
are clients, consultants/designers, contractors, public authorities, financers and users. These parties may
have direct or indirect interactions between each other.

Theoretical review

2.2. The Theory of Performance

The Theory of Performance develops and relates six foundational concepts to form a framework that can
be used to explain performance as well as performance improvements (Don, 2010). To perform is to
produce valued results. A performer can be an individual or a group of people engaging in a collaborative
effort. Developing performance is a journey, and level of performance describes location in the journey.
Current level of performance depends holistically on 6 components: context, level of knowledge, levels of
skills, level of identity, personal factors, and fixed factors. Three axioms are proposed for effective
performance improvements. These involve a performer’s mindset, immersion in an enriching environment,
and engagement in reflective practice. Performance advancing through levels where the labels “Level 1,”
“Level 2,” etc. are used to characterize effectiveness of performance. That is, a person or organization at
Level 3 is performing better than a person or organization at Level 2. Performing at a higher level produces
results that can be classified into categories: (i) quality increases; results or products are more effective in
meeting or exceeding the expectations of stakeholders; amount of waste goes down, (ii) capability increases;
ability to tackle more challenging performances or projects increases, (iii) capacity increases; ability to
generate more output increases, (iv) knowledge increases ; depth and breadth of knowledge increases, (v)
7
skills increase; abilities to set goals persist, maintain a positive outlook, etc. increase in breadth of
application and in effectiveness and (vi) identity and motivation increases; individuals develop more
sense of who they are as professionals; organizations develop their essences.

2.2.1. Construction Projects and Performance

Project success is almost the ultimate goal for every project. Success of construction projects depends
mainly on success of performance. Many previous researches had been studied on performance of
construction projects. Dissanayaka and Kumaraswamy (1999) remarked that one of the principle reasons for
the construction industry's poor performance has been attributed to the inappropriateness of the chosen
procurement system. Thomas (2002) identified the main performance criteria of construction projects as
financial stability, progress of work, standard of quality, health and safety, resources, relationship with
clients, relationship with consultants, management capabilities, claim and contractual disputes, relationship
with subcontractors, reputation and amount of subcontracting. Chan and Kumaraswamy (2002) stated that
construction time is increasingly important because it often serves as a crucial benchmarking for assessing
the performance of a project and the efficiency of the project organization.
In developing countries performance problems are even bigger, compounded by lack of adequate resources
and institutions to address them (Gyandu – Asiedu, 2009). In India, it is reported that 40% of construction
projects face performance problems of time overruns (Iyer and Tha, 2006). The Ghanaian construction
industry is saddled with several problems ranging from contract administration, complex and lengthy
payment procedure and delayed payments (Gyandu – Asiedu, 2009).

Performance of construction projects affects economic development of every countries especially the
developing ones (Olatunji, et al. 2016). This is as a result of the contribution of construction industry to the
economy of a country. Success of any construction project depends mainly on success of approved and
acceptable performance indicators for such project. This implies that success or delivery indices to measure
performance vary from one project to the other. Reichelt and Lyneis (1999) remarked that the important 389
structures underlying the dynamics of project performance are work accomplishment structure, effects of
feedback on productivity and work quality as well as effects from upstream to downstream phases. More so,
Ugwu and Haupt (2007) stated that an adequate awareness and ample knowledge of performance indicators
are required for archiving managerial goals of an organisation.

8
2.2.2. Construction project performance measurement models
Two models developed for measuring construction project performance are integrated performance index
(Pillai et al., 2002) and key performance indicator (Construction Industry Task Force, 1998). Integrated
Performance Index was developed initially for performance measurement of R&D projects, based on their
real-life experiences of working on the management system for the integrated guided missile development
programme of India. The model identified three project phases and dealt with performance elements such as
performance indicators or key factors associated with each phase; the stakeholders; and the performance
measurements. The three project phases identified are the project selection phase, the project execution
phase and the implementation phase. The usefulness of the integrated performance index is that it can be
applied at all the phases of the project life cycle to rank the project for selection, to compare project
performance under the execution phase and to act as an input for the management of future projects. One
problem of the model is lack of clarity in the way the mathematical formulae is used to integrate the
identified key factors into an integrated performance index. Given this shortcoming, this model is not well
received by practitioners.

Key Performance Indicators (KPIs) is the UK construction industry's response to Egan’s report
(Construction Industry Task Force, 1998) to measure project performances, based on 10 identified
parameters. These consist of seven project performance indicators; construction cost, construction time, cost
predictability (design and construction), time predictability (design and construction), defects, client
satisfaction with the product and client satisfaction with the service; and three company performance
indicators namely; safety, profitability and productivity. The strength of this model is that the overall
concepts are easily understood and easily implemented by clients, designers, consultants, contractors, sub-
contractors and suppliers. One problem with the model is that the KPIs are not compartmentalized along
project phases.

2.2.3 Factors affecting performance of a construction project

Construction project development may be impaired without a good knowledge and management of the
factors influencing the performance of such projects (Akanni, Oke and Akpomiemie, 2015). Dissanayaka
and Kumaraswamy (1999) concluded that one of the principal factors for construction industry's poor
performance is the inappropriateness of adopted or chosen procurement system. Furthermore, Thomas,
Palaneeswaran and Kumaraswamy (2002) identified the main performance criteria of construction projects
as financial stability, standard of quality; project duration; health and safety; relationship among clients,
9
consultants, contractors, sub-contractors and other stakeholders; amount of subcontracting; claim and
contractual disputes; and management capabilities. In addition, Akogbei, Feng and Zhou (2015) identified
project size as a key project performance factor.

2.2.3.1 Cost performance

According to Mbamali, Aiyetan and Kehinde (2005) a project is successful when it is completed within
budgeted and planned cost, specified quality, stipulated time and delivered safely to the satisfaction of
clients and other stakeholders. Msani (2011) stated that setting up cost objectives and indicators is driven
mainly by the process and individuals involved in the process. The level of experience, skills, training,
knowledge and expertise possessed by project team members shouldered with the responsibility of costing is
a major factors for the process. The cost also depends on the process adopted at arriving at the cost and
procedure that will be used to execute the project. For instance, transporting raw materials from source by
railway carriages or trucks would influence the cost of such materials, and thereby, affect overall cost of the
project.

2.2.3.2 Time performance

Jouini et al (2004) stated that managing time in the procurement, engineering and construction of projects is
a key competing factor among innovative firms. It is believed that customers who consider time as a
valuable performance indicator and resource will be keen on timely delivery of their projects and sometimes,
their demand influence contractors to improve their time performance. Walker and Shen (2002) found that
time performance of construction projects is directly proportional to design team performance. More so,
Aiyetan (2010) emphasized that where there are challenges in getting to the site, as a result of bad roads,
narrowness of the road or long distances between the storage and usage point, construction speed are likely
be negatively affected. According to Toor and Ogunlana (2008), this eventually causes delays in completion
of construction projects. According to Yakubu and Sun (2009), change in design at various times is the most
influential factor inhibiting timely delivery of construction projects in the United Kingdom. Proverb and
Holt (2000) observed that construction methods adopted for the procurement of a project significantly affect
construction time performance. More so, Koushki and Kartam (2004) concluded that projects experience
delays due to late delivery of materials, late selection and approval, type of construction materials and their
availability at either local or international market.

2.2.3.3 Quality performance

Quality of a project is influenced by general project characteristics, project participants, contractual

arrangements and interactive processes among the participants (Iyer and Jha, 2006). Chan, Scott and Chan
(2004) stated that factors affecting quality performance of construction projects are: effectiveness of design

10
team leader and project manager; project complexity, size and scope; nature and competency of client;
environmental factor; client's requirement and emphasis on quality, cost and time; project management
actions; procurement and contractual method and nature of project. Ling et al (2009) submitted that
important practices for quality management are to control the quality of contract document, quality of
response to perceived variations and extent of changes to signed contract. According to Aiyetan (2010),
planning factors to be considered for project quality management are analysis of construction methods;
analysis of materials and general resource movement to and within site; analysis of work and activities
sequencing to achieve and maintain workflow; monitoring and updating of plans to reflect work status;
responding to problems and taking advantage of present opportunities; effective coordination of project
resources, and development of appropriate and effective organisational structure to maintain workflow.

2.2.3.4 Health and safety performance

Most of the factors affecting cost, time and quality performance of projects were found to affect other
measures of performance such as sustainability, health and safety, satisfaction, etc. Mc Donald and Hrymak
(2002) investigated the factors that influence safety behaviour and compliance with safety requirements on
construction sites. It was revealed that the most significant safety compliance factor is the presence or
absence of a safety representative for the project. The presence of this representative is strongly related to
the effectiveness of response to audits and reported hazards on construction sites. This pattern of
relationships suggests that presence of safety representatives affect project health and safety performance.

2.2.4 Performance Measurement Theory

Mbugua et al., (1999) have identified a distinction between performance indicators, performance measures
and performance measurement. According to Mbugua et al., performance indicators specify the measurable
evidence necessary to prove that a planned effort has achieved the desired result. In other words, when
indicators can be measured with some degree of precision and without ambiguity, they are called measures.
However, when it is not possible to obtain a precise measurement, it is usual to refer to performance
indicators. Performance measures are the numerical or quantitative indicators (Sinclair and Zairi, (1995). On
the other hand, performance measurement is a systematic way of evaluating the inputs and outputs in
manufacturing operations or construction activity and acts as a tool for continuous improvements (Sinclair
and Zairi, 1995; Mbugua et al., 1999). In response to calls for continuous improvement in performance,
many performance measurements have emerged in management literature. Some examples include: the
financial measures (Kangari et al., 1992), client satisfaction measures (Walker, 1984), employee measures
(Abdel-Razek, 1997), project performance measures (Belassi et al., 1996) and industry measures (Egan,
1998). Rene cordero (1990) classifies performance measurement based on the method of measurement and

11
area of measurement. The methods of measurement of performance can be in terms of the technical
performance, the commercial performance and the overall performance. The areas of measurement are at the
planning & design level, the marketing level and manufacturing level etc., and for the overall performance
are at the level of a firm or strategic business unit.

2.2.5. Measurement of Project Performance

The purpose of performance measurement is to help organizations understand how decision- making
processes or practices led to success or failure in the past and how that understanding can lead to future
improvements. Tangen (2004) obtained that performance measurement is a complex issue that normally
incorporates at least three different disciplines: economics, management and accounting. Measurement of
performance has garnered significant interest recently among both academics and practitioners. Lehtonen
(2001) stated that performance measurement systems are imminent in the construction firms. Karim
and Marosszeky (1999) stated that performance measurement systems have been one of the primary
tools used by the manufacturing sector for business process re-engineering in order to monitor the
outcomes and effectiveness of implementation. Navon (2005) defined performance as a comparision
between the desired and actual performance. He also stated that performance measurement is 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.

Karim and Marosszeky (1999) defined the purpose of key performance indicators as to enable a comparison
between different projects and enterprises to identify the existence of particular patterns. They used different
representation values to evaluate time and cost performance such as project characteristics, procurement
system, project team performance, client representation's characteristics, contractor characteristics, design
team characteristics, external condition. Samson and Lema (2002) remarked that characteristics of emerging
performance measurement indicators need analysis of both the organization and environment such as: nature
of work, global competition, quality awards, organizational role, external demands and power of IT. The
indicators should be able to identify causes of problems, address all possible performance drivers, and
identify potential opportunities for improvement. Cheung et al (2004) remarked seven main key indicators
for performance which are: time, cost, quality, client satisfaction, client changes, business performance, and
safety and health.

Pheng and Chuan (2006) stated that project performance can be determined by two common sets of
indicators. The first set is related to the owner, users, stakeholders and the general public which are the
groups of people who will look at project performance from the macro viewpoint. The second are the
developer, a non-operator, and the contractor which are the groups of people who will look at project
12
performance from the micro viewpoint. Ugwu and Haupt (2007) developed and validated Key performance
indicators for sustainability appraisal using South Africa as a case study. It is used four main levels in a
questionnaire to identify the relative importance of Key performance indicators. The main indicators were:
economy, environment, society, resource utilization, health and safety and project management and
administration. Luu et al (2007) provided nine Key performance indicators which can be applied to measure
project management performance and evaluate potential contractors as well as their capacity by
requesting these indices.

2.2.6. Problem of Performance in Construction Industry

The failure of any construction project is mainly related to the problems and failure in performance.
Moreover, there are many reasons and factors which attribute to such problem. Long et al, (2004) stated that
the construction industry performance problems in developing economies can be classified in three layers:
problems of shortages or inadequacies in industry infrastructure (mainly supply of resources), problems
caused by clients and consultants, and problems caused by contractor incompetence/inadequacies.
Okuwoga (1998) identified that the performance problem is related to poor budgetary and time control.
Long et al (2004) remarked that performance problems arise in large construction projects due to many
reasons such as: incompetent designers/contractors, poor estimation and change management, social and
technological issues, site related issues and improper techniques and tools. Navon (2005) stated that the
main performance problem can be divided into two groups:
(a) Unrealistic target setting (i.e., planning) or (b) causes originating from the actual construction (in
many cases, the causes for deviation originate from sources).

2.3. Definition of Terms

Key performance indicator (KPI): is a type of performance measurement which evaluates the success
of an organization or of a particular activity in which it engages.
Time overruns: is defined as the extension of time beyond planned completion dates.

Cost overruns: is the difference between the original cost estimate of project and actual construction cost
on completion of works.
Project: Construction projects
Construction: Construction of any building projects
Owner: Organization for whom the construction project is being undertakes.

Contractor: A natural or juridical person under contract with an owner to construct the construction
projects.
13
Performance: The accomplishment of a given construction projects against the contractual cost, time
and quality standards.

2.4. Price in Relation to Contractors

The construction industry is a business sector which carries out a huge amount of turnover. Among the
parties involved in civil engineering works, contractors and consultants are purely of business organizations.
The others may or may not be of business organizations. And from the contractors and consultants, it is the
contractors that are mainly involved in diversified activities that are directly affected by the prevailing
market situation. With this respect, the overall business environment comes into picture in affecting the
contractors in many aspects; performance and capacity being the crucial ones. This research, however, takes
only the capacity aspect for consideration.
Market price fluctuations at all levels directly affect contractors, since they are the front line role players in
the construction business. Contractors are subject to procure and deliver all the necessary labor, material and
equipment, the cases depending on the type of contract, required for the completion of the works. This
makes them to directly be linked with suppliers, sub-contractors and the labor force. In principle contractors
need not sustain and suffer permanently from price fluctuations on the market. Such fluctuations shall be
sustained by the project owners or clients.

2.4.1. Price Fluctuation

Price fluctuation can generally be defined as the rise or fall of price of goods, materials and services on the
markets. Price fluctuation can occur at any market, i.e at international markets, local market and/or at the
labor market. The reasons for fluctuation are several, the major ones being [Stukhart 1982]: Government’s
regulation on oil price, shortage or excess supply at market and increase or decrease in demand of a certain
item. Government’s regulation on oil price: the price of oil governs the cost of materials since oil is related
to production or transport of materials. When the government changes the price of oil, the price of materials
also changes accordingly. Shortage or excess supply at market: the availability of certain item on market
has an inverse relationship with the price of the same on the market. If an item is supplied in excess amount
on the market, its price will reduce from its normal price, and inversely, if there is a shortage of the same
item, then its price will rise.
Increase or decrease in demand of a certain item: the price of a certain item has a direct relationship with
the demand of that particular item. If the demand for certain item rises, then its price will also rise and vise
versa.

14
2.4.2. Inflation and the Construction Industry

The term “inflation” applies to the “disproportionate and relatively sharp and sudden increase in the quantity
of money, or credit, or both, relative to goods available for purchase”. Inflation produces a general rise in
price levels but, more importantly, causes a decrease in the monetary unit with time, and these consequences
are proportional to the rate of inflation. If the effects of inflation are not included in financial and economic
studies, possible outcomes include selecting incorrect alternatives, understanding budgets, and overstating
profits. Although some may consider inflation as neutral factor because both prices and costs rise, we shall
demonstrate that it is not. The growth in total investment costs for the education sector development, road
sector development, water sector development and energy sector development reflects the severe effects that
economic factors have had on construction. The last few years have seen even greater distortion in the
economy and in particular, in the construction industry. Construction owners are aware of the overall rise in
construction costs, and the increase in cost of labor and materials is the most obvious manifestation.
Inflation has become a chronic problem whose effects permeate the entire construction industry. Contractors
are faced with server uncertainty in bidding and financing work on projects. Owners are not only paying for
the increased costs of facilities and capital but also for premiums on construction prices because of the
uncertainties of inflation and its side effects. Productivity is affected because contractors cannot accurately
forecast long-term returns on their investments and are required to divert necessary capital to meet resource
costs. In particular, the proper assignment of economic risks in contracting should reduce costs in the long
term, although this would entail considerable change in construction industry operations [Stukhart 1982].
Many articles address how one may gain limited protection from chronic inflation. Most familiar is indexing
which is a means of discounting actual birr to “real’’ or inflation-adjusted birr. But this adjustment
infrequently applied dose not account for other effects, such as individual price distortion or hidden costs
resulting from the inability to forecast on one’s investment. It is common, even with the national attention
on focused on the problem, for members of the construction industry in the Ethiopia to ignore or assume
zero inflation perhaps this behavior is due to believing that inflation is a temporary phenomenon and that
overcorrecting for inflation may exacerbate the problem [Stukhart 1982] this logic in itself, is even more
reason to include the best possible inflation forecasts into all aspects of planning to continue to apply such
forecasts consistently, and to revise such forecasts as new data is received. Changes in relative prices result
from inflation as well as other causes, such as government regulation or oil price shocks.

15
2.4.3. Differential Price Changes

If certain resource costs increase faster than others, the use of constant cash flows leads to erroneous results.
First, most such analyses use the consumer price index. The correlation between construction costs and the
consumer price index is questionable. Second, even a more representative index would not consider costs
that escalate at rates appreciably different from the general inflation rate. This subject has been addressed in
several articles concerned with the extreme rise in energy costs [Stukhart 1982].

2.5. Effects of Price Fluctuation

Price fluctuation can have effect on contractors, clients/owners and the project itself. The major effects of
price fluctuation on contractors, if not well compensated, can be summarized as follows [Stukhart 1982 &
Abdo Abatemam 2006]:
 Profit loss of contractors
 Cash flow (project financing) problem of the projects
 Delay in project completion
 Poor quality of project outputs

2.6. Price Estimation Methods and Setting of Prices

2.6.1. Basic components of pricing

Pricing in construction projects is a critical step that has to be undertaken very carefully. It is a process
whereby the organization interested in the construction of a project attempts to determine the expenditure of
resources such as materials, manpower, machineries, finance and time necessarily to realize the intended
project and also determine the revenue it expects from the execution of the same. Therefore, it can be put as
pricing as two major components: the cost component and the profit component.

2.6.2. Cost component

The cost component consists of the direct construction cost, indirect construction cost and risk allowances.
Tadesse Yemane, 2006 has categorized the cost components in the following manner:

a) Direct construction costs

The direct costs mainly include material, labor, equipment and subcontract costs as described below.

16
i) Direct material costs
ii) Direct labor costs
iii) Direct equipment costs
iv) Subcontract costs

Direct construction costs are all costs that can be specifically recorded with an activity in a project. The
direct cost cover the largest portion of the total project cost and these costs can be budgeted, monitored and
controlled far more effectively than the indirect costs.

b) Indirect costs

Indirect construction costs are all costs, which cannot be directly booked under a specific activity in a
construction project but required to keep the whole project operational. These costs are also called overhead
costs, which mainly include the head office and site overhead costs as listed below.

1. Office overhead costs

Office overhead costs are all costs required to run the whole operation of the construction company, which
usually administers different projects at a time.

2. Site overhead costs

Site overhead costs are all costs required to run the whole operation of a specific construction project at site
level.
c) Risk allowance

It is very essential to incorporate risk allowance in pricing for construction project pricing. This helps to
compensate the negative impacts of different risks such as contractual, technical, political and economic
risks.

2.6.3. Profit component

After carefully estimating the cost of a project, contractors need to decide on the amount of their competitive
profit they like to make from the project. The profit margin they set depends on the scale of the project and
the level of competition between bidders. Sometimes, large profit margins are adopted in cases of
uncertainty. Any business company operating a profitable business in Ethiopia is obliged to pay income tax
based on the prevailing income tax law.

17
2.7. Pricing techniques

As it is possible to construct an image of a prehistoric animal such as the brontosaurus from only a few key
bones and relics, so a theory of cost estimating may possibly be found on a few factual details. Factors
affecting pricing are [Skitmore 1988]:
• Types of projects
• Sizes of contracts
• Geographical locations
• Numbers of bidders
• Ability of ‘pricer’
• Level of information
• State of market

There are different techniques of cost estimation that can lead to the final pricing. The Project Management
Body of Knowledge, 2004 puts the different cost estimation methods as follows:

1. Analogous Estimating
Analogous cost estimating means using the actual previous cost of similar projects as the basis for
estimating the cost of the current project. Analogous cost estimating is frequently used to estimate costs
when there is a limited amount of detailed information about the project (e.g., in the early phases).
Analogous cost estimating uses expert judgment. Analogous cost estimating is generally less tedious than
other techniques, but it is also generally less accurate.

2. Determine Resource Cost Rates

The persons determining the rate or the group preparing the estimates must know the unit cost rates, such as
staff cost per hour and bulk material cost per cubic meter, for each resource to estimate schedule activity
costs. Gathering price quotations is one method of obtaining rates. For products, services, or results to be
obtained under contract, standard rates with escalation factors can be included in the contract.

3. Bottom-up Estimating

This technique involves estimating the cost of individual work packages or individual schedule activities
with the lowest level of detailed information. This individual costs are then summarized or “rolled up” to

18
higher levels for reporting and tracking purposes. The cost and accuracy of bottom-up cost estimating is
typically motivated by the size and complexity of the individual schedule activity or work package.

4. Parametric estimating

Parametric estimating is a technique that uses a statistical relationship between historical data and other
variables (e.g., square meter in construction, lines of code in software development, required labor hours) to
calculate a cost estimate for a schedule activity resource. This technique can produce higher levels of
accuracy depending upon the sophistication, as well as the underlying resource quantity and cost data built
into the model.

5. Project Management Software

Project management software, such as cost estimating software applications, computerized spreadsheets,
and simulation and statistical tools, are widely used to assist with cost estimating such tools can simplify the
user of some cost estimating techniques and thereby facilitate rapid consideration of various cost estimate
alternatives.

6. Vendor Bid Analysis

Other cost estimating methods include vendor bid analysis and an analysis of what the project should cost.
In cases where projects are won under competitive processes, additional cost estimating work can be
required of the project team to examine the price of individual deliverables, and derive a cost that supports
the final total project cost.

7. Reserve Analysis

Many cost estimators include, also called contingency allowances, as costs in many schedule activity cost
estimates. This has the inherent problem of potentially overstating the cost estimate for the schedule activity.
Contingency reserves are estimated costs to be used at the discretion of the project manager to deal with
anticipated, but not certain, events. These are “known unknowns” and are part of the project scope and cost
baselines one option to manage cost contingency reserves is to aggregate each schedule activity’s cost
contingency reserve that is assigned to a schedule activity.

19
2.8. Risks in Pricing

The role and contribution of the Construction Industry are pivotal and the primary conduits for infrastructure
development and maintenance. In construction industries and the various project stages, one of the silent day
to day realities is risks and uncertainties. And construction industry is inherently risky and uncertain and
these arise from the nature of the industry itself. These are faced due to evolving and emerging conditions
through project lifecycles and project environmental circumstances. They are generally due to physical,
economic, social and political circumstances inter alia with resources available and the project
characteristics at hand [J E Okema 2000]. Construction is a risky business. In construction projects, risk
exists in all phases of the project development cycle. It is important, therefore, to identify, quantify, and
manage the risk associated with the time, cost, quality, and safety aspects during the execution of these
projects. In this section, however, the focus is on construction cost, from the contractor’s perspective. In
general, uncertainties that may exist throughout the project development. Uncertainties that impact project
cost could be grouped into two categories: a project-specific and a general-market category. Escalation, for
example, belongs to the second category. Escalation accounts for unforeseen increases in material, labor,
and equipment costs. It is important to account for escalation when project completion time exceeds a year.
Escalation is generally tied to inflation, and it is advisable to have an escalation clause in construction
contracts. Escalation should not be included in a project contingency. Project specific uncertainties give rise
to risk that should be accounted for in the project contingency.

2.8.1. Principles of management of risk and uncertainty

There is no clear cut, definition of risk and uncertainty. Many scholars look at it from different perspectives.
However, it is generally agreed that, in risk and uncertainty, the outcome or activities are likely to depart
from expectations. It is considered that, the effect of the deviation from expectation could be Value-Neutral,
Value-Negative or Value-Positive. In construction project management, these values are in the form of
Time, Quality and Economy of the project. Therefore, in construction project management, it is the effect of
risks and uncertainties on project time, quality and economy that is the subject of management and
management development. In dealing with risks and uncertainties management as challenges facing
construction industry in developing countries project management, the focus should be on:
• Identification of the various risks and uncertainties that the project faces.
• Categorization and Quantification of risks and uncertainties that the project faces.
• Risk and uncertainty sensitivity analysis for the project.
• Project risks and uncertainties allocation and distributions to those with better capacity and mechanism to
handle each categorization. This may include the traditional allocation to God/gods through prayers or by

20
ignoring the risks and uncertainties. Sometimes, some people handle it in superstitious manners either
through fortune-tellers or witchdoctors or traditions for example sacrifices of some kind for certain type of
projects. Risks and uncertainties allocation and distribution should be done through terms and conditions of
contracts.
• Project risks and uncertainties response and mitigation by the responsible people or parties to whom they
were allocated and distributed. So that when the threats occur partially or wholly, the project implementation
is protected from their consequences or compensated for the consequences.

The fundamental bottom line of principles of management is that risks and uncertainties are not entirely
negative but also holds significant opportunities that their proper management could be very much
rewarding. It is this double edge notion of risks and uncertainties that is the benefit of the management
challenge in Construction Industry. This is also the only managerial attitude that makes the management
approach comprehensive, relevant and optimal. [J E Okema 2000]

2.9. Types of Construction Contracts

Construction contract types have direct impact on the cost estimation of construction projects. Similarly, the
contract type of a project also has a direct impact on the compensation in case of price fluctuation. There are
many types of construction contracts, which are applicable based on the prevailing specific project
conditions and largely the interest of the owner, as listed below [Tadesse Yemane 2006]:
 Lump sum fixed price contract
 Lump sum fixed price and escalation contract
 Lump sum fixed price and schedule rate contract
 Lump sum fixed price with escalation and schedule rate contract
 Unit rate contract
 Unit rate and escalation contract
 Schedule rate contract
 Schedule rate and escalation contract
 Cost plus percentage of cost contract
 Cost plus fixed fee contract
 Cost plus percentage of cost with guaranteed maximum cost contract
 Cost plus fixed fee with guaranteed maximum cost contract
 Target cost incentive contract

21
2.10. Minimizing the Adverse Effects of Price Fluctuation

Even though price fluctuation cannot be accurately predicted, its impact can be minimized. One way of
minimizing the effect is through risk management as discussed in section 2.8 and 2.9. In addition to risk
management literatures suggest the following methods [Stukhart 1982]:
• Improved financial utilization of contractors
• Improved contract procedures

2.10.1. Improved financial utilization of contractors

The contractor must identify and purchase items likely to delay the schedule or be in short supply. In
addition to this, proper planning and constant review of cash flows provides the best defense against
surprises. Companies should also constantly evaluate their profitability against objectives.

2.10.2. Improved contract procedures

The following are improvements on contract procedures are also believed to reduce the impact of price
fluctuation on construction contractors, especially the increase in prices [Stukhart 1982]:
• Contract award time
Reduce unnecessary administrative restrictions on contract award and change order procedures.
• Maintaining current information

22
2.11. Empirical Review

Enshassi et al. (2009) in his thesis on factors affecting the performance of construction projects in the Gaza
Strip, found out that the most important factors agreed by the owners, consultants and contractors were:
average delay because of closure and materials shortage, availability of resources as planned through
project duration, leadership skills for project manager, escalation of material prices, availability of
personals with high experience and qualification and quality of equipment and raw materials in project.
Bui et al., (2010) in their study carried out in Vietnam on factors affecting construction project outcomes
discovered that major enablers that lead to project success are foreign experts’ involvement in the project,
government officials inspecting the project and very close supervision when new construction techniques are
employed. Amusan and Adebile, (2011) studied factors affecting construction cost performance in Nigerian
construction sites. He discovered from the analysis that factors such as contractor’s inexperience, inadequate
planning, inflation, incessant variation order, and change in project design were critical to causing cost
overrun, while project complexity, shortening of project period and fraudulent practices are also responsible.

One study jointly conducted by Nigerians says the main performance measures used by construction SMEs
are cost, time, quality, customer satisfaction, profitability of the project, labour productivity, safety and
team work(Tunji-Olayeni, Timothy Olusoji Mosaku, Olabosipo Ishola Fagbenle, Ignatius Owoicho Omuh
and Opeyemi Joshua 2016).

Iyagba, Odusami and Omirin, (2003) did a research on the relationship between project leadership, team
composition and construction project performance in Nigeria. The tests of the hypotheses led to the
conclusion that there was significant relationship between the project leader’s professional
qualification, his leadership style, team composition and overall project performance. No significant
relationship was found between the project leader’s profession and overall project performance. Iyer and Jha
(2005) did a research on factors affecting cost performance evidence from Indian construction projects and
found out that the project manager’s competence and top management support are found to contribute
significantly in enhancing the quality performance of a construction project. Nyangilo, (2012) did an
assessment of the organization structure and leadership effects on construction projects' performance in
Kenya, he found out that lack of appropriate project organization structures, poor management systems
and leadership are the major causes of poor project performance. Chan and Kumaraswamy (2002) remarked
that project performance measurement includes time, budget, safety, quality and overall client satisfaction.
Kuprenas (2003) stated that project performance measurement means an improvement of cost, schedule, and
quality in design and construction stages. Navon (2005) defined performance measurement as a comparison
between the desired and the actual performances. The construction industry performance is affected by
national economies (Navon, 2005). Despite this complexity, the construction industry plays a major role in

23
the development and achievement of goals in the society. The pace of the economic growth of any nation
can be measured by the development of the physical infrastructure such as buildings, roads and bridges
(Takin and Akintoye, 2004). Successful building construction projects are those projects finished on time,
within budget, in accordance with specifications and to stakeholders’ satisfaction (Chua et al., 1999;
Puspassari, 2005, Ogunsemi, 2006; Yaman, 2007). Studies were conducted to examine factors impacting on
project performance in developing countries. Shortage of skills of manpower, poor supervision, poor site
management, unsuitable leadership, shortage and breakdown of equipment among others contribute to
construction delays in the United Arab Emirates (Faridi and El-Sayegh, 2006). According to Ajayi et al.
(2010) the choice of contractor(s) is a critical factor for the project manager and usually has a significant
impact on the success or failure of a project. The performance of a contractor will definitely correlate with
the performance of the contract. He further observed that the evaluation of performance has been a challenge
for the construction industry for decades. Several models and methods have been proposed by researchers
for the evaluation of project performance. However most of these procedures according to Ajayi et al.
(2010) limit their analysis to selected measures such as cost, schedule or labour productivity. Construction
performance embraces client’s satisfaction, time performance, cost performance, construction quality and
sustainable development. Mbachu and Nkando (2007) established that quality and attitude to service is one
of the key factors constraining successful project delivery in South Africa. Ling et al (2007) remarked that
architectural, engineering and construction (AEC) firms may face difficulties managing construction
projects performance in China because they are unfamiliar with this new operating environment. Kim et al
(2008) stated that international construction projects performance is affected by more complex and dynamic
factors than domestic projects; frequently being exposed to serious external uncertainties such as political,
economic, social, and cultural risks, as well as internal risks from within the project. Puspassari (2005)
identified 46 possible factors responsible for poor performance of construction contract. He further
categorized these factors into eight groups as; factors caused by clients, factors caused by contractors,
factors caused by consultants, factors related to subcontractors, factors related to material and labor,
contractual relationship factors, project procedures and external environment factors.

Planned time for construction projects and quality assessment system were also indicated as important
factors (Ayodeji Emmanuel Oke and Clinton Aigbavboa Aug 2016).

. In support, Shaban (2008) observed that if planned time is not implemented appropriately, the project will
suffer from delays and disputes between the owner and other parties. Another factor affecting project
performance of construction projects is cashflow, which is related to cost planning, control and
management.

24
2.12. Synthesis of the review

In citation of previous studies, little attention is being paid to construction performance in Ethiopia. Based
on a literature review of the existing factors affecting performance of construction projects, they can be
grouped as project characteristics related factors, labor and material related factors, contractual relationship,
project procedures, external environment, clients’ related factors and contractors’ related factors. These
categories form the basis by which research model developed to measure their effect on construction
performance of this study. It is graphically presented as shown below.

Independent variable

Project characteristics

 Project cost
 Number of projects

material related

 Availability of
material

Contractual relationship

 compensation Performance of construction

clauses
project

• Construction cost
Project procedures factors • Construction Time
 Integrated
project mgt.

External environment
factors

 Politics
 Economy
 Health

Clients’ related factors

 Financial
capacity Dependent Variable

Contractors’ related

 BID mgt.
system
 capacity

Figure 2. 1: Conceptual Framework

25
3. RESEARCH METHODOLOGY

Generally, this research is done to be an important stepping stone for examining the various aspects of the
problem under consideration; understanding and formulating guiding principles to govern the research
procedure; and developing and/or testing theories for the enhancement of the existing situation, state or
process.

3.1 Research Type

The research tried to explore how domestic contractors’ project performance is affected due to unpredictable
price fluctuation, and it implemented more of descriptive, exploratory and qualitative analysis with little
quantitative approach.

3.2 The Study Approach

This study focused on and chosen the contractors’ perspective as the target to this study. In fact, this can
contribute a lot for the overall development of the construction sector and the country’s economy as well.
The approach that is adopted conducting the research process was a desk study or secondary research
through surveys using both structured and non-structured questionnaire having descriptive outputs.

3.3 The Research Base

The research based on problem investigation and contributes knowledge mainly for contractors and for other
stakeholders in the construction industry. The research used concepts as a base line, and then identified
indicators which can be converted into variables [Kanjit Kumar 1996].

26
Table 3.3 Concepts, indicators, and variables assessed in the research

Concepts Indicators Variables

Price fluctuation  Increase in price  Market price fluctuation
trend/pattern

Price estimation and  Data collection  Price data collection methods

setting of prices  Data processing  Pricing methods
 Methods to accommodate price
 Pricing techniques
fluctuation
Effects of price  Profit losses on contractors  Contractors’ action during price
fluctuation  Delay fluctuation
 Opinion on what is happening to
 Poor quality works
contractors
 Cash flow problems
 Impact on projects
 Low project performance
 Impact on contractors
Minimizing the  Improvement in compensation
adverse effect of system  What contractors should do
price fluctuation  Improvement in planning and  What consultants should do
financial utilization
 What clients should do
 What regulatory bodies should
do

The result of the questionnaire survey and the findings is summarized as conclusions of the study.

27
3.4 Research population and sampling

Unpredictable price fluctuation is a problem of all contractors of different class and category. Even
if it is necessary to focus on contractors engaged in long period project since they undertake
projects of huge budget and lasts for long period of time, other lower class contactors are also
vulnerable for the adverse effect.

In the case of the research population, it does not mean that all members of stakeholders are
possible respondents for the questionnaire. Rather the questionnaire is distributed to engineers &
other professionals who know the concerned construction projects during the specified time who
confronts the challenge of unpredicted price fluctuation and affect their project performance.

The sample size is determined based on the following Slovin’s sampling formula (Yemane,
1967).

n= N / [1+ N*e2] Equation 1

Where:

 N = total number of populations (80)

 n = number of sample size

 e = error margin / margin of error, a 95% confidence level was taken and e =
0.05 so, for 80 contractor organizations: n = 67 will be taken.

3.4.1. Data sources, data collection instruments and procedures

3.4.1.2. Data Source and data collection

There are two types of research data collection, primary and secondary data collection. The
primary data collected through a questionnaire survey.

The secondary data used in this research obtained from project case studies and construction
report papers.

A questionnaire designed from literature review of price fluctuation effect on project

performance and from secondary data sources to identify to what extent the unpredicted price
fluctuation affect the project performance of construction civil contractors.

28
 3.5 The research process

The research problem, initiated from experience and observation in the construction industry have
passed through different processes. The research basic information is assessed in the literature
review part of the research. The literature review has helped in the assessment and identification of
variables. Once the variables are identified, research instrument preparation, and data collection
were executed in their order. Consequently, analysis of the data obtained from questionnaires and
interviews have processed which involves simple statistical approach, examining, tabulating and
categorizing based on the chosen measurement scale. After the collected data is analyzed, the
findings and results are discussed. Finally, the researcher has given his conclusion and
recommendation, based on the analysis and discussion.

3.6 Design of Research Instruments

Good questionnaire design is a key to obtaining good survey results and warranting a high rate of
return (Zikmund, 2000). The questionnaire that is designed for this study utilized the information
sourced from the extensive literature review and the global nature of the construction industry.

The research instrument that is used in this research is semi-structured questionnaire. The
questionnaire is designed in such a way that have three parts. The first part deal with the market
price fluctuation and pricing issues. The second part deal with market price fluctuation and pricing
and the third part is on project performance related issues.

The questionnaires are distributed for staffs of domestic construction contractors. Distribution of
questionnaires to contractors will is done both at head offices to make the data collection at
company level and individuals involved in construction contractors firm. These questionnaires are
filled by general managers, deputy managers, engineering department heads, office engineers and
contract administrators in different companies.

29
3.7. Piloting the research instruments

Taking into consideration the significance and need to identify and establish weaknesses in the
instrument that is used in the research study, the self-administered questionnaire pre- tested before
distributing it to the respondents. The questionnaires reviewed and then tested on a small pilot
sample of respondents with similar characteristics as the study respondents. Mugenda and Mugenda
(2003) suggest that the piloting sample ought to represent 10% of study sample based on the study
sample size. Proposed suggestions for improvement of the questionnaire is gathered and adjustments
is made to obtain a refined instrument. Piloting will help in revealing questions that could be vague
which facilitates their examination until they communicate the same sense to all the subjects
(Mugenda & Mugenda, 2003).

3.7.1 Reliability of research instruments

Reliability estimates the consistency of the measurements or more simply, the degree of uniformity of
the results obtained from repeated measurements. For this purpose, the quality of data is measured,
evaluated and guaranteed using appropriate techniques.

The data quality is assured and measured through internal validity instrument in to correct research
instruments application for accurately measuring the variables during the data collection procedures.
Besides, data consistency is checked using reliability test (Cronbach’s Alpha methods). According to
Sekaran (2010), reliability less than 0.6 are considered to be poor, those in the 0.7 range, acceptable,
and those above 0.8 are good. The closer the reliability coefficient gets to 1.0, the better.

30
3.8 Writing the research

This research has three major component stages. These are:

3.6.2 the research proposal
3.6.3 conducting and processing of the research
3.6.4 final writing of the research
The research was started by collecting, compiling and writing conceptual matters from literatures.
And the research instrument development was done parallel to the conceptual review and writing.
Writing the conceptual part and the data analysis and discussion part of the research had taken the
longest period of the research time. The detailed discussion and analysis of the responses from the
surveyed research population is presented in this part of the research. Writing of each stage has
been done in parallel with the on-going process. The final part, conclusion and recommendation
with rewriting of the research were done at last.

The whole research document is classified into five (5) major parts:
I. Introduction (Research overview)
II. Literature review
III. Research methodology
IV. Analysis and discussion
V. Conclusions and Recommendations

31
 4. ANALYSIS AND DISCUSSION

4.1. General

In recent years, the price fluctuation of construction inputs in the country has become severe and
unpredictable. even if the country tendering process is poor that it is focused on least bidder and the
contractors are afraid to consider future price fluctuation while filling their bid document, it is
appreciable that the contractors still trying to survive in the sector withstanding the challenges.
Also most construction contractors, especially domestic contractors, face strong challenges during
offering their price due to the high uncertainty of predicting what would happen in the course of
the project execution. The challenge is even more severe not only as a result of the dynamically
escalating market price but also as a result of the poor compensation system and practice in the
event of price fluctuation. Based on the aforesaid crude fact, the research problem has been
assessed in this research by collecting data with the help of the chosen research instrument;
questionnaires, distributed to domestic building contractors.

The research analysis and discussion is done based on the responses from the distributed
questionnaires. The response rate was 61.19% which can indicate a good confidence limit.

S/N Respondent Distributed Responded Response Rate (%)

1 Building contractors 67 41 61.19
TOTAL 67 41 61.19

Table 4.1 Summary of questionnaire distribution and response rate

4.2. Method of Data Analysis

The statistical method used in this research is simple statistics by taking a portion of the target of
interest to give response regarding the subject. And the research data analysis is done by adopting
simple statistical approaches.

The research uses nominal measurement scales to analyze the different variables of the research.

32
4.3. Time Value of Money

The conditions of contracts under which construction contracts are administered do not take the
time value of money into consideration. All contract conditions which are under application take
the actual amount of cost increased or decreased for price fluctuation compensation purposes. They
do not consider the value of money changed due to time, inflation and market interest rate changes.
Therefore, in this research, the actual amount of money spent and the price change in actual money
is considered. In other words, the time value of money is not considered in this research case
studies.

4.4. Assessment on the General Market Price Fluctuation and Pricing

The first step in this research was to assess the nature and occurrence pattern of price fluctuation of
construction inputs materials in relation to construction activities, in the past three years, from
2011 to 2013 Ethiopian calendar. In this part of the research, the price fluctuation of construction
input materials was studied.

4.4.1 Domestic contractors and the market price fluctuation

In the recent years in Ethiopia, as a result of the successive economic growth, the price of materials
on market is observed to be very unstable. Price of everything has greatly increased and is being
increased specially after COVID 19 pandemic. The construction sector is one of the victims of this
high price rise of inputs. And the main actors of construction are contractors who are sustaining the
damage at front line.

From all contractors, it’s the domestic contractors who are most affected. This is because of two
reasons: one is the poor compensation they receive in such situations and the other is because of
their relatively lower technical capacity to deal with such situations. And this will have a greater
effect on the project performance of the contractor that will impact all the stake holders of the
project at its later phases.

33
4.4.1.1. Market price fluctuation trend

From the response of the contractors who responded to the questionnaire survey, it can be seen that
the degree of predictability of material price fluctuation is very low and we can say it is
unpredictable. In other words, the material price fluctuation is unpredictable that contractors cannot
easily determine how the price of materials can go on.

Figure 4.1 represents the findings from the survey.

Predictablity of construction material price

80

p 70
e
r
c
e 60
n
t
a
g 50
e
material
o 40
f
c
o 30
n
t
r
a 20
c
t
o 10
r
s
0
highly predictable predictable fairly predictable less predictable unpredictable

Figure 4.1 Nature and occurrence of price fluctuation of construction input material

34
In any case, it can be seen that the occurrence of price fluctuation on construction inputs especially
on construction materials is unpredictable and is generally difficult to determine.

4.4.1.2. Major construction material whose prices fluctuate

The construction sector consumes different types of input material from foundation work to finishing work in
construction industry which has a wide variation in their type and some materials are produced locally and most
materials are coming from abroad with more foreign currency and highly explicit price fluctuation.

The basic and common inputs materials required to undertake a certain building construction
project are:
a) Cement
b) Structural steel
c) Reinforcement steel
d) Sand
e) Concrete hollow block
f) Bricks
g) Wood(form work, scaffolding)
h) Finishing materials (glass, paint, ceiling board, gypsum etc.)
i) Aluminum profile

Most of the finishing material, metal items and aluminum profiles used in the building construction
project are imported items and it’s highly vulnerable for price escalation since it is dependent on
foreign currency.

Other types of the materials also indirectly affected by others economic factors and showed price
escalation even if it is locally available and do not need or depend on foreign currency this is
because of the indirect effect of likes of fuel cost change in world market.

Most of the time it is not common to get compensation for locally available materials likes of coarse
aggregate, sand and wood items, to balance the loss the contractor will tolerate on the quality of the project
deliverables and affect the project performance.
35
 Price fluctuation pattern of construction material

100 95
90

p 80
e
r
c 70
e
n 60
t
a
g 50
e materials
40
o
f 30
c
o 20
n
t 10
r 5
a 0 0 0
c 0
t 0 % %) %) %) %)
o >5 50 30 20 -1
0
r se 0- 0- 0- (0
ea (3 (2 (1 e
s cr se se se as
in ea ea ea cre
r cr cr cr in
ajo in in in or
m igh gh te in
hi ra m
r yh od
e
ve m

Figure 4.2 Price fluctuation pattern of construction material

The questionnaire was developed in such a manner to let the respondents give their response in
same manner as described above by listing the items that showed price fluctuation. And the
respondents have listed the major materials that showed price fluctuation. In addition, the
respondents also rated the price fluctuation pattern of the listed inputs. To this end 95% of the
respondent agreed that the price fluctuation pattern of construction materials shows a major
increase, which means the price of materials is increasing by more than 50%.
36
4.4.2. Market survey and pricing
As construction is a risky business, contractors should take a good care while giving their offer.
The offer preparation, usually known as the bid pricing requires detailed market survey of the
construction input materials. The techniques used for the pricing also differ. The pricing does not
only require the study of the market, but also requires the consideration of other factors that
affect the price like the contractors have the input materials in bulk or risks of price fluctuation
and contingencies. This part of the research deals with how domestic construction contractors
prepare their offer and give their prices. Also it deals with how they deal with risks of price
fluctuation.

4.4.2.1. Data sources for pricing

The first step in pricing is to collect reliable market data from market and other data sources.
Similarly the surveyed contractors have also agreed that they conduct price data collection to be
used for pricing. To this end, from the survey, it can be seen that all the surveyed contractors
conduct simple market survey to collect price data for the construction input material to decide
the rate of the particular project work they are going to execute.

Figure 4.3 represents the summary of price data collection methods adopted by contractors.

P
e
r 90
c
e 80
n
t 70
a
g 60
e
50 90
o
f 40
c
o 30
n
t 20
r
a 10 5 5
0
c
t 0
o simple market survey centeral statistics national construction other sources
r agency publications magazines

37
Figure 4.3 Market price data collection methods adopted by contractors

From the above chart, it can be learnt that data sources like CSA publications and ECCA
magazine are not widely used by most contractors. The reason was, as described by some of the
respondents, the price data published in these publications cannot be reliable because of the
dynamically changing market. The price of materials on the market changes within very short
time while these publications publish the price data in a very wide time range. Therefore,
contractors are forced to conduct simple market survey whenever they are supposed to do price
or prepare offer.

4.4.2.2. Pricing methods

The next step after price data collection is pricing. Pricing is a process whereby an organization
interested in the construction of a project attempts to determine the expenditure of resources
such as materials, manpower, machineries, finance and time necessarily to realize the intended
project [TadesseYemane, 2006].

As described in section 2.6 of this work, there are different methods that can be used for pricing.
The major ones are: analogous estimation, parametric estimation, bottom-up estimation and
computerized tools. In addition, the contract types also govern the pricing in relation to price
fluctuation. For contracts which allow compensation for escalation and for those which do not,
contractors give different prices or offers. Accordingly, the surveyed contractors were asked
what methods they use to convert the raw market price into offer price. In addition, they were
asked whether they predict price fluctuation and what methods they adopt to accommodate price
fluctuation.

Figure 4.4 represents the summary of responses on pricing methods adopted by contractors.

38
 P
e
r 60
c
e 50
n
t
a 40
g 60
e 30
o 20
f
17 20
c 10
o 3 0
n 0
t
r
a
c
t
o
r
s

Figure 4.4 Pricing methods adopted by contractors

It can be seen that the majority of the respondents use computerized tools for pricing. In fact, it
should be known that the computer based tools that the contractors use are not well developed
computer programs. Rather, the tools are developed on spread sheet based program, Microsoft
Excel.

And these computer based tools are developed mainly to ease the calculation of cost breakdown
of work items. Here it can be seen that the degree of how detail that particular work item is
broken down depends on the estimator. Therefore, even though same computer based tool can be
used, the inputs to the adopted tool make quite remarkable difference on the outputs of the price
estimation or pricing process.

Even though it has been briefly discussed about the methods of pricing, the major concern is
how domestic contractors handle pricing during price fluctuation situations or in situations
where there is a possibility of occurrence of unstable market. To this end the respondents were
asked whether they try to anticipate or predict price fluctuation of any kind to use it as one input
in pricing. Accordingly, 75% of the respondents have said they predict the possible fluctuation
that would occur and use it as an input for pricing.

39
Figure 4.5 represents the summary of the responses showing the proportion of the surveyed
contractors who predict price fluctuation during prince and who do not.

contractors price fluctuation prediction

25%

75%

contractors who predicts price fluctuation contractors who do not predict price fluctuation

Figure 4.5 Contractors who predict price fluctuation and who do not

Here also another question arises, which asks: “How contractors who tried to anticipate the price
fluctuation handle the anticipated price fluctuation during pricing?”

To this end the respondents were asked and their response is presented in Figure 4.6. From the
surveyed contractors, it was found that 55% of them convert the result of their prediction into
percentage risk factor which is then applied on top of the result of their pricing. Here they adopt
a simple process that they study the trend of the fluctuation, if any, and use their own subjective
decision to reach to the risk factor to be applied. This risk factor is meant to accommodate any
possible price fluctuation, after the work is started, without affecting the planned project budget,
time and profit margin. In fact, this risk factor is not such a huge percentage which exaggerates
the overall price.

40
 P
e 60
r
c
e 50
n
t
a
g 40
e
o 55
f 30

c
o 20
n 28
t
r 17
a 10
c
t
o
r 0
introducing risk factor conducting risk analysis for adopting high profit margin
planning

Figure 4.6 Methods adopted by contractors to accommodate anticipated price fluctuation

Other 28% of the respondents said rather than introducing risk factors to their pricing, they adopt
high profit margins. And the rest 17% said that they conduct risk analysis to reach to a decision
on how to handle the pricing, where they anticipate price fluctuation. It can be learnt from all the
respondents that, no matter what methods they use during pricing, the ultimate goal of all is to
find ways to minimize the effects of price fluctuation which is feared to occur and yet difficult to
enumerate. In other words, contractors use different ways of predicting price fluctuation and
pricing because of the fact that they anticipate price would fluctuate but they are not quite sure
with the magnitude of its occurrence.
The other group of the respondents, 17% of the respondents [Fig 4.6] who said they do not try to
predict price fluctuation has given their argument, in one voice, why they do not try to predict
price fluctuation. They said, in the first place predicting price fluctuation is difficult. And if they
try to predict the possible fluctuation any way, and do their pricing using the predicted increased
price, they said they will be out of competition.

41
Here, one critical lesson can be drawn from both groups of respondents, that is: both witnessed
that they anticipate the occurrence of price fluctuation but it is difficult to determine or
enumerate. And this makes the price fluctuation that occurs on the course of the project works to
be unpredictable.

And the case being so, then how are the other actors of construction projects: clients and
consultants, handling unpredictable price fluctuation situations. Also how are construction
contractors being compensated in such situations? The findings and analysis on these issues are
presented in the following sections.

4.5. The effect of the unpredictable price fluctuation

On this study it is tried to focus on the effect of unpredictable price fluctuation regarding to the project
Performance of the contractors which will be explained in terms of indicators of project performance,
namely the delay (project time aspect) and cost overrun (project cost aspect).

So far it has been discussed what the pricing method used by most local contractors, contractors
tendency in predicting the price fluctuation for the construction input materials and how the
contractors accommodate the price fluctuation that will occur in the course of the project. In line
with this, it is worth to see what effect does unpredictable price fluctuations have on the
contractors and the project performance as well.

Accordingly, the surveyed contractors have indicated that the price fluctuations that occur in
construction input material unpredictably have effect on the project performance of the
contractors as well the capacity of the contractors to undertake their projects and on the overall
success or failure of the project itself.
To this end, 65% of the surveyed contractors have shown that such price fluctuations result in
delay and cost overrun of the projects. Here it can be seen that price fluctuation is also on cause
of delays in projects, which is one of the major problems in our country’s civil engineering

42
construction projects. Price escalation has been ranked the 6 th major cause of delay in civil
engineering construction projects [Abdo Abatemam 2006]. Figure 4.9 represents the summary of
the responses on the impacts of price fluctuation on projects’ performance.

P
e Effect on project performance
r
c 80
e
n
t 70
a
g 60
e
50
o
f
40
75
c
o 30
n 44
t 58
r 20
a
c 10
t
o
r 0
s Delay Cost over run decrease in profit

Figure 4.9 Effect of price fluctuation on project performance

In addition to the delay, it was also found out that cash flow problem of contractors, profit loss
and poor quality output may result as a result of unpredicted price fluctuation. Therefore, it can
be that price fluctuations can result in poor project performance by delaying project time, by
increasing the project cost and by making contractors to deliver poor quality projects.

43
On the other hand, the surveyed contractors also indicated that unpredictable price fluctuation of
construction input material also greatly affect their capacity to complete the projects on time and
within the project budget and by lowering the contractors performance it might endangers even their
capacity to stay in the industry. Contractors who are forced to suffer the negative consequences of
unpredictable price fluctuation also face profit losses and cash flow problems. This finding can be
related to the cause of slow growth of domestic construction contractors. Figure 4.10 represents the
summary of the responses on the impact of price fluctuation on contractors.

The profit losses, time delay and financial problems on due course of project can force contractors to
shift to other businesses.

To summarize the effect of fluctuating price of construction input material on the project performance
of the local building contractors, the core point focus should be understanding how price of the major
construction in put materials affect the construction process. If the materials not delivered on site on
time as per the material schedule, the planned work will not be executed and if the work is not
executed the project will be delayed and because of the project delay due to major construction input
material the project cost will be high, since the price of the materials will not stay the same when time
goes. This was the reality that was forwarded in the interview with some of the project managers
involved in this study. The further conclusions and recommendations to reduce the effect of price
fluctuation of major construction input materials will be discussed in the upcoming section of the
study in detail.

44
 5. CONCLUSIONS AND RECOMMENDATIONS
This research has examined the various factors how domestic contractors are faced with unpredictable
price fluctuations and how the effect of price fluctuation (escalation) will affect the project
performance of the civil contractors mainly involved in building construction projects. The findings
of the research, have been summarized under two parts. The causal factors and the effects of
unpredictable price fluctuations are presented under the conclusion part while the proposals of ideas
and knowledge to minimize the adverse effects of unpredictable price fluctuations on the capacity of
contractors are presented under the recommendation part.

5.1. Conclusions

 The research has shown that price fluctuation occurs any time; but the magnitude and
occurrence time of price fluctuation, whether increase or decrease in price, is the most
difficult to predict. It is difficult to predict accurately and determine how the price of
materials would increase or decrease. Even during high times of price fluctuation, it is very
difficult to predict whether the then current prices will rise or fall or stay fairly constant.

 The pattern of price fluctuation that has been occurring almost all the time is the increase in
prices. The research has revealed that the price of materials used to exhibit a very high
increase averagely (by more than 50%) e v e n i f s o m e m a t e r i a l s s h o w n 1 0 0 %
i n c r e m e n t over the past three years. The increase in price of construction input materials
might be taken as healthy, provided that it is fairly going in equal magnitude as the overall
inflation, and yet where the inflation is healthy but the current inflation rate of the country
especially after COVID 19 has at most effect on the price of construction materials. However,
the rate of increase in price of construction materials is much higher than the overall inflation
of the country which makes the sector very risky to do business.

 During bid pricing, contractors collect data mostly by direct market survey and use the
information for pricing. It has been said that it is difficult to predict the occurrence and
magnitude of price fluctuation, but, from experience contractors feel that prices would rise.
However, even though they feel prices would rise, they do not want to take into consideration
during bid pricing. This is due to two reasons:

45
 i. The pertaining conditions of contract allow them to use current price at the
time of tender, not the forecasted or predicted prices
ii. Contractors who try to predict, if they can, and use the forecasted prices
will definitely be the one who offer high prices, which makes them
unsuccessful in bids
Therefore, most contractors do not take price fluctuation factors into consideration during pricing.

 The price fluctuation system that is being applied in the country is very narrow which is
limited to few construction input materials. Even though civil engineering construction inputs
are quite many in number and type, the Ethiopian government has allowed only four types of
materials for compensation.

 Price fluctuation claims handling procedures are not consistent across all consultants and
clients. Such claims are being handled by the subjective decisions of the respective consultant
and/or client.

 Due to the narrow compensation system and denial for compensation, contractors loose
considerable amount from their profit.

 The profit the contractor gets is partially used to build the capacity of the contractor with
respect to equipment, competent professionals, working capital and others. But if the
contractor does not get adequate profit from the projects it undertakes, the capacity of the
company will decline and it will have a direct effect on the contractors’ project performance.
This research shows that contractors’ profit loss due to unpredictable price fluctuation has
created difficulty on contractors to build their capacity and lowered their project performance.

 The poor compensation system and profit loss in its complete set of negative effects, does not
only affect contractors. The project deliverables also suffer from the adverse effects of
unpredicted price fluctuations. Delays and cost overrun are common as a result of loss of
working capital and capacity of the contractor to persist during price increases. Also
contractors compromise on quality to economize the inputs and minimize the loss they suffer.

 So far it has been seen that price fluctuation is difficult to predict and contractors are being

46
 affected negatively. However, the most surprising finding of this research is that no one
contractor wants to step out of the construction business.

5.2 Recommendations

Developing the domestic contractor’s capacity eventually leads to strengthening the construction
industry. The goal of this research is to study the effect of unpredictable price fluctuation on the
project performance of construction contractors and propose ideas that would reduce the adverse
effects on the construction contractors. To this end the following recommendations are forwarded to
reduce the adverse effects of price fluctuation, especially to reduce its effect on the project
performance of the contractor:

 Update control information continually with current prices, indices, and trends. A
comprehensive and reliable price database should be established by joint effort of all actors of
the construction industry. The database should be updated regularly at short time interval to
give realistic price data. The government must take the initiative to coordinate the
stakeholders and establish a legal body to undertake this activity.

 Contractors, consultants, owners and regulatory bodies should work together to improve the
compensation system in which a wider range of inputs will be allowed for compensation. The
method of price fluctuation compensation estimation/calculation should be clear and
consistent across all contractors, consultants, regulatory bodies and clients.

 Contractors should be committed to undertake the project activities on time avoiding delays.
It is observed that when time passes and projects delay, the magnitude and effect of price
fluctuation (price increase) increases. Therefore, it is strongly recommended for the
contractors to undertake their projects on time.

 Closely scrutinize payment schedules. Contractors can suffer severely under price fluctuation
and high interest rates if payments are delayed. Owners should be committed to effect
47
 payments timely.

 The time gap from contract agreement to commencement should be minimized. Finalize all
the necessary administrative requirements on contract award and at the project site prior to
bidding in order not to waste the time.

 After contractors have given their offer. Extended time wasted in such activities pushes the
contractors to face challenges of increased price. Contractors should start work with in
minimum time after contract agreement.

 Contractors should improve their financial utilization system. They should identify and
purchase items whose prices are likely to increase or be in short supply. They should utilize
the advance payment they receive for similar purpose for the same project.

 Subdivide large risky venture into several smaller ones at prices more manageable and
foreseeable. The total huge risk will be reduced into smaller ones enabling the contractors
control the projects and minimize the risk of price increase. Here the total project time also
reduces which again reduce the risk of price fluctuation as a result improves project
performance.

 Reduce costs through improved material and financial management techniques, more
effective use of other resources and cost effective reductions in overhead. This includes
adopting technologies that enable to use cheap and less quantity of inputs.

 Contractors should consider the rate of skilled and unskilled labor, local construction
materials and other construction materials which are not allowed for compensation but exhibit
price increase by great extent while filling the bid document.

 The local contractors should focus on using efficient cost breakdown platform and need to
use market survey for specific project location and wisely manage in proactive way those
48
materials which are anticipated to exhibit price fluctuation.

49
References

 Gebre-Michael Paulos; Construction Industry: A Base for

development ; November 2002

 Abebe Dinku (Dr-Eng); Construction Management and Finance; 2003, AAU Printing
Press
 Mesfin Habtemariam; M.Sc thesis, Factors affecting construction projects performance,
the case of save the children ; St. Mary’s University school of graduate studies , Jan
2019
 Tunji-Olayeni, Timothy Olusoji Mosaku, Olabosipo Ishola Fagbenle, Ignatius Owoicho
Omuh and Opeyemi Joshua; Research Article Evaluating Construction Project
Performance: A Case of Construction SMEs in Lagos, Nigeria Patience, January 2016

 Tadesse Yemane; M.Sc thesis, Construction Cost Estimation Guideline for Local
Contractors in Ethiopia; AAU Civil Engineering Department, November 2006
 Wubishet Jekale Mengesha; Performance for Public Construction Projects in Developing
Countries, Federal Road and Educational Building Projects in Ethiopia, 2004, Norwegian
University of Science & Technology, Norway.
 Akanni, P.O., Oke, A. E. & Akpomiemie, O. A. (2015). "Impact of environmental factors
on building project performance in Delta State, Nigeria", Housing and Building National
Research Centre Journal, 11(1), 91– 97
 Dissanayaka, S. M. & Kumaraswamy, M., (1999) "Comparing contributors to time and
cost performance in building projects", Building and Environment, 34(1), 31- 42.
 Akogbei, R. T., Feng, X. & Zhou, J. (2015). "Project performance evaluation based on
time-cost-design capacity and plant utilization", Journal of Architecture and Civil
Engineering, 2(2), 1-9
 Auma, E. (2014). "Factors affecting the performance of construction projects in Kenya:
A survey of lowrise buildings in Nairobi Central Business District", The International
Journal of Business and Management, 2(10), 115-140

50
 Yakubu, O. & Sun, M. (2009) "Cost and Time Control of Construction Projects: A
Survey of Contractors and Consultants in the UK". Construction Information Quarterly,
11(2), 53–59.
 Koushki, P.A. & Kartam, N. (2004) "Impact of Construction Materials on Project Time
and Cost in Kuwait". Engineering, Construction and Management Economics Journal,
11(2), 126-132.
 Iyer K.C. & Jha K.N, (2006) "Critical Factors Affecting Quality Performance in
Construction Projects", International Journal of Project Management, 17(9), 1155-1170.
 Chan, A. P., Scott, D & Chan, A. P. (2004) "Factors affecting the success of a
construction project". Journal of Construction Engineering and Management, 130 (1),
153-155.
 Ling, F. Y. Y., Low, S. P., Wang, S. Q. & Lim, H. H. (2009) "Key Project Management
Practices Affecting Singaporean Firms: Project performance in China", International
Journal of Project Management, 27 (1), 59-71
 Aiyetan, A. O. (2010) Influences on Construction Project Delivery Time, PhD thesis,
Nelson Mandela Metropolitan University

 Fetene Nega; MSc. Thesis, Causes and effects of cost overrun on public building
construction projects in Ethiopia; AAU, Civil Engineering Department, Addis Ababa.
 Project Management Institute; Project Management Body of Knowledge; 2000 Edition

 Iyer K.C. and Jha K.N., (2005), Factors affecting cost performance: evidence from

Indian construction projects, International Journal of Project Management, Vol.

23, PP. 283-295
 Mandisa SIBIYA1, Clinton AIGBAVBOA2 and Wellington THWALA3; construction projects’ key
performance indicators: a case of south Africa construction industries, senior lecturer, department of
construction management and quantity surveying, university of Johannesburg, south Africa.

 Indochine apparel plc, annual project performance report ,2020

51
52