Construction Budget Over Runs and Late Project Completion

Construction Budget Over Runs and Late Project Completion Construction projects are graded very successful if the work is completed within budget and to the deadlines agreed in the specification. However, the sad truth is that not all projects are guilty of being successful. Many projects experience failure due to the uncertainties associated with construction projects which include weather, materials, equipment, money and profitability, disagreements between clients, contractors and sub-contractors, statutory regulations, economic and political issues and functionality and purpose. To prevent these failures from constantly occurring, the types of failures need to be addressed so future construction projects do not fall into the same category of unsuccessful Civil Engineering construction projects. It is clear that some of these failures occur regardless of careful planning due to uncontrollable conditions such as climate change, recession, delayed deliveries etc. Therefore addressing the controllable issues, contractors can incorporate the se problems into their specification. By understanding the issues from previous unsuccessful construction projects and correlating the failures, it will be easy to identify the common errors and try to eliminate them from future projects. The research will be based on unsuccessful construction projects by using data from case studies, books, the internet and journals. The constraints and limitation of this paper will depend highly on the data received and analysed by previous sources and their opinion. The paper will also focus on two main factors, budget over runs and late completion. Examples of Budget Over-runs and Late Completion Projects There are many construction projects which have Budget Overruns and Late Completion. A few examples of budget over-run and late completion projects are: Wembley Stadium Sydney Opera House Tfls Jubilee Line Wembley Stadium The Wembley Stadium was a renovation construction project which required the old stadium to be demolished and rebuilt. The main purpose of the new stadium was to increase the capacity of the stadium, be the new home of English football and also host other sports and national events. The original estimated cost of the stadium was  £757m. This value at completion soared to about  £798m. Multiplex (main contractor) reported about  £45m losses in the construction of the New Wembley Stadium. These losses arose due to factors which include: Weather Sub-contractor walkouts (Cleveland Bridge steel company walkout) Sub-contractor disagreements (trade union of workers walkouts) and Changes in design due to failures. Due to the above factors the completion date of the project was pushed back by about three months. [1, 2] Sydney Opera House The Sydney Opera House was built as a performing arts centre and was designed by Jà ¸rn Utzon. The original estimated cost to build the Opera House was AUS $7m in 1957 and expected to be completed in five years. The project was started in 1959 and the value escalated to a massive AUS $102m and was completed in 1973. Not only did the budget over-run to 15 times the original estimate, but it also took 14 years to complete, which is a very late completion. The main factor which affected this project was insufficient planning during the design stage This led to a series of errors during construction, which effectively caused a domino effect. Hence, increasing the cost and pushing back the completion date [3, 4]. Tfls Jubilee Line The London Underground Jubilee Line extension was to link Stratford and the Docklands to Westminster. This project was planned in 1989 and estimated to cost  £1.2billion. The construction started 1993 and expected to take four years. This however was not the case due to a series of setbacks. There are four major causes for these delays: The project was put on hold for 18 months to find funding The movement of the block signalling system caused delays The location of the O2 Centre (Millennium Dome) had not been established and Due to the collapse of Heathrow Express Tunnel, work was put on hold again. This caused many changes to the original design therefore causing the project to be completed in early 1999, which was a twenty months late completion. The cost also increased to  £3.5billion, an astonishing 70% budget over-run [5]. What Are Budget Over-runs? Budget Overrun can be simply defined as when the final cost of the project exceeds the original estimates [6]. In terms of construction, this means the actual cost of the project at completion minus the original tendered cost during the tendering stage. This therefore creates either a positive value or a negative value. If the value is positive, the project is within budget and has created a profit, if the value is negative, the project has created a loss and is referred to as a Budget Over-run. Why Do Budget Over-runs Occur and What Are The Causes? Budget Over-runs occur constantly in construction projects around the world. The main aim of any business (Construction Company) is to make money, however, it is very common in construction to hear companies reporting losses due to budget over-runs. If the project is completed within the budget specified, it can be graded a success. Therefore this is an ideal factor to use, to rate the success of a project. Budget over-runs occur due to many factors, which are sometimes split into two groups, controllable and extent of damages. The types of budget over-runs are caused by: The cost variations between clients and contractors and sometimes a third party e.g. project manager, consultant etc [7]. Poor estimation during tendering process Disagreements with Trade Union of Workers Climate change Late completion Changes in design etc. This shows that the slightest mistake or changes made could increase the cost of the project dramatically. Research carried out around the world on construction projects has shown that: [8] 9 out of 10 projects over-run Between 50 and 100% over runs were common There was a constant correlation of over-run projects for 70 years in each of the 20 nations and 5 continents surveyed. Average construction project costs are about 33%[9] Another source of research carried out by Jahren, et al [10] predicted that the factors which increased the chances of a budget over-run are: Project size Method of delivery Amount of competition Quality of contract documents and Interpersonal relations There have been predictions published in the User Guide (2005), which outlines the common factors which cause budget overruns. These are: Poor Project Management The project manager/management team is employed to control the entire development to run smoothly and efficiently from start to finish for the project. They may or may not cover the costing depending on the clients preference. If the project management is poor, it will create an effect on the entire project and in the User Guide (2005) it is listed as: Lack of planning and co-ordination Poor communication between members of the project team and the project sponsor Failure to identify problems and institute necessary and timely design and programming changes Lack of control over time and cost inputs Lack of end user involvement. Unexpected Ground Conditions The ground conditions on any construction site are key, if the ground is not tested prior to tendering, the costs could escalate out of control, in order to put it right. This effectively will be the contractors responsibility. Although trial pits and bore holes are used to get an idea of the ground conditions, the true site condition will not be exposed until full excavation. From the time the trial pits and bore holes are carried out to the time of excavation, the ground conditions may have changed. Changes in ground condition may cause a redesign and also cause problems for any machines and materials ordered to site. This therefore should be taken into account as these could increase costs. Shortage of Construction Materials When construction is at its peak development stage in a certain areas, locally ordered materials could be in great demand. Some materials maybe required but cannot keep up with the demand, hence causing delays to the project. These materials might be ordered from other areas of the world, but may cost substantially more as it will need to be shipped in and pushing back the completion date due to delays in material deliveries. Therefore to prevent any shortages occurring this will need to be anticipated and added to the cost to prevent budget overruns. Change in Foreign Exchange Rates If specific materials are unavailable in the local market, it will then need to be imported from overseas. This can cause a problem to the budget if there are dramatic changes in exchange rates. This unexpected exchange rate should be taken into account during costing as it will cause an increase in the budget. Inappropriate and/or Inexperienced Contractors Selection of the right contractor is another key decision. The contractor must be suitable for the project as some projects use a wide range of tenders who price the job. Although, the cheapest tender may be very inviting, it does not guarantee quality. The decision should be made on contractors experience, the contractors successful history of completing jobs on time and within budget and also the most competitive price. Research carried out by Yates et al (2003), the contractors tender which is 15% less than the Engineer, it is very likely there will be a budget over-run. The tenders reputation should also be consider. This could be key as some companies may fall into hardship and bankruptcy. This will delay the project considerably and also increase costs as most contractors tend not to takeover other contractors jobs in case of any problems which could arise during later construction. Natural Disasters/Events These are disasters or events which cause inevitable delays and therefore budget issues to the project. The types of disasters/events which may cause delays and cost implications are wars, riots, earthquakes, landslide, fire, political and economic issues, types of projectile, contamination and many other disasters/events. Underestimations Deliberate cost underestimating occurs in order to gain the job. This will result in the project not being completed and the client having to either increase the budget or retender, hence, causing budget over-runs. Research carried out by Fllyvbjjerg showed that big construction projects were common culprits to underestimation and therefore led to the statement, whatever the cause, almost all large public projects contain initial cost estimating errors that result in the need for increased funding to complete the projects'[8]. The underestimation has been split into four major topics by Fllyvbjjerg: Technical These are known as forecasting errors which are errors requiring changes because of imperfect techniques, honest mistakes, inadequate data, inherited problems in predicting the future and lack of experience on the part of forecasters. In this case, the errors occur between the budgeted estimation and the actual cost of construction. [11] Economical The economical issues are split into two groups, public interest and economic self interest. Public interest is where there are promoters and forecasters who underestimate the cost of the project on purpose to give public officials an incentive to cut costs to save public money. Economical self interest is used to create jobs for Engineers and construction companies and shareholders also get involved to make more money. The fact that shareholders get involved tends to influence the forecasting process and therefore makes an impression on the result. [8] Psychological This is known as appraisal optimism. Promoters and forecasters are held to be overly optimistic about project outcomes in the appraisal phase, when projects are planned and decided. [12] By making the cost seem lower than it should be, will effectively cause the budget to over-run. Political Political explanations interpret cost underestimation in terms of interests and power. The political issue arises on the fact that whether forecasters are intentionally biased to serve the interests of project promoters in getting projects started. This is key in order to start a project quickly, however, there is a legal and moral deception attached this form of underestimation [13]. Change and Variation Orders These are changes to the project and are not part of the outlined work during the agreement of the project. In construction, changes tend to be inevitable and will cause a disruption to the project deadline and also budget. These decisions are therefore discussed prior to any changes being made as it may not suit the client or contractor. Inflation The general definition of inflation in economics is the increase in prices and fall in the purchasing the value of money [14]. This means that if there is an inflation increase, the value of all parts of the project will increase e.g. material costs, machinery hire, wages etc, which in turn increases the budget. To avoid these extra costs, predictions of the market should be checked during the tendering process, by both client and contractors. Acceleration This is where there is a delay but the client demands the project to be completed by the contractor on time, before the completion date or before the agreed extension completion date. Delays Of Completion Time and Payments Delays of completion tend to equal delays of payments, this will cause interest rate repayments to escalate causing the alleged interest trap for both client and contractor. What Are The Overall Effects From Budget Over-runs? It is clear that budget over-runs occur continuously in construction projects around the world. There are many causes for these extra costs which have not been considered during the tendering process. This has caused a bad impression not only on clients but also contractors and end users. The effects on each party is as follows: The client loses faith in the construction industry but in-particular their consultants who are unable to deliver the project on time. This also leads to higher investment being required from the client. The consultants reputation is ruined as they have an inability to control the project budget therefore leaving question marks for winning new projects. Contractors do not make the profits anticipated and failure to complete the jobs leaves their reputation in tatters. The end user will effectively be the one paying the highest price in terms of buying/renting/leasing in order for the shareholders to cover their costs. Overall, its the construction industry that suffers as it causes major headlines in the media for the wrong reasons. Clients will be more cautious before investing in large scale projects which will cause a drop in the construction industry projects due to its feeble reputation. Many construction projects which are accepted by the client will come with a greater risk to the contractor. How To Prevent Future Projects From Budget Over-runs? To prevent future projects from being unsuccessful in terms of budget, the management of costs need to be broken down to show exactly where costs will be greatest and smallest. The estimating, scheduling, accumulating and analyzing costs, and implementing measures to correct construction costing must be adhered to strictly. This will prevent any failures in terms of budget. There is a three step process which can be employed during the planning stage through to the construction stage: Identify the scale of the project (in terms of quality, completion time and budget), Ensure scope is adhered to strictly (in terms of time and budget) Monitor and control the above 2 steps constantly till the completion of the project. A successful project is based on the project manager and contractor working hand in hand to get the greatest efficiency from a project and tend to be based on time, performance and cost. There are many types of key principles and actions which should be followed for a project to be labelled successful and a few are listed below [15]: Good project definition and sound business case, Appropriate choice of project strategy, Strong support for the project and its manager from higher management, Availability of sufficient funds and other resources, Firm control of changes to the authorized project, Technical competence, A sound quality culture throughout the organization, A suitable organization structure, Appropriate regard for the health and safety of everyone connected with the project, Good project communications, Well-motivated staff, Quick and fair resolution of conflict. Risks and uncertainties increase the budget of any project. Therefore, a 10% of the estimated cost contingency plan is usually inputted into many projects to prevent the project from delays and going over budget. Although 10% sounds fairly small, by adding other control systems to the project performance, this value could increase dramatically. However, a good project management costing is more desirable and efficient than a contingency plan. What are Late Completions? In construction projects a late completion is commonly referred to as the time between the actual deadline agreed, to the time the project is completed. This is commonly called a delay in construction and tends to have a major effect on the client, end user, contractor and shareholders. If delays occur in construction projects, the contractor will be subjected to: Additional/Extension time of completion, Immediate termination of contract, Reduced profit or A mixture of the above. This is not always the case, as some delays are not the contractors fault. The other parties involved in the construction stage are, clients, consultants and external influences e.g. suppliers, machinery, mother nature etc. Any delay will create problems between all/some of the parties involved. Why Do Late Completions Occur and What Are The Causes? Delays can be split into three categories, these are: Excusable Delays These are delays which are not caused directly or indirectly by the contractor and in turn the contractor is allowed an extension of time. The excusable delay can also be split into two parts, Excusable With Compensation This is where the contractor is delayed due to the actions of the client, and is given and extension of time and compensated with money for wasted time. An example is if client cannot access the site after the client has approved for the work to start. Excusable Without Compensation This is where the client and contractor cannot be blamed for the delays caused and the contractor is only given an extension of time. An example would be Mother Nature. Non Excusable Delays These are delays caused by the contractor or sub contractor and the contractor is not given any extensions. But the client may get liquidated damages. Concurrent Delays These are delays which occur at the same time. If, and only if two delays or more occur at the same time, then the contractor is entitled to an extension. Delays are caused by the members directly involved in the project and also members indirectly involved in the project. Research was carried out by Odeh and Battaineh (2002) and their finding showed that [17], Client Delays The client caused delays in terms of: Finance and Payments, Constantly Interfering, Indecisive Decisions on Design and Requirements, Very Unrealistic Forced Time Schedule, Minimal Experience of Construction Projects, Minimal Experience of Co-ordination and Communication, Very Poor Employment of Representatives, Inappropriate Feasibility Study. Consultant Delays The consultant causes delays in terms of: Poor Management/Management Team in general, Poor Management of the Contract, Lack of Preparation and Poor Drawings leading to Slow Approval of Drawings, Quality Assurance and Control, Improper Site Investigations and Slow Approval of Tests and Inspections, Poor Consultant Team with Minimal Experience. Contractor Delays The contractor causes delays in terms of: Poor employment of Sub-contractors, Poor Site Management, Inappropriate Construction Methods, Poor Planning including costs, time, budget etc, Terrible Decision Making during Construction, Inadequate Contractor Experience. Material Delays Material cause delays in construction projects in terms of: Overall Quality, Its Demand and Supply, Importing Materials, Inflation Rate of Materials, Late Delivery and Unreliable Suppliers Labour and Equipment Delays Labour and Equipment cause delays in construction projects in terms of: Labour Availability and Productivity, Skilled Labour Availability, Low motivation and morale, Strike Action and Absent Labourers, Equipment Demand and Supply, Frequent Breakdown and Maintenance of Equipment, Improper and Inadequate Equipment. Contract Delays Contract cause delays in construction projects in terms of: Constant Changing of Design, Mistakes and Discrepancies in Contract Documents, Different Party Relationship Breakdowns e.g. disputes, negotiations, breakdown in communication, improper organisation. External Delays External influences cause delays in construction projects in terms of: Climate and Weather Changes, Unexpected Ground Condition Changes, Regular Changes e.g. security codes, I.D.s etc, Complaints and Problems from Neighbours, Inflation of All Materials, War, Riots, and Other Conflicts, Slow Clearance of Site. How To Prevent Future Projects From Late Completions? There are many factors which cause late completions of construction projects. The delays can be caused by direct or indirect actions. Direct actions are delays which can be avoided as these tend to be made by the parties involved. Indirect actions are uncontrollable and therefore by minimising the direct actions, the delay can be kept to a minimum. Research carried out by Nguyen, et al. (2004) on project success factors in large construction projects in Vietnam, Aibinu and Jagboro (2002) on acceleration of site activities and contingency allowances, Koushki, et al. (2005) on what the minimization of time delays and cost overruns would require, and Odeh and Battaineh (2002) on recommendations for improving the situation of construction projects allowed for a table of thirty five methods to be created. These methods would show how to minimise/eliminate delays from construction projects.   Conclusion From the research carried out, it appears that Budget Over-runs and Late Completions are a common aspect of the construction industry. However, it is clear that not all Budget Over-runs and Late Completions are controllable and some are fabricated to seem as over-run and completed late due to the process of tendering. In appears that there is a connection between late completion and budget over-runs hence, these are key factors which need addressing. The most influential effects for over-running and late completion are delays, insufficient finances, loss of reputations and controversial decision making from clients, consultants and shareholders. It is therefore compulsory that all the above measures should be followed, but a few major recommendations must be adhered to in order to make sure the project is always successful. The major recommendations for all parties involved are, Client The client should make sure all finances and payments are available and paid on time, the feasibility study is well planned and accurate as possible, the client should be proactive in decision making and understand what is feasible and what isnt, and the client should recommended a deadline but allow for any anticipated delays. Consultant The consultant should have good people skills, understand the projects objectives and the clients obligations, any misunderstood/discrepancies should be ironed out prior to construction and during the construction stages, this will prevent any major changes required during construction. The management team should be more than adequate and have a good history in the field of the construction project, quality control and assurance procedures should be put in place along with potential disagreement solutions which could arise. Contractor The contractor should tender based on the actual job costs and not the minimum tender in order to gain the contract. The contractor should employ reliable sub-contractors which have a good history in terms of completion and quality, the contractor should have a good management history as well as a good reputation in the type of construction project.