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2.5.

Cost management practices in construction

Importance of Cost management in mega scale Constructions

According to Carr (1989) cost estimation and management in project management is


one of the most important aspects where it provides substantial support on decision
making, cost scheduling and resource management. Zou and Lee(2006) expressed cost
performance of a project is one of the important metrics of evaluating project success.
Jorgensen and Wallace (2000) expressed that project cost tend to be higher than
depicted by budgets so frequently. Odeck (2002) states that the project cost overruns is
predominant in road construction projects rather than cost under runs, hence has
become one of the most critical issues in construction projects. According to Flyvbjerg et
al. (2002) cost over runs are common in infrastructure development, building and
technology projects here these projects have seen a substantial increase in ending in
legal disputes and litigation. Abdul-Rahman et al. (2010) also stated that 25-33% costs
over runs are common in the construction industry. Hence for the purpose of mitigating
the cost over runs project managers require powerful and effective tools and techniques
which can help accurately forcast the status of the project in costruction phase of the
projects (Fleming and Koppelman, 2006).

Normal practices and techniques used in Construction industry

Morison (1984) was the pioneer of systematic According to Akintoye and Fitzgerald
(2000). Frank (2002) showed that there are two systems of cost estimating: Analogy cost
estimation techniques which rely on using cost management and estimation data from
historical projects and calibrating them according to current environments and markets.
The other key methodology of cost estimating is the parametric cost estimation which
depends on converting base information into parametric inputs (Doloi, 2010). According
to Jorgensen and Wallace (2000), general project management theory is based on
deterministic time-cost trade off models which tries to minimise the costs such as
Sensitivity analysis and Monte Carlo method. Earned value analysis (EVA) is also
considered as a convenient tool for forecasting the project performance and hence
controlling and managing the project costs (Abdul-Rahman et al. , 2010).

Challenges in Cost managing and forecasting

Yeo (1990) argued that there is a strong belief among professionals in construction
industry that traditional cost estimation and management systems do not work for
modern large scale construction projects. Doloi (2010) stated that the cost estimation
and management difficulties mainly arise due to the varying interests among the project
stakeholders during the project lifetime. He argued; most of the time there is not
enough time and resources available for accurate estimation of costs. Robinson (1986)
pointed out that, although the senior level management is responsible for providing topdown cost estimations, ultimately most of the cost overruns are born due to extra
margins and services requested by the end users of the finished project. Using a
research on road construction projects Odeck (2002) pointed out completion time of the
projects, regional differences and outside pressure on costs savings in small scale
projects are the key reasons for cost overruns. Moreover he also found that neither the
type of the project nor the workforce type influence the cost over runs. Zou and Lee
(2006) al so pointed out that lack of effective change management can result in cost
overruns in construction projects. However Frimphong et al. (2001) emphasised,
through effective management of the projects and using the appropriate tools and
techniques cost escalations can be eliminated. He identified difficulties in payments,

poor technical performances, poor contractor management, difficulties in material


procurement as well as escalation of material prices are the major reasons for cost
overruns in construction projects. Further Frimphong et al. (2001) stated that these
difficulties will also result in time over runs.
On the contrary, Cao et al (2008) argues that insufficient or ineffective risk management
results in most of the cost over runs in construction projects.
2.6. Estimating, budgeting & contingencies

The financial process in Construction


Challenges

Frank (2002) and Doloi (2010) argued that the mainstream cost estimation methods
such as analogy based and parametric methods are both top down cost estimation
methods hence they are prone to produce unreliable results due to non availability of
data and clarity on individual components of the project. On the contrary Abdul
Rahman et al (2002) argue that Earned Value Analysis is the best indicator of future
performance and therefore by using trend data it is possible to forecast cost or schedule
overruns at quite an early stage in a construction project where it allows the control of
many project managements aspects such as, project planning, budgeting, change
managements as well as accounting.

Where do they go wrong usually

Flvybjerg et al. (2002) pointed out that large scale transportation construction projects
are usually under estimated hence 86% of the projects run failures in maintaining target
costs. Their research indicated that these costs overruns occur not only to technical
challenges, but also to political and psychological reasons. Based on a research on
asphalt paving operation projects, Nasar et al. (2005) concluded; unpredicted additions
(scope changes), balanced final field measurements as well as cleanup process as major
reasons for project cost overruns. Through a research based on soft skill management
methodology, Doloi (2010) concluded that late intervention of the key project
stakeholders result in significant increase of risks in consequential costs plus lack of
market knowledge, project scope change (often resulted by change of clients
requirements), unforeseen risks would result in cost overruns in construction projects.
Furthermore he indicated: The economic conditions as well as the project
scope/duration expectations should be considered for accurate cost estimation as well
as competent project management, knowledge of the site, experience in quantity
surveying would increase the reliability and accuracy of cost estimation and cost
management of a project.
According to Mansfield et al. (1994) cost overruns in large scale construction project
usually occur due to poor management of contracts, inaccurate estimates, material
shortages and price fluctuations as well as issues in finance and payment arrangements.
These finding are similar to the findings by Frimpong et al. (2001).
On the otherhand researchers have found there is a close connection between the
project management and costs since cost is considered to be one of the key aspects of
defining project success (OGC,2009; PMI 2009). Based on a research on the cost
escalations in Scottish parliament building Lord Fraiser (2004) found that, failure to
identify relative significance of the time, cost quality triangle, inadequate budgetary
planning, inadequate risk management, poor communication between projects key

stakeholders as well as lack of experience in construction cost management as major


reasons for cost overruns (Potts, 2008). Rashed (2005) argued that effective risk
management leads to explicitly manage project costs in infrastructure construction
projects as well as it would allow more control over projects. Flybjerg et al. (2002) also
concluded that most of the large scale construction projects fail to meet budgetary
targets due to poor risk management.
According to Akintola et al. (1992) the greatest challenge of cost management is the
management of cost information. They identified these difficulties occur due to lack of
adequate design information, scarcity of relevant data base in order to get lessons as
well as the fluctuation of construction input prices.