COST MANAGEMENT TECHNIQUES FOR CONSTRUCTION OF PROJECTS IN LAGOS STATE

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ABSTRACT

Cost management has been a very important part of all projects, because it provides the information required to evaluate the profits and losses, before, during, and after the projects. Many projects experience extensive delays and thereby exceed initial time and cost estimate. This study therefore set out to examine the various cost management techniques for construction of project in Lagos State. The objectives of the study are to identify and evaluate cost reduction and control techniques available in the construction industry and to evaluate factors that lead to cost overrun or cost increase in construction project. In view of the objectives of this study, a total of 118 questionnaires semi-structured questionnaires were administered to various construction professionals in Lagos, Nigeria. Seventy five (75) questionnaires were retrieved, and were carefully coded and the data entered into the statistical package for social science (SPSS V.21). The result indicated that incompetent project team (designers and contractors) (3.61), fluctuation of currency/exchange rate (3.56), frequent design changes (3.52), and lack of proper training and experience on PM (3.43) are the common factors affecting construction cost performance in the industry. It was also discovered that financial reporting and cost reporting (3.16) and project cost-value reconciliation (3.76) are the major cost reduction techniques and cost control techniques commonly used on construction projects respectively. The study therefore recommends that it necessary to separate the cost control of projects at site level from the financial control systems operated at head offices in order to be able to detect cost and schedule overruns in good enough time to correct them while the affected projects are still in progress.

TABLE OF CONTENTS

DECLARATION ………………………………………………………………………………......................................ii

CERTIFICATION.......................................................................................................................... iii

DEDICATION................................................................................................................................ iv

ACKNOWLEDGEMENT............................................................................................................... v

ABSTRACT.................................................................................................................................... vi

List of Tables................................................................................................................................... x

List of Figures................................................................................................................................. xi

CHAPTER ONE.............................................................................................................................. 1

INTRODUCTION........................................................................................................................... 1

1.1 Background to the Study...................................................................................................... 1

1.2 Statement of the Research Problem.......................................................................................... 3

1.3 Research Questions................................................................................................................... 4

1.4 Aim and Objectives of the Study............................................................................................... 5

1.4.1 Aim.......................................................................................................................................... 5

1.4.2 Objectives............................................................................................................................... 5

1.5 Significance of the Study........................................................................................................... 5

1.6 Scope of the Study..................................................................................................................... 6

1.7 Definition of Terms.................................................................................................................... 7

1.8 Chapter Summary..................................................................................................................... 7

CHAPTER TWO............................................................................................................................. 9

REVIEW OF CURRENT AND RELEVANT LITERATURE...................................................... 9

2.0. Introduction.............................................................................................................................. 9

2.1. Concept of Cost Management.................................................................................................. 9

2.2. Cost Management Techniques................................................................................................ 11

2.2.1. Cost Planning and Control.................................................................................................. 11

2.2.2. Estimating............................................................................................................................ 13

2.2.3 Budgeting.............................................................................................................................. 13

2.2.4 Cash Flow Forecasting......................................................................................................... 14

2.2.5. Financial Reporting and Cost Reporting............................................................................ 15

2.2.6. Cost Code Systems............................................................................................................... 15

2.2.7. Value Management.............................................................................................................. 15

2.2.8. Judgement............................................................................................................................ 16

2.3. Measuring and Controlling Cost Progress............................................................................ 16

2.3.1. Cost Ratio............................................................................................................................ 17

2.3.2. Earned Value....................................................................................................................... 17

2.3.3. Cost Variance (CV)............................................................................................................. 18

2.4. Potential Cost Overrun Factors............................................................................................. 19

2.4.1. Project-Related Factors...................................................................................................... 19

2.4.2. Contract-Related Factors.................................................................................................... 21

2.4.3. Client-Related Factors......................................................................................................... 21

2.4.4. Contractor-Related Factors................................................................................................ 22

2.4.5. Consultant-Related Factors................................................................................................. 23

2.4.6. Labour-Related Factors...................................................................................................... 24

2.4.7. Design and Documentation Factor (DDF):......................................................................... 24

2.4.8. Financial Management (FIN):............................................................................................. 25

2.4.9. Material and Machinery Factors (MMF):.......................................................................... 25

2.4.10. External-Related Factors.................................................................................................. 26

2.5. Mitigation Measures to Control Cost Overrun..................................................................... 27

2.6 Gaps Identified From Literature............................................................................................. 28

2.7 Chapter Summary................................................................................................................... 29

CHAPTER THREE....................................................................................................................... 30

RESEARCH METHODOLOGY.................................................................................................. 30

3.0 Introduction............................................................................................................................. 30

3.1 Research Strategy................................................................................................................... 30

3.2. Research Design..................................................................................................................... 31

3.3. Research Population............................................................................................................... 31

3.4. Sample Frame......................................................................................................................... 31

3.5. Sample Size............................................................................................................................. 31

3.6. Sampling Technique................................................................................................................ 32

3.7. Data Collection Instrument.................................................................................................... 32

3.8 Approach / Procedure for Data Collection............................................................................. 34

3.9 Method of Data Analysis......................................................................................................... 34

CHAPTER FOUR......................................................................................................................... 35

DATA ANALYSIS, INTERPRETATION AND DISCUSSION................................................... 35

4.0 Introduction............................................................................................................................. 35

4.1 Social-Economic Characteristics of the Respondents............................................................. 36

4.1.1 Age of Respondent................................................................................................................ 36

4.1.2 Type of Organizations.......................................................................................................... 37

4.1.3 Years of Experience of the Firm/Organization................................................................... 37

4.1.4 Designation of Respondent................................................................................................... 38

4.1.5 Academic Qualification........................................................................................................ 39

4.1.5 Professional Qualification.................................................................................................... 39

4.1.7: Type of Project Handle....................................................................................................... 40

4.1.8 Employee Strength................................................................................................................ 41

4.1.9: Primary Player to the Cost Overrun.................................................................................. 42

4.2 Cost Reduction Techniques..................................................................................................... 43

4.3 Cost Control Techniques......................................................................................................... 44

4.4 Factors Affecting Construction Cost Performance................................................................ 46

4.4 Perspectives of Various Professionals on Cost Management Techniques.............................. 48

4.5 Analysis of Variance (ANOVA) of the Factors Affecting Cost Performance........................ 49

4.6 Discussion of findings............................................................................................................... 54

4.6.1 Cost Reduction Techniques.................................................................................................. 54

4.6.2 Cost Control Techniques...................................................................................................... 54

4.6.3 Factors Affecting Construction Cost Performance............................................................. 54

CHAPTER FIVE........................................................................................................................... 56

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS................................................... 56

5.0 Introduction............................................................................................................................. 56

5.1 Summary of Findings............................................................................................................... 56

5.2 Conclusion................................................................................................................................ 57

5.3 Recommendations.................................................................................................................... 58

5.4 Further research...................................................................................................................... 58

References...................................................................................................................................... 59

LIST OF TABLES

Table 4.1: Cost Reduction Techniques…………………………………..……………..…..42

Table 4.2: Cost Control Techniques……………………………………………………..…44

Table 4.3: FACTORS AFFECTING CONSTRUCTION COST PERFORMANCE………45

Table 4.4: Perspectives of Various Professionals on Cost Management Techniques………48

Table 4.5: ANOVA of the Factors Affecting Cost Performance……………………..……..50

LIST OF FIGURES

Figure 1: Age of Respondent……………………………………..………………………..36

Figure 2: Type of Organizations…………………………………………………..………..37

Figure 3: Years of Experience of the Firm/Organization……………………………….…..37

Figure 4: Designation of Respondent…………………………………………………….…38

Figure 5: Academic Qualification……………………………………………………….….39

Figure 6: Professional Qualification Level……………………………………………..…..39

Figure 7: Type of Project Handle……………………………………………………….…..40

Figure 8: Employee Strength…………………………………………………………….…..41

Figure 9: Primary Player to the Cost Overrun………………………………………………41

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Construction industry plays an important role in the development of a country (Malkanthi, Premalal, & Mudalige, 2017). They however opined that the success of any project will depend on how that project can achieve its objectives in terms of cost, quality and duration. In order to achieve success in a project, it would be essential to plan that project well and have a proper monitoring mechanism in place. Vasista (2017) argued that defining and assessing project success is therefore a strategic management concept that can align project efforts with short-term and long-term goals of the organization. Traditionally projects were perceived as successful when they meet time, budget and performance goals. These have however raise a great concern among construction stakeholders in the recent time. Cost management has been a very important part of all projects, because it provides the information required to evaluate the profits and losses, before, during, and after the projects. Resource management addresses the availability of all resources, which are consumed totally or partially by the projects, calculated as dry costs or overheads (ElAzzazy, 2017).

Vasista, (2017) agreed with (Young & Ibbs, 2002 and Olaoluwa, 2013) that cost means expenses incurred by contractor for labor, material, services, utilities etc., plus overheads and contractor’s profits. Cost control is a process where the construction cost of the project is managed through the best methods and techniques so that the contractor does not suffer losses when carrying out the activities of the project (Otim, Nakacwa, & Kyakula, N.D). Olawale & Sun, (2010) noted that Kerzner, (2003) believes cost management is a complex task undertaken by project managers in practice, which involves constantly measuring progress; evaluating plans; and taking corrective actions when required.

Cost Management is the process by which costs (expenses) incurred on a project are formally identified, approved and paid. Cost control is the deliberations, actions and reactions to project cost fluctuations during a project to maintain the project cost within the project budget. Cost management is the process of controlling the expenditure on a construction project at all stages from initiation to completion, within the approved budget (Vasista, 2017). The project cost estimate is mainly concerned with the cost of resources required to complete the planned project activities, and it is the most important aspects of construction management process which is used to forecast the cost of undertaking a construction work (Yismalet & Patel, 2018).

During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process (Otim, Nakacwa, & Kyakula, N.D). They however agreed with Dharwadker (1985) in their work that cost control can be achieved by selecting the right man for the right job, the right equipment and tools for the right work and the right quality of materials, in the right quantity, from the right source, at the right price and delivered at the right time. Managers are expected to be well equipped to execute the project, with due consideration to the quality of work, yet within the estimated cost and limits. This study is however aimed at examining the various cost management techniques for construction of project in Lagos State with a view to identify the most effective techniques in the construction industry in other to reduce or eliminate cost overrun or increase.

1.2 Statement of the Research Problem

Construction can be considered as a dynamic industry which is constantly facing uncertainties. These uncertainties and the many stakeholders in these kinds of projects, make the management of costs difficult which consequently causes cost overruns. Studies on cost management in construction industry has been the focus of many studies (for example, Li, (2009), Olawale & Sun, (2010); Anyanwu, (2013); Azis, Memon, Rahman, & Karim, (2013), and many others). Some of the earlier studies returned positive relationship between cost management/control techniques and cost overrun/increase while others showed negative relationship. For instance, Azis, Memon, Rahman, & Karim, (2013), established a robust relationship between cost control and productivity in order to support future policy development.

The result of the finding revealed that poor cost performance in construction project is a common problem worldwide resulting in significant amount of cost overrun. Their study focused the major contributors of cost overrun and propose mitigation measures to control cost overrun factors. They were able to evaluate eight (8) categories of cost overrun factors and identified that “contractor's site management” as most severe contributor of cost overrun and followed by “information and communication” category while the least severe category is financial management.

Anyanwu, (2013) in his study on project cost control in the Nigerian construction industry argued that many construction projects development have failed owing to the various technical and financial pressures of cost limit, quality and value optimization. He however ascertain that the rising cost of building materials nowadays and the ultimate astronomical increase in the cost of construction projects calls for adequate application of cost management principles so as to reduce or eliminate the cost of projects. When management techniques are appropriately utilized during the construction of any price of work right away from the planning stage to the completion period exhausting all other principles of cost management, the cost of such a scheme must be within the target cost (Anyanwu, 2013). This conclussion was only base on literature review of past authors. This study will now use the combination of literature review and structured questionairre to examine the various cost control techniques available in the construction industry.

Olawale & Sun, (2010) writes on cost and time control of construction projects argued that despite the availability of various control techniques and project control software many construction projects still do not achieve their cost and time objectives. They were able to identify common factors that inhibit both time and cost control during construction projects which include design changes, risks/uncertainties, inaccurate evaluation of project time/duration, complexities and non-performance of subcontractors. This study will also evolve the use of questionairre relevant literature related to factors contributing to cost overun or increase in construction of project.

However, it is on the premise of these claims that the questions “How do we Identify and evaluate cost reduction techniques used by contractors? What are the factors that lead to cost overrun or cost increase in the construction project? How do we examine the various cost control techniques available in the construction industry?” An attempt to answer these questions led to the examination of the various cost management techniques for construction of project in Lagos State with a view to identify the most effective techniques in the construction industry.

1.3 Research Questions

This research is proposed to answer the following questions, which invariably would assist in achieving its objectives. The questions are:

i. How do we Identify and evaluate cost reduction techniques used by contractors?

ii. What are the factors that lead to cost overrun or cost increase in the construction project?

iii. How do we examine the various cost control techniques available in the construction industry?

1.4 Aim and Objectives of the Study

1.4.1 Aim

The aim of this study is to examine the various cost management techniques for construction of projects in Lagos State with a view to identifying the most effective techniques necessary to reduce or minimize cost overrun in the construction industry.

1.4.2 Objectives

The objectives of this research include:

i. To identify and evaluate cost reduction techniques available in the construction industry.

ii. To identify and evaluate factors that lead to cost overrun or cost increase in construction project.

iii. To examine cost control techniques available in the construction industry.

1.5 Significance of the Study

This study is of importance to building professionals, policy makers, economy of the nation and the general public because it clarify and create awareness of the extent to which inadequacies in cost control techniques can adversely affect project performance. Through the identification of cost reduction techniques available in the construction industry, the study is of help to contractors, clients, consultants and all parties involved in construction projects recognize the most efficient way(s) of managing cost and about ways of improving their current method of cost management and control.

The economy of any nation tends to be more realistic when there is cost, time certainty and quality control. However, the quality and productivity of any completed project determines that, the economic benefit is liable to be achievable. The economy can save the money that would have been otherwise channeled for maintenance work of projects.

The study is also of great benefit for other student researchers’ who may want to venture into the same subject matter. Having gotten results-both empirically and theoretically on the subject matter, the study will serve as an establishment for future research studies. This study is of importance to building professionals and the general public because it would not only clarify but also create awareness of the extent to which inadequacies in cost control techniques can adversely affect project performance.

1.6 Scope of the Study

The scope of cost management in construction industry is indeed vast. It includes the cost control methods practiced by clients and consultants in the pre-construction, construction and post-construction stage. This study excludes cost control procedures related to the accounting and financial management of the company. This study is focused to contractor’s cost control during the construction stage, and the types of cost control utilized is dependent on the size of the projects, the size of the construction company and also the types of contracts. The study covers some selected building contractors in Lagos State.

Hence, the extent of this study covers the assessment of the socio-economic characteristics of the contractors in the construction industry in Lagos State Nigeria, identifying and evaluating cost reduction techniques available in the construction industry, identifying and evaluating factors that lead to cost overrun or cost increase in construction project and examining cost control techniques available in the construction industry.

1.7 Definition of Terms

· Construction: In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking. Normally, the job is managed by a project manager, and supervised by a construction manager, design engineer, construction engineer or project architect.

· Cost Management: It is the process by which costs (expenses) incurred on a project are formally identified, approved and paid (Vasista, 2017).

· Cost Control: Cost control is a process where the construction cost of the project is managed through the best methods and techniques so that the contractor does not suffer losses when carrying out the activities of the project (Otim, Nakacwa, & Kyakula, N.D).

· Cost: Cost means expenses incurred by contractor for labor, material, services, utilities etc., plus overheads and contractor’s profits (Otim, Nakacwa, & Kyakula, N.D).

· Cost overrun: This occurs when the final cost of the project exceeds the original contract value at the time of completion (Otim, Nakacwa, & Kyakula, N.D).

· Time Management: is the process of planning and exercising conscious control of time spent on specific activities, especially to increase effectiveness, efficiency, and productivity.

1.8 Chapter Summary

The chapter started with a background of the study which defined, characterized and related cost management techniques mentioning successful recent study on this subject area. It goes on to state the research problems and questions, thereafter the aims and objectives of the study. The significance, the scope of study and thereafter the definition of keywords and terms round up the chapter. This will lead to the next chapter for a review of the literature to further expatiate and establish issues started herein.

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