REVIEW OF BUSINESS AND FINACE
An International Journal for the study of Business and Finance
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Prof. W. Iyiegbuniwe
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Review of Business Finance
Volume 3
Jan- June 2001
No 1
ARTICLES
Management of cost overrun in selected building construction project in Ilorin.
OLUJIDE Jackson and OWOSHAG8A Steven
1
The degree of confidence on the public sector audit exercises by ICAN
and ANAN members.
IZEDONMI O.I. F, OLADIPUPO A. O and OTAKEFE J. P
8
Gender as a determinant of advancement into managerial positions in
Nigerian business organisations
OMOLAYO, B. Oluwabunmi
18
Improving external bank auditing for soundness and growth of banks in Nigeria
SUNNY M. Eke
22
Motivation and business success the relationship between entrepreneurs
motivation and new business ventures success
SIDIKAT Adeyemi
30
Assessment of the stages characterizing organizational capital equipment
purchasing decisions in Nigeria
ABIOLA, R. O
37
Modelling the spread of innovation in computer industry
ADEWALE T. A and ARIBISALA B. S
42
Journal Announcement
MANAGEMENT OF COST OVERRUN IN SELECTED BUILDING
CONSTRUCTION PROJECT IN ILORIN
_
OLUJIDE Jackson
Department of Business Administration, University of llorin, florin
&
OWOSHAGBA Steven
Federal Mortgage Bank Ltd, Lagos.
Introduction
The construction industry is a very important sector of the Nigerian economy. It contributes
significantly to its Gross National Product. The rapid growth in Nigeria's economy and
population, particularly during the oil-boom years, required additional physical infrastructures to
accommodate additional inputs to various components of the TCSS national product. Thus, the
construction industry has a weighted influence on all sectors of the Nigerian economy.
Onabule (1991) described the building construction activities as the single largest investment
sector in the Nigerian economy. In addition, appreciable percentage of the loans and advances
of merchant and commercial banks, insurance companies e.t.c are invested in real estate and
constructions. The promulgation of decree 53 of 1989, to establish Mortgage has also increased
investment in real estate in recent times.
Unfortunately, the per capita cost of building construction is increasing at a much faster rate
than at which income grows for individuals, companies and governments. Houses are becoming
more affordable. Closely associated with this high cost of construction is project overruns and
abandonment of construction projects nationwide.
The construction industry, unlike many manufacturing ventures, is concerned mostly with oneoff projects (Harris and McCaffer, 1979). This naturally creates difficulties for effective cost
control because each new contract often has a fresh management team because labour
transient and recruited on ad-hoc basis and sites and passed throughout the country.
For construction company, the scenario described above tends to create problems of selecting
communication with other parts of the company. Therefore, subcontracting and Labor are
common. Added to all these are problems associated with changing conditions. The resultant
effect of these problems of costing is cost overrun.
Cost overrun can be considered as the difference between actual cost of a project and its Cost
limit. It occurs when the resultant cost target of a project exceed its cost limits where Cost limit
of a project refers to the maximum expenditure that the client is prepared to incur on a
completed building project while cost target refers to the recommended expenditure for each
element of a project.
The ugly marks of these project cost overruns are seen in the numerous abandoned building
project in the country. According to Akindoyemi (1988) projects are rarely completed in the
country at scheduled time and cost.
The problem of project abandonment is serious and pervading during the era of military rule.
This situation has become so worrisome that the present Obasanjo administration had to set up
a panel to look into cases of abandoned federal projects in Nigeria. This study is design to
examine the incidence of project abandonment (Project cost overruns) in the building industry in
old llorin states. This study will provide information that will serve as a basis for articulating
public policy regarding project abandonment in Nigeria. This position
Review of Business and Finance Volume 3, Number I , Jan - June 2001
1
has become very necessary because government and their agencies are the single most
important client in this industry, they account for over 80% of projects in the industry.
This study establish the incidence of cost overrun in building projects, determine the causes of
project cost overruns in building and assess the management techniques to forestall overruns
in the Nigeria building industry.
Methodology
For the purpose of this study, we shall examine the causes of project delay a abandonment
in 30 building projects in Kwara and Kogi States. Thus, 30 building sited. constituted our
sample, the building sites were subjected on the basis of the judgement of the researcher.
llorin is one of the oldest cities in Nigeria; here there are a reasonable number of building
construction projects by individuals, private and public sector organizations, llorin was: seat of
government of llorin Province and it is now capital of Kwara State. It is the belief this study that
the situation with respect to the building sector in llorin will reflect what obtain in other cities in
Nigeria. Thus, this study is designed to probe into the operations of build practitioners in order to
examine the management of project cost overruns.
Data for this study were obtained from primary sources namely: Structured interviews v, 25
professionals respondents using a prepared questionnaire administered to them.
Table 1:
Distribution of professionals interviewed
Number
Frequency
Architect
5
20
Quantity Surveyor
6
24
Builders
6
24
Contractors
5
20
Engineers
3
12
Total
5
100
Data obtained were analyzed using Gross tabulation analysis and test of significance.
Data analysis and discussion of results
30 building sites were selected for examination at random. 25 questionnaires were give the
professional actors on those sites. Among the 25 questionnaires distributed only 20 \, completed
and returned. The professions of the respondents are as given by table 2 below
Table 2:
The professionals interviewed
Title
Number
Frequency
Architect
4
20
Quantity Surveyor
5
25
Builders
5
25
Contractors
4
20
Engineers
2
10
Table 2 above shows an event spread of questionnaires among the professional actor building
designed to construction at the various sites. The capacity of respond participation is also
studied and the resulted is presented in Table 4 below.
Table 3:
Respondents participation on projects
Respondents
Clients representative
Contractor representative
Contractor
Clients
Total
Number
14
-5
1
20
Review of business and finance Volume 3, Number I, Jan -June 2001
Percentage
70
-25
5
100
2
70% of the professionals interviewed are clients' representatives. Table 4 below shows the
employers of projected professionals on the site studied.
Table 4;
The employers of project Professional actors
Respondents
Government
Public Liability Company
Private individual
World Bank
Total
Number
13
-5
1
20
Percentage
65
25
5
100
From table 4, Government at all levels, employs 65% of the respondents with a meager 35%
share among the other employers in the industry. This further buttresses earlier statements that
Government finances about 70% of constructions in the building industry.
95% of the Respondents have project experience of more than 10 years, and have supervised
more than 20 building projects. This revelation from the questionnaire showed that respondents
have sufficient experience to participate actively in this study.
Table 5:
Frequency of cost overruns in Building Projects
Responses
Always
Sometimes
Not at all
Total
Number
3
15
2
20
Percentage
15
75
10
100
From table 5, one can see that 75% of the respondents accepted that cost overruns have
sometimes occurred in building projects, 15% said it always occurred, while 10% have not
experience cost overruns at all. The frequency of occurrence of projects cost overruns is further
probed into. The Table 6 below gives the response on frequency of occurrence. Table 6, below
gives the response as to whether respondents have experienced cost overruns or not.
Table 6:
Cost overruns in Projects
Responses
Yes
No
Total
Number
18
2
20
Percentage
90
10
100
From table 6 above, 90% of our respondents accepted that projects they have supervised have
had cost overruns at one time or the other. The frequency of occurrence of project cost overruns
is further probed into. Table 7 below gives the response on frequency of occurrence.
Table 7
Frequency of cost in the industry
Responses
Very often
Often
Occasionally
Not at all
Total
Number
4
5
9
2
20
Percentage
20
25
45
10
100
Table 7 shows that 45% of the 20 respondents accept that cost overruns occasionally occur in
projects, 20% very often, 25% occurs often while 10% have not experienced it at all.
Review of Business and finance Volume 3, Number I, Jan -June 2001
3
Table 8:
Project client
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
Federal Govt.
State Govt.
State Govt.
State Govt.
Local Govt.
Public Liability
company
Individual
TOTAL
Project costs and the associated overruns
Initial Cost
'000 Naira
3100
265
361
30000
527
1087
240
4900
1440
5000
994
6500
2890
490
Final cost
‘000 Naira
5000
325
521
38000
527
1087
240
6500
240
8500
1325
12000
3200
490
Cost overruns
'000 Naira
1900
60
160
8000
1440
3600
3600
331
3500
310
-
Percentage cost
overruns (%}
61.3
22.6
44 .3
26.7
32.5
73.5
287
60,000
287
80,935
20,855
-
73.5
33.3
41.2
10.7
-
Table 8, shows that for a total of 15 project whose costs were known among the 30 projects
studied, only 26.3% do not have project cost overruns. The planned cost of project overrun] is
N20.855 million. The cost overrun is 34.7% of the initial project cost overruns of N20.85.' million.
This cost overrun is 34.7% of the initial project costs.
The above analysis shows that cost overruns in projects can be very enormous. It can rise as
high as 73.5% of the project cost. The average overruns on the projects studied being 34.7%.
Table 9:
Projects cost overruns have specific advantages to the clients
Response
Number
Percentage %
Yes
4
20
No
16
80
TOTAL
20
100
We tried to find out from our respondents if cost overrun had any specific advantages.
Table 9 shows that 80% of the respondents accepted that project cost overruns have no specific
advantages to clients. 20% said it has advantages to the clients. Those who felt that cost
overruns have specific advantages to client gave the following two advantages Increased floor
area space of building and Faster completion
In order to be able to put this problem of cost overrun into proper perspective, it was added to
first identity at what level of the project cycle are cost overruns likely to occur.
Second, the possible causes of project cost overrun into proper perspective, it was added to first
identity then, the management action and techniques employed to control cost o projects were
investigated.
Table 10:
Origin of cost overruns project cycle
Project stage
Competition and Design
Tendering
Construction
All of the above
Total
Response
2
1
13
4
20
Percentage
10
5
65
20
100
From the table, the construction cost overruns, seem to have its genesis at construction stage
as 65% of the respondents chose the stage, 20% of the respondents believe that cost overruns
could originate at all stages, while 10% and 5% chose design and tendering stage; respectively.
Review of Business and Finance Volume 3, Number 1, Jan -June 2001
4
The response to the possible causes of project cost overruns are as given in table 11.
Table 11:
Cause of Projects cost overruns
Lack of proper appraisal of project
Design complexity
Unrealistic representation of clients needs
Lack of time for effective design
Selection of incompetent contractor
Shoddy tendering procedure
Lack of proper analysis of tenders
Variation orders
Ineffective and poor planning
Miscalculation by contractors
Inadequate tooling
Fluctuations in prices of materials
Lack of management tools such as
Bar Chart and Bar Chart and PERT
Delay in Honoring certificates
13
3
12
6
13
6
13
14
2
1
9
18
65
15
60
30
65
30
65
70
10
5
10
90
3
10
7
8
3
8
3
2
12
14
12
1
3
13
15
65
10
3
The major causes of project cost overruns identified from table 11 are as shown below:
1.
Fluctuation in the prices of materials/Labour
2.
Variation orders
3.
Delay in honoring certificates
4.
Lack of proper analysis of tenders
5.
Selection of incompetent contractors
6.
Lack of proper appraisal of projects
7.
Unrealistic representation of clients needs
When cost overruns have occurred in building projects management would take some actions.
These actions are as reported in table 11
Table 12:
Management reaction to cost overruns
Action
Ask for variation/fluctuations
Ask for revision of projects
Grant variations
Do nothing
Total
Number
9
4
6
1
20
Percentage
40
20
30
5
100
Table 12 shows a diverse reaction to cost revenue. The contractor team which is about 45%
could naturally seek for variations/fluctuations. Some of the respondents (20%) would however
seek for revision of the project. 30% would grant variations and 5% would do nothing.
The sites studied are conscious of the inherent dangers of cost overruns and they attempted at
curtailing it by employing management techniques. Table 13 shows that the responses 10 the
techniques respondents have used to control project costs.
Table 13:
Techniques used to control cost overrun
Techniques
Comparing estimate to clients budget
Costing to design
Cost planning
Cost modeling
Adoption of sound tendering techniques
Unit costing
PERT/Cost
Building cost index
Number of
responses
6
4
7
3
12
6
2
5
Relative
percentage
40
20
35
15
62
30
10
25
Review of Business and finance Volume 3, Number /, Jan - June 2001
Rank
2
6
3
7
1
4
8
5
5
From table 13, 60% of the respondents have used sound technique to manage cost, while 40%
have compared projects estimates to clients' budget in order to control cost, 35% have used
cost planning techniques and 30% have used the unit costing method.
The least employed management techniques are FERT/Cost control techniques, and cost
modeling. In the researcher's effort to further probe the exposure of respondents to modern cost
control management techniques, respondents were asked to recognize some models and
responses are given in table 14:
Models
Traditional costing technique
Regression analysis
Causal Or Empirical models
Monte-Carlos simulations
TOTAL
Response
19
1
20
Percentage
95
0
5
0
100
It is evident from table 14 that modem operational research and Quantitative techniques are not
employed in controlling projects costs in building projects in llorin. The traditional costing
techniques are used widely by the professional actors.
Conclusion
Analysis of data and distribution of result point to the fact that project cost overruns in building
projects have adverse effect on clients. It is another to the client's realization of dream houses
at planned time and cost.
From the foregoing therefore, one sees the necessity to manage cost planning at the conception
and design state of projects. The computer age and increasing resort to computer use, in order
to solve managerial problems has made it possible to employ cost planning models to predict
costs of projects to a near accurate level. The cost planning models in this category include:
Regression analysis, Causal or Empirical models and Monte Carlo simulation.
When the cost of a building has been accurately determined cost control techniques should be
employed to effectively monitor projects that are monitored in this manner are easier to control
than other projects therefore, projects should be planned on network using the Project
Evaluation and Review Techniques (PERT). This system allows for better monitoring of project
costs.
At conception and design stage, projects should be better appraised. Value Engineering should
be created and empowered to monitor and publish materials.
Some kind of body/agency should be created and empowered to monitor and publish, on a
regular basis, building cost indexes. This will facilitate and enhance ability of manager to make
better predictions of cost of material and labour. Thus, fluctuations on building sites will be
eliminated and hence reduction of cost overruns achieved.
The convincing professional development, CPD currently embarked upon by building
professional bodies should be expanded to include current research areas in the development
of managerial skills of members. Professional in government establishments and ministries
should particularly be given refresher training to update their skills.
Finally, if housing for all will ever be a reality in Nigeria, then all hands must be on deck to tackle
as a matter of urgency and necessity, cost overruns and other barriers to the successful
completion of projects. This can only be done by the employment of the right management tools
to plan and control cost.
Review of 'Business und finance Volume .1 Number I, Jan -June 2001
6
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