Research on Cost Compositions and
Influence Factors of Construction Project:
Based on Data Mining of Project Cost
Ji Li, Mao Hongtao, Luo Guiping, Peng Shaobing
(Southwestern University of Finance and Economics)
Abstract: The large-scale infrastructures invested by central and local government
certainly will promote the development of construction industry as well as make the
market competition more fiercely. Under the competition, the construction enterprises
in our country face both opportunities and challenges; therefore, it’s indispensable to
control the cost of enterprise profit creation center which is construction project.
Collecting the historical cost data of one finished project and adopting data mining
technology, this paper analyzes the cost compositions and influence factors of
construction project. It is found that the labor cost and the equipment cost have
complementation advantages. The construction period has prominent straight effect
on other direct and indirect costs. The distance between the construction project and
the headquarters have prominent straight effect on equipment cost and indirect cost,
while the price level has no prominent effect on material cost. The level one and level
two cities have negative correlation with equipment cost. The research conclusion
provides authentic date for optimization of construction project cost controlling.
Key Words: Construction Project; Cost Compositions; Influence Factors; Data
Mining
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1 Introduction
Under the circumstance of the global finance tsunami in 2008, Chinese government
has launched a four trillion investment plan to avoid the crisis and insure the growth.
It is worth noting that three trillion has been invested directly to the infrastructure
projects. With the introduction of the central investment plan, local governments have
also launched their massive investments plans. In the beginning of this year 2010,
Hebei Province funded 1300 key projects and the total investment amount reached 1.6
trillion; Ningbo City in Zhejiang Province finalized 100 poverty projects with total
investment of 0.28 trillion; Hubei Province also put forward their 12 trillion
investment plan of the next 6 years to 8 years on March 22; then Chongqi introduced
an investment plan totaled 1 trillion. In all of the investments of these provinces the
infrastructure input held a great proportion. It can be speculated that the construction
industry will step in a stable growth development stage within a quite long period of
time.
Benefited by the central and local government infrastructure investment with
“trillion” as a unit, the construction enterprises are facing significant develop
opportunities. However, as there would be massive influx into this industry, or
construction enterprises would expanse rapidly, the whole construction industry
would be highly competitive. Under the co-existence of opportunities and challenges,
construction enterprises should focus not only on the yearly increase of the output
value, but also on the creation of the enterprise value, to achieve the goal of enterprise
value maximization. Construction project is the profit center of a construction
enterprise, while cost control of the project department is the concern of the whole
cost control of an enterprise.
Cost control is an old topic of enterprise management, and it is also a continuously
developing subject. As the SASAC Director Li Rongrong said, the competition
between enterprises firstly reflected in the competition of price, while behind the price
it is the competition of cost. Cost index is the most effective and tangible indicator of
the management level of an enterprise. Under the rule of “reasonable low bid” the
profit margins are severely compressed, consequently the competition with private
enterprises and foreign-funded enterprises tend to be intensifying. As their rapid
expansion of business, the state-owned large-scale railway construction companies
should take the improvement of cost management as the top of agenda, especially the
reduction of project cost. Although many state-owned large-scale railway construction
companies have already realized the significance of cost management, and developed
related rules and regulations, they are more of a mere formality, whose
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implementation is ineffective. In recent years, the output value of large state-owned
construction enterprises increased year by year, while the gross profit margin has
dropped significantly, which can be a best proof.
In practice, the project cost is often difficult to control, and the situation of over
budget and over the expenditure occur frequently in major project. The reason lie in
the complexity of the project cost (First, its complex constitution; the second is the
multiple factors in the formation of the project cost), and the characteristics of the
project itself (one-time and unique). Construction project and its production have its
unique characteristics of unique and one-time. The characteristic of unique means any
project is unique and cannot be duplicated. Project design includes the scientific
planning of the project size, performance, etc. Project implementation includes
reasonable arrangement of construction organization, construction environment
(geographical location, climate, etc), and construction plan, construction technology,
etc. For projects have various uses and characteristics, and there are too many human
factors and uncontrollable factors in the construction process, we can say that no two
projects are exactly the same. The characteristic of one-time means that construction
project doesn’t produce new product like manufacturing enterprises, where the new
products can be continuously reproduced after test until they reach the requirement
and pass the test. Construction project should be completed and accepted only in
one-time, or construction companies would bear great loss or even go to bankruptcy.
It is precisely for these two characteristics of construction project and production,
many project managers take it for granted that the completed projects costing data is
meaningless to the projects under construction and the further projects. As a
consequence, a large number of project accounting data are not analyzed and fully
utilized. Most construction companies only take these data as a basis of cost, profit
calculation and final settlement, then, they are conserved forever, which is the status
quo of construction project accounting data. Because of this, according to the idea
of data mining and using its technology, a strenuous mining research to the project
data will show an unexpected effect on project cost control.
Based on this, this paper will make an analysis on a project’s historical cost data using
data mining technology, and extract the quantity rule of cost construction and related
factors. The rest of this paper is organized as follows: Section2 is the literature review.
It is designed to introduce the number laws of project cost and the application of data
mining in the project cost control. Section 3 is the research. Section 4 is the project
cost composition analysis. Section 5 is the impact analysis of the project cost factors.
Section 6 is the conclusions and recommendations.
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2 Literature Review
2.1 Research on quantity rules for construction project costs
Quantity rule is an inherent phenomenon, which objectively and widely exists in
social and economic life. Applying to the compositions of the project costs, there
undoubtedly exits a stable rule, we can closely observe, among different types of the
cost. Roughly speaking, it is the direct cost which accounts for about 80% of the total
cost .Also we find that material costs account for the total cost of the project not less
than 50%. The proportion for labor cost of the total is not more than 15%. Further, we
find that the material cost accounts for 65-75% of total cost of the project, Labor cost
accounts for about 10% of the total cost, From the construction and installation
projects of this type we find that material costs account for 60% of the total cost of
construction and installation project, and labor costs account for 10% of the total cost.
The research group meticulously interviewed the staff of the cost control and
engineering and find "escrow profit to the parent corporation", "cost red line" and
other cost quantity control standards. Essentially they are adopted based on a serials
of certain of rules formed the cost.
As shown, the cost quantity rule of engineering project does exist. However, most of
the recognized rules come from the work summary of the professional’s practice and
experience, however quantity rule is seldom refined by scientific statistical analysis
technology. Therefore, in line with practice some useful quantity rules are discover
from collected data, to provide more useful information for the enterprise decision
making
2.2 Data Mining Applying to Project Cost Control
Data mining has been applied to all areas of research, and achieved significant results,
however, so far it is rare for applied research in the field of project cost control . From
the existing literature, Lai guohua regarded the main factors of project cost (direct
cost factors, quality cost factors, project time cost factors and risk cost factor) as the
subject of data mining, listed the least method of cutting steel with linear
programming model, analyzed the negative correlation between prevention costs and
loss of a negative with relationship quality model, analyzed the main influence factors
of project time cost with decision tree method, and found the expense risk is the
greatest impact on the cost of risk using AHP.
Comparing project cost control to other areas of application of data mining，it is found
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that research in other areas is closer to the real data mining, mining potentially useful
information from a large number of data, rather data mining applied in the field of
project cost control, most of the literatures still remain in methodology aspects of
introducing data mining technology in the engineering project cost control, even if
using data mining technology to analyze quantity law of engineering project cost.
Literature have been based more on a project or even a fiscal year data analysis of a
project, based less than on a large number of data mining analysis of project cost. This
is clearly incompatible with the basic ideas and features of the data mining "mining
potentially useful information from a large number of data”. This article is for the
literature using data mining technology to analyze the status of the project cost and
lack . By collecting a large number of historical data of project cost, founds valuable
quantity law from a number of cost data, makes up defects of literature having less
sample data, and seeks to draw more practically significant conclusions.
3 Research Design
3.1 Samples
Above all, adopting data mining technology, the objective analysis of the historical
data of construction cost available for us will bring us more information valuable.
However, the cost data is confidential, and is hard to acquire from the public sources.
Based on the theoretical sample selection this paper chooses the data from China
Railway Group Limited. This corporation remarks a very long history and very
reputed for its scale, professional, industries crossed, high tech, good management.
Therefore, we obtain a very complete and sincere data which can satisfy us.
This large-scale railway construction enterprise established in 1950, which is long
enough to witness its history. Ended in the year 2009, this company has total assets of
more than 250 million yuan and annual production capacity of over 400 billion yuan,
which can be the symbol of large scale. This enterprise is reputed for high
construction quality, and the projects it has undertaken are diverse. For example, this
corporation mainly engaged in railway, roads, airport, docks, subways, municipal
engineering, Industrial and civil construction and other projects. It is certificated as
the national engineering construction general contracting level I business and large
multi-level national railway construction level I business. After the reform and
opening up, this corporation participates fully in the enterprise market competition
and gradually steps into the international market. The projects of this corporation have
changed from concentration in railway construction into multiple areas of
construction. Since 2005, this corporation has successfully preformed the
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management of responsibility cost reform, which sufficiently reflects its high
management abilities. In 1999, joint-stock company was set up. In 2001, the company
successfully listed on Shanghai Stock Exchange. The institutional policy of
information disclosure of listed companies required strictly by Stock Exchange
guarantees the historical data of this corporation’s project true and complete.
3.2 Sample selection
Having discussed with staff of the China Railway Group Limited, we've decided to
choose all of the engineering projects' cost accounting data from a large railway
construction enterprise between 01/01/2001 and 31/12/2009. During this period, The
CAS is adopted by Treasure department which is mandatorily enforced in limited
liability company from 01/01/2007, of which the basic accounting principles having
changed a lot asking for higher requirements, , and insisting the principle of substance
over form in terms of objectivity and other principles. However by share change and
listed in Shanghai stock exchange, the ZTEJ’s financial accounting followed the new
accounting standards. So, the quantifier rule contained in cost accounting data of the
engineering projects during this period has reference value with regards to the
engineering projects' cost control now and in the future. In order to meet the
consistency in terms of data mining, deleting the projects which can not content to the
data consistency principle is necessary. firstly removing 10 incomplete projects, then
expurgating other projects owing to various different reasons, namely demolition
project, double subcontracting project, connecting project, overseeing project and
project under construction. Demolition project which didn't satisfied the cost income
matching principle, for the expenses belongs to property unit rather than construction
enterprise. Double subcontracting project, in that the material expenses which is an
important part of project cost can't be calculated, so the data vesting in this item can't
be analyzed; Total subcontracting project also called connecting project, of which the
construction costs only contains sub-contract fees short of other cost data, similarly, is
no good to data analyses. The salary data for engineering project managers actually
reflected in company headquarter or other projects is not listed in overseeing project
item. Meanwhile, the overhead expenses do not include employee compensation. Well,
all of those go against data analysis. Project under construction which contains
instability factors, such as uncertain cost, indeterminate revenue and inaccurate
accounting data, is eliminable. Look at table1 to see the process of sample selection.
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Table 1 The table of simple selection
Original projects
The amount
deleted projects
Sample of
selecytion
项目类型
（unit）
Railway
projects
Highway
projects
Effective projects
(unit)
4 projects of half-baked data
44
1 demolition project
37
2 connecting projects
3 projects of half-baked data
52
3 double subcontracting projects
45
1 total subcontracting project
1 project of half-baked data
Municipal
projects
2 double subcontracting projects
55
1 connecting project
46
3 overseeing projects
2 projects under construction
Housing
construction
2 projects of half-baked data
51
projects
Subway
projects
Total
3 double subcontracting projects
41
5 connecting projects
8
0
8
210
33
177
3.3 Data Mining Methods
The difficulties of cost control lie in the complexity of the formation of cost. First, the
cost is an integrated economic variable, and it has a variety of economic contents,
there are always a number of cost items, which have their own characteristics and the
factors of them influence each other. This manifested as linkage relationships. So, in
accordance with the requirements of contract cost of the projects in CAS 15
“Construction Contracts”, this article aimed at the analysis of the proportion of each
cost in total cost in project cost to find the focus of the project cost control as well as
the relationship between the cost items. Second, the formation of the cost is
influenced by many factors and diversified uncertainties. This article will mine factors
from the acquired data, and analyze the influence of these factors to each cost items.
Data mining tasks can generally be divided into two categories: Descriptive task and
Predictive task. Descriptive task characterize the general characteristics of data in the
database, and predictive task will have to forecast and make predictions based on the
current data. In this paper, we conduct data mining mainly in this two aspects: one is
to research the composition of project cost, another is to explore the impact factors of
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the project cost. The former is the description of general characteristics of project item
cost, and the latter is the forecasting of impact factors of project cost.
On the other hand, the businesses of this corporation become increasingly diverse and
comprehensive. The proportion of pure railway construction business accounted for
the total enterprise business turn from 60% ~70% to 20% ~30%. While the projects of
non-public facilities, residential housing etc. are increasing in a different rate. Based
on this, this paper also examines the quantity rules of the formation of differential
project cost. This perspective and idea cannot be achieved through individual projects.
And it is one of the contributions of this study.
4 The Analysis of Cost composition of Construction
Project
ASC No. 15 "Construction contract" as IAS 11 prescribe that contract costs include
the costs attributable to a contract for the period from the date of securing the contract
to the final completion of the contract. Direct costs include the cost of materials
consumed, labor costs, equipment cost, and other direct costs (refer to other direct
costs of contract costs). And indirect cost mainly contains the costs generated in the
corporation and its subsidiary construction corporation for indirectly managing and
organizing.
The cost of construction project is a typical construction contract cost, of which the
indirect cost is the cost of the managing and organizing work of the management. In
theoretical study, some researchers give a more comprehensive definition, generally
speaking the project cost comprehensively contains the tax and the income of the
sub-contracts; narrowly speaking the project cost contains only the cost all staff
generated for construction; project cost can contain the previous cost of feasibility
analysis report, biding cost, and other preparation cost for construction; in the
perspective of life-cycle, the project cost not only includes designing cost, the
previous cost, the mid-term cost but also the operating cost, maintenance cost,
residual cost. Above all, compared to the production cost, construction cost
comprehends more, and composes more complicated. This paper concentrates on the
construction cost.
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4.1 The analysis of before-tax gross margin of construction
project
Table 2 Before-tax gross margin
Project
Type
Before-tax
gross margin
Railway
Project
Highway
Project
Municipal
projects
Metro
Housing
construction
projects
3.83%
7.65%
8.10%
9.60%
6.76%
Table 2 shows that the before-tax gross margin is very low. And after the tax
deduction (In China, the construction industry should pay for the main business tax,
urban maintenance and construction tax and education surcharge, the rate of 3.3% of
total), the gross profit margin would be lower after deduction. Moreover, we only
referred the costs generated on project construction, let along the management
expenses, the selling expenses and etc.. This is usually deemed nowadays as the
construction corporations are on the brink of break-even, and the profit margin shrank.
Accordingly, the emphasis on the cost control is the key point to increase the value of
the corporations and enforce the core capability of enterprise. Generally speaking, the
monopoly industry profits higher than the others. In China, railway construction
projects are nearly all occupied by subsidiaries of the CRECG, the China Railway
Group Limited. Thus, the profits of such projects are expected to be high. However,
Table 2 shows that the before-tax gross margin of railway projects is the lowest. Once
the tax deducted from it, many projects will show us a negative margin. This is very
contradictive to our previous expectation. This must attribute to the fact that railway is
the national strategic investment. Theses investment are mostly allocated to
state-owned enterprises and associated with specifially political retargets. These
retargets will compromise the profit motives. For instances, some projects are
supportive projects. The control of costs is very loose.
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4.2 The analysis of compositions of total cost of construction
project
Figure 1 The proportion of the total project cost structure
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Railway
Highway
Housing
Municipal
Metro
Labor
Material
Equipment Other direct
Indirect
4.2.1 Overview
Figure 1 shows the proportion of the total project cost structure. The material cost is
the main component that account for at least 50% of the total cost, up to 65%.
Followed by labor costs, it accounts for more than 12%. Addition is the equipment
costs, account for from 7% to 17%, the highest proportion of railway project cost is 2
times of the lowest of housing construction project cost. Labor costs, material costs
and equipment costs together accounted for 85% to 90% of the total cost. The
aggregate cost of the these three major cost components reaches up to 90%, referred
to housing construction projects, while the lowest 85% referring to the railway
projects，both more accurate than 80% coming from the personal experience,. Other
direct costs and indirect costs of total costs are about 5%, not exceeding 7%.
4.2.2 Material cost review
Material costs account for more than half of the project cost, consistent with most
papers (Zang Chonglei, Dong Anliang, 2006; Xu Yan, Wang Bing, 2008), yet five
projects cost of materials still exist some differences. Rail and road projects the cost
of materials, at least only 54% of the total cost, while the highest is the subway
project of which materia accounts up to 65% of the total cost. We can observe a quite
obvious 11% difference between the two. Change the physical properties of large,
complex projects construction technology, materials are correspondingly higher. It
means that the cost of materials depends on the formation of the physical
characteristics of the project and construction process. Through a larger proportion,
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but the control is not strong. Therefore, the price and the amount of material are two
factors, in practice, to complete project. The design will determine the basic amount.
The mainly challenge is to control waste of materials; prices in the short term is
difficult to control, and in the relatively long, the purchase manager can predict the
price trend during the period and to take preventive measures.
4.2.3 Labor cost and equipment cost review
According to Figure 1, it is obvious to discover that the histogram of the labor costs of
five projects is more or less the convex, and equipment cost is concave, labor and
equipment costs of basic substitutable. Labor costs accounted for the highest
proportion of the total cost of the project's building construction project cost but
accounts the lowest of railway projects. This rule is easy to understand, our
construction and production need the labor, but also the help of machinery and
equipment included in the forces of nature, both of which are the processing and
transformation of material. Construction specifications and requirements in the same
circumstances, labor costs and equipment costs can be interchangeable, the enterprise
should make choices and trade-offs between the two. The difference within labor
costs and equipment cost of the five projects depend on three factors: one is that in
large-scale construction environment decide whether to use mechanical equipment
(the open highway and rail construction of the project environment for mechanical
construction); Second, to determine whether in the construction process machinery
and equipment can be used to replace the manual (housing construction projects in
many process machinery and equipment can not be replaced, such as: walls,
installation, painting, etc.); third is the principle of cost-effectiveness lead to decision
which is better for cost control (rail road project construction period of mechanical
equipment can reduce the risk of default savings). It can be seen that, the labor costs
and machine costs in the formation of the project depends on the extent of processing
and transformation. Both under certain condition can substitute for each other.
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4.3 The analysis of compositions of indirect cost of
construction project
Figure 2 The proportion of indirect cost of the project
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Railway
Highway
Housing
Municipal
Subway
Compensation Administration Travel and Business
The other
vehicle
entertainment
Although focusing on the proportion of total costs, indirect costs are not high, but it is
a comprehensive cost including all costs incurred in the managements’ organization
and management of the project. Its composition is much more complex, but its
formation is often not the project itself inherent characteristics determined, the
formation show random, non-stability characteristics, we believe that a careful
analysis is very necessary.
Figure 2 shows, staff salaries account for more than 40% of indirect costs, the
building construction projects pay workers abnormally high than other projects, and
this is in contrast with the high labor cost of building construction projects. Costs of
building construction project for travel and vehicle use was significantly lower than
other projects, mainly due to the fact that construction of building construction
projects are concentrated. In addition, various types of projects business entertainment
cost are obvious different. In addition, building construction projects illustrate to us
relatively lower business entertainment cost, the other four projects are high, the
indirect costs of more than 10% of the total income of up to 9 ‰. In China, tax law
explicitly stipulates that "the amount of entertainment expenses in accordance with
the occurrence of 60% tax deduction, but can not exceed the annual gross revenue of
5‰", Project entertainment cost on such a high proportion of is bound to not to
increase corporate tax burden, and being strictly controlled. It is very necessary to
make it not more than 5‰.
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5 Project Cost Factors
5.1 Hypothesis
There are more influence factors of the project cost than that of cost of manufactured
goods. First of all, the project cost are subject to manufacturing price index, labor
costs and inflation, and the other macroeconomic impact; secondly, by the design
parameters, the integrity of the owners of their own characteristics and other projects;
the project cost are subject to construction methods, construction supervision and
other organizations; finally, the project cost also affected by weather, construction
contingencies and other environmental uncertainties. Factors influence the project
cost so much, however are all factors of all components of the project cost has an
impact? If all affected, how about the impact level? These issues are worth further
study. Correctly scrutinized the formation of project cost control factors on the cost of
possesses guiding significance.
5.1.1 Construction period and the cost
Progress of the project duration is a quantitative indicator of the project from start to
completion of the length of time spent, the main factors affected the duration of the
construction is influenced by organization, construction program, project complexity,
technical, geological, meteorological and environmental factors. In general, the longer
the duration, the higher the project cost.
Specifically, the labor costs are combined for the various quantities and unit price of
the product. Normally, the construction companies will divide labor costs into unit
price and quantity to services company, regardless of the company's construction
workers labor rushing or shirking, as long as the quality and quantity by the labor
service companies to complete the project agreed in the contract amount, and the unit
price has been in the sub- package fixed contract, labor costs do not increase with the
duration of the extension, nor does the duration of shortening reduced. Most of the
materials used to constitute the main project, the amount of material needed in the
construction the project is determined by the basic budget of the Party's bid to do the
construction designs . Although in the construction process, some materials may be
stolen, damaged or other unexpected phenomena may occur in the long duration , but
the construction materials used are based on the gradual procurement of construction
needs, rather than a one-time purchase, And supervision of the Project Ministry are of
the strong to prevent theft and waste play a positive role, furthermore, the additional
extension of time with the material has a very small proportion of the total cost of
materials, the total cost of materials will not extend with the duration increasing, so
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there duration has no significant positive correlation with the cost of materials. How
duration affect mechanical fee is relatively complex, it is not conducive to frequent
changes ,because the mechanical equipment is very heavy, it will not be much change
throughout the construction period once the number and type of machinery and
equipment is fixed, however, machinery and equipment of the project used in a
variety of ways to sources, the source of different ways by the duration of mechanical
equipment will be different, If the business owned (at the time lease) equipment, a
certain amount of mechanical equipment is conveyed to the construction scene,
whether rush or shirk, the number of machinery and equipment will not be a change in
the short term, therefore, the logisitcs of machinery depreciation costs should be on a
monthly basis (rental fees) and will increase with the duration of the extension. If the
machine costs are the same as the labor cost by the amount of subcontract engineering
machinery leasing company, the risks associated with the machinery will transfer to
the leasing companies, project department pay the amount of equipment leases to the
equipment suppliers by the completing quantity of the project, and the duration will
not significantly positively correlate with the mechanical fee. Other direct costs is the
cost of consumption which is to assist the completion of the project, they do not
constitute expenditures spent on the main body of the project, such as the stacking of
materials site (plant) and other temporary facilities, these facilities need to pay rent or
occupy the other resources of the project department , if the project is not completed
on time, it will occur related costs because of the early removal of these facilities;
Other security measures in construction cost of the direct costs is also a day, safety
measures need to maintain a day, so other direct expenses increased with the
extension of time. Indirect costs are stationed in the construction site for the
company's management headquarters personnel expenses, once the number of project
managers is determined, the remuneration of the relevant management is basically
determined before the construction, the number of managers will not be a change in
the short term, So it will still paying management salaries either crashing or lockout.
It can be seen, the longer the duration, the more salaries paid to the total number of
project managers, office costs and other expenses also increased with the extension of
time, the duration of the project has a significant impact on indirect costs. Therefore,
the proposed hypothesis 1:
H1a：there is no significant linked between the construction period and the
material cost;
H1b： there is no definite linked between the construction period and the
equipment cost;
H1c：construction period correlated positively to the other direct cost and
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indirect cost.
5.1.2 Inflation rate and the cost
Price level is measured by the weighted average of PPI during the construction of
each project month, the price level influencing the cost of the project is mainly
reflected in the impacting on the price level. National Bureau of Statistics data show
that from 2002 to 2006, the average wage of workers in the post after deducting price
factors in an average annual increase of 12%, while the 2000-based PPI rose from
96.5 in 2002 to 113.2, with wages the rise in the price level rose. But in June 2007
"People's Forum" magazine a survey conducted staff satisfaction with the current
wage: 85.4% of people claiming to wage or less than 12%, 7.1% of the person or even
4 years to pay "does not rise anti-down, "the wages of the current 96.5% dissatisfied
people. There are two kinds of explanation of this phenomenon : the one is 12% of the
average annual wage rise is not true; the second is the growth of the wage is pulled by
rarely part of people or monopoly industries, most of people don't actually get benefit
in the average salary increases. Whatever the explanation is, the basic reason is that
the mechanism of wage growth and price index growth is insufficient. Because in this
study data we used obtain both wages of the management and the grassroots migrant
workers, the relationship between them with the price level is still not sure. The
materials cost formed by project is not only affected by material quantity, but also
affected by material price, PPI represents the producer price index of industrial
products, so directly reflect the increase of the material price. Under normal
circumstances, during construction, the higher price level is, the higher the materials
cost formed by project is, in the case of the material quantity being fixed, the higher
the cost of materials. Therefore this paper proposes assumption 2:
H2a：there is no definite linked between the labor cost, indirect cost and
compensation cost;
H2b：there exits a positive linked between the PPI and material cost
5.1.3 Distances and the cost
Project distance is to show the near-far degree from company headquarters to project
construction site. Project distance has a certain effect on engineering project cost.
Specific see, there are two main reasons about labor cost not affected by project
distance, the one is that construction team is sent to the construction site by labor
company, so relevant costs are undertaken by the subcontractor company; the second
is that most construction team come from the area where the project is, it do not exist
the travelling problem of construction personnel shuttling. It not only should consider
price factor but consider the transportation cost when purchasing project material, the
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supply chain cooperative relationship is stronger in the place where the company
headquarters is located, so the negotiation skill is stronger, the corresponding
materials price is lower. Therefore, if the project is not far from company headquarters,
project department is more likely to purchase materials near company headquarters, if
the project is far from company headquarters, it is less likely to purchase materials
near company headquarters. Anyhow, project distance has certain effect on material
costs, but direction is uncertain. How the distance between the project and company
headquarters affects machine cost is mainly reflected on the cost of transporting
machine, because construction companies buy certain number of mechanical
equipment, in order to not make existing equipments idle, relevant equipment will be
transported to the construction site that project distance is more appropriate
participating the construction, so we can say that project distance has significantly
positive effect on machine cost. Project distance’s effect on indirect cost is mainly
embodied in two aspects, the one is round-trip travel expenses used by directly project
management person, in the circumstances that the times of round-trip travel is
prescribed, the farther the project is from the company, the higher one-way travel
expenses is, so the total indirect cost will be higher; on the other hand, the supervision
of the company headquarters for the project is influenced by project distance in
certain degree, this is mainly because that company headquarters and project
department is belong to two different levels of management, there exists certain
agency problem between them, therefore it will occur certain agency cost. The agency
cost mainly reflects: because that the farther the project is, the more unfavorable for
the company to execute supervision, project management personnel's expense
in-office will be higher, what’s more, the supervisory cost, such as travelling cost,
happened when the company sends supervision personnel to the construction site will
be influenced by project distance too, it means that the farther the project is from
company headquarters, the higher the indirect cost is. Therefore this paper proposes
hypothesis 3:
H3a：there is no definite linked between the material cost and the distance
between the project the and corporation;
H3b：there is positive correlation between the equipment cost and the distance
between the project the and corporation;
H3c：there is positive correlation between the indirect cost and the distance
between the project the and corporation.
5.1.4 Cities and the cost
Construction sites is an important aspect of the construction environment, the
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different projects’ sites will have different effects on the cost. We distinguish the city
into one, two, three, four-tier cities, usually, a second-tier cities according to the
economic indicators, the price is relatively higher than other cities in one or two-tier
cities, especially reflected in the price of labor of migrant workers, otherwise there
will not be present in China the phenomenon of migrant workers, a large number of
farmers. Material points circumstances, the price of reinforced concrete and other
materials needed for processing in first and second-tier cities, in general is lower than
the third and fourth tier cities because most of the steel companies and cement
companies are in the first and second tier cities around the lower shipping costs,
suppliers are more, the price is relatively low; the flooring is different, such as sand
and gravel, etc. mainly is from the third and fourth tier cities, the project will take the
nearest Ministry of the principles of procurement and wood procurement, the price is
lower in third and fourth tier cities; It shows that the construction site affects the cost
of materials in different construction projects according to main components and
different materials. As to the mechanical fee, the construction site of the impact of its
own equipment, machinery costs are mainly for transportation equipment, in first and
second-tier cities, it is easily accessible, so mechanical fees are lower than the third
and fourth tier cities; If mechanical equipment is leased (sub), as there are more
number of suppliers in first and second-tier cities, the suppliers in a relatively fair and
competitive position, machinery and equipment rental costs (sub-fee) is low. The
other direct costs and indirect costs are included the contents of the many and
complex, the cost and construction sites do not exist between the stable positive or
negative correlation, so it can not be determined the construction site and other direct
costs and indirect costs related to relationships .
H4a：the first and the second level cities have a higher labor cost
H4b：the first and the second level cities have a higher equipment cost
H4c：there is no definite correlations between the locations and the other cost and
the indirect cost
5.1.5 Scales and the cost
Quantity project is a direct manifestation size of the project, and the amount of total
income of the project comes from work unit and calculated quantities, therefore,
instead of total income can be indirectly project size, the larger is the project size the
more is the quantities. Work in a certain period, the required machinery and
equipment construction team and more form the main body of the material the project
the more, aided engineering project completion, and other direct costs are more
project management personnel at the same time more,that is the size of the project
cost for all projects have a significant positive impact. Therefore, this paper assumes
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5:
H5：there is positive correlation between the cost and the scale and the cost.
5.2 Variable selection and definitions
This part mainly analyzes the influence factors of the project costs to acknowledge the
main factors that influence the generation of specific cost. Accordingly, we set the
specific cost as the dependent variable, and theses factors as the independent variable
to dig out the level these factors explain and influence. Most of the variables can be
distill from the data collected from the actual cost information. This paper focus on
the period of construction, PPI, the distance from the corporation to project, the cities.
Table 3 Variable definition
Dependent
variable
The variable
Definition
ln（Cost）
The amount of the cost generated
ln(Time)
The period of construction including the first and last months
(PPI)
All projects are started from 2002 finished before 2009, so the
base year settled in 2000.
ln(Distant)
If there is train can arrive at, we use the shortest distance
between the corporation and the project. If there isn’t train
available, we use the aggregate distance of the most nearby city
to the most nearby train station and the car distances.
(City)
Based on economic index, we classify the cities four levels. And
we set the dummy variable if it’s the above two levels, we use 1.
If not, we use 0.
Fist level：Beijing, Shanghai, Guangzhou
Second level：Tian Jin, Chong Qing, Shen Yang, Harbin, Xian,
Wu Han, Nan Jing, Hang Zhou, Chengdu and Shenzhen.
Third level：Chang Chun, Da Lian, Hohhot, Taiyuan, Yinchuan,
Lanzhou, Urumqi, Xining, Shijiazhuang, Zhengzhou, Jinan,
Qingdao, Hefei, Ningbo, Fuzhou, Xiamen, Nanchang,
Changsha, Foshan, Haikou, Nanning, Kunming, Guiyang and
Lhasa; these are the provinces capital city or regional sub-center
city.
Fourth level：the remained
Independent
variable
ln(Size)
The revenue of the project
5.3 Statistical analysis
5.3.1 Descriptive statistics
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Table 4 shows the descriptive statistics of the sample results, in which the average of
the weighted average 113.57 PPI, compared to base year 2000, the average price level
rose by 13 percentage points, up to 25 percentage points, shows that in 2001-2009
between the price level, there was greater volatility. The City variable ‘mean was 0.29,
indicating 29% of the project is located in the first, second and third tier cities, most
of the projects are located in more remote areas, which is consistent with the nature of
the project.
Table 4 Descriptive statistics
N
Mean
Median
Standard
deviation
Minimum
Max
Scale
177
18.02
18.27
1.19
12.28
20.05
Period
177
3.16
3.26
0.65
0.69
4.26
PPI
177
113.57
114.57
6.19
96.53
124.73
Distance
177
5.53
7.11
3.04
0
8.21
City
177
0.29
0
0.45
0
1.00
5.3.2 Correlation statistics
Table 5 provides a project cost of the correlation coefficient between factors, it can be
seen from the table the correlation coefficient between the absolute value of the
independent variables were less than 0.5, so you can determine the present model
does not exist between the independent variables of multiple serious collinearity
problem, that the present model estimation error small.
Table 5 Correlation table
Scale
Period
PPI
Distance
Scale
1
Period
0.324***
1
PPI
0.088
-0.113
1
Distance
0.338***
0.245***
0.115
1
City
0.043
-0.074
0.051
0.065
Note: This table is Pearson correlation coefficient, *** indicates 1% significance level.
5.3.3 Regression analysis
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City
1
Table 6 Regression analysis
Total
cost
Labor
cost
Material
cost
Equipment
cost
Other
direct
cost
Indirect
cot
Compensation
Administration
Travel cost
Business
entertainment
Other
expense
constant
0.509*
(1.754)
0.681
(0.593)
-2.883***
(2.944)
-7.590***
(2.920)
-8.519**
(2.545)
-0.072
(0.062)
-15.750***
(2.863)
-19.650***
(3.262)
-26.281***
(4.064)
-29.053***
(4.722)
-2.693
(0.543)
Period
0.019
(0.929)
-0.038
(0.469)
0.043
(0.618)
-0.168
(0.921)
0.825***
(3.509)
0.289***
(3.536)
1.175***
(3.039)
1.286***
(3.038)
0.889*
(1.957)
1.079 **
(2.496)
0.175
(0.502)
PPI
0.000
(0.375)
0.006
(0.747)
-0.003
(0.466)
-0.009
(0.531)
-0.003
(0.152)
-0.004
(0.488)
0.088**
(2.334)
0.057
(1.388)
0.078*
(1.761)
0.107**
(2.554)
-0.086**
(2.541)
Distance
0.011***
(2.664)
0.003
(0.164)
-0.029**
(2.029)
0.101***
(2.633)
0.036
(0.720)
0.036**
(2.118)
0.030
(0.710)
0.101
(1.139)
0.065
(0.678)
0.107
(1.175)
0.072
(0.982)
Cities
-0.012
(0.465)
-0.118
(1.127)
-0.075
(0.843)
-0.404*
(1.701)
0.389
(1.271)
0.171
(1.605)
-0.820
(1.632)
-0.253
(0.460)
-0.835
(1.413)
-0.712
(1.266)
0.680
(1.501)
Scale
0.967***
(90.563)
0.835***
(19.766)
1.141***
(31.661)
1.337***
(13.980)
1.133***
(9.197)
0.802***
(18.724)
0.876***
(4.326)
1.130***
(5.096)
1.445***
(6.071)
1.363***
(6.019)
1.327***
(7.267)
Adj-R2
0.982
0.712
0.864
0.572
0.437
0.735
0.210
0.243
0.252
0.287
0.283
F
1891.000
87.815
224.283
48.063
28.329
98.426
10.357
12.327
12.863
15.197
14.899
Sig.
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Note: *** indicates 1% significance level.
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Table 6 shows the total cost of the five factors and the various costs of the regression
results. All F values are greater than 10, the five factors of the total cost of the project
explained the cost fairly. The larges R square apply to the regression of the total cost,
the second is the material cost, followed by indirect costs and labor costs, a minimum
of other direct costs. Thus, we can conclude that material costs, labor costs and
indirect costs are affected mainly by five factors, the five basic factors that can
explain the formation of the cost. While the equipment costs and other direct costs
was explained very low, indicating that there will be many more factors (such as the
construction plan, the construction environment) effects, both of which are hard to
control.
The link between the period and labor costs, material costs is not significant, while the
other direct costs and indirect costs have very significant correlation, showing that
H1a and H1b were assumed to be confirmed. Period and Equipment cost are not
significant correlated between the companies which may be due to the depreciation of
machinery and equipment owned by the amount apportioned to the project works, or
the amount of machinery and equipment is based on work subcontracted to equipment
leasing companies, therefore, mechanical fees is not affected by the period.
The PPI does have a link with some of the indirect cost, but don’t have certain
influence with most of the construction cost. Especially with the cost of material,
there doesn’t exist a significant correlations, this is due to the good estimation of the
charges of the price and long term corporations and contracts. Comparison of price
levels the impact on labor costs and employee compensation, was found there was a
significant positive effect, while significantly influence on labor costs can not be seen,
with the price climbing the management salaries climbs, however the wages of the
staff do not rise. Meanwhile, the price level and the travel and entertainment expenses,
have a positive correlation, which proves that the two linked price levels by more
directly.
There is a significant positive correlation between the total equipment cost and the
distance, so H3a and H3b can be confirmed. The correlation between the equipment
cost and the distance from the corporation to the project describe us at least some of
the equipments are prepared by the corporations; however the impact the distances
have on the indirect cost didn’t apply to every item of the indirect cost in another
word, the distance don’t have a specific impact on the subsidiary cost of indirect, in
which the travel and vehicle use fee does not exist a positive impact, but also Further
description of the project the major impact of indirect costs is not due to the impact of
distance, but mainly in project supervision, that is not conducive to parenthetic
corporation of the project supervision, more indirect costs will be formed by the
project, it is a true portrayal of "out of the control over arm length". The astonishing
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negative correlation between the distance and the material cost tell us another story
the further the project is, the more effective the purchase will be.
The city where the project is have only a negative impact on charge of the mechanical
and equipment cost, while did not significantly affect the other cost. The regression
shows the level 1 and level 2 cities , H4b and H4c thus proved.
Size of all the costs of the project have significant positive effects, thus H5 is proved.
Taking into account various types of differences that may exist between projects, we
do by project type robust test, the results obtained with the overall regression results
are basically the same, only a few indirect costs, there are some differences between
the regression results, does not have an impact on the overall .
6 Conclusions
Applying data mining technology to analyze the cost of construction project, this
paper reaches the following conclusion in cost compositions of construction project.
Within the cost of construction project, material occupies the total cost above 50%,
and labor, material and equipment cost to achieve more than 85% of the total cost.
Therefore, it can be said that labor, materials and equipment cost are the main
emphasis of construction project cost controlling, especially the control of material
cost and the complementary relationship between material and equipment cost. So the
two should be controlled in synchrony, and can't split apart.
The conclusions are got from application the method of Multiple Regression to
observe the influence factors of construction project cost as following. The most
significant factor affected on construction project cost is project scale or the total
quantity of project. The second factors are construction period and the distance
between the construction project and the headquarters. Construction period mostly
affects other direct and indirect cost. Therefore, construction period is suggested to be
reduced without affecting labor, material and equipment cost, in order to achieve the
goal of reducing other direct and indirect costs so that the total cost of construction
project; at the meantime, the rational use of temporary facilities in the other direct
cost is also very important. It's unnecessary to construct one-off temporary facilities in
the early stage, but lay aside in the later stage. And temporary facilities should be
fully utilized and rationally returned; for the control of salary expense in the indirect
costs, it should avoid the phenomena that over redundant administrators featherbed in
the beginning of construction and laid aside in the later period. The distance of
construction project has an influence on equipment cost and indirect cost. If the
project far away forms the corporation, for the equipment cost, project departments
should analyze that whether or not the expense saved by leasing equipment can cover
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the cost increased by transporting equipments; for the positive effect on indirect cost,
enterprise should be suggested to strengthen the supervision on the further project,
especially the supervision of project indirect cost. The price level affect evidently only
some of price in the overhead expenses, in the same way, the controls of these
overhead expenses done by an item needs use the experience of controlling material
expenditure similarly, for the rising of these expenses do not appear along with going
up material price. The select of construction site have ill effect to equipment expenses,
namely, the equipment expenses in the first and second-line city were lower. So, in
order to reduce total cost of project, we advise that an enterprise shall hire these
constructions machinery on the spot, while works item are done in these cities. In a
word, the effect formed by the equipment expenses and other direct expenses greater
than the material charge and manual cost. Correspondingly, aforementioned measures
are difficulty in the project control. Hence, while controlling all of costs in a project,
we wish every construction enterprise do not work blindly or treat no distinctively, but
should carry out controlling them discriminatively.
For the restrictions of data, the influencing factors on the cost of Construction Project
this paper refers to is definitely limited. The amounts of these influencing factors in
reality are much larger than that this paper refers to. Moreover, the construction
period this paper focusing on is a comprehensive variable because it decided by many
other factors, such as the quality of the construction program, the ability of the project
manager, the project scale, the weather condition during the project and the delay
about the construction period by unexpected accidents. Therefore, the further study on
this field could analyzes these influencing factors effecting on the cost of construction
project in depth.
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