Significant Factors Causing Cost Overruns in Large Construction Projects in Malaysia
Ismail Abdul Rahman,
Aftab Hameed Memon
Ahmad Tarmizi Abd. Karim
Once a construction projects fails in achieving effective
cost performance, it will result to cost overrun. These overruns are caused
from several factors which are very important to uncover for improving the cost
performance. In Malaysia, not many research works have been carried out on studying
cost performance factors. Hence, this study was conducted to identify the significant
factors causing cost overrun in large construction projects in Malaysia. Questionnaire
for the survey was developed based on 35 common factors of cost overrun identified
from literature work. These factors were grouped in 7 categories and validated
by interviewing five experienced personnel of construction industry. The feedback
of from the survey resulted in receiving 262 sets of completed valid responses
against 400 questionnaires distributed amongst contractors, consultants and
clients involved in large construction projects. The data from the questionnaire
was analyzed statistically. Relative importance index method was used for hierarchal
assessment of factors and found that the top 3 most significant factors of cost
overrun are fluctuation of prices of material, cash flow and financial difficulties
faced by contractors and poor site management and supervision. These factors
belong to two categories i.e., contractors site management and financial
management category, thus improvements in these categories are paramount for
controlling cost overrun in construction projects.
Received: October 31, 2012;
Accepted: January 29, 2013;
Published: February 21, 2013
Construction industry is an important industry that plays a vital role in the
socio-economic growth of a country. Economically, it contributes in significant
improvement in the overall GDP of a country. It also improves the quality of
life by providing the necessary infrastructure such as roads, hospitals, schools
and other basic and enhanced facilities. Hence, it is fundamentally crucial
to make construction projects completed successfully within time, budget and
expected quality. However, being a complex, fragmented and schedule driven industry
it always facing chronic problems such as low quality and productivity, cost
overrun, time overrun, construction waste and others. Of these, cost overrun
is a severe problem (Cantarelli, 2009, Olawale
and Sun, 2010) because it affects the overall development of any country.
Cost overrun is a global phenomenon in the construction industry where very
rarely projects are finished within the budgeted cost. In a global study (Flyvbjerg
et al., 2003) on construction project performance, cost overrun was
identified the major problem where 9 of 10 projects faced the overrun in the
range of 50 to 100%. Construction industry in developed countries like UK is
also affected by this problem where nearly one third of the clients complaint
that their projects generally overran the allocated budget (Jackson,
2002; Olawale and Sun, 2010).
Like other countries, Malaysia also facing a serious issue of cost overrun
in construction industry where only 46.8% of public sector and 37.2% of private
sector projects were completed within the stipulated budget (Abdullah
et al., 2009; Ibrahim et al., 2010;
Sambasivan and Soon, 2007). The issue of cost overrun
has become a serious concern to investors, which needs stern attention and in-depth
research to put forward solutions to this issue. Hence, this study focused on
assessing significant factors contributing to cost overrun issue in Malaysian
construction industry particularly in large construction project where the contract
tender amount is more than RM 5 Million.
Cost performance is the most important indicator of project success (Frimpong
et al., 2003; Olawale and Sun, 2010). It
presents not only the firms profitability but also the productivity of
organizations at any point during the construction processes. It can be seen
in the project account and is always used to measure project performance. Generally,
construction industry has been facing poor cost performance which describes
inability to complete project within budget. This chronic issue is experiencing
worldwide and becoming more alarming as shown in a study of 258 projects in
20 nations which cost approximately US$90 billion with the size ranging from
US$1.5 million to $8.5 billion (Flyvbjerg et al.,
2003). The study detected that almost 9 out of 10 projects facing cost overrun
with an average of 28% of the forecasted costs and trend of cost performance
has not improved over the time for the past 70 years. Similarly, investigation
on 87 projects (29 road projects, 28 rail projects and 30 fixed link projects)
conducted by Cantarelli (2009) revealed that cost overrun
was the common problem at an average of 10.3% of project cost. His study showed
that the percentage of cost overrun in road projects was the highest with the
rate of 18.5% followed by rail projects with 7.6% and finally fixed link project
with 4.5%. In Bosnia and Herzegovina, a study of 53 building projects including
29 new construction and 24 reconstruction projects showed that cost overrun
in reconstruction projects was higher than new construction project. In reconstruction
project the percentage of cost overrun was found at an average of 9.23% while
for new construction projects it was 6.84% (Zujo and Car,
In Malaysia, a study on 359 projects (308 public and 51 private projects) found
only 46.8% and 37.2% of public sector and private sector projects completed
within the budget respectively with average cost deviation of 2.08% (Endut
et al., 2009). Further, in MARA large construction project study,
it revealed that more that 90% of large MARA construction project experienced
delay since 1984 due to time and cost overrun (Abdullah
et al., 2009).
The cost overrun generated is caused by ineffective construction management
and poorly established cost control systems (Sriprasert,
2000). Other factors affecting cost overrun include inadequate/inefficient
equipment, tools and plant, unreliable sources of materials on the local market
and site accidents (Kousliki and Kartam, 2004). A study
on UKs construction industry, Olawale and Sun (2010)
identified 21 major factors causing cost overrun are design changes, risk and
uncertainty associated with projects, inaccurate evaluation of projects
time/duration, non-performance of subcontractors and nominated suppliers, complexity
of works, conflict between project parties, discrepancies in contract documentation,
contract and specification interpretation disagreement, inflation of prices,
financing and payment f or completed works, lack of proper training and experience
of project manager, low skilled manpower, unpredictable weather conditions,
dependency on imported materials, lack of appropriate software, unstable interest
rate, fluctuation of currency/exchange rate, weak regulation and control, project
fraud and corruption and unstable government policies. While in Gaza, study
conducted by Enshassi et al. (2009) found that
top 10 factors causing cause cost overrun include increment of materials prices
due to continuous border closures, delay in construction, supply of raw materials
and equipment by contractors, fluctuations in the cost of building materials,
unsettlement of the local currency in relation to dollar value, project materials
monopoly by some suppliers, resources constraint: funds and associated auxiliaries
not ready, lack of cost planning/monitoring during pre-and post contract stages,
improvements to standard drawings during construction stage, design changes
and inaccurate quantity take-off.
Similarly, in vietnam Le-Hoai et al. (2008)
found that top 5 significant factors causing cost overrun in large construction
project are poor site management and supervision, poor project management assistance,
financial difficulties of owner, financial difficulties of contractor; design
changes. In a study of infrastructure projects in Nigeria, it was found that
the major factors of cost overrun were price fluctuations, financing and payments
of completed works, poor contract management, schedule delay, changes in site
conditions, inaccurate estimates, shortage of material, imported materials and
plant items, additional works, design changes, subcontractors and nominated
suppliers, weather, non-adherence to contract conditions, mistakes and discrepancies
in contract conditions and fraudulent practices (Omoregie
and Radford, 2006). While for telecommunication projects studied by Ameh
et al. (2010) indicated that top seven factors were lack of experience
of contractors, cost of material, fluctuation in the prices of materials, frequent
design changes, economic stability, high interest rates charged by banks on
loans received by contractors, mode of financing, bonds and payments as well
as fraudulent practices and kickbacks. These identified factors are part of
the whole literature review on the factors causing cost overrun happening worldwide.
Comprehensive review conducted has resulted in identifying 35 common factors
of cost overrun which were considered for further investigation to find the
relevancy and significance of these factors towards Malaysian construction industry.
The identified factors are categorized in seven groups as presented in Table
|| Common factor of cost overrun identified
DATA COLLECTION AND ANALYSIS
Quantitative approach was used to understand the perception of constructions
professionals in Malaysia towards factors influencing construction cost at construction
projects by conducting questionnaire survey. An ordinal scale of measurement
was applied for data measurement in questionnaire survey. Ordinal scale used
in this study was adopted from (Enshassi et al.,
2009) i.e. N.S. = not significant (0%); S.S. = slightly significant (25%);
V.S. = very significant (75%) and E.S. = extremely significant (100%). However,
abbreviations were replaced with numbers i.e. 1 for not significant (0%); 2
for slightly significant (25%); 3 for moderately significant; 4 for very significant
(75%) and 5 for extremely significant (100%).
Prior to data collection work, a preliminary study was carried out by conducting
interview with 5 experienced personnel who are involved in construction industry.
This was done to validate the contents of questionnaire for its relevancy with
Malaysian construction industry. Table 2 shows the profile
of the respondents interviewed.
Table 2 indicates that the interviewed respondents had extensive
experiences in handling construction projects ranging from 16 years to 29 years.
The total professional experience of the 5 respondents is 114 years (average
experience of 22.8 years). The respondents are senior employees of their companies
and holding executive and managerial positions. Thus, it can be summarized that
the respondents had enough technical background and experience to verify the
questionnaire contents. Hence, data was collected using this developed structured
The gathered data was analyzed using statistical software package SPSS v17
to determine the hierarchal factor of cost overrun. The ranking of factors was
calculated based on Relative Importance index (RII) value. RII value was calculated
with the following expression:
||Relative importance index
||Weighting given to each factor by respondents and it ranges from 1 to
||Frequency of ith response given for each cause
||Highest weight (i.e. 5 in this case)
||Total number of participants
RESULTS AND DISCUSSION
Structured questionnaire survey was carried out by distributing a total of
400 questionnaire sets. It has been distributed randomly to 150 contractors
firms, 150 consultant firms and 100 client personnel. Of which 274 responses
were received back in a period of 10 months. However, some of the questionnaire
sets were incomplete which were considered invalid and not suitable for further
analysis as in Table 3.
The respondents involved in the survey had several years of experience in
handling various types of projects. The characteristics of the respondents participated
in survey are summarized in Table 4.
|| Profile of respondents interviewed for content validity
|| Summary of survey conducted
|| Demographical of respondents
|| Reliability test results
Table 4 indicates that majority of the respondents (45% respondents)
are working with contractor organizations followed by consultant and client
firms with a percentage of 35.1 and 19.8, respectively. All the respondents
had experienced in handling large projects i.e., projects with contract amount
of worth more than RM 5 million. They involved in handling both type of projects
i.e., building and infrastructure. Majority of the respondents had working experience
of more than 5 years. A significant number of respondents i.e., 29.4% of respondents
are engaged in construction industry for more than 20 years; 13.7% of respondents
have experience of more than 16 years and 56.9% respondents have experience
of less than 16 years.
|| Ranking of factors causing cost overrun
These indicate that respondents were competent enough and capable for participating
in the survey.
Reliability analysis: Reliability test is conducted to check the stability
and consistency of a data. It was carried out by using Cronbach α method
that is widely adopted. Reliability of the data is considered at low level when
Cronbach α is less than 0.3 which means the data is not reliable and cannot
be accepted. Reliability is at high level when Cronbach α is more than
0.7 (Li and Wang, 2007; Wong and
Cheung, 2005; Yang and Ou, 2008). In this study,
Cronbach α was calculated using statistical software SPSS V17 as shown
in table 5. Since, alpha value for each category as well as
overall data is found higher than 0.7 which is considered at high level. This
assures that the data is highly reliable for further analysis.
Ranking of causes of cost overrun: Hierarchal assessment of factors
was carried out to determine ranking of the factors based on level of significant.
It was assessed based on RII value and calculated for each group of respondents
i.e. contractors, consultant and client; and also the overall respondents as
presented in Table 6.
Table 6 shows that top 3 most significant factors of cost
overrun ranked by overall respondents are fluctuation of prices of material,
cash flow and financial difficulties faced by contractors and poor site management
and supervision. These factors are elaborated in more detail in the following
Fluctuation of prices of material: Fluctuation of prices of materials
was ranked as 1st place (RII = 0.83) as agreed unanimously by all the respondents
and this finding is concurrence with the findings from other countries (Ameh
et al., 2010; Azhar et al., 2008;
Chimwaso, 2000; Elinwa and Buba,
1993; Enshassi et al., 2009; Le-Hoai
et al., 2008). This factor can be attributed from various reasons
such as monopoly of suppliers or unavailability of construction materials locally.
Price fluctuation is also contributed from instability and inflationary rate
of a country. This may be due to demand exceeding supply or accentuated by the
creation of an artificial scarcity of goods. These fluctuations are reflected
in increase cost of raw materials, labour, machinery, other ancillary materials
and services. A national solution to this problem would effectively minimize
cost overruns (Okpala and Aniekwu, 1988) such as creating
an agency empowered to monitor and publish building cost indexes regularly (Olujide
and Owosagba, 2001).
Cash flow and financial difficulties faced by contractors: This factor
was found as 2nd major contributor to cost overrun with RII value of 0.78 as
agreed by contractor and client groups while consultants representative
rated this factor as 6th rank. This is very true for contractors because they
play very important role in success of any construction project especially for
physical execution of works. Hence, adequate cash flow and financial stability
of contractors is very critical in keeping construction progress as planned.
This finding concurrently match with the findings on Vietnam construction industry
(Le-Hoai et al., 2008), however this finding
dose not coincide with the research finding conducted in Ghana as this factor
was rated as 5th ranked (Frimpong et al., 2003).
Poor site management and supervision: All the respondents agreed that
this factor is a major contributor to cost overrun however there is some disagreement
in terms of ranking amongst the respondent groups. Consultants group ranked
this factor at 2nd place while contractor and client groups ranked this factor
at 5th place. Poor site management and supervision factor is focusing more towards
contractor group. It reflects the weakness and incompetence of contractors (Le-Hoai
et al., 2008) and affects significantly on the cost performance (Ali
and Kamaruzzaman, 2010). This factor can resulted to late compliance with
statutory bodys requirement, poor communication with sub-contractors and
material suppliers significantly, thus affecting the progress of project. Construction
industry in Indonesia also facing poor site management that lead to negative
cost performance of project (Harisaweni, 2007).
Cost overrun is a severe problem faced by large construction industry in Malaysia.
It is resulted from various factors which had been identified in this study.
A total of 262 samples were found as valid and analyzed statistically using
relative importance index method on 35 causative factors of cost overrun. It
was found that three most significant factors causing cost overrun in Malaysias
construction are fluctuation of prices of material, cash flow and financial
difficulties faced by contractors; and poor site management and supervision.
Of these, 2 factors are contractors
site management related factors and 1 factor is financial related issue. These
imply the need of urgent attention in improving contractors
performance to achieve substantial cost performance in avoiding project failure.
The authors would like to thank Universiti Tun Hussein Onn Malaysia for supporting
this study. Also, we are thankful to construction practitioners for providing
comprehensive and important information and a lot of cooperation which made
data collection easier.
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