Improving Cost Management Practices of National Contractors Focused on Building Costruction Projects
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Date
2008-03
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Addis Ababa University
Abstract
Construction firms, being project based organizations, have to develop their project
management capacity in order to accomplish firm and project objectives successfully. Copare
(1990) stated that, the number of business failures in the construction industry is high and the
high failure rate is not because contractors do not know the techniques of construction but
rather they have not developed their management skills. Among such skills one is the project
cost management.
This research work presents several issues related to current project cost management
practices of national contractors. The practice of 34 general and building contractors is
investigated via questionnaires. Existing practices related with estimating and tendering,
budgeting and cost controlling were assessed in view of identifying shortcomings and
limitations associated with each functions.
The research findings indicated that the success rate of tender offers is below 50% for 80% of
the surveyed contractors and 67% among these, have a success rate less than 25%. The
highest ranking responsible factor is tough competition, which is also aggravated by absence
or lack of bidding strategy by the contractors. The results moreover indicated that most of the
surveyed contractors are unable to obtain the profit they anticipate from their projects. 86% of
the contractors have obtained below 75% of the amount they expected from most of the
projects they have undertaken so far. Among these, 48% obtained less than 50% of the
anticipated amount. The major contributing factors, in the order of their influence are price
escalation, delays caused by owners and/or consultants, inadequate financial planning
practices, lack of cost controlling system and inaccuracy of the estimates prepared during the
tendering stage.
According to the results of the research, factors contributing to the inaccuracy of cost
estimates are unfamiliarity with different estimating methods, lack of up to date estimating
manuals or standards on resources consumptions and productivity, inadequate search for
information on project specific and contextual cost and non cost items, improper estimation of
overhead costs, failures to evaluate and incorporate and/or difficulties in forecasting and
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quantifying risk allowances and inadequate assessment of factors while determining mark up
amount or profit margin.
Bill of quantity/ admeasurements and lump sum contracts types which are different versions
of the fixed price contract, which place the economic risks on contractors, are the most widely
used contract types in Ethiopia. The standard or traditional estimating method is the sole
method used by the contractors for pricing construction contracts. None of the contractors
adapt recent estimating techniques, such as the range estimating and parametric estimating
methods, which consider risks and uncertainties, primarily or in addition to the standard
method.
Lack of standard estimating manuals by the construction industry, and absence of a system
which maintain records of actual on-site costs and productivities with in the contractors are
the major causes for errors in estimating direct costs. Regarding overhead costs, even though
the average ratio of over head costs to the total direct costs is as high as 25% majority of the
contractors do not identify and estimate them properly. 52% of the contractors add on
allowance arbitrarily to account for these costs. Only 38% of the contractors consider risks
during tender pricing. Qualitative items like project type, size, complexity, contract period,
statuary regulations and so on, which can affect the quality and accuracy of estimates
negatively, receive little attention from the contractors, during estimation and pricing.
The results revealed that contractors’ cost controlling process is not integrated with the budget
prepared for the project. Budgetary control is not popular among the contractors. The process
focuses mainly on revealing the amount of profit and fails to indicate/identify activities or
operations which are being carried out uneconomically together with the underlying reasons.
Moreover, it is not carried out in a way which provides feedback to the estimating process.
The survey results further revealed the very limited application of project works classification
/breakdown and works coding system for facilitating the cost management process.
Key words: Project cost management, competitive tendering, bidding strategy, direct and
indirect costs, overhead costs, mark-up, estimating methods, budget, project works breakdown
and coding system, cost controlling.
Description
Keywords
Project Cost Management, Competitive Tendering, Bidding Strategy, Direct And Indirect Costs, Overhead Costs, Budget, Project Works Breakdown And Coding System, Cost Controlling, Mark-Up, Estimating Methods