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Key drivers of discrepancies between initial and final costs of construction projects in New Zealand

SECOND EDITION

By Dr. Jasper I. Mbachu and Cresilda Cross

School of Engineering and Advanced Technology,
College of Sciences, Massey University,

Auckland, New Zealand


ABSTRACT

Construction projects and the environment within which they are implemented are complex, dynamic and over-regulated. As a result significant discrepancies are introduced between initial contract prices and final accounts for most projects. These discrepancies introduce enormous risks and uncertainties with consequences such as disputes, high cost of project finance and low profit margins. Previous studies have looked at the myriads of discrepant factors, but little attempt has been made to quantify and segregate them along lines of responsibilities and accountability in the building development process. This research aimed to fill this knowledge gap by examining the nature and contributions of the key cost escalators from the actions/ inactions of the key stakeholders as well as wider factors. Feedback from a two-stage survey of consultants and contractors in the New Zealand construction industry was analysed using content analysis and multi-attribute methods. Results revealed 6 sources of discrepant factors. These comprised issues related to the owner or owner’s principal agent, designers, contractors and subcontractors, project & environment, quantity surveyors/ estimators, and external parties such as local councils and utility companies. Change orders and quality of design information were perceived as the most significant sources of cost escalations which were attributed to the owner and designers, respectively. The report presents the priority factors under each broad category. It is recommended that project teams should proactively address the priority factors identified in the study with a view to effectively mitigating project cost overruns and ensuring more reliable outcomes in the project delivery process.

Keywords: Construction project, cost overrun, final costs, initial costs, variations

INTRODUCTION

Construction projects and the environment within which they are implemented are complex (Kartam and Kartam, 2001), dynamic (Mohammed et al., 2010) and over-regulated (Mbachu, 2012). As a result significant discrepancies are introduced between initial contract prices agreed at the onset and the adjusted final accounts for most projects (Olatunji, 2008; Ko, 2009). These discrepancies introduce enormous risks and uncertainties with serious consequences such as disputes, high cost of project finance and low profit margins (Zakaria et al., 2013). Mbachu (2012) argued that, as an obligation of duty of care and the basis for rewards, clients, financiers and other stakeholders expect consultants and contractors to careful consider risks that may affect outcomes in their operations and provide informed advice that the interested parties can rely on to make decisions such as commissioning projects or lending project finance. When proper risk analysis is not done and outcomes deviate from initial expectations, the reputation of the construction professionals suffers great damage.

This is more so that, on account of attribution theory, clients will always put all the blame on the service providers, notwithstanding that they contribute to the risks; the justification being that service providers are paid for shouldering the risks inherent in their services. It is therefore critically important that risk factors, especially in relation to cost advice, are investigated so that appropriate risk response measures are put in place at the onset.

Research objectives

The specific objectives of the study were as follows:

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Editor’s note: Second Editions are previously published papers that have continued relevance in today’s project management world, or which were originally published in conference proceedings or in a language other than English. Original publication acknowledged; authors retain copyright. This paper was originally presented at the 2nd annual University of Maryland Project Management Symposium in College Park, Maryland, USA in June 2015. It is republished here with the permission of the authors and conference organizers.

 


 

About the Authors

 

pmwj38-Sep2015-Mbachu-PHOTODr. Jasper Mbachu

Massey University
Auckland, New Zealand

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Dr. Jasper Mbachu
is a senior lecturer and coordinator of construction programmes in the School of Engineering and Advanced Technology, Massey University. For the past 20 years, Dr. Jasper has taught in universities in Nigeria, South Africa and New Zealand. He has over 14 years of construction work experience as a quantity surveyor, contracts manager, construction manager and a planner for the development of a range of building and civil engineering projects. He is the Secretary and Treasurer of the Auckland Branch of the New Zealand Institute of Quantity Surveyors (NZIQS). An RICS Chartered Surveyor, Dr. Mbachu is also a professional member of the NZIOB, PMI and the Construction Management Association of America (CMAA). He convenes the annual series of the New Zealand Built Environment Research Symposium (NZBERS) (construction.massey.ac.nz/nzbers.htm). Dr. Mbachu can be contacted at [email protected]

 

pmwj38-Sep2015-Mbachu-PHOTO2 CROSSCresilda Cross

Fletcher Construction
Auckland, New Zealand

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Miss Cresilda Cross
is a quantity surveyor cadet at Fletcher Construction, Auckland, New Zealand. Before joining Fletcher Construction, she completed a Bachelor of Construction (Quantity Surveying) degree at Massey University in 2013. Working under the supervision of Dr Jasper Mbachu, Cresilda’s research interests are in the fields of contract administration and financial management of construction. She can be contacted at [email protected]