Factors affecting construction cost performance in project management projects: Case of MARA large projects

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1 International Journal of Civil Engineering and Built Environment Vol.1, No.1, 2014; ISSN Published by YSI Publisher Factors affecting construction cost performance in project management projects: Case of MARA large projects Aftab Hameed Memon 1, Ismail Abdul Rahman 1, Mohd Razaki Abdullah 2,Ade Asmi Abdu Azis 3 1 Faculty of Civil and Environmental Engineering, University Tun Hussein Onn Malaysia, Malaysia 2 Majlis Amanah Rakyat (MARA) 3 Universiti Tun Hussein Onn Malaysia, Parit Raja - Batu Pahat Corresponding Author:aftabm78@hotmail.com Abstract Aim of Study This study has focused on investigating procurement strategies adopted in MARA large construction projects. It also identified various factor affecting construction cost performance of MARA large construction projects. Need of Study Very rarely MARA projects are finished within estimated project cost. For improving cost performance, it is very important to identify the reasons affecting cost performance of MARA projects. Hence, there is a need of study in understanding the reasons and factors affecting project cost performance of construction projects. Research Approach The project was carried out through interviews and survey using the questionnaire among the personnel involved in handling MARA large projects. Gathered data was analyzed statistically using SPSS software package. Research Findings This study revealed that fluctuation in price of the material, cash flow and financial difficulties faced by contractors, shortage of site workers, lack of communication between parties, incorrect planning and scheduling by contractors are most severe factors while frequent design changes and owner interference are least affecting factors on construction cost performance in MARA large projects. Limitations This study was limited to large construction projects administrated by Majlis Amanah Rakyat (MARA) Malaysia. Importance and Contribution This study has highlighted various issues causing poor project performance in MARA large projects. Ranking of the factors will enable the MARA engineers for taking appropriate actions in improving the performance of cost in construction projects. Keywords: Construction Industry, Construction Cost, MARA Projects, Cost performance, Cost Overrun I. INTRODUCTION In recent years, Malaysian construction industry has recorded an average growth rate of 0.7% [1] compared to GDP growth of 5.46%. However, the industry is facing a lot of challenges in achieving satisfactory cost performance [2-4]. Government formed MARA (Majlis Amanah Rakyat) to strengthen the Bumiputera (Malays and other indigenous Malaysians) in the areas of business and industry. MARA currently placed under the Rural and Regional Development Ministry after briefly controlled by the Entrepreneur and Cooperation Development Ministry plays an important role in implementing the government policy. MARA has spent about RM 12 billion in its development since 1 st Malaysian plan [5]. A portion of this allocation was spent on construction. The major issue in MARA large construction project is the delay in completing its projects. An interview with Tech Art Executive Director revealed that more that 90% of large MARA construction project experienced delay since Most frequent effects of delay in MARA projects are time overrun and cost overrun. Studies revealed that time and cost overrun has a linear relationship with each other [6]. Keeping construction projects within estimated costs and schedules requires sound strategies, good practices, and careful judgment. To the dislike of owners, contractors and consultants, however, many projects experience extensive delays and thereby exceed initial time and cost estimates. This problem is more obvious in the traditional or adversarial type of contracts in which the contract is awarded to the lowest bidder, which is the strategy in the majority of public projects in developing countries [7]. In order to manage and control construction projects, there are various procurements strategies being adopted. Most popular strategies include traditional, management, integrated services and in-house teams [8]. These strategies contain various methods of managing projects as shown in Table 1. TABLE I. TYPES OF PROCUREMENT METHODS &THEIR VARIATIONS Procurement Strategy Methods/Techniques Procurement Strategy Management Integrated Traditional Lump Sum System/Traditional System/ Design- Bid- Build/Open Tender Contracts Negotiated Contracts Best Value Procurement Incentives Contracts Construction Project Management/Contract Management Construction Management at Risk/Management Contracting Design and Build Turnkey System 30

2 International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014 In-house Self-Performance In-House Teams Job-Orderr Contract Separate Contracts In Malaysian, traditional lump sum system, design and build/ /turnkey system and Construction Project Management/Contract Management are commonly adopted in procurement strategies [1, 9]. This study has been conducted to (1) examine various procurement strategies adopted in MARAA Projects, (ii) identifying factors affecting construction cost performance in MARA projects. However, the limitations of this study include, firstly this paper focus large constructionn projects only. Although, it is difficult to define large constructions, but in a study of Vietnam projects with a total budget of $1 million were considered as large projects [10]. In this study, project of budget RM 5 million and above is considered as large construction project, secondly, this study focuses on projects with projects management procurement strategies only. Thirdly, targeted respondent included in dataa collection were personnel of contractor firms and client. II. RELATED WORKS W A. Budget Planning and Control Procurement method is a strategy to manage the entiree construction process. There are a number of proven strategiess that are used to manage the process where each has its own distinct advantages and disadvantages. Initially, four procurement approaches are widely discussed; traditional, management, integrated services and in house teams [9]. 1) Traditional Procurement: Basically, this procurement is applied to ordinary projects of moderate size and complexity. A client employs an architect (for a building) or engineer (for civil engineering works or other structures) and contractors for the construction separately. A designer is hired earlier to produce drawings and specification while contractors will be selected after a client is satisfied with the drawings and specification. Normally, an architect or engineer will be appointed on fee basis as a leader to coordinate the activities of other members and have direct access to the client. In orderr to get the best possible result, it is normal for the client to choose any suitable variations that suits to their plan. Variations such as design-bid-build, negotiated contracts, best value procurement, incentives contracts are widely used in USA, while variations such as open tender contracts and negotiated contracts in UK. In Malaysia, both open tender and negotiated contracts are extensively adopted and this is similar to UK. Sometimes, a client incorporates Project Management Consultant (PMC) into this procurement to assist the client in administering the project [9]. The typical contractual relationship and sequence of operation is shown in Figure 1 and Figure 2. 2) Management Procurement: Basically Compared to traditional procurement which is focusing on moderate size and complexity, management procurement is preferred to be adopted for large or complex projects. A person or company is appointed by client on a fee basis to organize and manage the whole construction process. A construction management (CM) is hired earlier or together with the designer before any substantial design work is done and before any substantial work begun. The CM (on client s behalf) works with the designer during the design phase and representing client during the construction phase. The typical contractual relationship and sequence of operation is shown in Figure 3 and Figure 4. Figure 1. Typical Contractual Relationships under Traditional Method Figure 2. Typical Sequences of Operations Figure 3. Typical Contractual Relationships under Management Procurement Figure 4. Typical Sequences of Operations of Management Procurement 3) Integrated Procurement: Basically Integrated procurement is where design and construction, as well as several other subtasks on the project, are performed by a single organization, often a large contracting firm. Sometimes, professionals such as construction managers, architect, quantity surveyors and engineers combined together to form a consortium to provide integrated services. This procurement is mainly adopted on technically sophisticated projects of which prospective contractors have special experience, or time is of 31

3 International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014 the essence. It provides a single point of contact and responsibility throughout the project. Design and build or design-build variation is popularly used in USA. Similarly in UK, design and build variation is also widely used. Apparently, design and build or turnkey system was introduced to Malaysia 1983 [9] and still widely adopted in Malaysia construction project. The typical contractual relationship and sequence of operation is shown in Figure 5 and Figure 6. Figure 5. Typical Contractual Relationships under Integrated Procurement Figure 6. Typical Sequences of Operations of Integrated Procurement 4) In House Procurement: Basically In house procurement is self perform construction. Normally, large clients such as large public organization or large private companies that have their own continuous construction projects have directly employ their own people such as engineers, architects, workers, etc. However, the client may choose to subcontract a substantial portion of the project to outside consultants and contractors for both design and construction, but it retains centralized decision making to integrate all efforts in project implementation. B. Cost Performance Cost Performance is the fundamental norm of measuring project success. Unfortunately, many of construction projects worldwide are experiencing poor cost performance. This is reflected in the cost overrun problem whichh now days is associated with almost every project [11]. Cost overruns dilemma is very serious and is faced in both developing and developed countries. It requires careful attention to improve this matter [12]. This problem of cost overrun is more rigorous in developing countries. Overrun in cost is occurred because of several factors as highlighted by numerous research works carried out worldwide. Among these, use of low quality materials is a common factor which results in higher construction cost compared to the estimated cost because of the significant amount of loss of materials during construction. It happens mostly because of lack of availability of standards for materials and management systems. Further, a major problem in the construction industry is the project managers have not adequate ability of preventing cost overruns. This has resulted poor cost performance and led many Thai construction to fail [13]. Similarity, in Kuwait it was highlighted by research work of Koushki [14] time and cost increases were significant issuess in private residential projects in Kuwait. The major time increase for these included frequent change orders, financial constraints and owners lack of experience in construction. While, the issues to related contractor, material and owner s financial conditions were major contributors to cost increase. Besides these, design changes, inadequate planning, unpredictable weather conditions; and fluctuations in the cost of building materials are frequently occurring factors leading to cost overruns [15, 16]. In Ghana, contractors and consultants mentioned that monthly payments difficulties is a major issue faced in construction projects that lead to delay in works and consequently project faces overrun in cost. While, client representatives highlighted that the poor contractor management is the most critical factors in causing cost overrun. Overall, in groundwater projects of Ghana, major factors recorded were found poor contractor management, monthly payment difficulties, material procurement, poor technical performances, and escalation of material prices [17]. III. DATA COLLECTION AND ANALYSIS Data collection was carried out in two phases where first phase focused on field study and interviews. It aimed to assess various procurement strategies adopted in MARA projects and identify common causes of cost overrun. In the second phase, survey was conductedd for identifying significant factors affecting construction cost performance among contractors, consultants and contractors for assessing significance of the factors. A five point likert-scale of 1 to 5 was adopted to assess the degree of agreement of each cause where 1 represented strongly disagree, 2 disagree, 3 moderately agree, 4 agree and 5 strongly agree. A total of 36 respondents participated in interviews and questionnaire survey process. Statistical Package for Social Sciencee (SPSS) version 17 was used to analyze the data. Data was checked for reliability prior to ranking the factors. Reliability describes the stability of the data collected measured using Cronbach α coefficient value. It is considered low and unacceptable if Cronbach α value is less than 0.3. Reliability is considered satisfactory if Cronbach α is more than 0.7 [18]. Distribution of respondents in terms of experience is shown in figure 11. Figure 11 indicates thatt majority of respondents i.e. 21 out of 36 (58.33%) were experienced more than 10 years in the construction industry, 7 out of 36 (19.44%) had experience between 6-10 years, while 4 respondents (11.11%) had 2-5 years experience and only 4 (11.11%) respondents had experience less than 2 years. Figure 7. Respondents working experience 32

4 International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014 IV. RESULTS AND DISCUSSION A. Classification of MARA projects MARA construction projects are classified into 2; small and large projects. Most of the small projects are adopting traditional procurement while the majority of large projects are adopting management procurement. In some cases, small projects which are complex and need special knowledge are also adopting management procurement. Therefore, the classification of the project is based on its contract cost but its delivery methods are based on its size and complexity. The project worth less than five million ringgit (RM 5 million) is normally considered as a small project. As mention earlier, normally MARA is adopting the traditional procurement wheree an architect is appointed as the leader to organize the construction at the construction site. The leader has direct contact with MARA. Contrast to small project, the project worth more than RM 5 million is considered as large project. This large project normally highly complicated and needs special knowledge and expertise to handle it. Most of the time, MARA is adopting management procurement for this kind of project and as a matter of fact, MARA engages PMC to supervise and administer the entiree project. B. MARA Construction Procurement Studies revealed that MARA is adopting 2 types of procurement; traditional and management. For traditional, MARA is organizing its own technical teams to administer the whole the project. However, if MARA decides to adopt management procurement,approval from LPM A must be granted first before a PMC is appointed. Figure 8 and Figure 9 show the contractual relationship of MARA traditional and management procurement while Figure 10 and Figure 111 shows their sequence of operation. Figure 8. Contractual Relationship of MARA Traditional Procurement Figure 9. Sequencee of Operation of MARA Traditional Procurement Figure 10. Contractual Relationship of MARA Management Procurement Figure 11. Sequence of Operation of MARAA Management Procurement C. Factors Affecting Construction Cost Performance During interview process, a total of 15 common factors affecting project cost performance in MRA large project were identified. Literature showed that the identified factors are common factors affecting cost performance worldwide as shown in figure II. These factors weree investigated for ranking purpose. Data collected through questionnaire was test for reliability. Cronbach's Alpha of the gathered data was found as which means dataa collected in acceptable for analysis. In order to identify the ranks of factors affecting construction cost performance, data was analyzed with SPSS 17. Results are presented in table III. Based on table III, Fluctuation in prices of materials is the most significant factor affecting construction cost performance followed by Cash flow and financial difficulties faced by contractors as second ranked factors. Shortage of site workers, lack of communication among parties were 3 rd major factor and incorrect planning & scheduling by contractors were found as 4 th ranked factor. Fluctuation in prices of materials: Table III shows that the fluctuation of material is the most dominant factor affecting construction cost. However, it is very interesting to know that according to client fluctuation in price was ranked as 6 th rank while contractor ranked as 1 st. Cash flow and financial difficulties faced by contractors: Contractors rankled cash flow and financial difficulties as 2 nd factor while client ranked same as 5 th. Contractors believe this issue is very critical where it may influencee other causes such as site management, shortage of site workers and ineffective planning and scheduling. This may be faced due to delay approval of work completed by consultant and late in monthly payment from client. Settling this issue may as well settle other issues simultaneously. Shortage of site workers: This factor is significant as perceived by Client. It is 3 rd ranked factor by overall respondents. However, client ranked this factor as most dominant while contractors ranked it as 12 th rank. Client respondents claim thatt the problem between contractor and subcontractor seems largely contribute to this cause. As most of the works are contracted to subcontractors, most of the workers are hired by these sub-contractor. If there are disputes between contractor and subcontractor, automatically this issue prevails. Lack of communication between parties: Lack of communication between parties is also ranked as third highest affecting factor. Clients ranked this factor as 3rd while contractor ranked as 4 th. Lack of coordination may result in poor management, selection of proper material and problems between the contractor and other parties. 33

5 International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014 TABLE II. RANKING OF FACTORS AFFECTING CONSTRUCTION COST PERFORMANCE S.No Causes [10] [`11] [17] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28] [29] [30] 1 Incorrect planning and scheduling by contractors 2 Fluctuation in prices of materials 3 Frequent design changes 4 Unforeseen ground conditions 5 Inadequate contractor experience 6 Change in the scope of the project 7 Low speed of decisions making 8 Cash flow and financial difficulties faced by contractors 9 Contractor's poor site management and supervision 10 Practice of assigning contract to lowest bidder 11 Lack of communication among parties 12 Shortage of site workers 13 Delay in Material procurement 14 Underestimate project duration resulting Schedule Delay 15 Incompetent Project team (designers and contractors) TABLE III. RANKING OF FACTORS AFFECTING CONSTRUCTION COST PERFORMANCE S.No. Factors Overall Client Respondents Contractor Respondents Mean S.D Rank Mean S.D Rank Mean S.D Rank 1 Fluctuation in prices of materials Cash flow and financial difficulties faced by contractors Shortage of site workers Lack of communication among parties Incorrect planning and scheduling by contractors Contractor's poor site management and supervision Delay in Material procurement Underestimate project duration resulting Schedule Delay Unforeseen ground conditions Low speed of decisions making Inadequate contractor experience Change in the scope of the project Practice of assigning contract to lowest bidder Frequent design changes Owner interference

6 International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014 V. CONCLUSION Study was carried out to investigate various procurement strategies adopted in MARA large construction projects. Results showed that MARA projects are classified as small and large project based on cost of project cost. Project worth contract amount above 5 Million Ringgit were regarded as large construction projects. In order to manage projects, traditional and management procurement strategies are adopted. Also, comprehensive study was conducted to identify the factors affecting construction cost performance. Through a questionnaire survey amongst contractor and client personnel, it was perceived that fluctuation of material prices was the most dominant factor affecting construction cost performance followed by cash flow and financial difficulties faced by contractors. 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