ESTIMATING CONTINGENCY SUM FOR BUILDING WORKS IN GHANA

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1 Sci., Tech. and Dev., 32 (3): , 2013 ESTIMATING CONTINGENCY SUM FOR BUILDING WORKS IN GHANA RICHARD ODURO ASAMOAH 1 *, JAMES COFIE DANKU 2 AND P.D. BAIDEN AMISSAH 1 1 Research Scientist, Building and Road Research Institute, Council for Scientific and Industrial Research, Kumasi, Ghana. 2 Department of Building Technology, Kwame Nkrumah University of Science and Technology, Ghana. Abstract It is a common practice in the construction industry in Ghana to allow for contingencies to cater for any unforeseen events. This study was to identify existing methods of determining contingency sum, factors influencing contingency sum and develop a new system of determining contingency sum. The study employed a case study of some 38 completed building projects in Ashanti and Brong Ahafo regions of Ghana to compare the accuracy of both the existing and the new method. Questionnaires were distributed to the selected professionals. Relative Importance Indices Ranking and the Kendall coefficient of concordance were used to rank factors and the agreement of factors ranking among building professions. It was established that the most commonly used method is the Percentage Approach method. The study revealed that 77% of the building professionals have been using the Percentage Approach and 23% have been using the Probabilistic Estimation Methods. These methods were based on subjective approach. Economic, Environmental and Technical factors were identified as the most influential factors. The study concludes by developing a new software system of determining contingency sum and new method was found to be 45% more accurate than the Percentage Approach. Keywords: Contingency sum, Factors, Existing methods, Proposed new method. Introduction Contingency sum has been defined as an additional fund, meant to cater for unforeseeable elements of cost, within the defined project scope. The purpose of contingency sum is to generate a reserve fund that may be sufficient to manage the inherent risk within the project, so as to complete it on time (Ford, 2002). In Ghana, it is characteristics of a construction work to proceed without any risk appraisal. In order to address any future risk, high contingency sums are included in the mark-ups (Badu, 2004). There has been little empirical research into the concept of contingency sum, its intended scope and methods of estimating contingency sum in infrastructure development contracts. The difficulty in determining contingency sum depends on technical, economic and institutional factors (Tawiah, 1999). Inappropriate contingency sums have resulted in poor management of risk leading to underestimation or overestimation, delay in the completion of projects and abandonment of projects altogether. In particular, overestimated contingency sums limit the cash-flow to contractors. To address these problems, it is important for building professionals to consider other methods of determining contingency sums. Determination of an appropriate contingency sum requires an understanding of how estimators make budget contingency decisions and the impact on the level of accuracy of the included contingency sum. The contingency sum is usually expressed as a percentage mark-up on the base estimate (Picken and Mak, 2001). In the construction industry, building professionals have not been able to state the actual percentage range for Contingency Sum. Available information, however, indicates percentage ranges of 2.5% - 10%, which have been determined for some selected projects financed by the Government of Ghana and other development partners, such as, the African Development Bank and the World Bank from 1999 to 2007 (GPRP/SIF, 2004). The amount for contingency sum varies but 10% is *Author for correspondence asamoaho@yahoo.com

2 ESTIMATING CO NTINGENCY SUM FOR BUILDING WORKS IN GHANA 267 recommended for lump sum projects and for other types of contracts (cost plus contracts), it is advisable to set contingency above 10% (Davey, 1992). Existing Method(s) of Determining Projects Contingency Sum in Building Works Baccarini in 2005 came out with 14 methods of determining contingency sum for construction works. The methods are as follows; Deterministic Estimation (Percentage Addition) Range Estimating Analytical Hierarchy Process Monte Carlo Simulation Probabilistic Estimating Methods of Moments Factors Rating Individual Risks expected value Regression Artificial Neural Networks Fuzzy Sets Controlled Interval Memory Influence Diagrams Theory of Constraints Preliminary survey conducted in the study indicated that among the above methods, building professionals had knowledge or had used the following methods before. These methods were: (i) Deterministic Method (Traditional or Percentage addition estimate). (ii) Probabilistic Estimation (Based on experience of past projects completed) (iii) Estimating using Risk Analysis (ERA) (iv) Range Estimating (v) Monte Carlo Simulation This study therefore used these known methods to determine the most widely used method in the building construction industry in Building Professionals Table 1. Questionnaire Response from Professionals. No. of Q uestionnaires Distributed Ghana. The study showed that the Deterministic Approach (Percentage Approach) was the most widely used and known method for determining Contingency Sum by professionals in Ghana. As indicated in Table 2, 77% of the sampled professionals have been using the Deterministic Approach and only 23% have been using the Probabilistic Estimation. The sampled professionals had knowledge about the Estimating using Risk Analysis, Range Estimating and the Monte Carlo methods of determining the Contingency Sum, but have not used any of the methods before. Methodology and Data Collection In this study, initial review of documents on the subject was conducted. Data collection was carried out using the stratified random sampling technique. The target population comprised construction professionals, working in Kumasi and Accra. The target professionals were Architects, Civil Engineers and Quantity Surveyors. Furthermore, Kumasi and Greater Accra are the commercial cities in Ghana where many of the working building professionals are located and most of the construction activities in the country could be located. Using the Kish (1965) formula, the overall sample size of 224 was obtained and assuming a return rate of 45%, the sample size was increased to 250. Two hundred and fifty (250) questionnaires were administered to professionals in the building industry. A total of 133 questionnaires representing 53.2% of the total questionnaire administered were returned. The return rate was high for the Quantity Surveyors and out of the 53.2% returned questionnaire as indicated in Table % were responsive and 20.3% were not responsive. No. of Q uestionnaires Returned % Rate of Returned Quantity Surveyors Architects Civil/Structural Engineers Total Source: Field Survey, February March, 2007

3 268 RICHARD ODURO ASAMOAH ET AL. Methods Table 2. Questionnaire Response from Professionals. Quantity Surveyors Architects Civil Engineers Total % Percentage Approach (Existing Method) Probabilistic Method Range Estimating ERA Monte Carlo Total Source: Field Survey, February March, 2007 Kendall (1970) coefficient of concordance, the best estimate of true ranking (rating) of n objects is provided, where W (the coefficient of concordance) is significant by the order of various sums of ranks. If one accepts the criteria used by the judges, then the best true ranking is provided by the mean of the ranks. This implies that most factors influencing contingency sum are the highest overall ranking. Based on the above premise, the overall rankings were calculated for the Quantity Surveyors, Architects and Civil Engineers. The Kendall s concordance coefficient, which measures the degree of agreement among professionals of ranking, is expressed as W = [ k (R i Ř) 2 ] [n (n 2-1)/12] where, k = the number of set of ranking (e.g. the number of judgments) n = the number of aspects of a problem or factors being ranked. Ř= average of the ranks assigned to the n th aspect of the problem n(n 2-1)/12 = the maximum possible squared deviation, i.e., the numerator, which will occur if there were perfect agreements among k sets of ranks, and the average ranking were 1, 2, 3,, n. R i = the rank assigned by an individual judge to one aspect of the problem posed. The sixth version of the Visual Basic (VB) was used to develop a simple calculator for determining contingency sum as shown in Fig. 2. The New Method of Determining Contingency Sum The study adopted and modified risk rating factors developed by the American Association of Cost Engineers (AACE, 2008), as shown in Table 3, to develop a system for determining contingency figure as a percentage to be added to project cost. The method is a visual basic programme designed to cover identified factors influencing the determination of contingency sum. The factors have been grouped into Economic, Technical and Environmental/Cultural Factors. From the study Technical and Environmental/Cultural Factors contribute 20% respectively to the determination of contingency sum, whiles Economic factors contributes 60%. Each of the main factors has related minor factors. Each of these minor factors has risk rated values, which vary depending on conditions and the impact of risk as identified by the project team, as shown in Table 3 and Fig. 1. Fig. 2 shows the pictorial nature of the Proposed Method. Table 5 shows the list of projects that were used for the case studies. The projects were under the sponsorship of the government of Ghana and the development partners, including the World Bank, African Development Bank and the Arab Bank. Projects include the following; Basic Education Support Project (BESP) Rehabilitation and Upgrading of Second Cycle Schools (Effiduase Senior High School) Primary Education Rehabilitation Project (PERP)

4 ESTIMATING CO NTINGENCY SUM FOR BUILDING WORKS IN GHANA 269 Highly Indebted Poor Country / Ghana Education Trust Fund Projects (HIPC/GETFUND) Table 3. Risk Factor Rating Promoting Partnership with Traditional Authorities Project (PPTAP). Item Factors Risk Factors Minimum Medium Maximum 1. Environmental/ Institutional A Demand for Extractive Materials 20% B Force Majeure C Cultural Implication Economic 60% D Inflation E Global Economic Pressure 3. Technical 20% F Project Specification G Design Consideration H Contract Period J Project Management L Form of Contract Source: Association of America Cost Engineers International, Table 4. Agreement between building professionals regarding factors influencing the determination of contingency sum. Factors Q uantity Surveyors Architects Civil Engineers Sum of Ranking (Ri) Mean of Ranking (Ř) Ri - Ř Ri -Ř) 2 O ver All Ranking Economic st Environmental / Institutional nd Technical nd Results and Discussions Construction professionals were asked to rate factors, influencing, contingency sum in percentage terms as indicated in Table 3. The survey revealed that, professionals in the construction industry classify the factors, influencing the determination of contingency sum into technical, economic and environmental/ institutional factors. Technical factors were considered as Project Specification, Design Consideration, Contract Period, Project Management and Form of Contract. Economic Factors included inflation and global economic pressure. Environmental factors included demand for extractive materials, force majeure and institutional factors included Social and cultural Impacts on project delivery in Ghana as shown in the flow chart of Fig. 1. In order to simplify the proposed method environmental and institutional factors were combined. Also some of these factors really do occur. According to the survey, construction professionals have all the abilities to manage the impact of technical factors in order to reduce the risk on contingency sum.

5 Environmental/ Institutional Factors (20%) Demand For Material (11) Force Majeure (7) Cultural Factors (2) Total Contingency (%) Economic Factors (60%) Inflation (40) Global Economic Pressure (20) Project Specification (4) Fig. 1. Flow Chart Indicating the Determination of Contingency Sum Technical Factors (20%) Form of Contract (6) Project Duration (2) Project Management (2) Design Consideration (6) 270 RICHARD ODURO ASAMOAH ET AL.

6 ESTIMATING CO NTINGENCY SUM FOR BUILDING WORKS IN GHANA 271 Fig. 2. The Proposed Method of Estimating Contingency Sum (Contingency Calculator) The study confirms that with proper planning from the conception stage, the impact of technical factors could be reduced to the minimum. The professionals agreed to rate technical factor at 20%. The survey also revealed that, environmental/institutional factors also contribute to risk in construction. In Ghana, apart from occasional flooding experience, volcanic eruption, earth quake, landslide, etc rarely do occur. Recurrent cultural developments in Ghana have shown that there is the need to consider these factors. Sometimes, some traditional leaders demand huge compensation before allowing projects to commence. Building Professionals were to rate environmental/cultural factors at 20% of the contract contingency sum. The study also revealed that, professionals have no control over the economic factors. All the selected professionals agreed to rate economic factors at 60%. It is in the domain of the central government to regulate the economic factors. Table 3 shows the rating and the agreement of factors amongst professionals in the construction industry. Grand mean Ř = ( n i 1 R i ) 1/n = (R i Ř) 2 = 1,067 where R i is the mean of rankings and n is the number of factors being ranked. Table 3 consists of factors and ratings influencing the determination of contingency. The factors and ratings were first developed by the Association of American Cost Engineers International (2008). The factors and the ratings were adopted for the purposes of the study to develop a flow chart for the new method of determining contingency sum (Fig. 1).

7 272 RICHARD ODURO ASAMOAH ET AL. The proposed method was used to calculate the contingency sums for 38 selected building projects from Ashanti and Brong Ahafo regions as indicated in Table 6. The results and discussions were based on Table 6. Fifteen (15) projects had contingency figures by the proposed method to be higher than the actual contingency figures. Ten projects were ±5% close to the actual contingency figures and five of the projects were more than +5 the actual contingency figures. Seventeen of the selected projects had contingency figures by the proposed method to be less than the actual contingency figures. Nine of these projects were ± 5% close to the actual figures and eight of the projects were less than - 5% from the actual contingency figures. Six projects were considered to have marginal percentage figures of ± 2% of the actual contingency figures. An assumption of ±5 was used to analyse the level of accuracy. Table 5 shows the outcome of the use of the proposed new Method. The table indicates that, the existing method had a contingency figure of ranging 2.5% - 10% with an average figure of 6.97%. The -5 gave a range of % with an average figure of 2.11%. And + 5 also gave a range of %, with an average figure of The proposed Method gave a range of % with an average figure of 14.54%. The -5% of the proposed method gave a range of %, with an average figure of 9.54, while the +5 gave a range of %, with an average figure of 15.75%. The existing method had an average contingency figure of 6.97%, 14.54% for the proposed Method and 15.75% for the actual contingency. This indicated that, the proposed method gave an accurate figure compared to the actual than the existing method. Using the range of ±5%, the percentage Approach Method gave an average contingency figure of 2.11% and the proposed method had an average figure of 9.54%. This implied that the proposed method could be more accurate than the percentage approach method. The +5% also gave 11.79% for the Percentage Approach Method, for the proposed method and + 5% to the actual average contingency figure was 20.75%. In comparison, the proposed method could be reliable. Table 5 showed that, the projects in items 21 and 22 had contingency figures of 2.5% each and after the completion of the projects the actual contingency was 4.8% and 4.5% respectively indicating 92% and 80 % increase in contingency sum using the Percentage Approach Method. However, the proposed method gave initial contingency figures of 10.2% and 10.8%. This suggests that, there would be enough to address unforeseen events and resources which were not be used would be reserved for future expenditures. Items 23, 27 and 33 had contingency by the Percentage Approach as 5%, 5% and 4.7%, respectively, and contingency figures from the proposed method gave 21.8%, 20.6% and 20.4% respectively. However, the actual contingency figures of 41%, 35.5% and 31.8% and were high above the initial percentage and the proposed contingency figures. In percentage terms, the actual contingency figures were 88%, 72.5% and 55.9%, respectively, high, but it could be said that the contingency figures by the Proposed Method were more accurate than the figures from the Percentage Approach Method. Item Table 5. Selected projects under the building contracts with the respective contingency figure. Project Estimated (%) Proposed Method (%) Actual (%) Difference A B C D E = D B F = D C 1. HIPC/GETFUND - Construction of Day Care, Clinic Post Office for Bosomtwi Atwima Kwanwoma District. 2. BESP 5 No 6 unit Classroom Block and 10 unit 3-seater K.V.I.P-Adansi District Ashanti Region BESP-1 3. BESP 6 No 6 unit Classroom Block and 12 unit 3-seater K.V.I.P-Offinso District Ashanti Region BESP-2 4. Basic Education Support Projects 5 No 6 unit classroom Block and 10 unit 3-seater K.V.I.P-Sekyere West District 5. PERP Construction of Classroom blocks and Ancillary Facility

8 ESTIMATING CO NTINGENCY SUM FOR BUILDING WORKS IN GHANA PPTAP - Construction of 6-unit Teachers Quarters- Offinso District. 7. PPTAP - Construction of 4-unit Teachers Quarters- Offinso District 8. PPTAP - Construction of 3-unit Teachers Quarters- Offinso District. 9. PPTAP - Re-roofing of Yaa Asantewaah Basic School - Kumasi 10. RUSCS Construction of 2-storey boys Dormitory- Effiduase Secondary Commercial School 11. HIPC/GETFUND Construction of 6-unit classroom Block - Kumasi 12. HIPC/GETFUND Construction of Day Care center at Old Amokom 13. HIPC/GETFUND - Construction of 6- unit classroom Block- Ahamadiya Basic School Kumasi 14. HIPC/GETFUND - Construction of 2-Room Day Care, for Bosomtwi Atwima Kwawoma District. 15. HIPC/GETFUND - Construction of 2-Room Day Care in bricks, for Bosomtwi Atwima Kwanwoma District. 16. HIPC/GETFUND - Construction of 3-unit classroom Block Bosomtwi Atwima Kwanwoma District. 17. HIPC/GETFUND - Construction of 2-storey Post Office and Stores - Kuntenase 18. HIPC/GETFUND - Construction of Community Library AME ZION Amokom- Kumasi 19. HIPC/GETFUND - Construction of 7-unit classroom Block - Amankwatia Kumasi 20. HIPC/GETFUND - Construction of Clinic for Bosomtwi Atwima Kwanwoma District. 21. BESP 5 No 6 unit classroom Block and 10 unit 3-seater K.V.I.P- Asutifi District Brong Ahafo Region BESP BESP 6 No 6 unit classroom Block and 12 unit 3-seater K.V.I.P- Asunafo District Brong Ahafo Region BESP RUSCS Construction of 2 No Masters Bungalow Dormitory- Effiduase Secondary Commercial School 24. RUSCS Construction of 2-bedroom 3-storey Masters Flat - Effiduase Secondary Commercial School 25. RUSCS Construction of 2-storey Classroom block - Effiduase Secondary Commercial School 26. RUSCS Construction of 2-storey boys Dormitory- Effiduase Secondary Commercial School 27. RUSCS Construction of 2-storey Girls Dormitory- Effiduase Secondary Commercial School. 28. RUSCS Construction of Assembly Hall - Effiduase Secondary Commercial School 29. RUSCS Construction of New Dining Hall Effiduase Secondary Commercial School 30. RUSCS Construction of Science Laboratory - Effiduase Secondary Commercial School 31. RUSCS Construction of Clinic - Effiduase Secondary Commercial School 32. HIPC/GETFUND - Construction of 6-unit classroom Block - Asokore Manpong - Kumasi Metropolitan Assembly 33. HIPC/GETFUND - Construction of 2-Room Day Care, for Kumasi Metropolitan Assembly HIPC/GETFUND - Construction of 2-Room Day Care in

9 274 RICHARD ODURO ASAMOAH ET AL. bricks, for Ejisu Juaben Municipal Assembly. 35. HIPC/GETFUND - Construction of 6-unit classroom Block Ejisu Juaben Municipal Assembly 36. HIPC/GETFUND - Construction of Community Clinic at Fenesu Adansi Central District. 37. HIPC/GETFUND - Construction of Community Library Kumasi Average Standard Deviation Table 6. Comparison contingency figures using the Percentage Approach and the Proposed Method and Actual. Item Percentage Addition Existing Method Proposed New Method Actual -5% +5% -5% +5% % Average

10 ESTIMATING CO NTINGENCY SUM FOR BUILDING WORKS IN GHANA 275 Conclusions The focus of this study was to identify more scientific method of determining contingency for the building industry. The construction industry has different methods of determining contingency sum for building works which include Monte Carlo Simulation, Range Estimation and Estimating Using Risk. However, in Ghana, particularly in the Ashanti and Greater Accra regions, building professionals have been using the Percentage Approach and the Probability Estimation. The study concludes by developing a more scientific method than the previous methods of determining contingency sum. The new method is devoid of subjectivity and gives more accurate contingency figures. The introduction of the new method will help building professionals to manage the causes of variation orders and the uses of contingency sum. Recommendations Proper feasibility studies have been identified as the main source of information for the commencement of any project. Therefore, it is recommended that, every project should commence from the feasibility stage which should include all stakeholders in a project. This will help to limit changes in design during the construction stage. The study also identified that building professionals in Ghana have been using the Percentage Approach and the Probability Estimation, which have been found to be subjective. It is, therefore, recommended that building professionals should use other methods, such as, the Monte Carlo Simulation, Range Estimation and Estimating Using Risk Analysis and other methods in order to check for accuracy of contingency sums. Finally, further studies should be done in the road sector in order to determine the possibility of using scientific method determining contingency sum for the construction industry in Ghana. References Association of America Cost Engineers International Risk Analysis and Contingency Using Range Estimation. Baccarini, D Understanding Project Cost Contingency A survey Conference Proceedings, Construction Research of the Royal Institute of Chartered Surveyors- 4-8th July 2005 at Queensland University of Technology Brisbane, Australia. Badu, E Risk Sharing in Ghanaian Construction Contracts. The Ghanaian Surveyor Journal of Ghana Institution of Surveyors. Vol , pp Davey, K Conservation Contracts and Grant Aid, Practical Guide pp 941 st Edition. London: E & FN Spon. Ford, D.N Achieving multiple project objectives through contingency management. Journal of Construction Engineering and Management, 128 (1), PP Ghana Poverty Reduction project/social Investment Fund (GPRP/SIF), 2004: Final Report. Kendall, M.G Rank correlation methods. Griffin, London. (4 th Edition). Kish, L Survey Sampling. John Wiley and Sons Inc. New York. Mak, S. and D. Picken Using risk analysis to determine construction project cost contingencies. Journal of Construction Engineering and Management, Vol. 126, pp Tawiah, O Factors Affecting the Performance of Ghanaian Owned Construction Firms (Unpublished).