Implications of Cost Overruns and Time Delays on Major Public Construction Projects

Implications of Cost Overruns and Time Delays on Major Public Construction Projects
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  Implications of Cost Overruns and Time Delays on Major Public Construction Projects Abderisak Adam, Per-Erik Josephson and Göran Lindahl Abstract  For decades, the construction industry has been characterized by costs exceeding budgetary limits and completion times reaching further than what was set out initially. This has been particularly noticeable for large public construction  projects where cost overruns and time delays have long been regarded a common occurrence. Due to the magnitude and frequency of these overruns, they have come to pose a significant financial risk to both clients and contractors, in addition to the impact exerted on the sustainability of the project. In dealing with this, researchers, auditors and practitioners have suggested a  broad range of solutions, ranging from technical and economical to psychological and political approaches. In doing so, the contractor’s role has been emphasized whereas the role of the client organization has often been overlooked. This paper which is based on a literature review investigates the occurrence of and the expla-nations for cost overruns and time delays in major construction projects from the  public client’s perspective. It also explores the implications of cost overruns and time delays; the purpose of which is to offer an extended understanding of the re-lationship between the client’s actions and effects on cost, time and sustainability  parameters. Keywords  Cost overruns • Time delays • Infrastructure • Sustainability  _____________________________ A. Adam  () Department of Civil and Environmental Engineering. Chalmers University of Technology, Gothenburg, Sweden. e-mail:  P-E. Josephson  Department of Civil and Environmental Engineering. Chalmers University of Technology, Gothenburg, Sweden. e-mail:  G. Lindahl  Department of Civil and Environmental Engineering. Chalmers University of Technology, Gothenburg, Sweden. e-mail:   2 Introduction For decades, the construction industry has been plagued by cost overruns (Akinci & Fischer, 1998). Unrelenting in its severity, the mere mention of a construction  project by media outlets, especially infrastructure projects of considerable size, has become more or less tantamount to costs exceeding budget and completion times reaching further than what was set out initially (Morris, 1990;Raftery, 2003; Siemiatycki, 2009;). The public’s perception can hardly be deemed unwarranted as made evident by the staggering number of projects that go beyond budgetary limits. According to a study by Moms and Hough, a sizable majority (63%) of 1778 construction projects funded by the World Bank exceeded their budgets (as cited in Baloi & Price, 2003). The case is further aggravated when it comes to large infrastructure projects such as rail and road construction in which Flyvbjerg et al. (2013) reports that a large share of such projects exceed their initial budgets with cost increases of 50– 100% being commonplace and increases beyond 100% not unheard of. In stating these figures, Flyvbjerg et al. not only shed light on the severity of the problem,  but also its global implications. The data upon which the study is based has been gathered from a range of different geographical locations, spanning five conti-nents, 20 countries, both developed and developing nations, from late 20’s to the late 90’s. This shows that the challenge of cost overruns is clearly a global phe-nomenon and although there are minor differences depending on the geographical location, the problems persist in every continent. The situation is even more dire in the developing world where corruption carries a significant impact on actual costs and accounts for 10-30% of the value of a single construction contract (World Bank, 2012). More significantly, while there has been strong interest in sustainability as it re-lates to urban development, there’s been a lack of clarification as to what consti-tutes as sustainable in the public construction context, most notably in relation to infrastructure projects. Questions regarding how sustainability can be quantified and the key contributors of sustainability in the urban context have all, to a large degree, been left undealt with (KPMG, 2012).  Research Methodology This paper explores the impact that cost overruns and time delays exert on the sus-tainability of large public construction projects. In particular, the study focuses on uncovering the causes underlying cost overruns and time delays in large public construction projects; these causes are subsequently examined in relation to their impact on the projects’ sustainability. Though the study encompasses large public construction projects in general, the lion’s share of projects covered in this study relate primarily to infrastructure  3  projects as these are the most prevalent type of large scale public projects dis-cussed in the research literature. In order to investigate the aforementioned research objectives, a literature study was carried out. The literature covered consisted predominately of empirical stud-ies discussing cost overruns, time delays and sustainability in public construction  projects. Literature Review This section describes the challenges that cost overruns and time delays pose on large scale public construction projects and how these challenges impact the sus-tainability of the projects. Reining in Expenses – Cost Overruns and Public Construction Pro-curement Jahren and Ashe (1990) demonstrated the existence of a correlation between pro- ject size and cost overruns showing that the larger the construction project is, the greater the percentage cost overrun will be. Similar results were obtained by Shrestha et al. (2013) who in a study of 363 public construction projects found that a greater project size resulted in more substantial cost overruns. These pro- jects, often referred to as mega projects, are defined in terms of their expensive-ness, physical nature and their impact on society leading to increased public atten-tion (Altshuler & Luberoff, 2003). Various estimates are used as a criterion for what constitutes a mega project, The U.S Federal Highway Administration (FHWA, 2004) state that projects in in excess of $1 billion can be considered mega projects, other common estimates include half a billion U.S dollars (Flyvbjerg, 2004) and 250 million U.S dollars (Altshuler & Luberoff, 2003). Flyvbjerg makes the case that the definition of a mega project differs depend-ing on the geographical setting, thus what might constitute a mega project in a more rural area might not be considered as such in a metropolis (Flyvbjerg, 2004). Though there appears to be a strong indication that a large project size will yield higher cost overruns, conflicting views have also been reported. Odeck (2004) in-vestigated cost overruns in exclusively road projects showing that smaller project sizes contributed to lower cost overruns than larger ones, an observation that Odeck attributed to larger road projects having been under better management than their smaller counterparts. Although Odeck does not offer an explanation for the contrary results, Cantarelli et al. (2010) proposes that the conflicting results may be due to the small sample size of large projects listed in that study. The passing of time seem to have had little effect on curbing cost overruns. In-stead, the trend has marched towards the undertaking of larger and more costly  projects; “never” remarks Flyvbjerg (2007, p. 3) “have so many expensive, large-scale projects been built over so short a historical period which consequently en-tails significantly higher economic risks.” On a similar note, Shrestha et al. (2013)  4 could not find any correlation between project completion year and cost overruns, suggesting that the situation was not improving over time. These findings run con-trary to those by Randolph et al. (1987) who indeed did establish a correlation be-tween project completion year and cost overruns. The differing results were at-tributed to whether or not the construction planning systems had been significantly altered during the time period in question. In the study by Shrestha et al. (2013), the construction practices in the studied region had not been changed significantly over the time interval studied and for that reason; the cost overrun figures saw no drastic variation. It may also suggest something entirely different. Granted that  both the construction technology and the techniques for estimating costs have im- proved with time, the observation that level of cost increases still persist may in-stead suggest that the root of the problem is not engineering nor accounting but ra-ther in the realm of politics (Altshuler & Luberoff, 2003). Furthermore, price increases have been identified by both governmental agen-cies (The Swedish National Audit Office, 2010) as well as by researchers (Morris, 1990; Mosey, 2009) as one of the chief causes for cost overruns. Morris (1990) argues that approximately 20-25% of all cost overruns can be attributed to price increases. The remainder can be traced to different factors of which the most im- portant are: poor design and implementation, inadequate project funding, bureau-cratic indecisiveness and the lack of coordination between enterprises. This view is not necessarily shared by project managers as shown in a study by Brunes and Lind (2014) in which it was found that the majority of the respondents in the ob-served sample size of 101 project managers were either unsure (32%) or opposed (48%) to the idea that price increases was a [common] cause of cost overruns. In addition to the factors mentioned above, the time to deliver the project will also affect whether or not cost overruns will occur (Morris, 1990). The many intricacies of construction projects allow for a large number of cost increasing causes to emerge, thereby elevating the risks and uncertainties in-volved. The trend toward larger projects with increased complexity results in greater cost and schedule variations which in turn produces unsuccessful ventures (Abdelgawad & Fayek, 2010). In order to appropriately discuss the large plethora of causes, it becomes neces-sary to categorize each cost with respect to a specific domain. This is what Can-tarelli et al. (2010) set out to do in a review of some of the most prolific reports and papers that deal with explanations for cost overruns. The authors conclude that the general consensus of researchers showed that political explanations consti-tuted the primary source for cost overruns in large infrastructure projects. Included in this category were cost underestimation and forecast manipulation that were al-so identified as primary causes (Cantarelli, et al., 2010). This forecast manipula-tion occurs as a byproduct of incorrect assumptions about traffic flows. Having established the occurrence of incorrect forecasts, Wachs’ (1989) pro- poses a number of explanations to account for the phenomenon, most notably; that  planners are either intentionally producing inaccurate forecasts or the tools to pro-duce these forecasts are inadequate insofar as their utility to produce accurate es-  5 timations. In regards to the first point, Wachs’ asserts that data is fudged in order to support a more politically sound narrative by using traffic flows that are not representative of the proposed area and in some cases, the figures are downright fabrications. The lack of ethics can in certain cases cause planners to produce es-timates that support a predetermined goal, disregard weaknesses in estimations and find consultants who are willing to produce such numbers, disavowing those who refuse. In general, causes for cost overruns can be attributed to political, economic, technical or psychological causes. Moreover, each category involves a different explanatory narrative and should therefore be dealt with a different and suitable theoretical model. Whereas political explanations can be explained by Machiavel-lian theory (focuses on power and influence) or agency theory (focuses on motives  based on self-interest), technical explanations may be explained through planning and forecasting theory. Likewise, economical explanations necessitate economic theories such as neoclassical economics or rational theory whereas psychological explanations fall under prospect theory (Cantarelli, et al., 2010). In a Norwegian study of road constructions, it was shown that cost overruns tended to rise when the planned completion time was shorter. A number of expla-nations to this were considered; it may be that uncertainties decrease when project time increases as cost predictions become easier to formulate. It may also be due to the project management team improving their ability to oversee the chief causes of cost overruns which in turn is facilitated by the lengthier project time (Odeck, 2004). Though a planned completion time that is short in duration is advantageous in terms of cost overruns, a lengthy planning process is not. Overly complicated and lengthy planning initiatives have become standard in both OECD countries as well as non-members nations (OECD, 2007). This is certainly the case in the Swedish transportation sector where overly complex planning processes has been identified as a central problem in domestic infrastructure projects (The Swedish  National Audit Office, 2010). A common response to this is to emphasize initia-tives that serve to increase the capabilities of the client organization in handling  projects of such complexity. This line of thought is most vividly expressed by auditors who have been as-signed to investigate the causes and remedies of cost overruns (Siemiatycki, 2009). Unlike researchers who have studied the phenomenon of cost increases in construction and transportation, auditors have had the benefit of an inside view from inside the governmental client organization lending them greater access to internal data. Consequently, this inside view has shaped their understanding of  both the causes for cost overruns as well as possible remedies to alleviate the situ-ation. Researchers, on the other hand, have largely been outside observers and thereby been able to broadly define the mandate of their studies and to take on an interdisciplinary approach. This approach has emanated in researchers focusing on the need for developing technological processes, uphold incentive structures that rewards accurate cost estimations and that discourages optimism bias (Siemiatycki, 2009).
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