Major Factors of Cost Escalation in Construction Projects in Saudi Arabia

EM 599 Research Proposal

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Major Factors of Cost Escalation in Construction Projects in Saudi Arabia

Abstract:

Cost escalation on construction projects, whether public or private, has a long history in almost all global projects. These escalations lead to an overrun of the initial budgets and a delay in the completion date. Many studies and researches have recognized factors that lead to increased project cost. After deep investigation of the previous literature review, we highlight major causes of this overrun. Twenty factors, which affect the cost of any project, have been identified. Engineers and researchers who identified these factors believed that we could improve the cost estimates for any projects by mitigating the influence of these factors.

Introduction:

Definition

By definition, cost escalation is a change in the initial budget of various goods or services of a given economy in a certain period. In construction projects, it refers to the additional amount of money required to execute and construct a project over the primary budget. Cost escalation occurs if the actual costs exceed the previous estimates. Escalation and inflation are almost similar except that escalation is for a particular item or a group of items in a project. For a long period, escalation will seem to be more-or-less equal to inflation since there is an up and down shift of the market supply and demand, unless efficient changes occur or there is an emergence of sustained technology in the market.

Examining the cost variation is usually calculated through price index measures (PIM), Wholesale Price Index (WPI), or Consumer Price Index (CPI). Unfortunately, the indices can be hard to establish since escalation can emerge in a micro-market and become difficult to quantify with surveys, unlike inflation.

In the context of project management and cost engineering, escalation is considered as risk funds, which should be part of any project estimates. When escalation is minimal, it can be controlled easily. On the other hand, it is not the best practice to execute, especially when escalation is significant.

Finishing projects on time within the initial cost is an indicator of efficiency. Unfortunately, the construction process is subject to many predicted and unpredicted factors.

1. Objectives of the study:

The main objective of this study is to identify the cost escalation factors in construction in the Eastern Province of Saudi Arabia.

2. Literature Review:

The History of Cost Escalation:

Cost escalation is a global problem almost in every area of the world especially on government highway projects. In India, most of the escalations on government projects come from the delay between the planning stage and the implementation stage. The last statistics show that around 77% of the highway projects in the United States experience cost escalation. For example, the construction of the Holland Tunnel in 1927, which is the longest underwater tunnel ever constructed. Its initial cost estimate done by renowned civil engineer George Washington is $12 million, and the execution will be done in three years. Another chief engineer takes care of the execution of the project, and when doing his analysis found that:

The proposed width is very narrow to accommodate all vehicles.

The concert will not hold the entire load.

The construction method, which is suggested by Gather, is not trivial.

The estimated cost and duration are very low.

These factors lead to the proposal of another scope of work and increased the cost to $28,669,000, and the execution will be done in 3.5 years. In addition, the schedule has also been changed. The inflation in materials and labor led to an increase in the cost of the project by $6 million. Fourteen (14) million has been added to the contract because of the scope creep. The ventilation system has been changed and affected the cost by $4,422,000 because of the change in the scope. These factors and others, such as unforeseen conditions and events, and challenges in controlling cost caused the final cost to be $48.8 million, and the execution will be done in 7 years. Moreover, Zambia faced the same problem over the past years, which spent huge resources on road construction projects. For example, in 2005, 2006 and 2007, the Zambia government spent around US$ 118.7, US$ 227, and US$197 million respectively. Overall Rail projects have the worst project underestimation record of accomplishment with an average cost escalation of 44.7% (Table 1)

Most of the time, estimated project costs increased multiple times during the years of construction. Usually, projects with a long lead-time and high budgets experience this problem more often than smaller projects with a low budget. If we revisit the Holland Tunnel example, we will notice that the cost has escalated eight times during execution. This is due to the scope creep, schedule delay, inflation, cost of labor and materials, unforeseen conditions, change in controlling costs, change in chief engineer’s position and a leak in the work force. In addition, when steel prices rose drastically in 2004, the cost of projects around the world also increased by almost double, from $300/TN to $600/TN.

Current Problem:

Managing execution of any project needs a lot of coordination between the employees and the organizations, and the technical issues need to be resolved in a timely manner. Furthermore, natural resources and materials need to be purchased and coordinated in an efficient way. Unfortunately, construct complex projects are dominated by social, economic, and political challenges. In Saudi Arabia, the construction industry is estimated to grow from the $80.2 billion of contract awards in 2011 to $86.1 billion by 2013 with the majority of the investments coming from the government. For example, the ministry of transportation executes roads projects of a length of more than nineteen (19) kilometers at a cost of forty two (42) billion SR. With this large number of projects, the government faces a major challenge in controlling the cost within a limited time because the many factors can interfere with the effect of the final cost. High demand in housing construction includes Saudi citizens, government public works projects, and housing projects. A shortage in resources such as cement, steel and other construction materials, lack of trained labor, and export of construction materials out of the kingdom lead to cost escalation. Large companies in Saudi Arabia, such as Saudi ARAMCO, SABIC, and Ma’and face this problem because of the gap between the design and the execution time. Another government sector facing the same problem is the education sector. Last statistics show that 700 (around 2.8%) school projects were put on hold due to securing logistics and cost of the land. Since 2003, the Kingdom spent over SR 6 ($1.6) billion to secure the land only.

2.1 Methodology:

Many researches and thorough studies have been conducted in order to find out the major factors leading to cost escalation. These factors were classified based on their nature as internals (controllable) and externals (uncontrollable). Internal factors are those that come from the organization itself and can be controlled under its authority. On the other hand, external factors refer to the factors that are out of the organization’s hands, and there is need to contact another organization such as the government or an act of God.