AN ASSESSMENT OF FACTORS INFLUENCING COST DIFFERENTIAL OF CONTRACT SUM OF BUILDING PROJECT

AN ASSESSMENT OF FACTORS INFLUENCING COST DIFFERENTIAL OF CONTRACT SUM OF BUILDING PROJECT

ABSTRACT

The research study on “An Assessment of Factors Influencing Cost Differential of Contract Sum of Building Project”, to achieve the aim of this research, the following objectives were established: To identify the factors influencing cost differential of contract sum, to assess the factors of cost differential of contract sum of building project and to determine the effects of factors influencing cost differential of contract sum.  The research questions are, what are those factors cause differential, which are the critical factors and what affect the differential on contract sum. The scope focus on the cost differential of contract sum of building contract in Abuja. The instrument used for data collection was structured questionnaire divided into three section stated in appendix and respondents are quantity surveyors, architects and project managers.  The procedures for data collection are primary and secondary source.  The method used for data analysis was percentage and relative important.  Index was also adopted with a five prints scale ranging from 1 (not true) to 5 (completely true).  Forty (40) data was distributed and 30 copies retrieved.  From the findings analysis nominated sub-contractors and nominated suppliers have the highest rank that cause extension of time due to delay of work and supply of goods or materials on site.  The discrepancies of contract drawing is the second rank that causes cost overruns due to change of contract drawing of bill of quantities and specification and also civil commotion due to the strike that cause delays and affect the high cost to the contract sum.  The following recommendations are; the clients or funding agency should ensure that adequate funds and other resources of funds are available before construction work starts and prompt payment should be paid at a contract agreement.  All errors should be corrected during design phase and clearly scope of work should be defined to avoid any discrepancies may likely occur in contract documents

CHAPTER ONE

1.0     INTRODUCTION

It is important to secure project that will satisfy the client’s requirement with regard to the cost, time functions and quality.  According to Ayeni (1997), said contract sum can be defined as a total figure of a contract to carry out the work and it is also a price agreed with the contractor and entered into the contract.  Ogunsemi (1997), actual cost is the total work expenses of work done during execution of work progress from starting stage to completion stage of a project.

The contract sum may be subject to adjustment under the terms of the contract for example; variations, fluctuations, provisional sums, prime cost sums, payment to nominated sub-contractors or nominated suppliers, statutory fees/compliance with the new government order, additional requirement by the employer, substitution of materials, goods and workmanship specified in the contract, payments relating to opening-up and testing the works etc which may affect the contract sum.

One major worry to professionals in the construction industry is the wide gap deviation between actual cost figure and contract sum.  Before a project is embarked upon, bills of quantities are prepared for which the agreed sum becomes the contract sum on which tenders are floated for tenderers to tender.  The contract sum in the bill of quantities is expected not to exceeded after the project but interestingly upon completion when the actual cost is prepared it is realized that there have been deviations, either the contract sum exceeds the actual cost or the actual cost exceeds the contract sum.  If the contract sum exceeds the actual cost, then the general convention is that the remainder is given to the client and it becomes an advantage to the client or the financiers as well as the contractors’ team and that of the consultant.  This may imply that the contractor’s outfit may have employed very stringent cost control mechanisms to keep the construction cost within budget.  The client would have also achieved value for the money committed into the project.  Additionally, the consulting team would have gained the credibility of being able to supervise and manage a construction project within its initial established budget.

However, if the actual cost exceeds the contract sum, additional money will then be required and this becomes a disadvantage to the client, the project’s consulting team, and the contractor as well, causing a whole lot of disappointment on the part of the client.  One other occurrence in Nigeria these days is the abandonment of most funded projects by the government of Nigeria.  The major reason is that, lack of funds to finance the projects in completion stage as estimates prepared, which formed the basis for initiating these projects, have been exceeded.

The actual cost usually stated as the total on the summary of cost is determined after the adjustment of prime cost and provisional sum items, re-measurement of provisional quantities, measurement of variations, valuation of fluctuations, and ascertainment of contract claims.  The express provisions under which the contract sum of a construction project can be altered are normally stated in the conditions of contract.  The quantifiable factors for the adjustment of the contract sum to obtain the actual cost include variations, re-measurement of provisional and prime cost sums, fluctuations, and claims.  The bigger the project the higher the difference between initial and actual cost of construction.  As a project takes longer to be complete, effects of fluctuation are also more pronounced.

Frimpan, et al (2003), that the appropriate funding levels should always be determined at the planning stage of the project so that regular payment could be paid to contractors for work done, that in order to improve contractors managerial skills there is the need for continuous work, training programmes for personnel in industry to update their knowledge and be familiar with project management techniques and processes, that effective and efficient materials procurement and management system should be established within projects, indicating that material procurement mismanagement has the potential to cause major delays to construction projects resulting in otherwise unwarranted cost overruns.

Giwa (1988), allowances made for prime cost in contract bills, cause overruns in contract sum because the actual costs are in most cases, higher. 

Ogunsemi (2007), because the quantity surveyor usually allowed for arbitrary figures.  In fact the amount allowed for, has often led to high figures in order to be on the safer side.  Ogunsemi opined that, the way and manner by which provisional sums are allowed for in the contract bill and later expended has a lot of impact on actual cost of construction project.  The more the provisional sum are inserted into contract bills, the less precise and realistic will be the initial contract sum with respect to the actual cost.

Ogunsemi (2007), an ideal bill of quantities is that, which contain neither prime cost nor provisional sum.  In a study carried out in Nigeria on building projects by the Akewusola during the prosperity period of 1972-1978 the mean of cost overrun was 46.76% out of this 7.79% was contributed by adjustments of prime cost sum while 3.23% from adjustment of provisional sums during the recession period of 1979-1983, mean of cost overrun was 65.83%, out of this were 28.37% contributed by adjustments of prime cost and provisional sums respectively, during the depression period 1984 to date, mean of cost overrun was 22.39% out of which 1.97% and 0.96% were contributed by prime cost and provisional sums respectively.

Azhar et al (2008), cost overrun causes in the construction industry due to some factors as found were fluctuation in prices of raw materials, unstable cost of manufactured materials, high cost of machineries, lowest bidding procurement procedures, poor project site management, poor cost control, delays between design and procurement phases, incorrect and inappropriate methods of cost estimation, additional work, improper planning, unsupportive government policies etc.

Odeyinka et al (2006),  the budgetary reliability of Bills of Quantities (BOQ) in building project procurement and concluded that the difference between the budgeted cost and actual cost incurred differed greatly depending on the project type.  The investigation concluded that with housing projects the percentage deviation from the BOQ was between -3.43% and +3.85%.  With educational project, the percentage deviation was found to be between -3.69% and +17.05%.  The range with regard to commercial projects is between -19.94% and +19.92%.  When refurbishment projects are looked at the percentage deviation was found to be between -10.72% and 36.90%.  This information shows that there can be a huge difference between the budgeted cost and actual cost with commercial projects; this is comparison to housing projects which have a small and acceptable deviation from budgeted cost.  It is therefore important to focus on commercial projects which includes capital projects, with a view on identifying the risks which occur within commercial construction and establishing why the actual cost is so often different from the original budgeted cost.

Ayodele (2004), the effect of the adjustment prime cost and provisional sums are, sub-contractor fully paid for work executed, cost overrun and time overrun whereby the client and their consultants should not be in a hurry about contract documentation, but make sure (as much as possible) that detailed Architectural, Civil, Mechanical and Electrical drawings are made available to the Quantity Surveyor for detailed bill of quantities before tender.

1.1     STATEMENT OF PROBLEM

The client desire is that, the contract sum will be equal to the actual cost if all necessary precautions were taken into consideration at the time of preparation, the question here;

–        What differential will be acceptable by the client? 

–        What are the liability factors that cause these differentials?

–        What way can be minimized?

1.2     AIM AND OBJECTIVES

AIM

A study on the impact of cost differentials between contract sum of building project.

OBJECTIVES

1. To establish contract sum of different building projects.
2. To establish the actual cost of the buildings selected in objective .
3. To establish the impact of the contract sum on the actual building cost.

1.3     RESEARCH HYPOTHESIS

It has been perceived that actual cost is higher than contract sum.

1.4     SIGNIFICANCE OF THE STUDY

To establish data that could be use in control and future building projects.

1.5     SCOPE AND LIMITATION

SCOPE

The study is restricted to contract sum and actual cost statement only ten (10) completed project in Kogi State executed by ten (10) different contractors using cost plus fluctuating fee contract.

LIMITATION

The limitation to the accuracy of the research are limited time, insufficient resource (money), secondly, affection and the hazard nature in which contract document are kept.

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