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CRITICAL FACTORS AFFECTING COST VARIATION IN RESIDENTIAL


CONSTRUCTION PROJECTS IN EGYPT.

Conference Paper · December 2014

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1st International Conference on Innovative
Building Materials
Dec. 28-30, 2014
‫المؤتمر الدولي األول لمواد البناء المبتكرة‬
8302 ‫ ديسمبر‬03-82

CRITICAL FACTORS AFFECTING COST VARIATION IN


RESIDENTIAL CONSTRUCTION PROJECTS IN EGYPT.
Bichoy Samir Tamer Aziz, Mohamed Badawy Abd El-Megeed, Ayman Hussien Khalil.

Structural Engineering Department, Faculty of Engineering, Ain-Shams University, Egypt

ABSTRACT
Cost is one of the major considerations throughout the project management life cycle and can
be regarded as driving force of project success. Despite its proven importance, it is common to
see a construction project failing to achieve its objectives within the specific cost. Cost variation
is a very frequent phenomenon and is almost associated with all residential projects.
Maintaining steady cost projection on residential projects had been recently an issue of serious
concern, both to the client and project contractors. Cost deviation from initial cost plan had been
prevalent on construction sites. However, little or no effort has been made to curtail the
phenomenon, this research work attempts to identify, investigate and rank factors perceived to
affect cost variation in the Egyptian residential projects with respect to their relative importance
so as to offer possible ways of coping with this phenomenon.

1. INTRODUCTION:
It's customary in construction industries to win projects with the lowest bids. Therefore, without
controlling key cost influencing factors, construction companies will not be able to control the
expenditure effectively, which will in turn increase project costs and affect overall profit. In fact,
construction cost overrun is a common problem in construction industries. Flyvbjerg et al. (2002)
pointed out that historically, large construction projects have been plagued by cost and
schedule overruns. Shane et al. (2009) stated that final project costs have been higher than the
cost estimates prepared in too many cases. Doloi (2011) brought up that cost overrun is a
chronic problem for most projects. Love et al. (2013) calculated cost overruns from 276
construction and engineering projects and revealed a mean cost overrun of 12.22%. Kaming et
al. (1997) also proved that construction time and cost overrun in developing countries such as
Nigeria, Saudi Arabia and Indonesia. However, construction overrun is not unique to developing
countries. It is a worldwide issue worsened by the global financial crisis due to increasing price
competition. As construction companies usually rely on various financing approaches to meet
their capital needs during construction, the inherent financial constraint poses further influence
on the overall costs and the ultimate profit if the key cost-influencing factors cannot be
controlled. Therefore, this paper takes the standpoint of the construction companies to explore
and to set key factors that affect project costs during construction.

2. LITERATURE REVIEW:
Past researchers studied the factors affecting construction costs from various perspectives.
However, different countries have different cost factors for consideration; therefore, construction
cost estimating process requires an appreciation of a country’s evaluation about the factors
influencing the practice. Important cost factors being identified from the Nigerian construction
industry are: the shortage of materials, financing methods and payments for completed works,
poor contract management, materials cost, fraudulent practices and kickbacks, and the
fluctuation of material prices, Akintoye (2000) studied the factors influencing project cost
132

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estimating practice in the United Kingdom and categorized them into seven cost factor
groupings, namely, project complexity, technological requirements, project information, project
team requirement, contract requirements, project duration, and market requirement. Kaming et
al. (1997) identified factors influencing construction time and cost overruns in Indonesia and
analyzed the correlation between the two. Dissanayaka and Kumaraswamy (1999) identified
and grouped factors significantly related to time and cost performance and then developed time
and cost overrun models, Al-khaldi (1990) conducted a study aims at identifying factors affecting
construction cost in Saudi Arabia from contractors
and consultants’ view. He found that project size is one of the top five affecting factors from both
contractors and consultants’ view, Al-Zarooni and Abdou (2000) conducted a survey to
investigate variations in UAE public projects’ estimates. They found that the variations (positive
or negative) between feasibility and contract cost, ranging between -28.5% and +36%. They
stated that these variations could be explained knowing that feasibility estimates in the
government agencies are usually budgeted using a Single Unit Estimating, regardless of the
nature of projects and their associated risks or the construction complexity of each building
type, Avots (1983) notice that variation almost exists in the construction work process and it
inevitably can have a significant impact on labor productivity’’. Cost has proven
its importance as the prime factor for the project success. Most of the significant factors
affecting project costs are qualitative, such as client priority on construction time, contractor’s
planning capability, procurement methods and market conditions including the level of
construction activity, T.Elchaig et al (2005) said that, variations will cause problems for everyone
involved in the project. Variations can be originated from numerous factors pertinent to the
construction projects, F.Arian et al (2005) mentioned that project otherwise completed may not
be regarded a successful endeavor until and unless it satisfies the cost limitations applied to it,
S.Rizwan said that the construction projects experience an increase in cost of about 33% on
average, it is at or near the top in the annual rate of business failures and resulting liabilities
compared to other industries Chapman, (2001), Chan and Park (2005) investigation of factors
that contribute to project costs in the Singapore construction industry involved a random sample
survey of the country’s building projects valued at more than US$5 million that were completed
after 1992. The study identified three main groupings which are
the project, contractor and owner/consultant, and dissimilates their characteristics into variables.
The findings show that special project requirements such as degree of high-technology,
contractor’s specialized skills, and public-administered contracts have significant effects on
costs. Other factors include the contractor’s technical expertise and financial management
ability, as well as the owner’s level of construction familiarity.
Chang (2002) identified the reasons for cost and schedule increase and classified them into
three aspects, owner's control, consultant control, and beyond control. Although Chang used
case studies to analyze the reasons and qualify their contributions, he only focused on
engineering design projects. Elhag et al. (2005) mainly took the standpoint of the quantity
surveyors to explore cost-influencing factors. They identified 67 variables which affect pre-
tender construction cost estimates through literature and interviews. These factors are divided
into 6 categories: client characteristics, consultant and design parameters, contractor attributes,
project characteristics contract procedures and procurement methods, external factors, and
market conditions,
Questionnaires were then used to evaluate and rank these factors. Chen and Hsu (2008)
identified and quantified the factors that influence corporate financing. They concluded 4
component groups with corresponding weight to 14 significant factors. Shane et al. (2009)
proposed escalation factors for construction project costs through case studies. They identified
11 internal factors and 7 external factors and verified them with over 20 U.S. state highway
agencies through interviews .Chan (2012) investigated the principal factors affecting project
overheads through questionnaires. Eight factors were extracted from 27 variables. Doloi (2013)
identified 48 major factors affecting cost overruns and analyzed the relationship among the
factors and 3 key stakeholders client, consultant and contractor. The previously referenced

2
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studies successfully utilized literature, interviews, and questionnaires or modified Delphi method
(MDM) to determine the critical factors which impact the project cost. Therefore, based on the
success of the above-mentioned studies and with new concepts introduced to existing methods,
Research on factors affecting the bid/no bid decision in the Saudi Arabian construction
contractors carried out by Bageis and Fortune discovered that the most influential
characteristics affecting the respondents’ assessment of concerning the importance for
decision-making in tendering processes are the size of contractor, contractor’s classification
status and the type of main client, based on the fact that construction cost estimation is
subjective in nature
This paper examines and ranks the cost factors that need to be considered when cost estimates
are prepared in the various stages of the development of the building construction project by
using a survey questionnaire to obtain the perceptions of the randomly selected samples of
building contractors in Egypt. Questionnaires sent via hand delivery to many Egyptian
engineers, estimators and contractors working for 1st category construction companies have
yielded about 80% response rate. The paper also describes the survey’s statistical analyses,
which are comprised later and ranking the cost factors.

3. RESEARCH OBJECTIVE:
the aim of this study is the attempt to determine the factors causing cost variation in Egypt for
residential projects. To achieve this objective, authors invited practitioners and experts
comprising a statistically representative sample to participate in a structured questionnaire
survey. Brain storming was taken into consideration, through which a number of cost variation
factors were identified for constructing residential projects. These factors were short-listed to be
a part of the questionnaire survey and the survey was conducted with experts and
representatives from local general construction firms. The data were analyzed using Relative
Importance Index, ranking and simple percentages to identify their impacts through a survey
from construction firms were discussed. Furthermore, some recommendations were suggested
to cope with these factors.

4. RESEARCH METHODOLOGY:
In this research a survey was conducted through a questionnaire about the factor affecting cost
estimation related to seven groups each group consists of many different factors. The
methodology of this research is listed as follows: A thorough literature review was done and
also opinions from industry experts were taken, through which a number of cost variation factors
were identified in the residential projects. Totally 28 factors were finalized to be part of the
survey questionnaire.
The questionnaire consisted of two parts (A and B) was developed.
In part (A): personal information of the respondent (e.g. work experience in residential projects,
annual amount of work per Egyptian pound collected. Part (B): aimed
to obtain information about causes of cost variation for constructing residential projects
respondents were asked to rate those initially identified 28 factors according to their frequency
and the procedures used to reduce or terminate the difference between the actual and
budgeted cost of residential projects. A survey was conducted through personal interviews in
which respondents were asked to score and rank these factors according to their experience.
Totally 100 construction firms were surveyed by questionnaires, total approached for these
questionnaires equal to 445 out of which 360 responses were received with response rate equal
to 80.89%. Assessment of feedback from questionnaire survey was made. Analysis was carried
out for 360 responses to identify major cost variation contributing factors. Analysis is discussed
in details, on the basis of which recommendations to construct residential projects were made.

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5. Questionnaire survey
5.1. Questionnaire design

The questionnaire design took into consideration the objectives of the study with the aim to
answer the research questions. Great effort and brain storming were done for designing the
questionnaire. Meetings with members of the industry were conducted to identify the right
questions required and to present them in a clear and an unambiguous format. Special care
also was done for phrasing the questions in a language that is easily understood by
respondents. In anticipation that all respondents were not fluent English readers or speakers, an
Arabic version of the questionnaire was developed.

5.2. Contents of the questionnaire

The questionnaire was divided into two sections. The first section contained general information
about the respondents such as: (1) Contact address; (2) Company size; and (3) Type. The
general industry characteristics was listed such as: (1) Years of experience; (2) List of their
projects which had cost variation about budgeted cost; (3) Causes of cost variation and rate
them as a point of respondent’s Views.
The second section addresses causes leading to cost variations. A list of major causes of cost
variations as read from the literature was presented and the respondent was asked to state the
frequency of occurrence of these causes in his projects. Most frequent causes correspond to
‘‘very high effect’’ whereas the least frequent correspond to ‘‘no effect’’ which denies existence
of the condition as a cause. Respondents were given a chance to add other causes and rate
them. A review of these causes and their effects was considered. The questionnaire addresses
the normally adopted controls of cost variations for constructing residential projects and the
administrative procedures set to minimize their impacts. A review of these controls is arranged.
The design philosophy of the questionnaire was based on the fact that they had to be simple,
clear and understandable for respondents, and at the same time they should be able to be
interpreted well by the researcher. The questionnaire has a definite advantage of requiring
smaller time to be responded and is more accurate in the final outcome. Factors causing cost
variation for constructing residential projects in Egypt were identified through the literature
based on previous research together with input, revision and modifications by local experts
where a total of 28 factors were identified. The participants were required to rate the factors in
the way they affect cost variation for constructing residential projects using their own
experiences on building sites. The questionnaire required the respondents to rank these on a
scale with the rating of ‘‘no effect= 0’’, ‘‘very low =1’’ little effect; ‘‘low = 2’’; ‘‘medium = 3’’ and
‘‘high = 4’’ '' very high''= 5 according to the degree of importance on cost variation for
constructing projects. The numbers assigned to the agreement scale (0, 1, 2, 3, 4, 5) do not
indicate that the intervals between the scales are equal, nor do they indicate absolute quantities
.
GROUP (1): PROJECT COMPLEXITY

1. Type of construction. 2. Scale and scope of construction. 3. Complexity of design.

GROUP (2): TECHNOLOGICAL REQUIREMENT

1. Quality of design and specification. 2. Constructability of design. 3. Amount of special


work.
GROUP (3): PROJECT

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1. Site condition / site topography. 2. Level of uncertainty of soil condition.


3. Tendering method. 4. Delivery method. 5. Level of accuracy of cost data.
6. Quality of finishing.

GROUP (4): PROJECT TEAM REQUIREMENT

1. Experience of the type of construction. 2. Number of team member.


3. Availability of qualified management staff. 4. Previous record of claims and disputes.

GROUP (5): CONTRACT REQUIREMENT

1. Contract value. 2. Type of contract 3. Client financial position and cost.

GROUP (6): PROJECT DURATION

1. Duration of contract. 2. Working time (8(R.T) - 12(O.T)).


3. Working shifts (8 – 12) hours. 4. Quantities of expected variation on the project.

GROUP (7): PROJECT RISK

1. Risk according to material variation price. 2. Risk according to Legal rule of country.
3. Risk according to politics of country. 4. Risk according to labor variation cost.
5. Risk according to nature of work.
This questionnaire was filled out by different construction companies, many consultant offices
and many different owners representator who are working in Egyptian construction field.

5.3. Data gathering

Questionnaires were mailed to respondents (consultants, owners, and contractors) and


completed forms were requested to be mailed or faxed back to the researcher, the response for
this request was poor. Another approach of collecting data was used; involved follow up
telephone calls and subsequent visit to firms and work sites, most of data were collected by this
method. Forms were given to respondents to complete, and completed forms were collected
later. In many instances, forms were completed at the meeting; this method has the added
benefit of making clarifications to respondents about questions in forms; it also gave a chance
to the researcher to explore further cost variation management practices and concerns. Over a
period of 8 months, the researcher collected 360 responses from 445 total forms at 100
construction firms; this means the rate of response was about 81%.

5.4. Sample size and selection

the studied target includes consultants, owners, and contractors. A systematic random sample
was selected to ensure a representative sample of all targeted respondents. Accordingly, the
total number ‘‘N’’ of considered classified contractors of construction companies in Egypt
(current members of the Egyptian Federation for Construction & Building Contractors [EFCBCs])
who have valid memberships under the available seven grades for the category of integrated
building works is 19,789 as on 1st of March, 2014. Based on that, a total of 100 construction
companies in Egypt were surveyed as a sample representing the total of 19,789 construction
companies. The sample was selected randomly from a combination of contractors under all
contractors’ grades. Researcher received, three or more completed questionnaire from each
surveyed company representing different levels of experience but including at least the input of
one project manager. The total number of completed questionnaires obtained from the 50
surveyed contracting companies was 180, 30 consultants company was 131collected

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questionnaires and 20 owners company was 49 collected questionnaires. Then; the overall
number of the completed questionnaires. Included in this study is 360 which comprise the
statistical data sample size that represents consultants, owners and contractors.
The sample size is statistically determined as was shown in this Section. According to the study
by Shash (1993), there are three factors that should be considered in determining the sample
size: standard error of sampling distribution, population size, variation in answers.
The sample size can be determined using the following formula:
n = n'/ (1+n'/N) Where;
n = sample size for desired level of precision.
N = size of population limited to infinity
n' = S2/V2 V
= the standard error of sampling distribution = 0.05 S
= the standard deviation in the population elements p
= proportion of population expected to choose one of the response categories.
S2 = p (1-p). As we assume that the answer will be homogeneous and the confidence level is
95%, then p value will be 0.1667. As N=∞, then n'/ n=0 so n= n'
2 2 2
as example for contract category n=180 and n= n' = S /V , and S = p (1-p).
2 2
180= 0.1667*(1-0.1667) /V then V =0.00077173 then Vcontractors =2.77%.
Table (1) shows v (standard error) for each member that participated in replied questionnaire

Table 1

The details of various professional cadres of respondents with their classifications were
mentioned for clarifications. To consider the effect of different levels of the participants’
experiences, the results are grouped into four groups: ‘‘Group 1’’ for respondents’ experience till
5 years; ‘‘Group 2’’ for respondents’ experience above 5 till 10 years; ‘‘Group 3’’ for
respondents’ experience above 10 till 15 years; and ‘‘Group 4’’ for respondents’ experience
above 15 years, depicts this group. Table (2) shows the members of respondents for each
group.

Table 2

Table (3) shows the various economy sectors that belong to the respondents, which partook in
the questionnaire survey.

Table 3

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Table (4) shows final result of analysis and ranking of factors.

Table 4
Relative
Factor Overall
Factor description importance
(I.D) ranking
index (RII%)
2.3 AMOUNT OF SPECIALIST WORK 67.34 1
1.2 SCALE & SCOPE OF CONSTRUCTION 65.30 2
1.3 COMPLEXITY OF DESIGN 63.34 3
QUANTITIES OF EXPECTED VARIATION ON THE
6.4 63.30 4
PROJECT
2.1 QUALITY OF DESIGN &SPECIFICATION 63.00 5
2.2 CONSTRUCTBILITY OF DESIGN 62.00 6
4.3 AVAILABILITY OF QUALIFIED MANAGEMENT STAFF 61.70 7
1.1 TYPE OF CONSTRUCTION 61.30 8
5.1 CONTRACT VALUE 60.34 9
7.5 RISK ACC. TO NATURE OF WORK 60.33 10
7.1 RISK ACC. TO MATERIAL VARIATION PRICE 59.70 11
3.1 SITE CONDITION / SITE TOPOGRAPHY 59.30 12
3.5 LEVEL OF ACCURACY OF COST DATA 58.70 13
3.6 QUALITY OF FINISHING 58.67 14
4.4 PREVIOUS RECORD OF CLAIMS AND DISPUTES 58.30 15
4.2 NO. OF TEAM MEMBER 57.72 16
5.2 TYPE OF CONTRACT 57.34 17
3.4 DELIVERY METHOD 57.00 18
4.1 EXPERIENCE REGARDINGTHE TYPE OF CONSTRUCTION 56.35 19
5.3 CLIENT FINANCIAL POSITION & BUDGET 56.30 20
6.1 DURATION OF CONTRACT PERIOD 54.36 21
7.2 RISK ACC. TO LEGAL RULE OF COUNTRY 54.34 22
3.3 TENDERING METHOD 54.00 23
7.4 RISK ACC. TO LABOR VARIATION COST 54.00 24
3.2 LEVEL OF UNCERTAINTY OF SOIL CONDITION 52.33 25
6.3 WORKING SHIFTS (8 - 16 - 24) HOURS 51.00 26
6.2 WORKING TIME (8 (R.T ) - 12 (O.T ) ) HOURS 46.67 27
7.3 RISK ACC. TO POLITIC OF COUNTRY 44.73 28

The top five factors are:


1.Amount of specialist work 67.34%. 2. Scale and scope of construction 65.3%.
3. Complexity of design 63.34%. 4. Quantities of expected variation of project 63.30%.
5. Quality of design & specification 63%.

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The lowest five factors are:


1.risk according to politic of country 44.73%. 2. Working time ((8R.T)-(12O.T)) Hours 44.67%.
3. Working shifts (8-16) hours 51%. 4. Level of uncertainty of soil condition 52.33%.
5. Risk according to labor variation cost 54%.
The results showed that the lowest effect factor identified by the obtained results is ‘‘Risk
according to politic of country’’ related to ‘‘Project risk Category’’ the less effect with Relative
Importance Index was 44.73%.

5. SCORING
As shown the total number of all grouped respondents for each selection per factor, for
analyzing data, (RIIi ) Relative Importance Index technique was used per factor for each group
of respondents. This index was computed by using (Tawil et.al 2008).
RIIi % = ((5n5) + (4n4) + (3n3) + (2n2) + (1n1) + (0n0)) / (5(n5 + n4 + n3 + n2 + n1+n0))
Where RIIi Relative Importance Index of each factor for each group of respondents; and n0; n1;
n2; n3; n4; and n5 are the numbers of each grouped respondents who selected: ‘‘no effect= 0’’;
‘‘very low =1’’; ‘‘low = 2’’; ‘‘medium = 3’’, ‘‘high = 4’’ and '' very high''= 5
Ex. For factor 2.3
RIIi%=((5*18)+(4*204)+(3*66)+(2*42)+(1*24)\(5*360) = 67.34%.

6. ANALYSIS AND RESULTS:


The factors causing cost variation for constructing residential projects in Egypt have to be
looked at from different perspectives. The Important Index had been calculated as final outlined
results. These factors was ranked and categorized based on their Importance Index. It was
noticed that the first factor ‘‘Amount of specialist work’’ related to ‘‘technological requirement
Category’’ had the highest effect with a Relative Importance Index equals 67.34% and last one
‘‘Risk according to politics of country’’ related to ‘‘Project risk Category’’ has the least effect with
a Relative Importance Index equals 44.73% from 28 factors. The perceived effect of each of the
28 factors explored on cost variation for constructing residential projects in Egypt was
determined. The relative importance indices, rank within the corresponding category, and the
overall ranks of the factors were investigated and presented. The ‘‘category’’ importance indices
are, furthermore, quantified; and a comparison among their relevant importance.

7. CONCLUSION
To improve controlling of cost variation for constructing residential projects in Egypt; one must
identify and recognize the influence of the main factors affecting it. This research has identified
and, based on the quantified relative importance indices, determined the influence ranks of 28
factors causing cost variation for constructing residential projects in Egypt. Identifying the cost-
influencing factors is the first step toward addressing such problem. If construction companies
can effectively control these key factors and formulate prevention strategies, it is possible not
only to avoid cost overrun, but also to increase the overall profits for the project. In order to
factually provide the key cost-influencing factors to the construction companies, the cost-
influencing factors are analyzed and specified from the perspectives of the construction
companies. It must have clear understanding of the scope of the contract and ask the clients for
necessary clarifications regarding the drawings and specifications prior signing the contract to
avoid pricing disputes. Additionally, during project implementation, the contractors should fully
implement cost-control measures. Construction companies can also use the remaining factors
to conduct a thorough investigation that is tailored to the characteristics of the project and the
client prior to the commitment of the project commences in order to minimize uncertainties and
reduce the chance of cost overruns. The explored factors were classified under the seven

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primary classifications. The results were compared by studying all participants to cope up with
all the factors that cause cost variation for constructing residential projects in Egypt. This study
reveals the important causes of cost variation for constructing residential projects overall.

9.RECOMMENDATIONS:
Based on the findings of this research shown with main conclusion listed above and in
reference to findings of previous studies shown in the literature review, the following
recommendations are made: (1) Improve owner’s project management procedures (2) Include
an appropriate contingency allowance in the pre-contract estimate; (3) Spend more money on
the design phase issue results in less cost variation; (4) Select competent and reliable
contractor to carry out the work and hire supervision engineer to independently supervise work
progress and ensure timely delivery of materials. All these reduce the cost increase during the
implementation phase; (5) The establishment of an appropriate set of rules, regulations and
specifications concerning the qualifications of construction firms is a pre-requisite to the
elimination of unfit contractors from the construction industry; (6) Ensure adequate and
available source of finance; (7) Perform a preconstruction planning of project tasks and
resource needs.

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