Investigate effects of unpredictable price fluctuation on the capacity of

construction contractors.

DIRE DAWA UNIVERSITY

DIRE DAWA UNIVERSITY INISTITUT OF

TECHNOLOGY
School Of civil engineering and architecture
Department of construction engineering
Thesis Proposal Title: - investigate effects of unpredictable price fluctuation
on the capacity of construction contractors.
Prepared by:-

Name ID

1. Daniel gezmu 1001786

2. Sabadin suleja 1001138
3. Muluken hayamo 1001686
4. Yosef tsehay 1001783
5. Elul tewelde 1002588
6. Betelhem kefelegn 1001486

Advisor name: Mr. biniyam A.

Submission date:

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 Investigate effects of unpredictable price fluctuation on the capacity of
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Table of content
CHAPTER ONE ...................................................................................................................... 4
1. INTRODUCTION .................................................................................................................... 5
1.1. Background of the Thesis .................................................................................................................. 5
1.1.1. Focus on the Construction Sector ................................................ Error! Bookmark not defined.
1.2. Problem Statement ............................................................................................................................. 5
1.3. Objective ............................................................................................................................................ 6
1.3.1. Main objective ............................................................................................................................ 6
1.3.2. Specific objectives ...................................................................................................................... 6
1.4. Research questions ............................................................................................................................ 7
1.5. Significance of the Research .............................................................................................................. 7
1.6. Scope and Limitations........................................................................................................................ 7
CHAPTER TWO .......................................................................................................................... 8
2. LITERATURE REVIEW ........................................................................................................ 8
2.1. Price Fluctuation ................................................................................................................................ 8
2.1.1. Inflation and the Construction Industry ....................................... Error! Bookmark not defined.
2.2. Price Fluctuation in Relation to Construction Contractors and Compensation Practices .......... Error!
Bookmark not defined.
2.3. Effects of Price Fluctuation................................................................. Error! Bookmark not defined.
2.4. Price Estimation Methods and Setting of Prices ................................................................................ 9
2.4.1. Basic components of pricing ....................................................................................................... 9
2.4.2. Cost component ........................................................................................................................ 10
2.4.3. Profit component ....................................................................................................................... 11
2.5. Pricing techniques ............................................................................................................................ 11
2.6. Risks in Pricing ................................................................................................................................ 13
2.7. Principles of management of risk and uncertainty .............................. Error! Bookmark not defined.
2.8. Types of Construction Contracts......................................................... Error! Bookmark not defined.
CHAPTER THREE .................................................................................................................... 15
3. RESEARCH DESIGN AND METHODOLOGY ................................................................ 15
3.1. Study Area ....................................................................................................................................... 15
3.2. Research Design............................................................................................................................... 15
3.3. Populations....................................................................................................................................... 15

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 Investigate effects of unpredictable price fluctuation on the capacity of
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3.4. Sample Size...................................................................................................................................... 15

3.5. Source of data .................................................................................................................................. 15
3.5.1. Primary source of data .............................................................................................................. 15
3.5.2 Secondary source of data ........................................................................................................... 16
3.6. Data Processing and Analysis .......................................................................................................... 16

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List of figure
Fig 2.1 Alternative related to managing price changes……...………… 9
Fig 2.2: Principal causes of escalation………………………………...… 14

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CHAPTER ONE
1. INTRODUCTION
1.1. Background
Ethiopia is still a developing country and there is a huge development activity yet to be
undertaken. One of the key factors to ensure a desired level of economic growth in a developing
country like ours is achieving a significant amount of investment by the private as well as the
public sector. In this development activity the infrastructure development sector becomes the one
in which the construction industry is a front line role player. However the general state of the
domestic construction industry in Ethiopia is reportedly characterized by:
 An inadequate capital base.
 Old and limited numbers of equipment.
 Low level of equipment availability and utilization.
 Deficiencies in technical, managerial, financial and entrepreneurial skills.
 Very limited experience or participation in road and bridge works and provision of
related consulting services.
The above listed deficiencies have been the subject of many discussions over the last period of
time. This research work also focuses on the effects that could result on the capacity of
construction contractors as a result of unpredictable price fluctuations.

Construction is continual activity across the globe. In most countries, construction activity
constitutes 6-9% of the gross domestic product (GDP) and constitutes more than half of the fixed
capital formation as infrastructure and public utilities capital works required for economic
development (Chitkara 2003). In Ethiopia, construction constituted 3.8-5.0% of the GDP
between the year 2001 to 2007 (Gebremedihine Birega 2006). For instance, the Ethiopian
Government had allocated an average of 58.2%of its annual capital budget for Public
Construction Projects between 1996/97 and 2001/02 (Wubishet Jekale 2004).

1.2. Problem Statement

The research problem of the study investigate the effects of unpredictable price fluctuation on
the capacity of construction contractors in dire dawa city.

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 Investigate effects of unpredictable price fluctuation on the capacity of
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The construction industry in Ethiopia is challenged by several problems which tend to confront
the sector and making efforts at developing the construction industry is very difficult and
complex. The underlying problems of the construction sector is related to
 Deficiencies and market price fluctuation of the inputs required for the construction
(GebreMichael Paulos, 2002).
The deficiencies and market price fluctuation of construction inputs is also greatly hindering the
growth of the construction industry. The availability and affordability of building materials in
quality, quantity and variety is very important for the development of the construction industry
(Gebre-Michael Paulos, 2002).

The unpredictably occurring sharp price increases lead contractors into failure to complete their
projects within the acceptable margin of time and quality for the client and fail to complete
within the planned cost margin for themselves. This hinders their growth in all aspects.

Construction contractors are the major actors in any construction project there for they are the
ones who take up all the responsibility to undertake the whole construction activities and related
tasks. These major tasks include procurement of materials, deployment of all the necessary
machinery, equipment and human resource, managing the financial resources and converting all
resources into the intended project outputs. Therefore, among the different stake holders
involved in the construction industry, contractors are the ones at the front line to play the largest
role in realizing projects. Hence, on due course of their operation they are the ones to first face
the problems and challenges encountered within the industry.

This research work focuses on the effect of unpredictable price fluctuation of these physical
resources on construction contractors. The essential resource ingredients that must be considered
in the construction of a project are physical resources (Material and Machinery), manpower.

1.3. Objective
1.3.1. General objective
The general objective of this study is to investigate effects of unpredictable price fluctuation on
the capacity of construction contractors.

1.3.2. Specific objectives

1. To investigate the specific characteristics of inputs price used in the construction.

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 Investigate effects of unpredictable price fluctuation on the capacity of
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2. To identify the relation between unpredictable price fluctuation and capacity of

construction contractors.
3. To develop strategies or interventions for minimizing the adverse effects of
unpredictable price fluctuation of construction contractors.

1.4. Research questions

For accomplishing the above stated objectives the research will have post the following
questions.
1. How is the price of construction inputs behaving?
2. What does the compensation practice look in terms of contractor?
3. Which strategies or interventions developed for minimizing the adverse effects of
unpredictable price fluctuation?

1.5. Significance of the Research

 Seek for possible means of minimizing the resulting adverse effects, particularly on
domestic contractors.
 Provide information about how much is the price fluctuation of the inputs.
 Assess methods adopted by contractors for Market price data collection and pricing
method.

1.6. Scope and Limitations

 The scope of the study is limited to effects of unpredictable price fluctuation on the
capacity of construction contractors in dire dawa city.
 The study populations intended for the research work is domestic contractors of class 3
and above.
 The inputs considered in the research are material, equipment, manpower and overhead
cost.

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CHAPTER TWO

2. LITERATURE REVIEW

2.1. Price Fluctuation

Generally defined as the rise or fall of price of goods, materials and services on the markets.
Price fluctuation can occur at any market, i.e. at international markets, local market and/or at the
labor market. The reasons for fluctuation are several, the major ones being (Stukhart 1982):
Government’s regulation on oil price, shortage or excess supply at market and increase or
decrease in demand of a certain item. Government’s regulation on oil price: the price of oil
governs the cost of materials since oil is related to production or transport of materials. When the
government changes the price of oil, the price of materials also changes accordingly. Shortage or
excess supply at market: the availability of certain item on market has an inverse relationship
with the price of the same on the market. If an item is supplied in excess amount on the market,
its price will reduce from its normal price, and inversely, if there is a shortage of the same item,
then its price will rise.
2.1.1 Price Fluctuation in Construction

Mossa, (2013) investigated that, the common fact of price escalation is a delay, which affects
both clients and contractors. Furthermore, long delays significantly increase the project's cost.
Excessive price increases necessitate additional budget, which depletes the country's limited
financial resources, resulting in further budget shortfalls for construction projects. Price
escalation causes excessive delays in projects, which leads to additional price increases as the
project's duration is extended. Building materials are materials that are used in the construction
process from beginning to end. Cement, steel, fine aggregate, coarse aggregate, brick, tile, and
wood are examples of basic construction materials. The rise in building material prices has
become a common occurrence, affecting all three construction stakeholders ( Jithin, et al., 2021).
Hailu, et al., (2015) investigated that Contractors, consultants, Client, and End-user are the
construction industries most affected by price escalation, according to the study. Regulatory
agencies are unaffected by price hikes. Construction work is generally carried out under the pre-
determined contract price and contract agreement. However, there may be certain changes in

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economic conditions, such as sharp price fluctuations, on which the construction contract is
founded and carried out over a lengthy time. Most countries have controlled the escalation clause
in the law or the terms of construction contracts to deal with the potential (Mohammed Ercan,
2017). Hailu, et al., (2015) stated that the number of construction projects that have experienced
price increases in Ethiopia is higher than the number of projects that have experienced price
increases in other countries, necessitating further research. This is one of the main reasons that
drew the researcher to investigate it.
Figure 2.1. Depicts a few options for dealing with price increases. When price adjustment
implementation is not included in the contract, as indicated in the diagram, the client/employer
will not share or assume substantial risk. In this instance, the contractor bears practically all of
the risk. On the other hand, if the contract allows for price adjustments, the client/employer will
bear the majority of the risk (Mohammed Ercan, 2017).

Figure 2.1 Alternative related to managing price changes

2.2 Price Estimation Methods and Setting of Prices

2.2.1. Basic components of pricing
Pricing in construction projects is a critical step that has to be undertaken very carefully. It is a
process whereby the organization interested in the construction of a project attempts to determine
the expenditure of resources such as materials,

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 Investigate effects of unpredictable price fluctuation on the capacity of
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Manpower, machineries, finance and time necessarily to realize the intended project and also
determine the revenue it expects from the execution of the same. Therefore, it can be put as
pricing as two major components: the cost component and the profit component.

2.2.2. Cost component

The cost component consists of the direct construction cost, indirect construction cost and risk
allowances. (Tadesse Yemane, 2006) has categorized the cost components in the following
manner:
a) Direct construction costs
The direct costs mainly include material, labor, equipment and subcontract costs as described
below.
a) Direct material costs
b) Direct labor costs
c) Direct equipment costs
d) Subcontract costs
Direct construction costs are all costs that can be specifically recorded with an activity in a
project. The direct cost cover the largest portion of the total project cost and these costs can be
budgeted, monitored and controlled far more effectively than the indirect costs.

b) Indirect costs
Indirect construction costs are all costs, which cannot be directly booked under a specific activity
in a construction project but required to keep the whole project operational. These costs are also
called overhead costs, which mainly include the head office and site overhead costs as listed
below.

1. Head office costs

2. Site overhead costs
c) Risk allowance
It is very essential to incorporate risk allowance in pricing for construction project pricing. This
helps to compensate the negative impacts of different risks such as contractual, technical,
political and economic risks. Contractual risks are usually stemming from the contract
agreements with the project owner, subcontractors and suppliers. Technical risks are associated

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usually with the clarification of the technical specifications, working drawings, construction
technology and difficulties in understanding new method of constructions.
2.2.3. Profit component
After carefully estimating the cost of a project, contractors need to decide on the amount of their
competitive profit they like to make from the project. The profit margin they set depends on the
scale of the project and the level of competition between bidders. Sometimes, large profit
margins are adopted in cases of uncertainty. Any business company operating a profitable
business in Ethiopia is obliged to pay income tax based on the prevailing income tax law.

2.3. Pricing techniques

As it is possible to construct an image of a prehistoric animal such as the brontosaurus from only
a few key bones and relics, so a theory of cost estimating may possibly be found on a few factual
details. Factors affecting pricing are (Skitmore 1988):
 Types of projects • Sizes of contracts
 Geographical locations • Numbers of bidders
 Ability of ‘pricer’ • Level of information
 State of market
There are different techniques of cost estimation that can lead to the final pricing. The Project
Management Body of Knowledge, 2004 puts the different cost estimation methods as follows:

1. Analogous Estimating
Analogous cost estimating means using the actual previous cost of similar projects as the basis
for estimating the cost of the current project. Analogous cost estimating is frequently used to
estimate costs when there is a limited amount of detailed information about the project (e.g., in
the early phases). Analogous cost estimating uses expert judgment. Analogous cost estimating is
generally less tedious than other techniques, but it is also generally less accurate. It is most
reliable when previous projects are similar in fact, and not just in appearance, and the persons or
groups preparing the estimates have the needed expertise.

2. Determine Resource Cost Rates

The persons determining the rate or the group preparing the estimates must know the unit cost
rates, such as staff cost per hour and bulk material cost per cubic meter, for each resource to

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estimate schedule activity costs. Gathering price quotations is one method of obtaining rates. For
products, services, or results to be obtained under contract, standard rates with escalation factors
can be included in the contract. Obtaining data from commercial databases and seller published
price lists is another source of cost rates. If the actual rates are not known, then the rates
themselves will have to be estimated.

3. Bottom-up Estimating
This technique involves estimating the cost of individual work packages or individual schedule
activities with the lowest level of detailed information. This individual costs are then
summarized or “rolled up” to higher levels for reporting and tracking purposes.
4. Parametric estimating
Parametric estimating is a technique that uses a statistical relationship between historical data
and other variables (e.g., square meter in construction, lines of code in software development,
required labor hours) to calculate a cost estimate for a schedule activity resource. This technique
can produce higher levels of accuracy depending upon the sophistication, as well as the
underlying resource quantity and cost data built into the model. A cost-related example, involves
multiplying the planned quantity of work to be performed by the historical cost per unit to obtain
the estimated cost.

5. Project Management Software

Project management software, such as cost estimating software applications, computerized
spreadsheets, and simulation and statistical tools, are widely used to assist with cost estimating
such tools can simplify the user of some cost estimating techniques and thereby facilitate rapid
consideration of various cost estimate alternatives.
6. Vendor Bid Analysis
Other cost estimating methods include vendor bid analysis and an analysis of what the project
should cost. In cases where projects are won under competitive processes, additional cost
estimating work can be required of the project team to examine the price of individual
deliverables, and derive a cost that supports the final total project cost.
7. Reserve Analysis
Many cost estimators include, also called contingency allowances, as costs in many schedule
activity cost estimates. This has the inherent problem of potentially overstating the cost estimate

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for the schedule activity. Contingency reserves are estimated costs to be used at the discretion of
the project manager to deal with anticipated, but not certain, events. These are “known
unknowns” and are part of the project scope and cost baselines one option to manage cost
contingency reserves is to aggregate each schedule activity’s cost contingency reserve that is
assigned to a schedule activity.
2.4. Risks in Pricing
The role and contribution of the Construction Industry are pivotal and the primary conduits for
infrastructure development and maintenance. In construction industries and the various project
stages, one of the silent day to day realities are risks and uncertainties. And construction industry
is inherently risky and uncertain and these arise from the nature of the industry itself. These are
faced due to evolving and emerging conditions through project lifecycles and project
environmental Circumstances. It is important to account for escalation when project completion
time exceeds a year. Escalation is generally tied to inflation, and it is advisable to have an
escalation clause in construction contracts. Escalation should not be included in a project
contingency. Project specific uncertainties give rise to risk that should be accounted for in the
project contingency. This includes:
 the project delivery system, i.e., the project ownership, the construction management
approach used (traditional, phased, or fast-track construction), and the type of
contract;
 project state of technology, which includes the process, material, and equipment;
 project location;
 project complexity;
 logistics, access to the project site and site characteristics;
 project definition stage, generally the more information the less uncertainty and lower
the inaccuracy in estimating the project cost;
 quality of design;
 Project schedule—generally the tighter the schedule becomes, the higher the risk of
experiencing a cost overrun; and
 Project procurement plans and policies.

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Fig 2.2: Principal causes of escalation

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CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1. Study Area

The research will be conducted on domestic construction contractors in dire dawa city. The city
is about 500km from addis ababa located on central east of Ethiopia. Based on Central Statistical
Agency of Ethiopia, 233,224 peoples are living in the city of dire dawa.
3.2. Research Design
The researches try to explore how domestic contractor’s capacity is affected due to unpredictable
price fluctuation. It will be conducted first by identifying effect of unpredictable price fluctuation
through literature review. Secondly through questionnaire Survey approach develop and
distribute to different domestic contractors and finally assess’ effect of unpredictable price
fluctuation on the capacity of construction contractors.
3.3. Populations
Unpredictable price fluctuation is a problem of all contractors of different class and category.
But since they undertake projects of huge budget, the higher class contactors are more vulnerable
for the adverse effect. Therefore, the study population include for the research work was
domestic contractors of class 3 and above.

3.4. Sample Size

Domestic contractors of class 3 and above are more affected by this problem and purposive or
judgmental sampling technique used priority needs across the most affected area because of this
reason select purposive sampling technique.
3.5. Source of data
Our proposal considers the sources on which to base and confirm their Research and Findings.
They have a choice between primary Data and Secondary or use of both which is termed as
Triangulation or Dual methodology.

3.5.1. Primary source of data

Primary data is the data collect by our self. The kind of primary data source collection instrument
we used is Questionnaires.

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3.5.2 Secondary source of data

Secondary data sources are a sources which has been Already exists .We used such kind of
secondary Data Sources are: Previous research, Official Statistics, Web Information, Historical
data and information, Literature ,Reports etc… ,

3.6. Data Processing and Analysis

Analysis of the data obtained from questionnaires has processed which involves simple statistical
approach, examining, tabulating and categorizing based on the chosen measurement scale.
Hence, the analysis was carried out based on the responses of the participants and the collected
data were be analyzed by using frequency distribution. And also the data processing task will be
done with Microsoft excel and the analysis will be using Microsoft word. Accordingly, after
analysis has been made an attempt is made to systematically build up conclusions and
recommendations about the study from the data analysis. Finally, the researcher has given its
conclusion and recommendation, based on the analysis and discussion.

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CHAPTER FOUR

4. ANALYSIS AND DISCUSSION

In recent years, the price fluctuation of construction inputs in the country has become severe and
unpredictable. Most construction contractors, especially domestic contractors, face strong
challenge during offering their price due to the high uncertainty of predicting what would happen
in the course of the project execution. The challenge is even more severe not only as a result of
the dynamically escalating market price but also as a result of the poor compensation system and
practice in the event of price fluctuation. The research problem has been assessed in this research
by collecting data with the help of the chosen research instrument; questionnaires, distributed to
domestic construction contractors.

Questionnaires were distributed to different contractor members (sit engineers, office engineers,
professional engineers and project manager) to get the accurate information from those
respondents in order to have our researches a clear and precise description. 11 responses were
received out of the 15 targeted respondents,

The research analysis and discussion were done based on the responses from the distributed
questionnaires. The response rate was 73.3% which can indicate a good confidence limit.

Table 4.1 summary questionnaires response rate

Responden0t Distributed Responded Response

Rate (%)

Construction contractors 15 11 73.3

TOTAL 15 11 73.3

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4.1. Specific characteristics of prices of inputs of construction

From the response of the contractors who responded to the questionnaire survey, it can be seen
that the degree of predictability of material price fluctuation is very low. In other words, the
material price fluctuation is unpredictable that contractors cannot easily determine how the price
of materials can go on. And regarding labor and equipment’s, it can be seen that the price
fluctuation of these inputs can be fairly predictable, that is contractors can fairly determine how
the price of these inputs will go on based on other factors.
Table 4.2 Degree predictability price of construction input by respondent

Item of Highly Predictable Fairly Less Unpredictab

inputs predictable predictable predictable le

No % of No of %of No of %of No of %of No %of

of respon respon respon respon respon respon respon of respon
res dents dents dent dent dent dent dent res dent
po po
nd nd
ent ent
s

materials 1 9.09 2 18.1 1 9.09 0 0 7 63.6

labor 1 9.09 2 18.1 4 36.3 2 18.1 2 18.1

Equipmen 0 0% 1 9.09 7 63.6 2 18.1 1 9.09

t

The above table shows the degree of predictability as we received and analyzed depending on the
respondents answer. From the table above and figure below helps to show which of the

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construction inputs were predicted in a well manner and which are not based on the percentages
of predictability.

63.60% 63.60%

36.30%

18% 18% 18.10%18% 18.10%

9% 9% 0% 9% 0.00% 9% 9.09%

MATERIAL LABOR EQUIPMENT

highly predictable predictable fairly predictable less predictable unpredictable

Figure 4.1 Degree of predictability price fluctuation of construction input from indent

In any case, it can be seen that the occurrence of price fluctuation on construction inputs
especially on construction materials is unpredictable and is generally difficult to determine.

4.2. Price fluctuation pattern of construction inputs

The major construction inputs that are used in the construction those prices fluctuates are:-
 Material
 Labor
 Equipments and
 Overhead cost
It is also known that under each inputs there are sub categories that are included and
fluctuates,for instance under construction materials cement, aggregate,sand ,reinforcement etc
and under labor skilled and unskilled labors are the sub categories which under takes fluctuation..

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Table 4.3 Price fluctuation pattern of construction input

Degree of fluctuation
Major Very highly Highly increase Moderate Minor
increase increase increase

Item of
input No of % of.R No of % of R No of % of R No of % of R N0 R %
R R R R

Materi 1 9.09 1 9.09 18.1 9.0

al 6 54 2 1 9
Skilld 3 27.1 3 27.1 1 9.09 1 9.09 3 27.
1
Unskil 2 18.1 3 27.2 1 9.09 2 18.1 3 27.
ld 1

2 18.1 1 9.09 4 36.3 2 18.1 2 18.

Equipe 1
t
Over 2 18.1 9.09
head 1 2 18.1 2 18.1 4 36.
3
The questionnaire was developed in such a manner to let the respondents give their response in
same manner as described above by listing the items that showed price fluctuation. And the
respondents have listed the major materials that showed price fluctuation. In addition, the
respondents also rated the price fluctuation pattern of the listed inputs. To this end 54% of the

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respondent agreed that the price fluctuation pattern of construction materials shows a major
increase, which means the price of materials is increasing by more than 50%.

60%

50% 54%

40%

30% 36.30% 36.10%

27.10% 27.10%
27.10% 27.10%
27.10%
20%
18.10%
18.10%
18.10% 18.10%18.10% 18.10%
18.10%
18.10% 18.10%
10%
9.09% 9.09%
9.09%9.09%
9.09%
9.09% 9.09% 9.09%
0%
major very high high moderat minior

matrial skilled un skilled Equipment over head

Figure 4.2 percentage of respondent on price fluctuation pattern of construction input

4.3. Data sources for pricing

The first step in pricing is to collect reliable market data from market and other data
sources. Similarly the surveyed contractors have also agreed that they conduct price data
collection to be used for pricing. To this end, from the survey, it can be seen that most of
the surveyed contractors conduct simple market survey to collect price data for the inputs
of the particular project they are giving their price. Figure 4.3 represents the summary of
price data collection methods adopted by contractors.

82%

9% 9.09%

SIMPLE MARKET SURVEY CENTRAL STATISTICS AGENCY NATIONAL CONSTRUCTION OTHER SOURCE
PUBLICATIONS MAGAZINE BY ECCA

Figure 4.3 Market price data collection methods adopted by contractors

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4.4. Assessment of pricing methods

After collecting the market price data the steps next to it is identifying the methods of pricing
methods and pricing of it. As it explained in chapter two there are different methods that can be
used by the company for pricing, the best ones are analogous estimation, parametric estimation,
bottom up estimation and computerized tools. Selecting the best one from these is the contractors
work. In addition to this the type of contract agreement also govern to select the type of pricing
methods, because of this some contract types requires compensations for items of inputs which
its price escalates.
Accordingly, the surveyed contractors were asked what methods they use to convert the raw
market price into offer price. In addition, they were asked whether they predict price fluctuation
and what methods they adopt to accommodate price fluctuation. Figure 4.4 represents the
summary of responses on pricing methods adopted by contractors.

36%

27.00%

18%

9% 9.09%

ANALOGOUS PARAMETRIC BOTTOM-UP COMPUTERIZED OTHER

ESTIMATION MODELING ESTIMATION TOOLS

Figure 4.4 Pricing methods adopted by contractors

It can be seen that the majority of the respondents use computerized tools for pricing. In fact, it
should be known that the computer based tools that the contractors use are not well developed
computer programs. Rather, the tools are developed on spread sheet based program, Microsoft
Excel. And these computer based tools are developed mainly to ease the calculation of cost
breakdown of work items. Here it can be seen that the degree of how detail that particular work
item is broken down depends on the estimator. Therefore, even though same computer based tool
can be used, the inputs to the adopted tool make quite remarkable difference on the outputs of the
price estimation or pricing process.

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Even though it has been briefly discussed about the methods of pricing, the major concern is how
domestic contractors handle pricing during price fluctuation situations or in situations where
there is a possibility of occurrence of unstable market. To this end the respondents were asked
whether they try to anticipate or predict price fluctuation of any kind to use it as one input in
pricing. Accordingly, 82% of the respondents have said they predict the possible fluctuation that
would occur and use it as an input for pricing. Figure 4.5 represents the summary of the
responses showing the proportion of the surveyed contractors who predict price fluctuation and
who do not.

cotractors who
do not pridict
price fluctuation
27% cotractors who pridict
cotractors who price fluctuation
pridict price
fluctuation
cotractors who do not
73% pridict price fluctuation

Figure 4.5. Contractors who predict price fluctuation and who do not

Here also another question arises, which asks: “How contractors who tried to anticipate the price
fluctuation handle the anticipated price fluctuation during pricing?” To this end the respondents
were asked and their response is presented in Figure 4.6. From the surveyed contractors, it was
found that 63.6% of them convert the result of their prediction into percentage risk factor which
is then applied on top of the result of their pricing. Here they adopt a simple process that they
study the trend of the fluctuation, if any, and use their own subjective decision to reach to the
risk factor to be applied. This risk factor is meant to accommodate any possible price fluctuation,

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after the work is started, without affecting the planned project budget and profit margin. In fact,
this risk factor is not such a huge percentage which exaggerates the overall price.

70% 64%
60%

50%

40%

30%
18% 18.10%
20%

10%

0%
Introducing risk factor Conducting risk analysis for Adopting high profit margin
planning

Figure 4.6. Methods adopted by contractors to accommodate anticipated price fluctuation

Other 18.1% of the respondents said rather than introducing risk factors to their pricing, they
adopt high profit margins. And the rest 18.1% said that they conduct risk analysis to reach to a
decision on how to handle the pricing, where they anticipate price fluctuation.

It can be learnt from all the respondents that, no matter what methods they use during pricing,
the ultimate goal of all is to find ways to minimize the effects of price fluctuation which is feared
to occur and yet difficult to enumerate. In other words, contractors use different ways of
predicting price fluctuation and pricing because of the fact that they anticipate price would
fluctuate but they are not quite sure with the magnitude of its occurrence.

The other group of the respondents, 27% of the respondents [Fig 4.5] who said they do not try to
predict price fluctuation have given their argument, in one voice, why they do not try to predict
price fluctuation. They said, in the first place predicting price fluctuation is difficult. And if they
try to predict the possible fluctuation any way, and do their pricing using the predicted increased
price, they said they will be out of competition.

Here, one critical lesson can be drawn from both groups of respondents, that is: both witnessed
that they anticipate the occurrence of price fluctuation but it is difficult to determine or

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enumerate. And this makes the price fluctuation that occurs on the course of the project works to
be unpredictable.

And the case being so, then how are the other actors of construction projects: clients and
consultants, handling unpredictable price fluctuation situations. Also how are construction
contractors being compensated in such situations. The findings and analysis on these issues are
presented in the following sections.

4.5. Assessment of the compensation

As contractors are the main actors in the construction industry, they also have experience about
price fluctuation of construction inputs. And we used compensation system to relating
unpredictable price fluctuation with capacity of construction contractors. From the surveyed data
the contractors were required tell about what action they took when they face price increase in
the item of input. And the response was that most of them claim to be compensated but in some
causes report for the consultants for sharing the prices if possible. As most of the respondents
respond that the contractors receive compensations for materials, the reason for this was most of
the time price escalation occurred on construction materials and about 40-60% of the project cost
covered by materials.
Thus if the price of materials increases, they will be unable to perform the project. And also that
for contractors they also absorb the increased price within their profit margin. From the surveyed
data, there was minimum compensation costs received for overhead cost price increases.

Table 4.4. Summary of compensation for input fluctuation

Percentage of respondent
Inputs against the total

Material 72.7%

Labor 27.2%

equipment 0%

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overheads 0%
The table4.4 above best expresses that regarding with compensation, about 72.7% respondent
suggest a compensation agreement would be taken mostly about material. The reason to be that
most of the project costs were covered by materials and fluctuations also seen on materials
specially price escalations.

Others 27.2% of respondents said that they took compensations for labors. Equipment, overhead
wear not compensated.

80.00% 72.70%
70.00%
60.00%
50.00%
40.00%
27.20%
30.00%
20.00%
10.00% 0.00% 0.00%
0.00%
materials labour equipment overheads

Figure 4.7. Summary of compensation for construction input price

4.6. The effect of the unpredictable price fluctuation

In the previous section in chapter two, it has been discussed that what price fluctuation means
and compensations are there in the contract documents of domestic projects relation to price
fluctuation compensation. In the same manner to this, the price fluctuations have an effect on the
contractors as well as on the project.
As the surveyed data collected from contractors explained that the price fluctuation has effects
on contractors’ capacity to perform the project with the contract cost and time and may also
affect the project quality. To end this, the contractors who face unpredictable price fluctuation of
the construction inputs are enforced to profit losses, cash flow problems, delay on projects, may
be dispute among parties and may cancelled projects.

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Table 4.5. Impact of fluctuation project performance

No
Effect Significance
No of % of respondent
respo
ndent
Delay on 5 45.5%
project
Contractor
profit 3 27.2%
loose
Financial 3 27.2%
problem

From the above table 4.4 and fig 4.8 it is better to understand that by comparing the percentages
of the respondents. Also that as about 45.5% of the respondent describe that delay on projects
and financial problems were 27.2% that would be appeared on contractor.

50
45
40
35
30
25
20
15
10
5
0
Delay project contrctor proofit finacial problem

impact on project

Figure 4.8. Impact of fluctuation project performance

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4.7. Assessment of contractors’ observations and suggestions

4.7.1. What contractors should do?
Since contractors are being the first victims of price fluctuation, a lot is expected from them. In
this regard, 45.4% of the surveyed contractors have said that to minimize the adverse effect of
price fluctuation, they should work hard with others to bring improvement on the compensation
practice while obeying the rules. And the other 36.3% said that contractors should also propose
other improved favorable methods of compensation. Others also suggested that the claiming
behavior and capacity of contractors against price fluctuation must be well developed to
challenge the project stakeholders. Figure 4.9 represents the result.

50.00% 45.50%
40.00% 36.30%

30.00%
18.10%
20.00%

10.00%
0.00%
0.00%
Obey favorable rules and Obey favorable rules and Refrain from the works in Build strong claiming
struggle for change propose other rules the industry behavior

Figure 4.9. Contractors’ suggestion: what contractors should do

Even though all the contractors agree that they are victimized by the unfavorable compensation
practice, it was surprising to see no one contractor who wants to refrain from the construction
business.

4.7.2. What consultants should do?

Consultants play a vital role in civil engineering projects from inception to the final
commissioning. They also play the biggest role in linking the contractor and the client.
Therefore, in case any thing happens to a particular project, it is the consultant who can advise
and consult the client to take any action. And in price fluctuation cases also, the consultants are
expected to act accordingly.
To this end, 63.5% of the surveyed contractors suggested that consultants should prepare
contract documents allowing for price adjustment. And the other 27.1% said that consultants

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should develop and propose other favorable compensation methods to their clients to be applied
in cases of price fluctuation.

70.00% 63.60%
60.00%
50.00%
40.00%
27.20%
30.00%
20.00%
9.09% 9.09%
10.00%
0.00%
Act mostly in favor of the Act mostly in favor of the Develop and propose other Prepare contract documents
contractor client rules allowing for adjustment

Figure 4.10. Contractors’ suggestion: what consultants should do

4.7.3. What clients should do?

The first thing that many clients miss is that since the projects are their own, things that happens
on due course of the projects are their responsibilities to take. Clients usually seem to throw the
burden or consequences of price fluctuation to the contractors undertaking their projects. And
this makes contractors to suffer consequences which they are not supposed to take.

Therefore, the surveyed contractors were asked to give their suggestion on what clients should
do to minimize or avoid the adverse effect of price fluctuation. To this end, 72.7% of the
surveyed contractors suggested that clients should be considerate to entertain price fluctuation
compensation cases.

80.00% 72.70%
70.00%
60.00%
50.00%
40.00%
30.00%
18.10%
20.00%
9.09%
10.00% 0.00%
0.00%
Always ask for firm prices Be considerate in cases of Develop their own price other
price fluctuation databases

Figure 4.11. Contractors’ suggestion: what clients should?

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And 18.1% of the respondents suggested that clients should develop their own price database in
order to be used in cases of price fluctuation. This is believed to avoid the problem of having
price indices of all times of the project execution time.

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CHAPTER FIVE

1. CONCLUSION AND RECOMMENDATION

This research has examined the various factors how domestic contractors are faced with
unpredictable price fluctuations. The findings of the research, have been summarized under two
parts. The causal factors and the effects of unpredictable price fluctuations are presented under
the conclusion part while the proposals of ideas and knowledge to minimize the adverse effects
of unpredictable price fluctuations on the capacity of contractors are presented under the
recommendation part.

5.1 Conclusions
1. The research has shown that price fluctuation occurs any time; but the magnitude and
occurrence time of price fluctuation, whether increase or decrease in price, is the most
difficult to predict. It is difficult to predict accurately and determine how the price of
materials would increase or decrease. Even during high times of price fluctuation, it is
very difficult to predict whether the then current prices will rise or fall or stay fairly
constant
2. Shortage in delivery of inputs, limited capacity of material producers, fluctuation in
money exchange rates, increase/decrease in demand for construction materials,
availability of materials and labors within the specific times are the causes for price
fluctuation of inputs. Also that adverse weather condition, government regulation on
oil and project schedule change has an effect causing the prices to be fluctuate.
3. Assess the adverse effects of price fluctuations on contractors. Thus dispute among
the parties, delay on the projects, project financial problems may cancel projects,
profit loss for contractor and an increase on project costs are the effect that will have
to be occurred.
4. Pricing methods to mitigate the adverse effect that will be occurred on contractors. As
discussed in the literature part of the research and the analysis and discussed on
chapter four based on the surveyed questionnaire the best and most accurate methods
of pricing were computerized tool methods and bottom up. Because those methods
uses accurate available information for pricing the project cost before the parties

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agreed to sign the contract. As a result in order not to be affected by those explained
above effect selecting the best and appropriate method of pricing is the work of the
contracting parties.
5. Based on the survey result, it was found that the major construction inputs they
encountered price fluctuation in construction projects are cement, fuel, skilled and
unskilled labors, reinforcement bar, and equipment. However, only four material
components comprising, cement, aggregate, reinforcement bar and fuel are allowed
for price adjustment in the local context.

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5.2. Recommendation
The main objective of this research was to generate and target findings of this research addressed
in the literature review through questionnaire survey. Basically, one of the objectives of this
research was to forward recommendations to improve the administration of price fluctuation of
construction inputs especially for contractors.
To minimize the adverse effect of price fluctuations, the recommendation will be summarized as
follows;

1. The contractors should have full commitment to perform the projects on time by
considering all the effect before going to take an agreement without any delay. It is
observed that when time passes the projects will delay at the same time, in case of this,
the effect of price fluctuation increases. So that, it enforces us to recommend the
contractors to undertake their projects on time.
2. All the stakeholders (clients, contractors, consultants and regulatory bodies) should work
all together. Because it will be easy to identify the factors causing price fluctuation and to
improve price compensation systems and to know which of the items need compensation
before the works executed.
3. For contractors, it will be better to put his/her financial utilization methods easy and to
purchase the materials price escalates continually that expects.
4. contractors, it is better to improve material and financial management techniques other
than other resources, because about 60% of the project cost is covered by materials.
Select the best and most accurate pricing methods also important for contractors to increase their
profits; this is because the methods that have accurate and full information help the contractors to
estimate the cost of the project easily. This helps identify and minimize the adverse effect of
price fluctuations that will occur.

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