Causes and Effects of Cost Overrun On Pu

CAUSES AND EFFECTS OF COST OVERRUN
ON PUBLIC BUILDING CONSTRUCTION PROJECTS
IN ETHIOPIA
BY FETENE NEGA
A Thesis Submitted to the School of Graduate Studies of
Addis Ababa University, Faculty of Technology
In partial fulfillment of the requirement for the Degree of
Master of Science in Civil Engineering
(Construction Technology and Management)
March, 2008
ADDIS ABABA UNIVERSITY
SCHOOL OF GRADUATE STUDIES
CAUSES AND EFFECTS OF COST OVERRUN ON PUBLIC BUILDING
CONSTRUCTION PROJECTS IN ETHIOPIA
BY FETENE NEGA
APPROVED BY THE BOARD OF EXAMINERS
Name Signature
_________________________ ___________________
ADVISOR
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EXAMINER (INTERNAL)
_________________________ ___________________
EXAMINER (EXTERNAL)
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CHAIRPERSON
SIGNED DECLARATION SHEET
Submitted by
_________________ _______________ ______________
Student Signature Date
Approved by
_________________ _______________ ______________
Advisor Signature Date
__________________ _______________ ______________
Chairperson, Department’s Signature Date
Graduate Committee
__________________ _______________ ______________
Chairperson, Faculty’s Signature Date
Graduate Committee
__________________ _______________ ______________
Dean, Graduate School Signature Date
DECLARATION
I declare that this thesis entitled “CAUSES AND EFFECTS OF COST OVERRUN ON
PUBLIC BUILDING CONSTRUCTION PROJECTS IN ETHIOPIA” is my original
work. This thesis has not been presented for any other university and is not concurrently
submitted in candidature of any other degree, and that all sources of material used for the
thesis have been duly acknowledged.
Candidate:
Name: _______________________
Signature: ____________________
i
Acknowledgements
First of all I would like to thank the Almighty God, Who gave me the commitment and
tolerance to pass various obstacles and come up to the accomplishment of this thesis.
I would like to express my deepest appreciation to my advisor, Professor Abebe Dinku, for
his supervision and excellent advice and also for spending his precious time for improving the
quality of this research. I am also deeply gratefulto Dr:-Ing, Wubishet Jekale, for lending me
the necessary books and materials in the field of study, and for his comments and excellent
advice throughout the preparation of this thesis. All my postgraduate instructors deserve great
thanks since their inputs are worthwhile.
I would like to express my appreciation to all organizations and individuals who contributed
directly or indirectly to this thesis and provided the necessary materials and support for
realization of this thesis. Especial thanks are forwarded to contractors, consultants and clients
(project owners) who sacrificed their time in filling the questionnaires. I would particularly
like to thank Ato Getachew Yirga, Acting Director of Contract Administration Department, of
Construction Design Share Company (CD Sh. Co.), and Ato Yohannes Desta, Head of
Central Archive, of Construction Design Share Company (CD Sh. Co.). Ato Abadir Hassen
deserves special thanks for his support in providing me with various types of journals in the
field of study.
I would like to extend my deepest gratitude to my family (Ebaba, Naney, brothers and sisters),
without their care and love this thesis would not have been realized.
ii
TABLE OF CONTENTS
Table of Contents ..................................................................................................................... i
List of Tables ......................................................................................................................... iii
List of Figures ........................................................................................................................ iv

Abbreviations ...........................................................................................................................v
Acknowledgements ................................................................................................................ vi
Abstract................................................................................................................................. vii
CHAPTER 1 INTRODUCTION.....................................................................................1
1.1.............................................................................................................. The study Overview 1
1.2..........................................................................................Construction Industry in Ethiopia 1
1.3...................................................................................... Challenges ofConstruction Projects 2
1.4.................................................................................................... Objectives of the Research 4
1.5...................................................................................................... The Research Motivation 5
1.6........................................................................ Overview of the Research Process and Study 5
CHAPTER 2 LITERATURE REVIEW .........................................................................7
2.1................................................................................................................................. General 7
2.2.........................................................................................................................Cost Overrun 8
............................................................................................. 2.2.1 Definition of Cost Overrun 8
2.3.........................................................................................................Causes of Cost Overrun 9
2.4.........................................................................................................Effects of Cost Overrun 23
2.5................................................................................................................. Cost Management 24
........................................................................................2.5.1 Controlling construction Costs 25
................................................... 2.5.2 Phases in Building Construction for Cost Management 26
.............................................................................................2.5.3 Construction Cost Estimate 28
..............................................................................2.5.3.1 Project Stages for Cost Estimating 29
CHAPTER 3 THE RESEARCH DESIGN AND METHODOLOGY .........................33
3.1...............................................................................The Study Approach and Research Type 33
.............................................................................................................3.1.1 The research type 33
3.2.............................................................................................. The study scope and limitation 33

3.3.....................................................................................................Data source and collection 34
3.4.......................................................................................................The Research Population 36
3.5...............................................................................................................Method of Analysis 37
3.7.........................................................................................................Writing of the Research 38
iii
CHAPTER 4 DATA ANALYSIS AND DISCUSSION ................................................41
4.1.......................................................................................................................... Introduction 41
4.2................................................................................................ Questionnaire Response Rate 42
4.3.....................................................................................Existence and Extent of cost overrun 43
4.4.........................................Relationship between Rate of Cost overrun and Contract Amount 45
4.5................................. Causes of Cost overrun from Desk Study and Questionnaire responses 48
...................................4.5.1 Identifying Causes of Cost Overrun based on Rate of Occurrence 54
......................................................4.5.2 Identifying Causes of Cost Overrun based on Impact 56
4.6 Tests for Agreements on Causes of Cost Overrun among Stakeholders in the
Construction Industry..................................................................................................59
4.7.........................................................................................................Effects of Cost Overrun 62
CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS ........................................65
5.1.......................................................................................................................... Conclusions 65
5.2.................................................................................................................Recommendations 67
............................................................................................... 5.2.1 Expected from Consultant 67
..................................................................................................... 5.2.2 Expected from Clients 69
.............................................................................................. 5.2.3 Expected from Contractors 70
.............................................................................................5.2.4 Expected from Government 70
REFERENCES .....................................................................................................................72
Appendix A............................................................................................................................78
Appendix B. ...........................................................................................................................87
Signed declaration sheet .........................................................................................................88
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List of Tables
Table 1.1: The Question and Answer Approach
Table 4.1: Summary of number and percentage of questionnaires distributed, returned and
response rate
Table 4.2: Summary of project type, contract amount and actualcost, contract and actual
completion time for public building construction projects
Table 4.3:causes of cost overrun
Table 4.4:rate of occurrences of causes of cost overrun
Table 4.5:Impact of causes of cost overrun
Table 4.6:Summary of correlation test on the ranking of causes of cost overrun
Table 4.7:Summary of correlation test on the ranking of variables of cost overrun based on
chance of occurrence
List of Figures
Figure 2.1 Construction cost estimate with changes in the project stage: (Nigel J. Smith,
1995).
Figure 2.2 Estimated Envelope Stepped: the estimated value does not follow a continuous
evolution but is refined in stages when the estimates are produced: (Nigel J. Smith,
1995).
Figure 3.1 Flow chart of research methodology.
Figure 4.1 Contract amount versus rate of cost overrun.
vi
Abstract
Many projects experience cost overrun and thereby exceed initial contract amount. In Ethiopia,
the number of public building construction projectsis increasing from time to time. However, it
becomes difficult to complete projects in the allocated cost and time. Taking into account the
scarce financial resources of the country, cost overrun is one of the major problems in Ethiopia.
Therefore, this research was carried out to dig-out information on the factors that cause cost
overrun during construction and their effects on public building construction projects in Ethiopia.
Questionnaire survey together with desk study was used to collect data on cost overrun. A total of
42 questionnaires from clients, consultants and contractors were collected and a desk study of 70
completed public building construction projects in Ethiopia were investigated and analyzed using
both descriptive and inferential statistics. From the results it was found that 67 out of 70 public
building construction projects suffered cost overrun. The rate of cost overrun ranges from a
minimum of 0% to the maximum of 126% of the contract amount for individual projects. In this
research it was found that the rate of cost overrundecreases with the increase in contract amount.
Respondents identified 39 causes of cost overrun for Ethiopian case. The most important causes
of cost overrun were found to be inflation or increase in the cost of construction materials, poor
planning and coordination, change orders due to enhancement required by clients, excess quantity
during construction.
Spearman rank order correlation analysis was used to evaluate whether consensus of opinions
exists between groups of respondents (client versus consultant, client versus contractor and
consultant versus contractor). From the analysis of the results it was found that consensus of
opinion exists between respondents on the factors that cause cost overrun and on their rate of
occurrence.
The most common effects of cost overrun identified by this research were delay, supplementary
agreement, adversarial relations among stakeholders, and budget shortfall of project owners. It is
hoped that these findings will guide efforts to improve the performance of the construction
industry in the future.
Key words: cost overrun, cause, effect, rate, public buildings.
M Sc. Thesis on Causes and Effects of Cost Overrun on Public Building Construction ProjectsIn Ethiopia
AAU, Department of Civil Engineering Construction Technology and Management
41
CHAPTER 1 INTRODUCTION
1.1. The Study Overview
The construction industry has a great impact on the economy of all countries [Leibing,
2001]. It is one of the sectors that provide crucial ingredients for the development of an
economy. According to Chitkara, (2004), the construction industry in many countries
accounts for 6-9 % of the Gross Domestic Product (GDP); and according to Bhimaraya,
(2001), it reaches up to 10 % of the GDP of most countries. In Ethiopia its percentage of
GDP amounts to 3%, considerably lower than the sub-Saharan average of 6% [MoWUD,
2006]. The construction industry is a vital element of the economy and has a significant
effect on the efficiency and productivity of other industry sectors. One cannot think of
widespread investment in manufacturing, agriculture, or service sectors unless the
construction results of infrastructure facilities are in place. In some of the developing
countries, the growth rate of construction activity outstrips that of population and of GDP
[Chitkara, 2004].
1.2. Construction Industry in Ethiopia
Ethiopia has a rich history of magnificent construction endeavors. The ruined palace of
Queen Sheba at Yeha, the Obelisks of Axum, the rock-hewn churches of Lalibela, and the
castles of Gondar are few examples of these expertises. With the advent of modern
civilization, especially during the late 19

th
and early 20
th
century, there have been some
significant developments in this regard. Even though, the development of the construction
industry in Ethiopia is slow, it plays a key role in the development of the national economy.
The role the construction industry plays in socio-economic development is significant. It
provides the basis upon which other sectors can grow by constructing the physical facilities
required for the production and distribution of goods and services. The construction
industry has a significant multiplier effect on the economy as a whole [MoWUD, 2006].
According to MoWUD, (2006), the interrelationship between the construction industry and
the broader economy largely emanates from three of the industry’s characteristics namely:
42
The public sector is its major client;
It’s large size, ability to produce investment or capital goods which contribute
significantly to national GDP; and
It is a major source of employment, directly and indirectly by its multiplier effect.
Public construction projects in Ethiopia are parts of the country’s development initiative. It
shared considerable amount of the country’s scarce financial resources. In Ethiopia, the
construction industry is the highest recipient of government budget in terms of government
development program. Consequently, public construction projects consume an average
annual rate of nearly 60%, according to MoWUD, (2006), and 58.2% according to
Wubishet, (2004), of the government’s capital budget.

1.3. Challenges of Construction Projects
Construction Projects can be marvelous in their breadth and complexity from the Egyptian
pyramids, Lalibela’s rock-hewn churches, and Gothic Cathedrals to soaring skyscrapers
and enormous bridges. It is obvious that the construction industry has special features that
are not usually encountered in other industries. Usually in construction, when conditions in
the field turn out to be more complex than what was anticipated in the planning and design
phase, additional costs and time are needed. Any extremes can affect productivity level,
damage materials and work in place. Moreover the industry, most of the time, is custom
oriented, meaning that it is difficult to use mass production techniques. Because of all these
factors and others, it is difficult to predict accurately how much money will be necessary to
complete construction projects [Gould, et al, 2002]. Creating a large facility takes a long
time and usually involves a large capital investment. Cost overruns, delays and other
problems tend to be proportionally monumental [Gould, et al, 2002].
Cost is one of the primary measures of a project’s success. This is true, especially for
public projects in developing countries like Ethiopia, because public construction projects
in theses countries are executed with scarce financial resources. Most literature review on
43
construction projects suggested that the common criteria for project success are generally
considered to be cost, time and quality [Arditi et al, 1997; Frimpong et al, 2003]. Atkinson
(1999) called these measures as the ‘iron triangle’. Songer and Molenaar (1997) considered
a project successful if it was completed on budget, on schedule, conformed to user
expectations, met specifications, attained quality of workmanship and minimized
construction aggravation. Generally, a project is considered successful if the project is

completed within a stated cost or budget, getting the project into use by a target date, meets
the technical specification, and if there is a high level of satisfaction concerning the project
outcome among the project participants.
Completion alone does not constitute success for the project owner. For the owner, much of
the success of a project depends on many factors, the most important of which is project
completion within specified cost parameters (i.e. within a specified budget). The second
most important factor affecting success is on time completion as delays in completion of
facilities often directly equate to financial losses due to lack of revenue from facility
operation [Darrell, 1995].
In Ethiopia, the present state of the construction industry falls short of meeting domestic
and international quality standards and the performance demand expected from the sector
[MoWUD, 2006]. Construction projects have problems with construction techniques and
management as well as limitation of funds and time. The critical problems are inability to
complete the projects on schedule, low quality work and cost overrun. In general, most (if
not all), construction projects experience time overrun and cost overruns during their
execution phase. An examination of the records of more than four thousand construction
projects by Morris et al, (1998), showed that projects were rarely finished on time or within
the allocated budget. Other researchers have also observed that time and cost overruns are
common in the construction industry worldwide [Arditi et al, 1985].
1.4. Objectives of the Research
This study will be undertaken with the following main objectives.
44
1. Identifying the main causes of cost overrun and their overall effects for public
building construction projects in Ethiopia.
2. Identifying the related responsible party to the causes of cost overrun.
3. Identifying the rate of cost overrun for various types of public building construction
projects
4. Identifying the relationship between rate of cost overrun and contract amount.
5. Forwarding recommendations to minimize or to avoid cost overrun and frequency of
its occurrence; and hence to reduce its consequential effects on public building
construction projects in Ethiopia.
To assess the objectives, beneficiaries, and methodology of the research work it is
diagnosed using a question and answer approach as shown in Table1.1 below
Table 1.1: The question and answer approach
1.5. The Research Motivations
N0. Question Answer
1 Why has the research been
established?
Most Construction projects in this country suffer time
and cost overruns.
2 What does the research try to
achieve?
To contribute knowledge on problems of cost
overruns their causes and their overall effects.
3 What are the important issues
for the research?
Methodology and literature review together with
distribution of questionnaire and desk study on public

construction projects.
4 Who will benefit from or
affected by this research?
Stake holders in construction industry and my self.
5 How can the research be done? Literature review, distribution of questionnaires, and
desk study on public building construction projects.
45
The initiation for the study of this research is largely due to personal observation and low
performance of the construction projects in terms of cost and time. These include
construction projects owned by the government and the private sectors. However, due to
the limitation with regard to accessibility of data on private construction projects this thesis
will focus on public building construction projects.
1.6. Overview of the Research Process and Study
This thesis will have the following broad categories.
Chapter I: Introduction/The research background
Chapter II: Literature review
Chapter III: The research design and methodology
Chapter IV: The research analysis and discussions
Chapter V: The research conclusions and recommendations
Each of the above chapters will contain the following contents as stipulated below.
Chapter I describes the research overview, its initiation and purposes. It also indicates the
research objectives, how the research process is conducted and the contents of the research.
Chapter II covers the literature review part of the thesis; the literature review will include
general information about cost, causes of cost overrun and their overall effects.
Chapter III covers the research methodology. The methodological approach consists of
the overall research strategy; the research design, the analysis of the data and writing of the
research paper.
Chapter IV contains the discussion and analysis part. It contains the findings on causes
and effects of cost overrun; the rate of cost overrun on public buildings, the relationship
between rate of cost overrun and contract amount and finally;
46
Chapter V in this part, the research conclusions and recommendations are presented. This
will serve as an action guideline to stakeholders in the construction industry.
CHAPTER 2 Literature Review
2.1. General
Construction project is a mission, undertaken to create a unique facility, product or service
within the specified scope, quality, time, and cost [Chitkara, 2004]. In practice, however,
47
some construction projects encounter cost overrun, delay on completion time or poor
workmanship upon completion. Cost overrun, poor quality workmanship and delay of
construction projects require an in-depth investigation to improve the outputs of the
construction industry.
It is not uncommon to see construction projects failing to achieve their mission of creating
facilities within the specified cost and time. Hardly few projects get completed on time and
within budget since construction projects are exposed to uncertain environments because of
such factors as construction complexity; presence of various interest groups such as the
project owners, end users, consultants, contractors, financiers; materials, equipment, project
funding; climatic environment; the economic and political environment and statutory
regulations.
The successful execution of construction projects, keeping them within estimated cost and
the prescribed schedules, primarily depends on the existence of an efficient construction
sector capable of sustained growth and development in order to cope with the requirements
of social and economic development and to utilize the latest technology in planning and
execution. According to Chalabi, et al, (1984), adequate planning at the early stages of a
project is crucial for minimizing delays and cost overruns.
Cost overrun is common in infrastructure and building construction projects. Researches on
construction projects in some developing countries indicate that by the time a project is
completed, the actual cost exceeds the original contract price by about 30 % [Al-Momani,
1996]. One of the most comprehensive studies of cost overrun that exists found that 9 out
of 10 projects had cost overrun. Overruns of 50 to 100 % were common [Flyvbjerg, et al,
2003]. Studies of construction projects in India, for example, found that more than 60 % of
projects experienced up to 200 % time overrun and 75 % cost overrun [Chandra, H. 1990].
According to Peter Hall, (1982), the Sydney Opera House in Sydney sets some kind of a
world record for time delay and cost overrun. Originally estimated in 1957 to cost just
48
A$7.000.000.00 and to be completed in January 1963, it was in fact finished in October
1973 at a cost of A$102.000.000.00. This makes final costs about 14 times the original
estimate.
2.2. Cost Overrun
The sad truth about construction cost overrun is that they have been a fact of life since
Biblical times “For which of you, intending to build a tower, sitteth not down first, and
counteth the cost, whether he have sufficient to finish it?” Luke, 14:28; quoted by L.
Powers, (2006). The problem of cost overrun, especially in the construction industry, is a
worldwide phenomenon, and its ripples are normally a source of friction among clients,
consultants and contractors on the issue of project cost variation. Project cost overruns
create a significant financial risk to clients. However, in spite of the risks involved, the
history of the construction industry is full of projects that were completed with significant
cost overruns [Garry, 2005].
2.2.1. Definition of Cost Overrun
a) Costs overrun: An instance in which the provision of contracted goods or services
are claimed to require more financial resources than was originally agreed between a
project sponsor and a contractor [User Guide, 2005].
b) Cost overrun: The amount by which actual costs exceed the baseline or approved
costs [Wideman, 2002].
c) Cost overrun: The difference between the original cost and the actual cost when the
project is completed [Avots, 1983]. Actually, Avots, (1983) used the word cost
growth instead of cost overrun.
For the purpose of this research cost overrun is defined as the difference between the final
actual cost of a construction project at completion and the contract amount, agreed by and
between the client (the project owner) and the contractor during signing of the contract.

49
2.3. Causes of Cost Overrun
Angelo and Reina, (2002), stated that cost overrun is a major problem in both developed
and developing countries. Several studies of major projects show that cost overruns are
common. The causes of cost overrun in construction projects are varied, some are not only
hard to predict but also difficult to manage [Morris and Hough, 1991]. According to a study
made in Turkey by Arditi, et al, (1985), the important sources for cost overruns were found
to be inflationary pressures, increases in materialprices and workmen's wages, difficulties
in obtaining construction materials, construction delays, deficiencies in cost estimates
prepared by public agencies and unexpected sub soilconditions were the most important
sources for cost overruns. Kaming, et al, (1997), studied the factors influencing
construction time and cost overruns for high-rise projects in Indonesia, and pointed out that
the major factors influencing cost overrun were material cost increase due to inflation,
inaccurate material estimating and the degree of project complexity. Mansfield, Ugwu, and
Doran, (1994), found that cost overrun is attributed to problems in finance and payment
arrangements, poor contract management, material shortages, changes in site conditions,
design changes, mistakes and discrepancies in contract documents, mistakes during
constructions, price fluctuations, inaccurate estimating, delays, additional work, shortening
of contract periods, and fraudulent practices and kickbacks.
Stewart, (1982), attributes cost overruns to several factors that are either not controllable or
that to a varying degree are unmanageable. They include the accuracy of original cost
estimate, degree of government regulation and control, construction completion delays,
number of design changes, and labor related matterssuch as their availability, skills, and
increases in fringe benefits.
50
According to Robert F. Cox, (2007), project owners identified five reasons for project cost
overruns: these reasons were, incomplete drawings, poor pre-planning process, escalating
cost of materials, lack of timely decisions and excessive change orders.
According to User’s Guide, (2005), the following are the factors that change the cost of the
construction projects through time: poor project management, design changes, unexpected
ground conditions, inflation, shortages of materials, change in exchange rates,
inappropriate contractors, funding problems and force majeure.
In developing countries the lack of proper phasing of construction projects can contribute
to the economy to become ‘overheated’. This leads to shortage of construction materials as
the demand will exceed the supply, this in turn leads to a climb in the cost of construction
materials; this inevitably gives rise to project cost overruns, with consequential effects on
inflation and a decline on efficient activity in the construction industry [Mansfield, Ugwu
and Doran, 1994].
According to Jahren, et al, (1990), on their research on predictors of cost overrun rates they
found the following factors to influence the cost overrun rates; the size of the project, the
difference between lowest bid and engineer’s cost estimate, the type of delivery method,
the level of competition, quality of contract documents, and the nature of interpersonal
relations on the project.
Studies have shown that the size of a construction project influences the rate of cost
overrun. Large projects are generally more complex, and in complex projects some items
are fraught to be missed out or may be forgotten during planning and design stages hence
the complexity may increase the rate of cost overrun. However, since the stakes are higher
on larger projects, more care may be exercised from conception of the project until
completion. Review of some literatures indicates support for both of these conflicting
views. Randolph, et al, (1987), found that cost overrun rates decreased as the contract
amount increased, while Rowland, (1981), found that cost overrun rates increased with
increase in the contract amount of construction projects.
51
Factors that could influence construction costs arenumerous. Chan and Park, (2005), stated
that the cost of a construction project is affectedby a large number of factors because of the
fact that construction is a multidisciplinary industry and its work involve many parties such
as the project owner and various professionals, contractors and suppliers. Thus, a
construction project cost not only depends on a single factor but a cluster of variables that
are related to the characteristics of the project and to the construction team as well as the
market conditions.
In the following section of this research, factors which affect the cost of a construction
project will be dealt in detail.
i. Poor Project Management
The role of the project manager or project management team is probably the most
important element in controlling and/or managing the costs of a construction project. It is
often true that a good project, if combined with poor project management, will usually face
serious difficulties.
According to User’s Guide, (2005), a poor project management structure will have an
impact at all stages of the construction process leading to:
Lack of planning and coordination;
Poor communication between members of the project team and the project sponsor;
Failure to identify problems and institute necessary and timely design and
programming changes;
Lack of control over time and cost inputs;
Lack of end user involvement
Good project management manages costs by estimating, scheduling, accumulating and
analyzing cost data, and finally implementing measures to correct problems related to cost.
52
ii. Unexpected Ground Conditions
Ground conditions can be assessed by the use of trial pits and borehole sampling onsite or
by using hi-tech equipment. However, the actual site conditions for the full extent of a
project are not usually determined until excavation is completed. It is sometimes possible
that those difficult conditions are overlooked by the initial review or conditions have
changed due to adverse weather conditions or changes in sub-soil conditions. Unexpected
sub surface conditions can, at times, require fundamental redesign of projects at great
expense. Changes in surface ground conditions can lead to problems for moving machinery
and supplies around the site, and in undertaking excavations and laying foundations. This
can also increase costs and add to the construction time required.
iii. Shortage of Construction Materials
During periods of high development where the level of construction activity is unusually
high in a particular region, there may be shortages of some construction materials. Some
times the local market may not be able to supply the full demand of these construction
materials; hence, a need may arise to import these construction materials from abroad. If
this was not anticipated in the original cost estimate, delays may occur and/or the prices of
these elements may increase which consequentially lead to delay and cost overrun for the
project.
iv. Change in Foreign Exchange Rates
The change in foreign exchange rate is particularly relevant if materials or other elements
of the construction project are being purchased from foreign countries. If the foreign
exchange rates change beyond the expected level; then the cost of the project may increase
which automatically leads to cost overrun.
v. Inappropriate/Inexperienced Contractors
Contractors are selected on the basis of price, experience in undertaking particular types of
construction project and their reputation or track record in producing high quality work
53
within budget and on time. In most cases there is a trade-off between price, experience and
track record but the desire to accept the lowest tender does not always lead to a project that
is completed within time and budget. According to Yates et al, (2003), in contracts where
the Engineer’s estimate is at least 15% greater than the contractor’s bid amount there is a
strong likelihood of cost overruns. Therefore, these projects need to be carefully tracked
and documented.
There are cases where the prime contractor and sub-contractors go into bankruptcy during
the construction period. This can lead to significant delays and extra costs arising as the
project owner has to re-tender the remaining work to be undertaken by another contractor.
vi. Force Majeure
This term covers a range of events which are also commonly referred to as “Acts of God”.
They include revolution, war, riot, earthquake, landslide, fire, political and economic
instability, projectile missile, hostilities, contamination and other such risks. Where they do
occur, they will normally lead to significant delays and cost overrun to construction
projects.
vii. Construction Cost Underestimation
A more serious situation can confront an owner when there has been deliberate
underestimating of costs in order to obtain project approval or for fraudulent practices.
According to studies made by Flyvbjerg, (2003), large projects have been intentionally
underestimated in order to obtain voter support for the financing approvals. He sated that
whatever the cause, almost all large public projects contain initial cost estimating errors
that result in the need for increased funding to complete the projects.
Construction cost increases seem to materialize after the commencement of the e
construction but the problem is deep-rooted during contract cost estimation and tendering
stage [Abukar Warsame, 2006].
54
According to Flyvbjerg, (2003), explanations of cost underestimation come in four types:
Technical
Economic
Psychological, and
Political
a) Technical Explanations
Most studies that compare actual cost at completion and estimated costs at the
beginning of bid award of construction projects explain what they call “forecasting
errors” in technical terms, such as imperfect techniques, inadequate data, honest

mistakes, inherent problems in predicting the future, lack of experience on the part of
forecasters, etc. [Wachs, 1990].
b) Economical Explanations
Economic explanations consider cost underestimation in terms of economic rationality.
According to Flyvbjerg, (2003), two types of economic explanations exist; the first
explained in terms of economic self-interest, the other in terms of the public interest. As
regards self-interest, when a project goes forward, it creates work for engineers and
construction firms, and many stakeholders make money. If stakeholders are involved in
or indirectly influence the forecasting process, then this may influence the outcomes.
As regards the public interest, project promoters and forecasters may deliberately
underestimate costs in order to provide public officials with an incentive to cut costs
and thereby to save the public’s money. Empirical studies by Wachs, (1990), have
identified promoters and forecasters who say they underestimate costs in order to save
public money. The argument has also been adopted by scholars, for instance Merewitz
(1973), who explicitly concludes that “keeping costs low is more important than
estimating costs correctly”.
55
Both types of economic explanation account well for the systematic underestimation of
costs. Both depict such underestimation as deliberate, and as economically rational.
c) Psychological Explanations
Psychological explanations attempt to explain biases in forecasts by a bias in the mental
makeup of project promoters and forecasters. Politicians may want a monument
complex or museums, and transportation officials sometimes have the mentality of

building roads and bridges. The most common psychological explanation is probably
“appraisal optimism.” According to this explanation, promoters and forecasters are held
to be overly optimistic about project outcomes in the appraisal phase, when projects are
planned and decided [Fouracre et al., 1990]. An optimistic cost estimate is a low one.
The existence of appraisal optimism in promoters and forecasters would result in actual
construction costs being higher than estimated costs.
d) Political Explanations
Political explanations interpret cost underestimation in terms of interests and power
[Flyvbjerg 1998]. A key question for political explanations is whether forecasts are
intentionally biased to serve the interests of project promoters in getting projects
started. For legal, economic, moral, and other reasons, if promoters and forecasters
have intentionally fabricated a deceptive cost estimate for a project to get it started, they
are unlikely to tell researchers.
viii. Change Orders or Variations Orders
Change orders are common in all types of construction projects [O’Brien, 1998; Ibbs et al,
2001]. Changes in construction projects can cause substantial adjustment to the contract
duration and construction cost [Ibbs et al, 1998]. Changes can be deleterious in any project
and can cause cost overrun, if not considered collectively by all project participants [Ibbs et
al, 2001].
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The most common effect of change orders, during theconstruction phase, is the increase in
project cost [Construction Industry Institute, 1990]. Change orders have been found to be a
major contributor to time and cost overruns [Jahrenand Ashe, 1990].

Changes and variations are inevitable in any construction project [Ibbs et al, 2001]. . In an
ideal world, changes will be confined to the planning stages. However, late changes often
occur during construction, and frequently cause serious disruption to the project. Project
variations were identified as a major source of conflicts and disputes in the construction
industries of many countries [Yates and Hardcastle, 2003]. The need to make changes in a
construction project is a matter of practical reality. Even the most thoughtfully planned
project may necessitate changes due to various factors [O’Brien, 1998]. Needs of the owner
may change in the course of design or construction, market conditions may impose changes
to the project, and technological developments may alter the design and the choice of the
engineer. Furthermore, errors, additions and omissions during construction may force a
change.
Changes can be originated from numerous factors pertinent to the construction projects.
According to O’Brien, (1998), causes of change orders include the following:
Additions and/or enhancement required by owners
Accident or damage
Force Majeure
Unforeseen conditions
Change in Plans and/or specifications
Value engineering
Acceleration
Changes in designs and contract documents usually lead to a change in contract price or
contract schedule. Typically, change orders and variations present problems to all parties
involved in the construction process. Usually, these design changes require additional time

57
and cost inputs which ultimately lead to time overrun and cost overrun. The impact of
change orders or variations varies from one project to another. However, it is generally
accepted that change orders or variations can affect construction projects with unpalatable
consequences in time and cost [Ibbs et al, 1998; Ibbs et al, 2001]. Change orders that are
imposed when construction is underway, usually lead to reworks, cost overrun and delays
in project completion [Construction Industry Institute, 1990]. Rework and demolition are
potential effects of changes in construction, depending on the timing of the occurrence of
the changes, which ultimately lead to time and cost overrun.
Researches in construction projects in some developing countries indicate that by the time a
construction project is completed change orders or variations result in an 8.3 % cost
overrun [Al-Momani, A., 1996]. According to Michel Gibeault, (2007), change orders
typically average between 2-5 % of construction costs, but can easily soar to more than 10
% depending up on the degree of changes.
ix. Inflation
Adamson (1996) defines inflation as the rate of increase in general price level in an
economy. Generally, inflation is the term used when paper money loses value, or the
buying power of money becomes less.
Inflation can act to increase the construction costs. If the rate of inflation increases above
the predicted level during the construction period, then the original cost estimate will be
exceeded. Obviously any factor that delays a construction project will expose the project to
the risk of further inflationary cost increases.
Due to the nature of the process and the rate of return for work undertaken on construction
projects, the effects of inflation can cause loss of profit to contractors and higher cost
overrun to project owners.

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Cost estimates for construction work are produced at a specific point in time and the prices
used therein are relevant only for that time and for short near future. This is because prices
for items supplied and work undertaken are continually subject to market forces.
In a study carried out by Pohl and Mihaljek (1992) in which they surveyed 1,015 World
Bank projects, it was found that the nominal cost overruns were primarily due to
unexpected inflation.
x. Acceleration Costs
Acceleration occurs when a project has been delayed, yet the owner demands that the
contractor complete the contracted work before the contract completion date, or agreedupon
changed completion date, or when the contractor wants to complete early.
When acceleration occur the contractor typically will incur additional direct and indirect
costs. While direct costs are relatively easy to quantify, indirect costs are difficult to
identify and quantify [William C. Last, 2002]. If the contractor establishes a valid
acceleration claim, it is entitled to recover the costs incurred. These costs may include
increased mobilization and demobilization costs due to the need to commit additional
resources in terms of labor, equipment and supervision at the project than originally
contemplated by the original schedule; specifically, direct labor costs include such items as
increased wage costs for additional workers, overtime pay and rental costs for additional
equipment. Further, the contractor may incur additional costs for inefficiencies in labor.
These inefficiencies may include congestion or fatigue from extensive overtime work.
Labor inefficiencies are a hidden but very expensive cost of an acceleration. Nevertheless,
while labor inefficiencies are a very real part of an acceleration cost, they are extremely
difficult to quantify.
xi. Delay on completion Time and Delay on Payments
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Delays defer income, while interest and interest of interest, keep accumulating. Long
delays may result in projects ending up in the so-called ‘interest trap’ [Flyvberg, et al
2004], where a combination of escalating construction costs, delays and increasing interest
payments result in cost overrun. According to Arditi et al, (1985), lengthy delays in
inflationary environments increase cost overruns tremendously.
The overall lack of finance to complete a project, or delays in the payments for services by
the project owners or clients can lead to significant problems. If the costs of a project have
increased significantly beyond the original estimate, then work on the project may have to
be stopped or be delayed until additional funds can be found. Delays on payment may some
times provoke the contractor to claim for interest rates. If the payment by a project owner is
slow, the contractor may begin to commit fewer resources to a project, and may even cease
work if cash flow becomes a problem.
xii. Late Site Hand Over or Change of Location of Construction site
Late hand over of construction sites, some times may happen and substantially increase the
cost of construction projects. In most international projects in Ethiopia late site hand over is
a common form of claim source for compensation for contractors [Girmay, 2003]. For
example, the Addis Ababa Bole International Airport Project has suffered an additional
cost of about $1,000,000.00 USD due to late site hand over [Girmay, 2003]. Fortunately,
domestic contractors do not ask for compensation due to late site hand over.
Sometimes the owner may decide to change the location of the project after the award to
the winning contractor. This is a rare phenomenon but it does happen due to sudden and
unavoidable circumstances. The change of location of a project might extensively change
the entire character of the work that was initially required under the (awarded) contract or
the new location of the construction site may have different sub surface condition that may
necessitate the structure to be redesigned. In such cases it is rightly alleged that the changes
do alter the “general scope of work” and therefore, the final cost of the project might
exceed the original contract amount.
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xiii. Provision of Clauses in FIDIC and MoWUD Standard Conditions of Contract
Related to Cost
In construction contracts the contracting parties agree on conditions of work for the
construction project to be carried out. Conditions of contract in the construction industry
are prepared to be implemented according to the accepted practices. These conditions are
intended to govern and regulate the obligation of each party that participates in the contract.
It helps the parties to perform their part and facilitate the overall accomplishment of the
projects. Federation International Des Ingenieurs Conseils (FIDIC) 1987, and Ministry of
Works and Urban Development (MoWUD) 1994, standard conditions of contract are very
widely used conditions of contract in the Ethiopian construction industry. They define the
responsibilities of the parties involved in the contract and describe the guide lines to be
followed for the contract administration. In Ethiopia, FIDIC 1987 standard conditions of
contract have usually been used for international construction projects, while MoWUD
1994 standard conditions of contract have been usually used for domestic public
construction projects.
The following FIDIC 1987 and MoWUD 1994 standard conditions of contract clauses are
related to costs, they can consequentially alter the construction cost of projects unless and
otherwise they are deleted or replaced by some other sentences in the particular condition
of the contract for the specific construction projects.
FIDIC 1987 Clauses.
1. Cost incurred by the contractor due to delay of drawings and/or instructions for
which notice has been given by the Contractor in accordance with Sub-Clause 6.3
(Clause 6.4)
2. Costs associated with the encountering of physical obstructions and conditions
which would not have been foreseeable by an experienced contractor (Clause 12.2)
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3. Errors in setting out which are based on incorrect written data supplied by the
Engineer (Clause 17.1)
4. Loss or damage due to employer’s risks (Clause 20.3)
5. Indemnities that the employer has contractually undertaken to assume (Clause 22.3)
6. Fossils or discovery of things of geological or archeological interest (Clause 27.1)
7. Cost associated by other interfacing contractors and workmen of the employer
(Clause 31.2)
8. Cost associated with test of samples not provided in the contract (Clause 36.5)
9. Uncovering of works that has already been completed, but they are found to be
executed in accordance with the Contract (Clause 38.2)
10. Suspension of work ordered by the Engineer (Clause 40.2)
11. Late possession of the site, which is as a result of a failure of the employer to give
the required handover (Clause 42.2)

12. Remedying defects not the responsibility of the contractor (Clause 49.3)
13. Searching for defects which are not the fault of the contractor (Clause 50.1)
14. Additional costs due to variations works (Clause 51.1)
15. Interest on late payments due to failure of the employer to make payment within the
times stated (Clause 60)
16. Costs due to special risks which very often include out break of war, projectile
missile, hostilities, contamination and other such risks (Clause 65)
17. Contractors entitlement to suspended works due to employers failure (Clause 69.4)
18. Fluctuations in the cost of labor and/or material or any other matter affecting the
cost of the execution of the works and subsequent legislation that affect the project
(Clause 70)
MoWUD 1994 Clauses.
1. Cost incurred by the contractor due to ambiguities or discrepancies of documents
which could not have been foreseen by the contractor (Clause 5.2)
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2. Cost incurred by the contractor due to delay of drawings and/or order requested by
the contractor in accordance with Sub-Clause 6.3 (Clause 6.4)
3. Costs associated with the encountering of physical obstructions and conditions
which would not have been foreseeable by an experienced contractor (Clause 12)
4. Errors in setting out which are based on incorrect written data supplied by the
Engineer (Clause 17)
5. Loss or damage due to excepted risks (Clause 20)
6. Indemnities that the employer has contractually undertaken to assume (Clause 22.2)
7. Fossils or discovery of things of geological or archeological interest (Clause 27)
8. Cost associated by other interfacing contractors and workmen of the employer
(Clause 31)
9. Cost associated with test of samples not provided in the contract (Clause 36.4)
10. Uncovering of works that has already been completed, but they are found to be
executed in accordance with the Contract (Clause 38.2)
11. Suspension of work ordered by the Engineer (Clause 40.1)
12. Costs incurred by the contractor due to failure on the part of the employer to give
possession of the site in accordance with the terms of the contract (Clause 42.1)
13. Costs for the execution of work of repair not the responsibility of the contractor
(Clause 49.3)
14. Searching for defects which are not the fault of the contractor (Clause 50)
15. Additional costs due to variations works (Clause 51.1)
16. Costs due to special risks which very often include out break of war, projectile
missile, hostilities, contamination and other such risks (Clause 65)
17. Fluctuations in the cost of labor and/or material or any other matter affecting the
cost of the execution of the works and subsequent legislation that affect the project
(Clause 70).
2.4. Effects of Cost Overrun
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The global construction industry is plagued with cost overruns in project delivery. This
development has brought about loss of clients’ confidence in consultants, added investment
risks, inability to deliver value to clients, and disinvestment in the construction industry
[Mbachu and Nkado, 2004].
Cost overruns in public and in private construction projects are often the stuff of scandal in
the news media. Typically owners and contractors are treated as eager participants in
bribes, illegal financing and other forms of corruption and waste [Oberndorfer, 1994].
Cost overruns have obvious effects for the key stakeholders in particular, and on the
construction industry in general. To the client, cost overrun implies added costs over and
above those initially agreed upon at the onset, resulting in less returns on investment. To
the end user, the added costs are passed on as higher rental/lease costs or prices. To the
professionals, cost overrun implies inability to deliver value for money and could well
tarnish their reputations and result in loss of confidence reposed in them by clients. To the
contractor, it implies loss of profit for non completion, and defamation that could
jeopardize his/her chances of winning further jobs, if at fault. To the industry as a whole,
cost overruns could bring about project abandonment and a drop in building activities, bad
reputation, and inability to secure project finance or securing it at higher costs due to added
risks [Mbachu and Nkado, 2004]. All these consequences undermine the viability and
sustainability of the construction industry.
According to Arditi, et al, (1985), the effects of cost overrun are not confined to the
construction industry but are reflected in the state of the overall economy of a country.
They state that delays and cost overruns in construction projects prevent the planned
increase in property and service production from taking place, and this phenomenon in turn
affects, in a negative way, the rate of national growth.
Angelo and Reina, (2002), state that the problem of cost overrun is critical and needs to be
studied further to alleviate the problem in the future. Project cost overruns can cause a

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slower payout and reduce an early return on the client’s or project owner’s investment
[Ritz, 1994].
2.5. Cost Management
Managing construction costs includes estimating, scheduling, accumulating and analyzing
cost data, and finally implementing measures to correct construction cost problems. .
Throughout a project' ' s planning, design, and construction phases, cost management is
employed as a means of balancing a project' ' s scope, expectations of quality and budget.
The approach can be summarized as requiring the following three steps:
1. Define the scope, the level of quality desired, time for completion and the budget,
2. Ensure that the scope, quality, time and budget are aligned,
3. Monitor and manage the balance of these components throughout the life of the
construction project.
Project cost management begins with the identification of the owner’s objectives and ends
when those objectives have been met. The purpose of project control is to guarantee that
the project’s design, budget, and schedule are met by the project team. If any objective
begins to slip, the control system will identify this deviation early so that the appropriate
correction can be made timely. Project cost control provides management with cost related
information for making decisions with a view to complete the project with specified
quality, on time and within budgeted costs [Bill, et al, 2006]
In construction projects, generally, there are two parties whose investments are involved;
the project owner (or client) and the contractor. This section of the research paper will
focus on the cost management objective of the client. Client’s investment starts with his
decision to go ahead with the project. His expenses continue during design, execution and
commissioning stages. After taking into considerations the contract commitments, he

65
formulates his cost budget for the project. Clients try to reduce their budgeted costs by
various measures such as economizing the scope of work and offering incentives to
contractors for early completion, which may yield them early revenue from the project than
the originally planned completion time.
2.5.1. Controlling construction Costs
In civil engineering, cost control is the periodic auditing of actual costs for the construction
and commencement of operations of an engineering project [Oberndorfer, 1994]. Cost
control during the construction process is vital to ensure the success of a project. . As a
project progresses more information becomes available to allow costs to be calculated to a
greater degree of accuracy, and these information helps for controlling costs. However,
most construction projects share the common theme that they are fraught with risks and
uncertainty that can cause cost overrun. For example, Laufer, A. et al, (1993), found that
about 80% of all projects begin the construction process with a high level of uncertainty.
Many aspects in construction process remain uncertain and normal costing practice is to
include an extra element to provide “insurance” against cost overruns. The word
“contingency” is usually used to describe this additional cost element. The contingency is
typically based on a “rule of thumb” calculation, as a certain percentage of the estimated
cost. A figure of 10% of gross costs is a common allowance. The use of a better specified
contingency will only be effective if suitable project control procedures are in place to
control all aspects of project performance. However, it should be noted that improved
contingency planning can never be a substitute for good project cost management.
2.5.2. Phases in Building Construction for Cost Management

According to Bill, et al, (2006) there are three phases for construction cost management
theses are: Planning phase, Design phase and Construction phase.
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i) Planning Phase
This is a critical stage in the cost management process; an inaccurate planning can doom
a project to continual stress and compromise, neither the client, end-user nor design team
being completely satisfied at the end. A common mistake at this stage is to apply those
historical data without making adjustments for the myriad factors which affect
construction costs such as size of the project, location, price increases, delivery system,
overall quality of the project envisioned, etc [Bill, et al, 2006].
Early cost estimates are employed in the early planning phases of a proposed project to
match an owner' ' s needs, expressed as written programmatic requirements, with budget
constraints in order to establish its overall scope and quality expectations. Value
Engineering should also be considered at this stage. Any changes to the program at this
early phase have very little, if any, impact on schedule and redesign costs, but the benefits
in terms of solidifying the program and establishing project goals can be huge.
Most owner and designer cost control problems are created at the planning stage of a
project. At this time, client needs sometimes are understated in order to justify a project.
More often than not, client needs are not fully known and thus are oversimplified [Donald
E. Parker, 1984].
ii) Design Phase
Once an initial budget has been established, the scope set and the quality expectations
documented, it is important to monitor the estimated cost of the project by employing a

series of increasingly precise cost estimating techniques that coincide with further
development of design and construction details.
Estimates are employed at various stages of project design development as part of
ongoing cost management, and as a means of evaluating competing alternatives. The
drawings and specifications should also go through a constructability review, wherein the
construction documents are analyzed for completeness, coordination between activities,
cost effective designs, and general code compliance. The specifications should also be
67
reviewed to ensure that the general requirements included are not overly restrictive (e.g.
working hours, noise restrictions and so forth).
iii) Construction Phase
At the bid stage, drawings should be nearly 100% complete; however, in many instances
this does not happen, leading to addenda being issued to clarify details, resolve conflicts or
to complete the design. The preparation of the bidding documents is also crucial in an
overall cost management strategy. Consideration should be given to contract clauses that
govern changes in the work and how they will be valued; allowable mark ups on changes
by the various levels of contractors and sub-contractors; notice requirements for delays; the
use of unit prices for changes and any other clauses that may affect the final cost of the
project.
During construction, usually, the focus shifts from predictive cost estimating to reactive
cost control of any changes in the work. Changes arise from a number of different sources;
unforeseen conditions, owner generated changes, drawing errors and omissions, code issues
or contractual claims, etc. In addition, changes can arise from ongoing proactive cost
management, generated either by the consultant, the client or by the contractor, where one
of the parties proposes a better value substitution.
2.5.3. Construction Cost Estimate
Ahuja, (1994), states that estimating is the primary function of the construction industry;
the accuracy of cost estimates starting from early phase of a project through the tender
estimate can affect the success or failure of a construction project [Ahuja 1994]. He also
states that many failures of construction projects are due to the result of inaccurate
estimates. A study conducted in United Sates of America on cost estimation problems
associated with pioneer energy projects and process plants revealed that 74% of cost
growth was caused by underestimation, that is, improper estimation (Merrow, 1988).
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Cost is a major factor in most decisions regarding construction; since construction cost
estimate is prepared before the actual construction of the project, much study and thought
must be put into the construction documents. However, estimates made in the early phases
of a project are particularly important because they affect the most basic decisions about a
project: whether it will be undertaken at all; how large it will be; how elaborate,
sophisticated and durable it will be.
As projects develop, there is continual competition among issues of quality, size,
performance and cost. Owners want the biggest building with the best finishes and systems
that will perform over time for the least amount of money. With these criteria, conflicts are
bound to arise. The design and construction team uses estimates to insure that good cost
information is developed and a feed back loop established so that these conflicts can be
addressed as quickly as possible. Estimates are products of information supplied by the

designer, the owner, and the suppliers. Estimates are not guarantees of costs; used properly,
however, they can be important tools in bringing a project under or at budget with the
appropriate features for the owner. The costs developed during design stage and even at the
bidding stage are almost never the final and complete costs of a construction project. In
theory, the unknowns (i.e. the risks associated with a construction project) can be shown to
decrease as the project progresses to completion. The question of accuracy is often raised;
the best possible estimate will always contain a number of key risks. The goal of the
estimator is a practicable level of accuracy. An estimate can only be as accurate as the
information upon which it is based.
2.5.3.1. Cost Estimating at different Stages of a Project
All projects begin with an idea and end by filling a need. As a project is proposed and then
developed, through time the estimate preparation and information will change based on the
needs of the owner or the designer. Generally, cost estimating is a dynamic process that
begins in the early stages of a project and ends when the project is completed and turned
over to the owner.
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It is important to consider the project stages at which estimates can realistically and
usefully be produced so that there is a sound basis for deciding whether or not to proceed to
the next stage. The number of stages in a project is influenced by the project delivery
strategy adopted. According to Nigel J. Smith, (1995) traditional civil engineering projects
can be divided into six stages: Identification, Appraisal, Definition, Approval,
Implementation and Operation.
These stages may not be appropriate for every project and cannot be adhered to
exclusively, but they do offer a rational and structured approach which is applicable to
many construction projects. Figure 2.1 shows the sequence of these project stages and
indicates the types of estimate used in each stage.
Fig. 2.1 Construction cost estimate with changes in the project stage: (Nigel J. Smith, 1995)
i. Preliminary estimate:
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This is an initial estimate at the earliest possible stages. It is likely that no design data will
be available and that there will be only a crude indication of the project size or capacity.
The preliminary estimate is likely to be of use in the provisional planning of capital
expenditure program.
ii. Appraisal estimates:
Sometimes known as feasibility estimates; these are directly comparable estimates of the
alternative schemes under consideration.
iii. Proposal estimate:
This is an estimate for the selected scheme. A proposal estimate is usually based on a
conceptual design and design study specifications.
iv. Approved estimate:
A modified version of the proposal estimate to reflect the client' ' s views, which is intended
to provide the basis for project cost control.
v. Pre-tender estimate:
A refinement of the approved estimate based on the definitive design work using the
information provided in the tender documents which should be used during bid evaluation
as a marker against which bids can be assessed.

vi. Post-contract estimate:
Once the design documents are complete, companies interested in actually performing the
work price the project. At this level the cost estimate is made by contractors who want to
execute the project. This estimate is the most important. It carries with it legal implications;
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if the bid is accepted, a construction company is legally bound to a specific price for a
specific scope of work.
This estimate serves as a base-line cost for comparing the deviation of the actual cost from
the initial contractors estimate. It also serves for controlling and managing costs during
construction phase.
vii. Achieved cost (Actual Cost):
This is a record of the actual costs of the job in order to review performance and provide
data for future projects. It is useful to compare the actual use and expenditure of allowances
and contingencies with those included in the various estimates.
Fig. 2.2 Estimated Envelope Stepped: the estimated value does not follow a continuous
evolution but is refined in stages when the estimates are produced: (Nigel J. Smith, 1995)
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Every estimate, whether prepared in the early phase of the project or at tender time
considers the same basic issues. Project price is affected by the size of the project, the
quality of the project, the location, construction start time and duration, and other general
market conditions, etc... The accuracy of an estimate is directly affected the availabilities of
data and by the ability of the estimator to properly analyze these basic data.
CHAPTER 3 The Research Design and Methodology
3.1 The Study Approach and Research Type
Kumar, (1999), considers research as a process of collecting, analyzing and interpreting
information to provide solutions to questions. For the purpose of this thesis, research is
defined as a practical investigation or exploration to find out new facts or assemble old
facts by scientific ways for the purpose of developing existing theory or its application for
real problems. Research can either be a theory based (deductive), or a problem initiated for
theory contribution (inductive), or a mixed approach to research.
3.1.1 The research type
The research is a practical problem developed from the observation of construction projects
and the research questions are oriented to investigate the cause of cost overrun and their
effects.
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This research can be categorized as applied, exploratory, descriptive and co-relational type.
It is applied and exploratory because the research was initiated from practical problems and
finds whether there exists cost overrun or not. It is also descriptive and co-relational
because it tried to describe the actual rate of cost overrun and the variables of cost overrun
and tries to draw relationship between contract amount and rate of cost overrun in the
Ethiopian public building construction projects.
3.2 The study scope and limitation
Cost overrun in building construction projects are caused by many factors. Each causes of
cost overrun have different rates of occurrences and their impact on the final cost of the
construction project also varies. Therefore, it is important to identify both key causes of
cost overrun based on their occurrence and their impact on building construction projects.
The effects of cost overrun on the stakeholders, onthe construction industry, and on the
national economy of the country will be identified.
The research work was not with out its problems andlimitations which were encountered
throughout the preparation of this research. Its limitation is the unavailability of adequate
documented information in the field of the study, and the reluctance of some stakeholders
in the construction industry to provide informationrelated to cost.
3.3 Data Source and Collection
The study has used the data sources to produce the following basic documents:
respondents’ documents and archival documents. The respondents’ documents were
collected using questionnaires from clients (project owners), contractors and consultants.
There are two basic types of survey questions from which to choose: open-ended and
closed-ended. This questionnaire survey has both open-ended and closed-ended
questionnaires. Archival documents were mostly from completed projects, in which
contract documents, project reports, correspondenceletters and payment certificates were
investigated thoroughly which were very important in identifying the recurrent problems
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related to cost in the Ethiopian building construction sector. In addition, they helped to
judge how problems on causes of cost overrun arise and how they are documented.
Data collection part of the research is the most tiresome part; the most difficult one is the
respondents’ reluctance to react as per their promised schedule. The time schedule that was
allocated to the research and respondents reluctance not to respond quickly made the
research stressful for the period of data collection.
Owing to the large number of public agencies that own construction projects and the large
number of contracting and consulting companies thatundertake work for public agencies a
survey by questionnaire was found appropriate in addition to the desk study. The
questionnaire was carefully designed in light of getting high response rate from
respondents.
The answers for the structured part of the questionnaire are based on Likert’s-scale of five
ordinal measures of agreement towards each statement (from 0 to 4) as shown in the
following sections. The reasons for adopting this simple scale are:
• To provide simplicity for the respondent to answer,and
• To make evaluation of collected data easier
Likert’s-scale is important to know respondents' feelings or attitudes about something. The
respondents must indicate how closely their feelings match with the question or statement
on a rating scale.
After the variables of cost overrun in building construction projects are identified;
respondents are asked about their agreement on these variables in causing cost overrun.
Accordingly the respondents choose one of the following based on their feeling.
0- I strongly disagree
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1- I don’t agree
2- Neutral
3- I agree
4- I strongly agree
After expressing their agreement and/or disagreement on the variables of cost overrun
respondents are asked about the chances of occurrences of these variables based on the
following choices.
0- Not at all = 0% probability to happen
1- Unlikely = 0% - 25%
2- Likely = 26% - 50%
3- Almost certain = 51% - 99%
4- Certain = 100% probability to happen
After identifying the chances of occurrence of the cost overrun variables respondents were
asked about the impacts of each causes of cost overrun based on the following choices.
0- No significance
1- Minor significance
2- Average significance
3- High significance
4- Extreme significance
After data is gathered on causes of cost overrun, the responsible party from stakeholders in
the construction industry has to be identified for the cause of cost overrun; the
questionnaires are prepared in such a way that detailed information can be gathered in a
systematically prepared matrix table.
3.4 The Research Population
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The research samples are taken from stakeholders inthe construction industry which are
clients (project owners), contractors and consultants, that are selected depending on their
direct exposure to building construction activities. Project owners are selected from both
the Federal and regional public agencies, project owners from Addis Ababa, Amhara and
Oromia were selected. Consultants were selected based on their class categories, such as
consultants above category 4 are selected. Their lists were taken from MoWUD office and
the research samples were selected randomly from the list. Contractors were also selected
based on their grade categories, General contractors (GC) and Building Contractors (BC)
above grade GC/BC 5. Their lists were taken from MoWUD office and the research
samples were selected randomly from the list. Building projects with contract amount
greater than or equal to one million birr are surveyed in the desk study.
3.5 Method of Analysis
Both descriptive and inferential statistics are employed in the data analysis. In the analysis
the “Mean Score” method is adopted to establish therelative importance of the causes of
cost overrun for public building construction projects in Ethiopia. As discussed earlier
Likert’s scale of five ordinal measures of agreement towards each statement (0, 1, 2, 3 and
4) is used to calculate the mean score for each factor that is used to determine the relative
ranking.
The mean score (MS) for each variables of cost overrun is computed by using the following
formula;
MS = ∑(f x S)
------------------------------------------------------------------- [3.1]
Where:
MS – Mean Score

77
f– Frequency of responses for each score
S– Scores given to each factor (from 0 to 4)
N– Total number of responses concerning each factor
The Spearman (rho) rank correlation coefficient is used for measuring the differences in
ranking between two groups of respondents scoring for various factors (i.e. clients versus
consultants, clients versus contractors, and consultants versus contractors).
The Spearman (rho) rank correlation coefficient forany two groups of ranking is given by
the following formula.
Rho (ρcal) = 1 – 6 x (Σ ΣΣ Σd
) ------------------------------------------------------- [3.2]
N x (N
– 1)
Where:
Rho (ρcal) – Spearman rank correlation coefficient
– The difference in ranking between each pair of factors
N – Number of factors (variables)
Procedure for hypothesis testing:
1. Define the null hypothesis (H0) and the alternative hypothesis (H
A
)
2. Choose a value for ρ. (i.e. choose the significance level)
3. Calculate the value of the test statistic, Rho (ρcal).
78
4. Compare the calculated value with a table of the critical values of the test statistic.
5. If the calculated value of the test statistic is less than the critical value from the
table, accept the null hypothesis (H
). If the absolute (calculated) value of the test
statistic is greater than or equal to the critical value from the table, reject the null
hypothesis (H
0) and accept the alternative hypothesis (H
).
3.6 Writing of the Research
The research contains four main parts. These are the research proposal, the literature review
part, the research methodology and analysis, and the final research writing. The research
proposal writing was already taken place. The literature review part took the longest period
of the research. During this period, different documents were collected and tested against
the research objectives and the relevant information were taken. Finally all the notes taken
down were linked to produce a document; the differences in perceptions between authors
being noted down. The final research part was written after analyzing all primary and other
support documents to test the actual existing situation of the construction industry towards
the research objectives. Finally, the conclusions and recommendations part was written.
The final research writing was classified into the following five major parts for final
presentation.
Chapter I: Introduction
Chapter II:Literature Review
Chapter III:The Research Design and Methodology
Chapter IV:Data Analysis and Discussion
Chapter V: Conclusions and Recommendations
79
Data Analysis
and Discussion
1.
2.
3.
Literature Review
• Literature search using books, journals
and internet.
• Identify the variables of cost overrun
• Study and explore the causes of cost
overrun and its effect
• Study construction cost estimate and
cost management
• Distribution of questionnaires to
stakeholders in the construction
industry
• Desk study on public building
construction projects
• Evaluate the existence and extent of
cost overrun
• Evaluate the causes, the occurrence
and the impact of the variables of cost
overrun
• Evaluate the effects of cost overrun
• Test for the agreements of
respondents’ response
Data Collection
1.
2.
80
Fig. 3.1 Flow chart of research methodology
CHAPTER 4 Data Analysis and Discussion
4.1. Introduction
This part of the research deals with the analysis and discussion of the data gathered from
the desk study and questionnaire survey. It includes the identification of the existence and
extent of cost overrun, relationship between rate of cost overrun and contract amount, main
causes of cost overrun, rate of occurrences of variables of cost overrun, the impact of the
variables of cost overrun on the final/total cost of the project. Finally, the effects of cost
overrun on the various stakeholders, on the construction industry, and on the national
economy in general will be dealt.
The procedure used in analyzing the results was aimed at establishing the relative
importance of the various factors responsible for cost overrun and their effects. The
questionnaire gave each respondent an opportunity to identify the factor that was likely to
cause cost overrun by giving the response “I strongly disagree”, “I disagree”, “I agree”,
etc…; frequency occurrence of the variables of costoverrun ; and the impacts of each cost
Conclusions
1.
2.
Recommendation
1.
• Conclude the findings
• Recommendation for improvements
• and suggestion for future research
81
overrun variables on the final cost of the project.For each variables of cost overrun, the
percentages of respondents’ response were ranked for analysis purpose. On the basis of the
ranking of the variables by the various groups, it was possible to identify the most
important factors that influenced cost overrun in public building construction projects in
Ethiopia.
From the desk study a variety of completed public building construction projects
throughout Ethiopia were surveyed. During the desk study all the documents of each
project such as correspondence letters, project report, payment certificate, the contract
amount, contract time during signing of the contract actual cost and actual completion time
at completion of the project were thoroughly investigated. These help to understand the
reasons behind each project for cost overrun, and to investigate how the actual cost at
completion deviates from the contract amount. Collecting these data helped to analyze and
draw the relationship between rate of cost overrun and contract amount.
4.2. Questionnaire Response Rate
Detailed questionnaires were designed and distributed for the assessment of cost overrun
on public building construction projects in Ethiopia, for this purpose the questionnaires
were distributed to major stakeholders in the construction industry; these are Contractors,
Consultants and Clients (project owners). To make the analysis more comprehensive a total
of 63 questionnaires were distributed to consultants, contractors and clients (project
owners) out of which 42 questionnaires were filled and returned. Table 4.1 below shows
the number of questionnaires distributed to clients, consultants and contractors and the
number of questionnaires returned from these stakeholders including their percentage
response rate.
Table 4.1:Summary of number and percentage of questionnairesdistributed
and returned; and response rate
82
4.3. Existence and Extent of Cost Overrun
The first
step in this
research is to check whether cost overrun in public building construction projects in
Ethiopia had been found existent or not. On the basis of data gathered from the desk study,
out of 70 public building construction projects investigated 67, (95.7%), public building
projects suffered cost overrun. From this result, the number of construction projects that
suffered cost overrun in Ethiopia are more than thenumber of projects that suffered cost
Questionnaire
distributed
Questionnaire
Returned
Response
Rate No. Respondent
No. (%) No. (%) (%)
1 Client 18 28.57 13 30.95 72.22
2 Consultant 23 36.51 15 35.71 65.22
3 Contractor 22 34.92 14 33.33 63.64
Total/Average 63 100.00 42 100.00 66.67
83
overrun in other countries, as indicated in the literature review part of this thesis Flyvbjerg,
et al, (2003), found that 9 out of 10 projects experienced cost overrun.
The total cost overrun ranges from the minimum amount of 0% to the maximum amount of
126% of the contract amount for individual projects; andthe mean rate of cost overrun was
found to be about 15.14% of the contract amount. These results show that the rate of cost
overrun in Ethiopian public building construction projects is less than the values found by
other researchers in different parts of the world. For example, Al-Momani, (1996), found
that at project completion the actual cost exceeds the original contract price by about 30%.
Table 4.2, below shows the types of public building projects, contract amount, contract
time, actual cost and actual time at completion, and rate of cost overrun.
84
Table 4.2: Summary of project type, contract amount and actualcost, contract time and actual
completion time forpublic building
construction projects
Item
No.
Project
No. of
Projects
Sum of Contract
Amount, x10
(Birr)
Sum of Actual
Cost at
Completion,
x10
3
(Birr)
Sum of
Contract
Completion
Time (days)
Sum of
Actual
Completion
time (days)
Sum of Cost
Overrun,
x10
(Birr)
Cost
Overrun
(%)
Educational
Buildings 29 579,654.49 631,703.16 17,074.00 30,025.00 52,048.67 8.98
2 Office Buildings 15 81,602.00 93,714.40 7,462.00 12,860.00 12,112.40 14.84
Residential
Buildings 10 149,574.00 171,906.75 4,856.00 7,545.00 22,332.75 14.93

4 Health Buildings 9 85,096.00 124,867.04 3,509.00 5,977.00 39,771.04 46.74
5 Industrial Buildings 4 68,705.00 85,219.42 1,630.00 4,090.00 16,514.42 24.04
6 Others 3 21,786.00 28,309.60 789.00 1,945.00 6,523.60 29.94
Total/Mean 70.00 986,417.49 1,135,720.36 35,320.00 62,442.00 149,302.88 15.14
Source: various
85
From the above Table 4.2, it can be seen that the rate of cost overrun has significant
variations for the different types of public building construction projects. From the desk
study it was found that educational buildings projects have the lowest rate of cost overrun
with 8.98% of the contract amount. Which means educational building projects required an
additional cost of 8.98% to accomplish the project.The reasons for rate of cost overrun to
be relatively low in these projects is that, for educational projects the type of buildings that
are being built are similar in architectural, structural, electrical, and sanitary designs for
different locations, hence scope of the works in these building projects are known very well
and the change orders/variations are minimal, if any. The cost overrun in theses projects are
most of the time due to increase in the cost of construction materials and due to unexpected
or unforeseeable ground conditions, etc... Health buildings have the highest rate of cost
overrun with 46.74% of the initial contract amount.Which means health buildings required
an additional cost of 46.74% to accomplish the project.
4.4 Relationship between Rate of Cost overrun and Contract Amount
In the literature review part of this research paper it was indicated that the size of the
project determines the rate of cost overrun, however, it is important to determine how rate
of cost overrun varies with project size. As indicated in the literature review part of this
thesis, there were two ideas which contradict each other; Randolph, et al, (1987), found that
cost overrun rates decreased with increase in the contract amount of construction projects,
while Rowland, (1981), found that cost overrun rates increased with increase in the
contract amount of construction projects. This section of the thesis will identify the
relationship between rate of cost overrun and contract amount; how the rate of cost overrun
varies with contract amount.
The graph on Figure 4.1 shows that the rate of costoverrun decreases with the increase in
contract amount. That is small projects, in terms of contract amount, have higher rate of
cost overrun while large projects have low rate of cost overrun. This is in agreement with
86
Randolph, et al, (1987), who found cost overrun rates decreased with increase in the
contract amount of construction projects.
Generally, one can conclude from the graph that the rate of cost overrun decreases with
increase in the contract amount; that is rate of cost overrun is higher for small projects, and
it is smaller for bigger projects. Thus, the size of estimated cost has a significant negative
impact on percentage cost overrun rates indicating that percentage overrun tend to be lower
the higher estimated costs are. Since cost overrun rate decreases with estimated cost of
projects, this may indicate that larger projects generally are under better management as
compared to smaller ones. For small projects the emphasis given is little, as the consultant
and supervisor assigned for these small projects isnot a well qualified one and the time
allocated for planning and design of these small projects is short. Hence, there might be
some mistakes in their design and contract document preparation that ultimately lead to
changes or variations and consequentially these projects will face higher rate of cost
overrun. For bigger projects the emphasis given is big, and the consultant hired and
supervisor assigned for these projects is a qualified one and the time allocated for planning,
design and contract document preparation of theses projects is enough to complete the
whole design and contract document preparation accurately.
87
Fig 4.1 Contract amount versus rate of cost overrun
Contract Amount Vs Rate of Cost Overrun
Y =89.03 X
-0.907
R = 0.75
= 0.56
-20.00
40.00
60.00
80.00
100.00
120.00
140.00
- 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00
Contract Amount (ETB) X 10
6
Y
Rate of Cost
Overrun (%)
M Sc. Thesis on Causes and Effects of Cost Overrun on Public Building Construction Projects In Ethiopia
‘
88
4.5 Causes of Cost Overrun from Desk Study and Questionnaire Response
It has been found from the desk study that the mostcommon causes of cost overrun are
supplementary agreement, price fluctuation of construction materials particularly cement,
reinforcement bar, fuel, and asphalt; change orders or variations due to enhancement
initiated by clients, excess quantity during construction, unexpected or unforeseeable
ground condition, mistakes during planning, design and contract documents preparation,
etc,… Most of the time site works, such as fence, site sanitary installation, site electrical
installation, and internal access roads are forgotten in the original design, specification
and/or contract document preparation. Furthermore, in some complex projects some
items are fraught to be missed out; all these problems which were created during planning
and design stage will lead to excessive cost overrun during construction phase.
When the cost of a project exceeds by more than 10%of the contract amount, consultants
prepare the so called “supplementary agreement.” Inthis “supplementary agreement” the
prices for items of work, which were not included in the original contract documents are
not accompanied with rebate and the unit price quoted for these new items of works will
be relatively higher than the original unit price. This makes the cost overrun much greater
than it should have been, had the contract and the design been prepared with care and due
diligence from the start. Generally, supplementary agreements increase construction costs
tremendously and tarnish the reliability of the consultant and they always become a
source of friction among the different parties involved in the project. Valuation of unit
prices is also a source of conflicts among project participants.
The causes of cost overrun from the questionnaire survey are identified based on
respondents’ response on each variables of cost overrun in causing cost overrun. For
example, causes of cost overrun identified by the different researchers, as indicated in the
literature review part of this thesis, might not becauses of cost overrun for the Ethiopian
construction industry cases, hence it is important to ask the respondents for their
agreement on each particular variables of cost overrun, then this is accompanied by
‘
89
identification of causes of cost overrun based on their occurrence, for example, force
majeure related causes of cost overrun occur less frequently but their impact, if they
happen, is devastating one and they increase the ofcost the project substantially, hence
identifying the rate of occurrence alone can not help in identifying the critical causes of
cost overrun that are more prevalent for Ethiopian construction industry. To clearly
identify the most common causes of cost overrun it is important first to identify the
causes of cost overrun for Ethiopian public building construction projects, and then
identify their rate of occurrence and finally theirimpact on the final cost of the project.
The factors which are chosen by the respondents to be causes of cost overrun in the
Ethiopian public building construction projects are identified from the returned
questionnaires based on the mean scores (MS) of thethree groups of respondents, clients,
consultants and contractors for each variables costoverrun. In this research variables of
cost overrun which have a mean score of greater than 2 are taken as causes of cost
overrun; since a mean score of less than 2 means the respondents do not agree that the
variable will be a cause of cost overrun.
Table 4.3, below shows the causes of cost overrun for Ethiopian public building
construction projects, based on the responses of clients, consultants and contractors;
‘
90
Table 4.3:Causes of cost overrun
No Hypothesized Causes of Cost overrun
MS of
Client
MS of
Contrac
MS of
Consult
Weig
hted
Avg. Responsible Party
Inflation or increase in the cost of
construction materials 3.00 3.67 3.14 3.26
Government &
others
Lack of planning and coordination or less
emphasis to planning 3.17 3.33 3.21 3.24
Client &
Consultant
Fluctuations in the cost of labor and/or
material or any other matter affecting
the cost of the execution of the works
and subsequent legislation that affect
the project (Clause 70) 3.42 3.33 2.64 3.11
Government &
others
4 Insufficient geotechnical investigation 2.92 3.00 3.29 3.08 Consultant
Additional costs due to variations
works (Clause 51.1) 3.00 3.00 3.21 3.08 Consultant
Change in foreign exchange rate (for
imported materials) 2.75 3.50 2.93 3.05
Government &
others
Change orders and/or lack of control

on excessive change orders 2.75 3.08 3.14 3.00
Client &
Consultant
Costs due to special risks which very
often include out break of war, projectile
missile, hostilities, contamination and
other such risks (Clause 65) 2.92 3.00 3.07 3.00
Government &
others
Delay of drawings and/or order requested
by the contractor in accordance with Sub
Clause 6.3 (Clause 6.4) 2.75 3.08 3.07 2.97 Consultant
10 Changes in Plans and drawings 2.75 2.83 3.14 2.92
Clients, end user, &
Consultants
11 Inappropriate/inexperienced contractor 2.75 2.83 3.07 2.89
Clients, Consultant
& Contractor
12
Encountering of not foreseeable
physical obstructions and conditions
(Clause 12) 2.75 2.92 2.86 2.84
Consultant &
others
13
Failure to identify problems and
institute necessary and timely design
and programming changes 3.08 2.67 2.71 2.82
Consultant &
Contractor
14
Failure on the part of the employer to give
possession of the site in accordance with
the terms of the contract (Clause 42.1) 2.92 2.75 2.79 2.82 Client
15
Inaccurate quantity estimate or
excess quantity during construction 3.25 3.33 2.00 2.82 Consultant
16
Unclear specifications or changes
to specification 2.75 3.00 2.64 2.79 Consultant
17 Contractors bankruptcy 2.67 3.17 2.57 2.79 Contractor
‘
91
18 Cost under estimation 2.92 3.08 2.43 2.79
Client, Consultant
& Contractor
19
Additions and/or enhancement required by
clients or end users 2.17 2.92 3.14 2.76 Client & end user
20
Difficulties in obtaining construction
materials in the local market 3.00 2.75 2.57 2.76
Government &
Contractor
21
Errors in setting out which are based
on incorrect written data supplied by
the Engineer (Clause 17) 3.00 2.75 2.57 2.76 Consultant
22
Ambiguities or discrepancies of
documents (Clause 5.2) 2.83 2.83 2.57 2.74 Consultant
23
Loss or damage due to excepted risks or
employers risk (Clause 20) 2.50 2.83 2.43 2.58
Government, Client
& others
24
Suspension of work ordered by the
Engineer (Clause 40.1) 2.58 2.58 2.57 2.58 Consultant
25 Complexity of construction projects 2.75 2.42 2.36 2.50
Consultant &
Contractor
26
Poor communication among contractor,
consultant, and the client 2.42 2.50 2.50 2.47
Client, Consultant
& Contractor
27
Mistakes during construction or defective
work 2.42 2.67 2.36 2.47
Consultant &
Contractor
28 Supplementary/additional agreement 2.75 2.58 2.14 2.47 Client & consultant
29
Cost associated with test of samples
not provided in the contract (Clause 36.4) 2.42 2.25 2.57 2.42
Client &
Consultant
30
Funding problems or client's shortage
of finance or delayed payments to
contractors 2.00 3.00 2.21 2.39 Client
31 Lack of end user involvement 2.50 2.25 2.36 2.37
Client, Consultant
& end user
32
Executive bureaucracy in the client’s
organization 2.42 2.50 2.14 2.34 Client
33
Uncovering of works that has already
been completed, but they are found
to be executed in accordance with
the contract (Clause 38.2) 2.50 2.17 2.21 2.29
Client &
Consultant
34
Acceleration required by the owner
(shortening of contract time) 2.33 2.75 1.79 2.26 Client & end user
35
Indemnities that the employer has
contractually undertaken to assume
(Clause 22.2) 2.42 2.42 2.00 2.26 Client & others
36
Different consultant for Design,
Supervision & Contract Administration 1.58 2.33 2.71 2.24 Consultant
37
Increase in tax/change in government
fiscal/monetary policies 2.25 2.75 1.71 2.21 Government
38
Searching for defects which are not the
fault of the contractor (Clause 50) 2.17 2.50 1.93 2.18

Client &
Consultant
‘
92
39
Fossils or discovery of things of
geological or archeological interest
(Clause 27) 2.25 2.00 2.21 2.16 Others
As we can see from Table 4.3 above, the major causes of cost overrun are inflation or
increase in the cost of construction materials, poor planning and coordination or less
emphasis to planning, fluctuation in the cost of materials according to clause 70 of
MoWUD, 1994, etc which are in agreement with the literature review. However there are
some differences between the results of the literature review and the questionnaire
survey. In the Ethiopian construction industry delayed payments are tolerated by
domestic contractors but delayed payments are not tolerated by foreign contractors
operating in Ethiopia, foreign contractors claim for additional payment for the interest
rate on delayed payments. Domestic contractors tolerate delayed hand over of
construction sites but foreign contractors do not tolerate delayed hand over of
construction sites by employers; foreign contractors claim to be compensated for idle
hours of man power and equipments due to the delay. These are due to cultural
differences between domestic contractors and foreign contractors; domestic contractors
which suffered from delayed payments and late site hand over, say that such tolerance is
to avoid adversarial relationship with the stakeholders on that project and hence to create
conducive working environment. Actually, this is not the only reason for such tolerance;
sometimes they tolerate such things to escape penalties due to their own mistakes, one of
the commonest contractors’ problems is delay due totheir own problems.
Contrary to the literature review, increase in workmen’s wage can not be a cause of cost
overrun in the Ethiopian case. If there is an increase in work men’s wage due to inflation
or due to some other problems in the country, this increased wage rate will be shouldered
by the contractor, it will not pass to the project owner as in the case of rise in the cost of
cement, fuel, reinforcement bar and asphalt. In the Ethiopian construction industry the
contractor can be compensated for the increase in the cost of cement, fuel, reinforcement
bar and asphalt. For other items, unless and otherwise specified in the particular
conditions of contract, price increase is not compensable for contractors.
‘
93
Without prioritization of the causes, and identification of the responsibilities, the
solutions to cost overruns will be incomplete. Identifying the stakeholders in the
construction industry who are responsible for causing cost overrun in public building
construction in Ethiopia are some of the most important information needed to take
corrective measures for minimizing or avoiding cost overrun. Identification of
responsible party is useful to understand who causes cost overrun so that concerned
parties will give more attention to minimize or avoid the problem of cost overrun.
From the desk study it was found that each party blames the other for causes of cost
overrun. From the clients' point of view most of the time consultants are responsible for
causing the problem, project owners believe that had the designs, specifications and
contract documents been done and prepared correctlyfrom the start, there wouldn’t have
been late change orders and ‘unexpected ground conditions’, etc... From the consultant’s
point of view it is the project owners that initiate late changes and hence it is the client
who is responsible for initiating cost overrun mostof the time.
In the questionnaire survey the responsibility was rated among the parties that could be
involved directly or indirectly in public building construction projects including project
owners (clients), consultants, contractors, end users, government, and others.
Identification is done based on the information gathered through the questionnaire and
selecting the maximum percentage in each case. The identification of the responsible
party for causes of cost overrun was shown in Table4.3.
Lack of planning and coordination or less emphasis to planning, changes in plans,
drawings and specifications, insufficient geotechnical investigations, inaccurate quantity
estimate, unclear specification, etc… are found to be the fault of the consultant.
‘
94
Additions or enhancement required by the client, funding problems or clients shortage of
finance, late site handover to the contractor by clients, etc… are found to be causes of
cost overrun for which project owners or clients are found to be responsible.
Contractors bankruptcy, inexperienced or inappropriate contractor, etc are found to be
caused by the contractor problems, inflation or increase in the cost of construction
materials, change in foreign exchange rate (for imported materials) are found to be
caused by government related actions or others such as international or national market
conditions, foreign government influences or general global conditions.

4.5.1 Identifying Causes of Cost Overrun based on Rate of Occurrence
The most frequent causes of cost overrun were assessed from respondents and results are
given in Table 4.4 below. From the 53 causes of cost overrun which have a mean score of
greater than or equal to 2 (MS ≥ 2) rate of occurrence are considered as important
because there is at least a probability of 50% chance for the occurrence.
Table 4.4 shows causes of cost overrun based on rate of occurrence. The table shows the
mean scores of clients’ contractors’ and consultants’ with their weighted average mean
score.
‘
95
Table 4.4:Rate of occurrences of causes of cost overrun
No. Hypothesized Causes of Cost Overrun
MS of
Clients
MS of
Contract
MS of
Consult
Weig
hted
Avg.
Inflation or increase in the cost of construction

materials 2.50 3.58 3.07 3.05
Fluctuations in the cost of labor and/or material or any
other matter affecting the cost of the execution ofthe
works and subsequent legislation that affect the
project (Clause 70) 2.83 3.25 2.43 2.82
Change in foreign exchange rate (for imported
materials) 2.00 3.25 2.93 2.74
Change orders and/or Lack of control on excessive
change orders 2.42 2.75 2.86 2.68
Lack of planning and coordination or less emphasis to
planning 2.58 3.00 2.43 2.66
6 Additional costs due to variations works (Clause 51.1) 2.58 2.83 2.57 2.66
Failure to identify problems and institute necessary
and timely design and programming changes 2.50 2.42 2.71 2.55
9 Insufficient geotechnical investigation 2.33 2.25 2.93 2.53
10 Contractors bankruptcy 2.25 2.83 2.50 2.53
11
Difficulties in obtaining construction materials inthe
local market 2.67 2.42 2.50 2.53

13
Inaccurate quantity estimate or excess quantity during
construction 2.67 3.00 1.86 2.47
14
Delay of drawings and/or order requested by the
contractor in accordance with Sub Clause 6.3 (Clause
6.4) 2.17 2.58 2.07 2.26
15 Inappropriate/Inexperienced contractor 2.17 2.08 2.43 2.24
16 Unclear specifications or changes in specification 2.00 2.33 2.29 2.21
17 Supplementary/additional agreement 2.25 2.42 1.86 2.16
18
Ambiguities or discrepancies of documents (Clause
5.2) 2.00 2.67 1.86 2.16
19
Poor communication among contractor, consultant,
and the client 2.17 1.83 2.21 2.08
20
Encountering of not foreseeable physical obstructions
and conditions (Clause 12) 1.92 1.92 2.21 2.03
21 Executive bureaucracy in the client’s organization 2.00 2.25 1.79 2.00
22
Suspension of work ordered by the Engineer (Clause
40.1) 1.83 2.08 2.07 2.00
23
Failure on the part of the employer to give possession
of the site in accordance with the terms of the contract
(Clause 42.1) 1.67 2.00 2.29 2.00
‘
96
24
Funding problems or client's shortage of finance or
delayed payments to contractor 1.67 2.28 2.17 2.00
As indicated on Table 4.4 above, inflation or increase in the cost of construction
materials, change in foreign exchange rate, and lack of planning and coordination or less
emphasis to planning, change orders or variation orders are the top most frequently
encountered causes of cost overrun. Where as force majeure related causes of cost
overrun such as out break of war, hostilities, uprisings, etc..., are rarely encountered in
the Ethiopian construction industry. Since the occurrences of causes of cost overrun
related to force majeure are rare, they have low rank.
4.5.2 Identifying of causes of cost overrun based on Impact
As discussed previously identifying the rate of occurrence only will not help in
identifying factors that are critical in causing cost overrun; regardless of the chance of
occurrence the significance of the factor independently has to be gauged with respect to
its severity, when it happens during construction phase.
Table 4.5 shows causes of cost overrun based on impact. The table shows the mean
scores of clients’ contractors’ and consultants’ with their weighted average mean score.
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97
Table 4.5:Impact of causes of cost overrun
No. Hypothesized Causes of Cost Overrun
MS of
Client
MS of
Contract
MS of
Consult
Weighted
Avg.
Inflation or increase in the cost of
construction materials 2.92 3.67 3.21 3.26
Fluctuations in the cost of labor and/or
material or any other matter affecting
the cost of the execution of the works
and subsequent legislation that affect
the project (Clause 70) 3.25 3.33 2.93 3.16
Costs due to special risks which very

often include out break of war,
projectile missile, hostilities,
contamination and other such risks
(Clause 65) 3.17 3.00 3.21 3.13
Change in foreign exchange rate (for
imported materials) 2.42 3.58 3.21 3.08
Additional costs due to variations works
(Clause 51.1) 2.67 3.33 3.21 3.08
Changes orders or lack of control on
excessive change orders 2.67 2.92 3.07 2.89
8 Insufficient geotechnical investigation 2.75 2.75 3.07 2.87
Difficulties in obtaining construction
materials in the local market 2.83 3.08 2.57 2.82
10
Ambiguities or discrepancies of
documents (Clause 5.2) 2.67 2.92 2.86 2.82
11
Encountering of not foreseeable
physical obstructions and conditions
(Clause 12) 2.75 2.75 2.93 2.82
12 Contractors bankruptcy 2.67 3.08 2.64 2.79

13 Inappropriate/Inexperienced contractor 2.75 2.67 2.93 2.79
14
Lack of planning and coordination or
less emphasis to planning 2.58 3.17 2.43 2.71
15
Failure to identify problems and
institute necessary and timely design
and programming changes 2.58 2.50 2.86 2.66
17
Failure on the part of the employer to
give possession of the site in
accordance with the terms of the
contract (Clause 42.1) 2.25 2.75 2.86 2.63
18
Inaccurate quantity estimate or excess
quantity during construction 2.92 3.08 2.00 2.63
20
Unclear specifications or changes in
specification 2.42 2.83 2.43 2.55
‘
98
21
Delay of drawings and/or order
requested by the contractor in
accordance with Sub Clause 6.3
(Clause 6.4) 2.42 2.83 2.36 2.53
22
Suspension of work ordered by the
Engineer (Clause 40.1) 2.42 2.58 2.50 2.50
23
Errors in setting out which are based on
incorrect written data supplied by the
Engineer (Clause 17) 2.42 2.83 2.21 2.47
24
Additions and/or enhancement required
by clients or end users 1.92 2.58 2.71 2.42
25
Funding problems or client's shortage
of finance or delayed payments to
contractors 1.83 3.00 2.43 2.42
26
Mistakes during construction or
defective work 2.33 2.50 2.07 2.29
27 Supplementary/additional agreement 2.33 2.58 2.00 2.29
28
Loss or damage due to excepted risks

or employers risk (Clause 20) 2.50 2.50 1.93 2.29
29 Complexity of construction projects 2.33 2.00 2.43 2.26
30
Executive bureaucracy in the client’s
organization 2.25 2.33 2.00 2.18
31
Indemnities that the employer has
contractually undertaken to assume
(Clause 22.2) 2.25 2.50 1.86 2.18
32
Poor communication among contractor,
consultant, and the client 1.92 2.25 2.29 2.16
33
Acceleration required by the owner
(shortening of contract time) 1.92 2.67 1.79 2.11
35
Different consultant for design and
Supervision & Contract Administration 1.50 2.33 2.29 2.05
From Table 4.5 above finance related causes of costoverrun such as inflation or increase
in the cost of construction materials, fluctuation in the cost of materials according to
Clause 70 of MoWUD conditions of contract, etc and force majeure related such as out
break of war, up risings, etc have higher impact on the final cost of the project at
completion. Even if force majeure related causes ofcost overrun have severe impact on
the final cost of the project at completion their rate of occurrence is low.
‘
99
4.6 Tests for Agreements on Causes of Cost Overrun Among Stakeholders
in the Construction Industry
One of the purposes of this thesis is to investigate whether there is agreement or not on
the attitudes of stakeholders towards the causes of cost overrun on public building
construction projects in Ethiopia. Hence in this section respondents’ response will be
tested for correlation using Spearman rank correlation coefficients, to see if there is
difference in ranking between two groups of respondents; these are Clients versus
Contractors; Contractors versus Consultants; and Clients versus Consultants, on the
variables of cost overrun and their rate of occurrence.
The purpose of a hypothesis test is to avoid being deceived by chance occurrences.
The tests also helped to evaluate whether consensusof opinions exist among respondents.
The Null Hypothesis (HO) is:
There is no agreement in the ranking of causes of cost overrun between two groups of
respondents
The Alternative Hypothesis (HA
) is:
There is agreement in the ranking of causes of cost overrun between two groups of
respondents
‘
a
100
The spearman correlation coefficient (ρ) is calculated using Equation 3.2 and tabulated as
shown below in Table 4.6,
In order to decide whether to accept or reject the null hypothesis, the level of significance
95% (P= 0.05) is used. This allows to state whether or not there is "agreement" between
respondents response.
If the calculated value of ρis greater than the critical value, H
is rejected, i.e. there is
evidence of a statistically significant agreement between the groups. If the calculated
value of ρ is less than the critical value, H
is accepted, i.e. there is no evidence of a
statistically significant agreement between the twogroups.
Table 4.6:Summary of correlation test on the ranking of causes of cost overrun
In this case, with a significance level of 95% (P =0.05), the calculated value of ρfor all
the three group cases are greater than the criticalvalues of ρ, so the hypothesis that there
is no significant agreement between the respondentsis rejected i.e. the null hypothesis is
rejected.
From Table 4.6 above, it can be concluded that there is strong correlation between the
attitudes of the respondents in all the three groups and hence the null hypothesis should
Respondents
Rho (ρχαλ)
= 1 - (6x∑d
i
(Nx(N
-1))
Critical value of
(Appendix B )
Significance
forP < 0.05
Reject/don’t
reject the Null
Hypothesis
Client Vs Contractor 0.690 0.364 significant reject
Contractor Vs Consultant 0.627 0.364 significant reject
Client Vs Consultant 0.573 0.364 significant reject
‘
101
be rejected and the alternative hypothesis shall beaccepted. This means that most of the
respondents have the same perception about causes of cost overrun.
In a similar way correlation test is done for rate of occurrences as shown below in the
following section.
The spearman correlation coefficient (ρ) is calculated using Equation 3.2 and tabulated as
shown below in Table 4.7,
Table 4.7:Summary of correlation test on the ranking of variables of cost overrun based
on chance of occurrence
In this case, with a significance level of 95% (P =0.05), the calculated value of ρfor all
the three group cases are greater than the criticalvalues of ρ, so the hypothesis that there
is no significant agreement between the respondentsis rejected i.e. the null hypothesis is
rejected.
From the above Table 4.7, it can be concluded that there is strong correlation between the
attitudes of the respondents in all the three groups and hence the null hypothesis should
be rejected and the alternative hypothesis shall beaccepted. This means that most of the
respondents have the same perception on frequency of the occurrences of variables of
cost overrun.
Respondents
Rho (ρχαλ)
= 1 - (6x∑d
(Nx(N
-1))
Critical value
of ρ
(Appendix B
Significance
forP < 0.05
Reject/don’t
reject the Null
Hypothesis
Client Vs Contractor 0.923 0.400 significant reject
Contractor Vs Consultant 0.829 0.400 significant reject
Client Vs Consultant 0.840 0.400 significant reject
‘
102
4.7 Effects of Cost Overrun
From the survey results almost all respondents agreed on the severity of the effects of
cost overrun on the project owner (client) or end user. Although the degree of effects of
cost overrun varies on the stakeholders in the construction industry, all the parties
involved are affected by cost overrun. The first victim of cost overrun would be the
project owner since he has envisaged his construction project to be realized within an
allocated cost and time frame. Anything outside these stated frames are cost overrun and
time overrun to the client.
Cost overrun does not affect only those parties that are involved directly in the
construction of a project, but its effects pass to the construction industry as a whole and
consequently to the national economy of the country.
Cost overrun for public clients, whose financial resources are scarce, has many effects
and it will be a source of friction between the public client and the consultant. When the
cost overrun is due to financial constraints of clients, the construction projects suffer lots
of problems which further aggravate the problems of cost overrun. For public projects
cost overrun will lead to delay as the public clients do not have enough financial
resources which are ready to be pumped to the construction project, they require new
approval for these additional costs from higher public officials or Ministry of Finance and
Economic Development (MoFED), in doing so time willgo on and consequent delay on
the project will crop up. Which lead to further cost overrun as a construction project is
delayed for a long period of time it will be subjected to inflationary pressure and interests
will be accumulated.
Even if it is not common in the Ethiopian construction industry to abandon a public
building construction project due to cost overrun, projects suffer excessive delay from
‘
103
cost overrun, which subsequently lead to additional cost overrun as the duration of a
project is extended the price of materials will rise which subsequently lead to additional
costs not only to the project owner but also to thecontractor and to the consultant which
participate on that project until completion. And the contractor will incur an additional
cost due to idle man power and idle equipments.
Generally, the following are the main effects of cost overrun which are collected from the
respondents of the questionnaire survey and desk study.
1. Delay,
2. Supplementary agreement,
3. Additional cost, budget short fall,

4. Adversarial relationship between participants of the project,
5. Loss of reputation to the consultant, the consultant will be viewed as incompetent
by project owners,
6. High cost of supervision and contract administration for consultants,
7. Delayed payments to contractors,
8. The contractor will suffer from budget short fall of the client,
9. Poor quality workmanship,
10. Dissatisfaction by project owners and consequently by end users,
11. Negative attitude towards the construction industryby the higher public authority
and by the society as a whole,
12. The contribution of the construction industry to the growth of national economy
of the country will be less,
13. Cost overruns in construction projects prevent the planned increase in property
and service production from taking place, and this phenomenon in turn affects, in
a negative way, the rate of national growth
14. Weakens the growth of the construction industry by eroding mutual trust and
respect,
‘
104
15. Pours money unnecessarily to the project at hand at the expense of other new
projects,
16. Distorts fair and equitable resource distribution,
17. Discourage investment, the investment on building construction by public clients

will be less, hence the number of projects will decrease in the future,
18. Creates skeptical outlook on appraisal of other newconstruction projects,
19. Some project owners (clients) become reluctant to effect additional payments to
contractors and they view the cost overrun as a fabricated thing. This will propel
to delay the project and become a source of dispute among participants of the
project,
20. Creates frustration on stakeholders.
One of the common effects of cost overrun is delay; this in turn affects clients,
consultants and contractors. Furthermore, lengthy delays increase cost overruns
tremendously.
Excessive cost overrun requires additional budget, this in turn eat up the scarce financial
resources of the country, which lead to further budget short fall for construction projects.
This prevents the planned increase in property and service production from taking place,
and this phenomenon in turn affects, in a negative way, the rate of national growth. Cost
overrun will also be a source of dispute among stakeholders and it will lead to adversarial
relationship among project participants. Project owners will loose confidence on
consultant and on professionals in general. To the industry as a whole, cost overruns
could bring about a drop in building activities, bad reputation, and inability to secure
project finance easily form public authorities in the future.
All these effects undermine the viability and sustainability of the construction industry.
‘
105
CHAPTER 5 Conclusions and Recommendations

5.1 Conclusions
Financial resources are so scarce in developing countries like Ethiopia, hence, cost
related issues in the Ethiopian construction industry are sensitive issues. Therefore,
carrying out a research in this area will have a paramount importance.
Identification of causes of cost overrun is a prerequisite to minimize or to avoid cost
overrun in the construction industry. The main objective of this research is, therefore, to
identify and investigate the critical causes and effects of cost overrun on public building
construction projects in Ethiopia. Desk study was used to identify the existence and
extent of cost overrun on public building construction projects in Ethiopia. Questionnaire
survey was also used to identify the causes and effects of cost overrun. Clients,
consultants and contractors were asked to identify the variables of cost overrun in the
Ethiopian construction industry. Frequency of occurrence of the variables of cost
overrun, and their impacts on the final cost of theproject were also asked. Agreements of
the respondents on the causes of cost overrun, i.e.between client and consultant, between
client and contractor, and between consultant and contractor were also tested. The data
gathered from the survey are analyzed using the mean score (MS) and correlated using
Spearman correlation coefficient (rho, ρ). The analysis of the results from the open-ended
part of the questionnaire was carried out using descriptive analysis.
From the results of the analysis of desk study and respondents’ responses the following
conclusions are drawn.
1. Justification of the existence and extent of cost overrun on public building
construction projects is important before identifying the causes of cost overrun. 67
out of 70, (95.7%), public building projects investigated in the research suffered
cost overrun in their execution. For these public building construction projects,
the actual cost overrun ranges from 0% to 126% of the contract amount.
‘
106
2. Rate of cost overrun is found to be influenced by the contract amount. The
regression analysis of the data gathered from desk study for 70 public building
construction projects shows that the rate of cost overrun is found to decrease with
increase in the contract amount.
3. There are significant variations in the total amount of cost overrun for the
different types of public building construction projects investigated in this
research. From the survey educational buildings have the lowest rate of cost
overrun, where as health buildings have the highestrate of cost overrun.
4. From the results of this thesis 39 causes of cost overrun were identified by the
respondents. The causes of cost overrun were identified based on the responses of
the respondents. The most frequent causes of cost overrun are also identified by
the research based on the ranking of the rate of occurrences of the variables of
cost overrun. The most common causes of cost overrun are inflation or increase in
the cost of construction materials, change in foreign exchange rate (for imported
materials), change orders and/or lack of control on excessive change orders,
failure to identify problems and institute the necessary and timely actions.
5. There is strong correlation on the responses of respondents, i.e. between client
and contractor; between contractor and consultant; and between client and
consultant in ranking causes of cost overrun and the rate of occurrences of the
variables of cost overrun.
6. From the research it was found that consultants aremost of the time found to be
responsible followed by clients for the problems of cost overrun in the
construction industry.
7. From this research clients are those who are severely affected by cost overrun,
since they are forced to look for additional money to complete the construction
‘
107
project. However, it should be noted that clients, consultants, contractors, and
even the national economy of the country are all affected by cost overrun.
8. There are many effects of cost overrun to stakeholders in the construction
industry. The most common effects of cost overrun in the construction industry
are; delay, supplementary agreement, budget short fall of project owners,
adversarial relationship among stakeholders, and loss of reputation for
professionals on the construction industry especially to consultants.
5.2 Recommendations
Based on the findings of the research, the following recommendations are expected from
key role players in construction projects.
5.2.1 Expected from Consultants
The consultant is one of the key role players in construction projects that translates the
clients’ needs and ideas in to plans and drawings and supervises the translation of these
plans and drawings into visible physical structures. The following recommendations are
expected from consultants.
1. Continuous coordination and direct communication, which will eliminate design
discrepancies and errors as well as omissions in design and also provide an

opportunity for professionals to review the contract documents thoroughly. This
would help in eliminating change orders or variations due to discrepancy in
contract documents.
2. Provide comprehensive information required for easier interpretation of the
drawings and setting out of the works. Specifications should also be standardized
as much as possible for ease of understanding by project participants; ensure
adequate and realistic specifications of materials and methods are stated in the
contract documents.
‘
108
3. Detailed and comprehensive site investigation should be done at the design phase
to avoid variations and late changes during the construction phase.
4. As much as possible avoid complex designs, while trying to achieve aesthetic
appeal, consider seriously the issue of build ability in the design.
5. Build-in adequate flexibility in design to respond more proactively to imminent
changes in client needs and requirements; after completion of designs and plans,
cross-check designs and details to eliminate errors.
6. Adopt efficient information retrieval and distribution systems to guard against
communication gaps; respond as quickly as possible to contractor and client
questions and requests for clarification to avoid associated delays and confusions
which consequentially will lead to cost overrun.
7. Ensure that the scope includes all the work required, and only the work required
to complete the project successfully. Guard against incomplete identification of

scope to avoid frequent changes; do not incorporateunnecessary works to avoid
distractions and a drain on scarce resources.
8. Implement the necessary measures to reduce construction cost, since construction
cost reduction is one way of reducing potential cost overrun.
5.2.2 Expected From Clients/Project Owners
Clients are one of the most important parties who invest their money for realization of
construction project, and they are the key role players starting from conception through
construction up to operation of the project. The following recommendations are expected
from clients.
‘
109
1. Clients should allow sufficient time to prepare project briefs and other feasibility
studies. Allow sufficient time for proper feasibility studies, planning, design,
information documentation and tender submission. This helps to avoid errors and
omissions that consequentially help in avoiding or minimizing cost overrun.
2. Ensure comprehensive articulation and communication of owner and end-user
needs and requirements during briefing sessions; client goals should be
sufficiently accurate and realistic.
3. Fulfill contractual obligations, especially as regards to payment of contractor's
works duly executed, or settlement of fees accountsof consultants and possession
of construction site. Clients should ensure that adequate funds are available before
projects are started, so that contractors can be paid in accordance with the contract
agreement.
4. Employ professionals to work as counter part with consultants and contractors.
5. Select suitable contractors not only on the basis of price and time offerings, but
also on experience, financial standing, capacity and expertise.
6. Minimize red-tape; that is, minimize unnecessary and excessive bureaucratic
procedures in the clients’ organization.
7. Implement cost reduction incentive proposals
5.2.3 Expected From Contractors
Contractors are one of the stakeholders who participate directly on the construction
projects; accordingly the following recommendationsare expected from contractors.
1. Procure construction materials and other items in collaboration with the client
ahead of time.
2. Solve problems and propose solutions on construction projects proactively.
‘
110
3. Minimize adversarial relations with stakeholders onconstruction projects.
4. Ensure efficient time management through proper resource planning, duration
estimation, and schedule development and control; to avoid delay and hence to
avoid cost overrun due to delay.
5.2.4 Expected From Government
Most public projects are financed by the government; hence, the government is one of the
key role players in public construction projects. The following recommendations are
expected from government authorities.
1. Phasing of large construction projects by the government, this helps the economy
from becoming ‘overheated’ this in turn avoids the consequential effects of
inflation and hence avoids cost overrun on construction projects.
2. The government must create a climate of economic stability that is sufficient to
inspire investors, especially in the production of construction materials to be
produced from local materials and production of enough quantity and quality of
construction materials in the local market, this will curtail excessive price
fluctuations associated with imported construction materials.
3. Make the required budget available on time.
4. Carry on capacity building programs for professionals and for firms on the
construction industry. There must be programs for institutional strengthening and
man power development in the areas of construction project management.
5. Assist individuals, organizations and institutions in the construction industry on
research and development of appropriate construction management techniques
and technology which will help to reduce problems related with cost overrun.
6. Create opportunity for domestic consultants in the construction industry to work
as joint venture with foreign consultancy firms.
‘
111
7. Work with private investors and financiers to co-finance public projects to
overcome problems related with finance.
All stakeholders in the construction industry have to work for improving the out puts of
the construction industry and to sustain a healthy growth of the industry. Especially
consultants, contractors and clients have to use a holistic approach for solving problems
in the construction industry; they have to familiarize themselves to the latest technology
and methods to solve problems and look for solution proactively. Institutions and
academicians in the construction industry have to work hand-in-hand with practitioners in
the industry. A combined effort of stakeholders is necessary to apply the results of
researches conduct in the construction industry.

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CAUSES AND EFFECTS OF COST OVERRUN

ON PUBLIC BUILDING CONSTRUCTION PROJECTS

A Thesis Submitted to the School of Graduate Studies of

Addis Ababa University, Faculty of Technology

In partial fulfillment of the requirement for the Degree of

Master of Science in Civil Engineering

(Construction Technology and Management)

ADDIS ABABA UNIVERSITY

SCHOOL OF GRADUATE STUDIES

CAUSES AND EFFECTS OF COST OVERRUN ON PUBLIC BUILDING

CONSTRUCTION PROJECTS IN ETHIOPIA

APPROVED BY THE BOARD OF EXAMINERS

_________________ _______________ ______________

Student Signature Date

_________________ _______________ ______________

Advisor Signature Date

__________________ _______________ ______________

Chairperson, Department’s Signature Date

__________________ _______________ ______________

Chairperson, Faculty’s Signature Date

__________________ _______________ ______________

Dean, Graduate School Signature Date

PUBLIC BUILDING CONSTRUCTION PROJECTS IN ETHIOPIA” is my original

thesis have been duly acknowledged.

thanks since their inputs are worthwhile.

Table of Contents ..................................................................................................................... i

List of Tables ......................................................................................................................... iii

List of Figures ........................................................................................................................ iv

1.1.............................................................................................................. The study Overview 1

1.2..........................................................................................Construction Industry in Ethiopia 1

1.3...................................................................................... Challenges ofConstruction Projects 2

1.4.................................................................................................... Objectives of the Research 4

1.5...................................................................................................... The Research Motivation 5

1.6........................................................................ Overview of the Research Process and Study 5

CHAPTER 2 LITERATURE REVIEW .........................................................................7

............................................................................................. 2.2.1 Definition of Cost Overrun 8

2.3.........................................................................................................Causes of Cost Overrun 9

2.4.........................................................................................................Effects of Cost Overrun 23

2.5................................................................................................................. Cost Management 24

........................................................................................2.5.1 Controlling construction Costs 25

................................................... 2.5.2 Phases in Building Construction for Cost Management 26

.............................................................................................2.5.3 Construction Cost Estimate 28

..............................................................................2.5.3.1 Project Stages for Cost Estimating 29

CHAPTER 3 THE RESEARCH DESIGN AND METHODOLOGY .........................33

3.1...............................................................................The Study Approach and Research Type 33

.............................................................................................................3.1.1 The research type 33

3.2.............................................................................................. The study scope and limitation 33

3.4.......................................................................................................The Research Population 36

3.7.........................................................................................................Writing of the Research 38

CHAPTER 4 DATA ANALYSIS AND DISCUSSION ................................................41

4.2................................................................................................ Questionnaire Response Rate 42

4.3.....................................................................................Existence and Extent of cost overrun 43

4.4.........................................Relationship between Rate of Cost overrun and Contract Amount 45

...................................4.5.1 Identifying Causes of Cost Overrun based on Rate of Occurrence 54

......................................................4.5.2 Identifying Causes of Cost Overrun based on Impact 56

4.7.........................................................................................................Effects of Cost Overrun 62

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS ........................................65

............................................................................................... 5.2.1 Expected from Consultant 67

..................................................................................................... 5.2.2 Expected from Clients 69

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