Cost

Cost & Cost overrun: its Regulation & Management under the MDB-FIDIC (2006) &PPA (2011) 2015
Condition of Construction Contracts & the Applicable Laws: with special emphasis to Price Adjustment
CHAPTER ONE: INTRODUCTION
1.1 Back ground of the study
Construction has become an important player in the economy of many countries. According to
Olawale (2010), the industry contributes to the GDP and employment rate of many nations and
hence it was considered as vital for the economic development of any nation. Furthermore, he
(Olawale (2010)) affirmed that construction activities have become a significant market due to
the fact that this industry procures products and material from other businesses in other sectors.
One cannot think of widespread investment in manufacturing, agriculture or service sector unless
the construction results of infrastructure facilities are in place.
In practice, most construction projects encounter cost overrun, delay on completion time or poor
workmanship up on completion. According to (Chimwaso, 2001) one of the challenges facing
the construction industry in developing countries is the chronic problem of construction cost
overruns. As a result, the contract sum cannot always be regarded as a firm price. Even where the
work is ordered based on “fixed price”, measurements related to provisional work, adjustment of
prime cost and provisional sums and variation orders will still occur (Chimwaso, 2001). The
costs arising from these unforeseen circumstances are a sure cause for the adjustment of the
contract sum. Consequently, the initial tender price is not what is finally paid, due to the many
factors that influence cost overruns. It goes without saying that this results in poor cost
performance of construction projects, leaving many clients unsatisfied.
1.2 Objective
1.2.1 General objective
The general objective of this study is to define cost, to identify categories of costs, to identify all
possible causes for construction cost overrun and then to discuss the concept of price adjustment
based on the factors of cost overrun.
Addis Ababa Science and Technology University

School of Civil Engineering and Construction Technology
Department of Construction Technology and Management 1
1.2.2 Specific Objective of the study
1. To define and discuss cost, construction cost and cost overrun.

2. To identify and discuss categories of cost; and their management.
3. To identify the major causes of cost overrun during different phases of
construction and their overall effect. .
4. To focus on the issue of price adjustment based on cost overrun factors.
5. Forward recommendation aimed at solving cost related challenges on building
construction projects.
1.3 Methodology
In achieving the foregoing objectives, the study employed different approaches which includes;
literature reviews related to cost, causes of cost overrun and price adjustment practice; case study
on selected sample projects, interviewing construction profession, and extensive and in addition
standard bidding documents review such as MDB FIDIC 2006 and PPA 2011.
The study encompassed four case study building projects constructed in Addis Ababa,
designated as project A,B,C and D for purpose of this study, though actual document review
(contract and final acceptance document) to obtain enquired project parameters such as contract
cost, actual cost, contract time, actual completion time and other project parameters. Beyond
literature review, interviewing construction profession include general managers, supervisors,
and contract administrators was also conducted to investigate the cause of the cost overrun and
price adjustment practice in the case study projects.

1.4 Scope and Limitation
The research is limited to public building construction projects in Ethiopia. This research
cannot be taken as conclusion for all public building construction projects in Ethiopia due to
sample limited only four projects case study. The major limitation of the study include lack of
organized project document, unwillingness for the stakeholders in proving project documents
due to confidentiality nature of the inquired data, and reluctant of the professionals for interview.

CHAPTER TWO: LITERATURE REVIEW
2.1 General
Ethiopia is amongst the fastest growing non- oil economies in the world. The country has
showed a remarkable growth over the past ten years. The average annual growth GDP is 10.9%
(UNDP, 2014). This figure is double of the Sub Sahara Africa and triple of the world average
growths indicating that Ethiopia is one of the fastest economic growths in the world .According
to the economic review of UNDP for the third quarter of 2014, the contribution of the industry
sector for the annual economic growth of the country is increasing due to the exuberant
performance in the construction sub- sector. The construction industry trend in the past 10 years
shows a yearly growth rate of 12.43 and this shows a share of 5.3% of the country‟s GDP
(ECIDP, 2014).
The construction industry involves the mobilization and utilization of capital, specialized
personnel, materials, and equipment to assemble materials and equipment on a specific site in
accordance with drawings, specifications, and contract documents to create a unique facility,
product or service within the specified scope, quality, time, and cost .
Though the construction sector is given high prominence, several defects are being noted in the
sectors that need immediate action. One significant problem is the fact that current
infrastructure and construction projects show significant cost and time variation (ECIDP,
2014). Although completion of a construction project with intended budget is frequently seen as
a major criterion of project success by clients, contractors, consultants and related stakeholders ;
it is very common to see construction projects failing to achieve their mission of creating
facilities within the specified cost and time as a result of uncertainties raised from factors such as
construction complexity; presence of various groups with their respective interest such as the
project owners, end users, consultants, contractors, financiers; materials, equipment, project

funding; climatic environment; the economic and political environment and statutory
regulations.
One of the common features that construction projects face as a bi-product of the above
mentioned failure is cost overrun.
The cost overrun on projects results in poor investment returns from the use of the project, delay
in the utilization of the public facilities and extended inconvenience for the public in practice.
Hence, identification of the root causes of the challenges and pointing the possible way out in
consultation with stakeholders are critical factor. In doing so, it intends to identify underlying
causes for cost variation of construction projects. Moreover, it would serve as a basis for further
research in the area
2.2 Cost and Construction cost
2.2.1 Definition
Cost: is monetary valuation of effort, material, resources, time and utilities consumed,
businesses of risks incurred, and opportunity forgone in production and delivery of a good or
service
Construction Cost: is all expenditure reasonably incurred (or to be incurred) by the contractor,
whether on or off the Site, including overhead and similar charges, but does not include profit
(MDB FIDIC 2006).
2.2.2 Categories of cost
Cost can be classified in many different ways. Tadesse Yemane,( 2006 )has categorized the cost
components in the following manner:
a)Direct construction costs
Direct construction costs are all costs that can be specifically recorded with an activity in a
project. The direct cost cover the largest portion of the total project cost and these costs can be
budgeted, monitored and controlled far more effectively than the indirect costs.

The direct costs mainly include material, labor, equipment and subcontract costs as described
below.
i. Direct material costs
ii. Direct labor costs
iii. Direct equipment costs
iv. Subcontract costs
a) Indirect costs
Indirect construction costs are all costs, which cannot be directly booked under a specific activity
in a construction project but required to keep the whole project operational. These costs are also
called overhead costs, which mainly include the head office and site overhead costs as listed
below.
i. Head office costs
Head office overhead costs are all costs required to run the whole operation of the construction
company, which usually administers different projects at a time. These include: Senior
management costs, indirect labor costs (salaries and benefits of staffs other than the senior
management members), head office building costs, bidding expenses, expertise service costs i.e.
for professional services such as external auditors, lawyers, management consultants and
external trainings, office furniture and equipments, office running expenses, workshops, garages
and warehouses, bank charges, insurance charges, transportation and travel expenses and sundry
(miscellaneous) expenses.
ii. Site over head costs
Site overhead costs are all costs required to run the whole operation of a specific construction
project at site level. These include: Site management costs, indirect labor costs (salaries and
benefits of staffs other than the site management members working at the project site such as site
engineers, office engineers, administrative and finance staffs), mobilization and demobilization
costs, site offices, office furniture and equipments, office running expenses, radio
communications, camp facilities, access roads, water and power supply, workshops, garages and
warehouses, bank charges, transportation and travel expenses.
c) Risk allowance
It is very essential to incorporate risk allowance in pricing for construction project pricing. This
helps to compensate the negative impacts of different risks such as contractual, technical,
political and economic risks. Contractual risks are usually stemming from the contract
agreements with the project owner, subcontractors and suppliers. Technical risks are associated
usually with the clarification of the technical specifications, working drawings, construction
technology and difficulties in understanding new method of constructions.
Political and economic risks reflect the impact of political situations, stability of economic
policies, inflation and price fluctuation of the inputs (material, labor, equipment and other related
costs) on the execution of the intended construction project. The quality and accuracy of
construction cost estimation can be continually improved as the construction execution
progresses where more detailed and actual data become available.
2.2.3 Cost management
Cost management is the most essential part of project management running through the entire
life of a project. According to PMBOK 2000, the project cost management includes the process
required to insure that the project is completed within the approved budget. The major process in
cost management encompasses; resource planning, cost estimating, cost budgeting and cost
control.

Table below overview the major processes in Project cost management (adapted from PMBOK
2000)
Project Cost management
1. Resource 2. Cost 3. Cost 4. Cost

Planning Estimating Budgeting Control
Table 2.1 Major processes in project cost management (PMBOK 2000)
1. Resource planning: - involves determining what physical resources (labor, equipment,

materials) and what quantities of each should be used and when they would be needed to
perform project activities. The inputs of resource planning includes work break down
structure, historical information, scope statement, organizational policy and activity duration
estimates.
Figure 2.1 Inputs, Tools, Techniques and Outputs of Resource Planning (PMBOK 2000)
 Work break down structure: - identifies the project deliverables and processes that will need
resources and thus are the primary inputs to resource planning. Any relevant outputs from
other planning process should be provided through the work break down structure to insure
proper control.

 Historical information: - regarding what type of resources were required for similar work on
previous project should be used if available.
 Scope statement: - contains the project justification and the project objective.
 Organizational policy: - the policies of the performing organization regarding staffing and the
rental or purchase of supplies and equipments.
 Activity duration estimates: - are quantitative assessments of the likely number of work
periods that will be required to complete an activity.
The output of resource planning processes is description of what type of resource are
required and in what quantity for each element at the lowest level of work breaks down
structure.
2. Cost Estimating: - involves developing an approximation (estimate) of the costs of the
resource needed to complete the project activity. In approximating cost, the estimator should
consider the cause of variation of the final estimate for purpose of better managing the
project. when a project is performed under contract care should be taken to distinguish cost
estimating from pricing .cost estimating involves developing an assessment of the likely
quantitative result –how much will it cost the performing organization to provide the product
or service involved? Pricing is business decision –how much will the performing
organization charge for the product or service. The input parameters for cost estimating
includes work breakdown structure, resource requirement, resource rate, activity duration
estimate, estimating publication, historical information and risk for each activity.

Figure 2.2 Inputs, Tools, Techniques and Outputs of Cost Estimating (PMBOK 2000)
3. Cost Budgeting: - involves allocating the overall cost estimate to individual work activities
or work packages to establish a cost base line for measuring project performance. Reality
may dictate that estimates are done after budgetary approval is provided, but estimates should
be done prior to budget request whenever possible. The cost baseline is a time phased budget
that will be used to measure and monitor cost performance on the project. It is developed by
summing up the estimated costs by period and is usually displayed in the form of S-curve.
The input parameters for cost budgeting involves work break down structure, project
schedule and risk management plan.
Figure 2.3 Inputs, Tools, Techniques and Outputs of Cost Budgeting (PMBOK 2000)

4. Cost Control: - Cost control during the construction process is vital to ensure the success of
a project; it is concerned with but not limited to;
 Monitoring cost performance to detect and understand variances from plan.

 Ensuring that all appropriate changes are recorded accurately in the cost baseline.
 Preventing incorrect, inappropriate, or unauthorized changes from being included
in the cost baseline.
 Informing appropriate stakeholders of authorized changes.
 Acting to bring expected costs within acceptable limits.
Input parameters in cost control involves cost baseline, performance reports, change requests,
and cost management plan. Among the listed tools and techniques in cost control, Earned value
management (EVM) obtained much emphasis in cost control of construction projects.
Figure 2.4 Inputs, Tools, Techniques and Outputs of Cost Control (PMBOK 2000)
Earned Value Management (EVM) has proven itself to be one of the most effective performance
measurement and feedback tools for managing projects. it provides organizations with the
methodology needed to integrate the management of project scope, schedule, and cost. EVM can
play a crucial role in answering management questions that are critical to the success of every
project, such as Are we ahead of or behind schedule? , How efficiently are we using our time? ,
When is the project likely to be completed? , Are we currently under or over our budget? , How
efficiently are we using our resources? , What is the remaining work likely to cost? , What is the
entire project likely to cost? , How much will we be under or over budget at the end?

In summary, Earned Value Management relies on three key data points: Planned Value (BCWS),
Earned Value (BCWP), and Actual Cost (ACWP) to facilitate the planning and control of cost
and schedule performance. (PMI – EVM, 2005).
 Planned Value (PV), otherwise called Budgeted Cost of Work Scheduled (BCWS) is the
budgeted cost for the work scheduled to be completed on an activity or WBS component up to
a given point in time.
 Earned Value (EV) otherwise called Budgeted Cost of Work Performed (BCWP), is the
budgeted amount for the work actually completed on the schedule activity or WBS component
during a given time period.
 Actual Cost (AC), otherwise called Actual Cost of Work Performed (ACWP),is the total cost
incurred in accomplishing work on the schedule activity or WBS component during a given
time period.
Figure2.5 Earned Value Analysis (Lecture note by Wubishet Jekale)
Generally, EVM performance analysis and forecasting includes:
Variances:
a) Schedule Variance (SV) = BCWP - BCWS

b) Cost Variance (CV) = ACWP - BCWP

c) Variance at Completion (VAC) = BAC - EAC
Indices:
a) Schedule Performance Index (SPI) = BCWP / BCWS
b) Cost Performance Index (CPI) = BCWP / ACWP
c) To- Complete Performance Index (TCPI) = (BAC-EV)/(BAC-AC)
Forecasts:
a) Time Estimate at Completion (EACt) = BAC/CPI
b) Estimate to Complete (ETC) = (BAC -BCWP) / CPI
c) Estimate at Completion (EAC) = ACWP + ETC
Table below shows interpretation in Earned value analysis for both cost and time performances
measures.
Table 2.2 Earned value analyses for cost and time performance measure (Lecture note by
Wubishet Jekale)

2.3 Cost overrun
2.3.1 Definition
Different scholars and journals give different definition for cost overrun. According to (Endut et
al 2005) cost overrun is defined as an extra cost beyond the contractual cost agreed during the
tendering stage of project life cycle. From construction management perspective it is perceived
to be the difference between the final project cost and the original contract amount (Hinze and
Seistead 1991).
According to (Jackson 1990) cost overrun is the change in contract amount divided by the
original contract award amount. This calculation can be converted to a percentage for ease of
comparison. For the purpose of this research cost overrun is defined as the difference between
the actual construction cost at the time of completion and the original cost estimate of the
project.
2.3.2 Causes of cost overrun
A successful project means that the project has accomplished its technical performance,
maintained its schedule and remained within budgetary goals. However it is uncommon to see a
construction projects to achieve its goal within the specified cost, time and quality. Several
studies were carried out in different parts of the world for the identification of cost overrun
factors in construction projects.
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 cost estimating, additional work and shortening of
contract periods. Elina and Buba(1994), carried out a survey and found that material cost,
fraudulent practices, material price increment and poor planning were the most important causes
of cost overrun .

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 rate, inappropriate
contractors, funding problems and force majeure. Amusan (2011), found that inadequate
planning, inflation, variation order and design changes constitute major factors contributing to
cost overrun.
Fetene Nega(2008) affirmed that in his study parties blamed each other for encountered cost
project escalation in the Ethiopian construction industry. Fetene Nega(2008) then suggests that it
was important to identify the stakeholders who are responsible for causing cost overrun in public
building construction projects in order to evolve corrective measures. He reported that that there
were claims made by clients concerning issues related to design, specification and contract
documentation.
Table 2.3 indicates causes and corresponding responsible parties for cost overrun Fetene Nega
(2008)
No Causes of cost overrun Responsible parties

1 Inflation or increase in the cost of construction Government & others
Material
2 Lack of planning and co-ordination or less emphasis on Client & consultant
Planning
3 Insufficient geotechnical investigation Consultant
4 Additional cost due to variation work Consultant
5 Change in foreign exchange rate (for imported Government & others

materials)
6 Change orders and/or lack of control on excessive Client & consultant
change orders
7 Changes in plans and drawings Clients, end user, &
consultants
No Hypothesized causes of cost overrun Responsible party
8 Encountering of unforeseeable physical obstructions Consultants & others

and conditions

9 Failure on the part of the employer to hand over Client

possession of the site in accordance with the terms of
the contract
10 Inaccurate quantity estimate or excess quantity during Consultant
construction
11 Cost underestimation Client, consultant & contractor
12 Additions and/or enhancements required by clients or Client & end user
end users
Source: - Fetene Nega (2008)
Chan and Park, (2005), stated that the cost of a construction project is affected by 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 factors which will affect the cost of a
construction projects in different phases of the project will be dealt.
2.3.2.1 During planning phase
Insufficient planning and programming of a project is one of the major causes of cost overrun
and delay in construction. This is a critical stage in estimation of project cost; 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 or previous 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
planning phases of a proposed project to match an owner‟s need expressed as written
programmatic requirements with budget constraints in order to establish its overall scope and
quality expectations. However it has been observed that in several projects, all functional teams
were not involved in the conceptualization stage.

This results in inadequate assessment of the risk and mutual interdependencies that projects
could face in the execution stage. The desired level of collaboration between the project owners
and the contractors also appears to be lacking. Consequently, projects face deviation in scope
which affects the delivery both in time schedule as well as budgeted cost. In majority of projects
scope creep arise due to lack of holistic planning and limited ability of stakeholders to assess all
potential risks .Peetrs and Madauss (2008) stated that the biggest factors that contribute to
overrun of budget is inaccurate estimation of original or initial cost of the project. This is
because of technical problem on how to estimate project costs and also not enough project
information in the early stage of project.
2.3.2.2 During Design phase
During design phase of the project; unforeseen site condition, mistakes in design, lack of
coordination at design phase are some of the common causes of cost overrun in construction
projects. Fetene Nega (2008) found that actual site conditions of projects are not usually
determined until excavation is completed. It is sometimes possible that site conditions are
overlooked by the initial review or conditions are changed due to change of subsoil condition.
The unexpected condition on the sub surface sometimes requires fundamental redesign of
projects with high expense will lead cost overrun. According to Long et al(2008) mistakes in
design or poor design are caused by low competence designer .The approval design or drawing
process become low quality and ineffective especially for those with government funded projects
.The unrealistic design which found after the beginning of construction has change and it could
lead to cost overrun.
2.3.2.3 During bidding phase
During the bidding stage; incomplete design at a time of tender, construction cost
underestimation, poor contractor selection, are some of the causes of cost overrun. This is
supported by the research of Ramabodu and Verster (2010), Mahamid et al. (2011) and Kasimu
(2012). Because of rushing to get the job out on tender, it often goes out with designs which are
subject to more revisions, leading to further cost implications.

This type of practice has shown in more ways that the end results often have cost implications
than cost saving to the project. The incomplete designs often open a window for the client to
increase the scope of the project further, thus resulting in cost overrun to the detriment of the
project. Whereas, if the designs were complete and the client involved in the process; then the
scope could have been finalized without expecting immense changes later that have cost
implications for the project.
In the same vein a more serious situation can confront an owner when there has been deliberate
underestimating of costs in order to obtain project approval. According to studies made by
Flyvbjerg (2003), large projects have been intentionally underestimated in order to obtain voter
support for the financing approvals. He stated 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 project but the problem is deep-rooted during contract cost estimation and tendering stage
[Abukar Warsame, 2006].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, inherent problems in
predicting the future, lack of experience on the part of forecasters, etc [Wachs,1990].Similarly
poor selection of contractors due to low bids with no technical capability to handle the project
will lead to cost overruns, schedule delays, poor quality, and a final result that is not acceptable.
2.3.2.4 During Construction phase
During construction phase of the project additional work by owner‟s request, addition and
omission, material and labor cost increase are some of the causes of cost overrun. The earlier
research done by Azhar et al. (2008) and Kaliba et al. (2009) confirm this case. The professionals
have no total control over what the client wants; if the client was involved during the design
stage it could have been managed. As a result, their approach has to be reactive to the problem as
it arises as they are never allowed enough time to prepare for handling such problems. The lack
of preparation in the design phase exerts a major influence on how the professionals will be able
to handle causes of cost overrun appearing in the construction phase. Addition and omission of

some items from the contract is also another factor which will cause cost overrun at construction
phase. The other critical problem that will happen during construction phase of a project is
material and labor cost increment. Pricing in construction projects is a critical step that has to be
undertaken very carefully. It is a process whereby the organization interested in the construction
of a project attempts to determine the expenditure of resources such as materials, manpower,
machineries, finance and time necessarily to realize the intended project and also determine the
revenue it expects from the execution of the same. The pricing does not only require the study of
the market, but also requires the consideration of other factors that affect the price like risks of
price fluctuation and contingencies. In order to share the problem of price fluctuation between
the contractor and the employer adopting price adjustment in the contract is vital. Therefore if
the contract allows price adjustment the risk will be shared between the parties if not the
contractor will suffer by the problem and cannot handle the project properly. Due to the above
reasons the initial contract amount of the project will be changed and final construction project
cost will overruns .In the following section relationship between the initial and final contract
amount will be dealt.
2.3.3 Relationship of accepted contract amount, final contract price and final
construction project cost
Different scholars have different ideas regarding cost overrun that is between the initial project
cost and the final project cost. Cost overrun rates decreased with increase in the contract amount
of construction projects says Ralph et al (1987) while Rowland, (1981) found that cost overrun
rates increased with increase in the contract amount of construction projects.
The idea of regarding relationship between rate of cost overrun and contract amount; how the
rate of cost overrun varies with contract amount (depends on size of project) may be depend on
project cost because large project (i.e. high contract amount) all preparations and executions
are made in bigger curiosity in which everything will be defined and clearly presented for the
projects while for small project (small contract amount ) the emphasis given is little, all the
preparation and executions were is not seriously or cautiously done . Because of the attention
given for the larger project there is better management when comparing to the smaller project.

This leads to a high probability of cost overrun .Therefore, 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 impact on
percentage cost overrun rates indicating that percentage of cost overrun tend to be lower as the
higher the estimated
2.3.4 Effects of cost overrun
Effect of cost overrun is the consequences that will be encountered when cost overrun occurs on
the construction projects. Fetene Nega(2008) states that cost overrun have obvious effects for
the key stake holders in particular and on the construction industry in general. To the client, cost
overrun implies add costs over and above those initially agreed upon at the onset, resulting in
less returns on investment. To the end users, the added costs are passed on higher rental or lease
costs or price. To the professionals, cost overrun implies inability to deliver value for money and
could tarnish their reputation and results 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
or her chance of winning further jobs, if at fault. To the industry as a whole, cost overrun could
bring about project abandonment and a drop in building activities, bad reputation, and inability to
secure projects finance or securing it at higher costs due to added risks. The effect of cost
overrun are not confined to the construction industry but are reflected in the state of the overall
economy of the country. Delay and cost overrun 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 the national growth.
The study of Fetene Nega(2008) further identified the following as the major effects of cost
overrun; delay during construction, supplementary agreement, additional cost, budget shortfall,
adversial relationship between participants of the project, loss of reputation to the consultant, the
consultant will be viewed as incompetent by project owners, high cost of supervision and
contract administration to the consultant, delayed payment to the contractor the contractor will
suffer from budget short fall of the client and poor quality workmanship.

2.4 Price adjustment
2.4.1 Introduction
Price adjustment is an equitable risk-sharing mechanism, as payments to the contractor can be

adjusted either upwards or downwards in response to actual changes in costs of labor and
selected key materials during the course of the contract. With CPF provisions, the contractor is
made aware at the time of tender that the contract will be subject to CPFS. This awareness helps
to remove the uncertainty of inflation/deflation and hence the contractor can price his tender
based on the current market value without including an additional premium to take account of
possible movement. At the same time, CPFS ensures the employer pays what should be paid,
taking into account prevailing inflation or deflation. (CPFS guide line 2011) Price shall be
adjusted for fluctuation in the cost of inputs only if provided for in the special conditions of
contract .If so provided, the amount provided in each payment certificate, after deducting for
advance payment, shall be adjusted by applying the formula under clause 62 of PPA 2011in
Ethiopia local construction contract and under clause 13.8 of MDB FIDIC for international
construction contract.
2.4.2Types of price adjustment
Three types of adjustments are generally considered and used; including (CPFS guide line 2011)
a) Invoice method: This requires the contractor to produce documentation reflecting any
increase in materials costs which may have occurred between the time the contract was
signed and the time that the materials were actually purchased, passing same on to the
owner.
b) Index method: Under this sort of price adjustment clause, certain material costs are tied
to an index for that applicable commodity, allowing the contract price to fluctuate in
accordance with any regional or local changes to the price index for that commodity.

Contractors should be aware that unlike the invoice method (which passes on increases in
costs), the index method can result in a loss when the cost of materials decreases.
c) Hybrid method: This combines the invoice and index methods and is based on a
“certified bid cost” where the contractor certifies its estimate of the costs of certain
materials or fuel, based on current supplier prices or an index price listing. If the certified
bid cost changes by a pre-set percentage, the contract can be adjusted accordingly
2.4.3Approaches for price adjustment
1. Risk proportion approach
The risk proportion approach represents the most simple and straight forward way to deal with
the price fluctuation risk .The contract sum can be viewed as comprising two parties: one part
composed of elements that more prone to major price fluctuation (the “adjustable elements”) and
the other part made up of elements that are less prone to fluctuation (the “non adjustable
elements”) Adjustable elements generally include materials, equipments and labor. Whereas non
adjustable elements are most commonly costs such as preliminary insurance, project
management costs, design costs contractor‟s site, office & other fixed over heads.
Under the risk proportion approach, the employer will made the proportion of the non adjustable
elements in the contract. This proportion can be varying among contract discipline .Once the
proportion of non adjustable elements is set the employer can decide the minimum level of price
fluctuation above which the risk sharing mechanism becomes effective. The risk proportion
approach is suitable for contracts which have few major cost elements and where the employer
has limited appetite for risk sharing. Because of its easy of application, it can be applied to all
type of contract. (CPFS guide line 2011)

2. CAP approach
The CAP approach is an extension of the risk proportion approach where by the fluctuation
adjustment is capped under a threshold percentage of the contract sum. Such that the risk beyond
a threshold is taken by one party only. Under the CPA approach, the employer sets ceiling for
fluctuation beyond which the risk will be born solely by the employer or the contractor. (CPFS
guide line 2011)
3. Target cost approach
Under this system, target cost is agreed between the employer and the contractor .The employer
will also agree pain/gain-sharing ratio with the contractor, which is usually in the region of
50:50.The aim of both the employer and the contractor is to execute the work within the target
cost. The contract can be formed in two tender stages. Identification of Specified elements in
Stage one and their planned consumption and estimated unit prices in Stage two. The target cost
system is suitable for contracts involving great deal of uncertainty and potentially high risk to
both the employer and the contractor. (CPFS guide line 2011)
4. PFF Approach
Under the PFF approach, price fluctuation factor will be calculated for each of the adjustable
elements in the contract. The individual price fluctuation factor will be considered to form the
combined price fluctuation factor (CPFF) which will be approach to the effective value of the
valuation period to calculate the fluctuation adjustment .The PFF approach is suitable for
contracts where the employer generally accepts the risk of cost fluctuation and it can be used for
both public and private sector construction contracts where there is a number of cost elements
that are expected to fluctuate, and can be used for medium to large works. (CPFS guide line
2011)

2.4.4 Advantage and Disadvantage of Price Adjustment
I. Advantage of Price Adjustment

a) For the Employer
Encourage competitive tenders by releasing contractors from the need to include

speculative pricing for fluctuation in tender bids.
Avoid potential works interruption/termination due to financial difficulties of

contractors associated with increase in construction costs.
Reduces the risk of substandard works due to the use of poor quality or insufficient
materials or labor forces due to unexpected force pressure.
Benefits from reduced construction costs in deflationary economy.
Rationalizes building costs in the long run due to decreased risk and
Enhance a humorous and comparative working environment between employers and

contractors and reduces the risk of commercial disputes.
b) For the Contractor
Avoid loss of competitiveness due to over stated tender amounts to provide for
construction costs increases.
Lowers risk of financial loss /insolvency due to understated tender amounts or

unforeseeable inflation in costs where actual construction costs cannot be recovered
from employer‟s payment.
Ensures compensation by employers for the relevant portion of any increased amount
of construction costs in inflationary economy and
Reduces the scope for commercial disputes.

II. Disadvantages
The disadvantages of adopting price adjustments are;
May require more detailed payment application process requiring more resources and
there for greater cost to manage.
May encourage contractors to speculate on fluctuation compensation.
May introduce an additional variable for the assessment of tender prices.
May create uncertainty in estimating individual project cost.
May appear to increase construction costs in an inflationary economy.
The benefit of fluctuation compensation method may not get passed to lower tiers of
subcontractors.
2.4.5 Practice of price adjustment in Ethiopia on building projects.
In the recent years in Ethiopia, as a result of the successive economic growth, the price of
materials on market is observed to be very unstable. Price of everything has greatly increased
and is being increased. The construction sector is one of the victims of this high price rise of
inputs. And the main actors of construction are contractors how are sustaining the damage at the
front line. The material price fluctuation is unpredictable that contractors cannot easily determine
how the price of materials can go on. And regarding labor and equipments, it can be seen that the
price fluctuation of these inputs can be fairly predictable, that is contractors can fairly determine
how the price of these inputs will go on based on other factors. As construction is a risky
business, contractors should take a good care while giving their offer. The techniques used for
the pricing also differ. The pricing does not only require the study of the market, but also
requires the consideration of other factors that affect the price like risks of price fluctuation and
contingencies. In order to share the problem of price fluctuation between the contractor and the
employer adopting price adjustment in the contract is vital, but practice of price adjustment in
Ethiopia is not widely used and most contractors suffer shortage of finance and delay on the
construction project that lead to disputes between the parties, and the client cannot use the
intended projects on the appropriate time.

However some of the construction projects allow price adjustment in their contract and use the
following formula and procedure for adjustment;
The Price Adjustment formulae is:
Pn = A + Bi(Mni / Moi) + Ci(Lni / Loi) + Di(Eni / Eoi) + etc where;()
Pn = Price Adjustment Factor applied to each payment amount less Advance Payment /
Repayments.
A = Non – Adjustable portion.
B, C, D, etc = weightings of adjustable cost elements net of Provisional Sums / Prices.
Lo, Mo, Eo, etc = Basic Cost indices for adjustable cost elements from sources identified
28 days prior to bid submission date.
Ln, Mn, En, etc = Current Cost indices for adjustable cost elements from same sources
identified 28 days prior to Interim Payment Application is related.
etc. implies for additional Price Adjustment components from the indirect or overhead
cost components or foreign exchange change
The following procedures are used to formulate the Price Adjustment Formulae:
Identifying Price Adjustment (PA) Components that will separately be subjected to

price adjustments,
Identifying Resources for each PA components that will be subjected to price
adjustments,
Identifying Representative Resources to be used for price adjustments,
Identifying Imported Resources whose price adjustments involve foreign exchange

variations,

Assigning / Determining Adjustable Weightings (Bi, Ci, Di, etc) for resources subjected
to price adjustments,
Determining the Non Adjustable Weighting A; which is = 1 - ∑ (Bi, Ci, Di, etc),
Identifying Sources for representative resources and other indicators of cost indices,
Defining type of documents to be used as evidence to show the basic and current price
indices or indicators or information,
Determining the Basic Price indices or indicators or information, and
Define Conditions that disallow price rise adjustments.
The Price Adjustment Formulae are used to determine price adjustments due to direct costs
only. The Overhead price adjustments are determined based on the price adjustments due to
direct costs; that is as proportion (20%) to price adjustments due to direct costs.

CHAPTER THREE: PRICE ADJUSTMENT UNDER MDB FIDIC & PPA
3.1 Under MDB FIDIC 2006
1. The amounts payable to the contractor shall be adjusted for rises or falls in the cost of
labor, goods and other inputs to the works, by the addition or deduction of the amounts
determined by the formulae prescribed in clause 13.8. To the extent that full
compensation for any rise or fall in costs is not covered by the provisions of this or other
clauses, the accepted contract amount shall be deemed to have included amounts to
cover the contingency of other rises and falls in costs.(Clause 13.8)
2. The adjustment to be applied to the amount otherwise payable to the contractor, as

valued in accordance with the appropriate schedule and certified in payment certificates,
shall be determined from formulae for each of the currencies in which the contract price
is payable. No adjustment is to be applied to work valued on the basis of cost or current
prices. (Clause 13.8)
3.2 Under PPA’S Standard bid document 2011
1. Adjustments of contract prices shall be allowed after twelve (12) months from the
effective date of the contract where it is verified that the performance of the contract
requires more than 18 months (Clause 62.1)
2. Request for price adjustment in relation to a particular work items under this contract
may be filed by the contractor after twelve (12) months from the effective date of the
contract where it is verified that the performance of the contract requires more than 18
months, which adjusted price takes effect as the new contract price in relation to that
work item on the expiration of 30 days from the date on which the public body receives
notification of that adjusted price from the contractor, unless another date is agreed in
writing between the parties (Clause 62.2)

3. All prices shall be firm unless the contractor has provided claim for price adjustment. The
contractor may invoke this provision at any time during the contract by notice in writing
to the Engineer (Clause 62.3)
4. Price Adjustment shall be applicable as payable in full for the original scheduled
completion period (Clause 62.5)
5. In the event the completion of contract exceeds the original scheduled period. (Clause
62.6)
6. In case of default on the part of the contractor causing delay in original scheduled
completion, the rate of price adjustment will be frozen at the original scheduled date of
completion; however price adjustment will be applicable till actual completion. While
computing price adjustment beyond the scheduled completion period, in the event the
rate is reduced, then that reduced rate will be applied (Clause 62.6 a)
7. The price adjustment will be payable in full for the extended period if the contractor has
been granted an extension of time for no fault on the part of the contractor, duly approved
by the public body (Clause 62.6 b)
8. Unless specifically stated otherwise in the contract, the basis for compensation will be
only those categories of inputs, which are specifically listed as specified items in the SCC
(Clause 62.7)
9. An adjustment of the contract price, depending of selected categories of contract price,

shall be limited to an amount which takes account of price indexes or price indicators
issued by Ethiopian Central Statistical Agency or Public Procurement and Property
Administration Agency (Clause 62.8)
10. Notwithstanding the provision of GCC sub-clause above, price information available
from a renowned local producer or competent foreign institution may be used in case the
Ethiopian Central Statistical Agency or Public Procurement and Property Administration
Agency are not in a position to issue current price indexes (Clause 62.9)

11. Contractor shall submit to the Public Body for review and approval all calculations and
supporting information necessary to determine the price adjustment(Clause 62.10)
12. Adjustments in compensation may be either plus or minus depending on the differences
between the Benchmark Price Index and the Monthly Price Index (Clause 62.11)
13. To determine the adjustment on each item any such price variation shall be calculated in
accordance with the formula on Clause 62.12 by applying the combination of all criteria
stated from clause 62.1 to 62.11 (Clause 62.12)
14. The fraction for each specified element and exact combination of elements that will be
applied in the formula for price adjustment shall be determined in the SCC (Clause
62.13)
15. An increase in the Contract Price takes effect as the new contract price in relation to the
selected category on the first day of the next payment period following receipt of an
application for increase provided the application is received no later than 14 days prior to
the commencement of that payment period (Clause 62.14)
16. An increase in the contract price takes effect as the new contract price in relation to the
selected categories of inputs on the expiration of 30 days from the date on which the
Public Body receives notification of the increased price from the contractor, unless
another date is agreed in writing between the parties (Clause 62.15)
17. When the contractor varies the contract price of a product or service it must supply a
copy of a revised pricing schedule which incorporates the proposed changes in price and
specifies the date on which the proposed variation in price is to take effect in accordance
with GCC Sub-Clauses 62.14 and 62.15 (Clause 62.16)
18. The Contractor shall, when it notifies or requests a price adjustment under GCC Sub-
clause 62.12, provide to the public body such document or other information as the
contractor considers appropriate for the purpose of substantiating the requested price
adjustment (Clause 62.17)

19. Where the public body questions a price increase notified or requested under GCC sub-
clause 62.12, and the contractor is not able, on the basis of the information it provided to
the public body, to substantiate to the public body any, or a part of, the notified or
requested price adjustment, the contract price shall be increased by only so much as the
contractor is able to substantiate (Clause 62.18)
20. The substantiated increased contract price shall take effect as the new contract price in
relation to the works as the case may be, on the date referred to in GCC sub-clause 62.14
or 62.15 unless another date is agreed in writing between the parties(Clause 62.18 a)
21. The contractor shall, if it has not already done so, supply a suitably revised pricing
schedule in accordance with the requirements of GCC sub-clause 62.16(Clause 62.18 b)
22. Any discount offered by the contractor under this agreement cannot be reduced during
the term of this contract without the agreement in writing of the public body (Clause
62.19)

CHAPTER FOUR: CASE STUDIES
This part of the research presents four case studies selected from actual building projects
implemented in Addis Ababa. The data was collected via interviews with the project's
contractors, consultants and owners. Site visits and reviewing project documents are the core of
data for all case studies. Summarized data of the collected information was presented by
concentrating on the factors influencing cost overruns of these projects.
4.1Case study No 1
4.1.1 Project back ground
This case illustrates one of projects which experienced cost overruns in Addis Ababa. The
project faced a lot of obstacles and problems that concerns every party of the project with variant
degree of responsibility for each party. The project consists of B+G+ 12 building with gross
floor area of 8,348.93m2. The type of contract which is used in this project is unit price contract
and price adjustment is not included in the contract.
Table 4.1 The characteristics of Building project „„A‟‟
Project name Building A

Description of the project The project consists of
B+G+12 building with gross floor area of
8,348.93m2.
Project location Sidist killo.
Contract amount without VAT (birr) 52,472,555.17
Actual amount without VAT (birr) 78,129,236.6
Cost overrun (birr) 25,656,681.43
Cost overrun (%) 48.89
Contract duration (days) 540

Actual duration (days) 1475

Delay (days) 935
Time overrun (%) 173
From the above quantification, it was observed that building “A” project was characterized by
high cost overruns. The reason for cost overrun of the project “A” was investigated though direct
interview of supervisors and contract administrators involved during the construction of the
project and review of recorded documents such as letters, and meeting minutes. Accordingly, the
major cause of cost overrun for the case building project encompasses in the next section.
4.1.2 Assessment
From the information we gathered the most important factors which causes cost overrun for this
project are the following;
In adequate planning
Additional work at owner request
Poor soil condition
Delay in issuing information to the contractor during construction stage
Contractual claim such as extension of time with cost claim
Addition and omission in BOQ
In complete design at a time of tender

4.2 Case study No 2
degree of responsibility for each party.
The project consists of G+4 building with gross floor area of 2,036.3m2. The type of contract
which is used in this project is unit price contract and price adjustment is not included in the
contract.
Table 4.2 The characteristics of Building project “B”

Project name Building B
Description of the project The project consists of
G+4 building with gross floor area of
2,036.3m2.
Project location Around Ambassador.
Contract amount without VAT (birr) 8,122,843
Delay (days) 490
Time overrun (%) 272.22
From the above quantification, it was observed that building “B” project was characterized by
cost overruns. The reason for cost overrun of the project “B” was investigated though direct
interview of Project manager, Office Engineer, supervisors and contract administrators involved
during the construction of the project and review of recorded documents such as letters, and

meeting minutes. Accordingly, the major cause of cost overrun for the case building project
encompasses in the next section.
4.2.2Assessment
project are the following.
Additional works at owner's request.
Contractual claims, such as, extension of time with cost claims
Inaccurate takeoff for the bill of quantity.
Incomplete design at the time of tender.
Addition and omission.
Consultant's delay in giving instructions due to low experience

of the consultant.
4.3 Case study No 3
degree of responsibility for each party. The project consists of G+4 building with gross floor area
of 3958.65m2. The type of contract which is used in this project is unit price contract and price
adjustment is not included in the contract.

Table 4.3 The characteristics of Building project “C”
Project name Building C

Description of the project The project consists of G+4 building with
gross floor area of 3958.65m2.
Project location Kality.
Delay (%) 700
From the above quantification, it was observed that building “C” project was characterized by
high cost overruns. The reason for cost overrun of the project “C” was investigated though direct
interview of Project manager, Office Engineers and Contract administrators involved during the
construction of the project and review of recorded documents such as letters, and meeting
minutes. Accordingly, the major cause of cost overrun for the case building project encompasses;
4.3.2 Assessment
Lack of experience of technical consultants
Change in owners brief
Variation order
Time and cost claim
In compete design at a time of tender

Difference between actual geological condition and the original survey.
4.4 Case study No 4
degree of responsibility for each party. The project consists of G+4 building with gross floor area
of 3628.4m2. The type of contract which is used in this project is unit price contract and price
adjustment is part of the condition of contract.
Table 4.4 The characteristics of Building project “D”
Project name Building D

Description of the project The project consists of G+4 building with
gross floor area of 3628.4m2.
Project location Akaki .
Cost overrun due to price adjustment(birr) 3,325,305.45
Delay (days) 416
From the above quantification, it was observed that building “D” project was characterized by
high cost overruns.

The reason for cost overrun of the project “D” was investigated though direct interview of
supervisors and contract administrators involved during the construction of the project and
review of recorded documents such as letters, and meeting minutes. Accordingly, the major cause
of cost overrun for the case building project encompasses;
4.4.2 Assessment
Incomplete design at a time of tender.
Lack of experience of technical consultants
Material and labor cost increase.
Contractual claims, such as, extension of time with cost claims
Variation order
Difference between actual geological condition and the original survey.
Addition and omission.
Delay in decision making of the client, failure of specific coordination.
Adjustment of prime cost.
Since the project allows price adjustment in the contract as the cost of material and labor
fluctuates by using the formula and the procedure adjustment was done.
4.5 Summery of findings
Through the discussion of this case study the following results are common and the major causes
of cost overrun for the above selected projects.
In adequate planning
Additional work at owner request
Consultants delay in giving responses

Contractual claim such as extension of time with cost claim
Addition and omission in BOQ
Incomplete design at a time of tender
Variation order
Table 4.5 Summary of cases studies
Case Type of project Contract Actual Time Contract Actual Cost overrun
study duration duration overrun amount amount
No1 Office Building 540 1475 935 52,472,555.17 78,129,236.6 25,656,681.43
No 2 Office Building 180 670 490 8,122,843 9,970,514.09 1,847,671.09
No 3 Commercial 210 910 700 9,218,780.62 16,699,432.84 7,480,652.22

Building
No 4 Dormitory 270 686 416 11,315,716.73 18,130,180.76 6,714,464.03
Building

CHAPTER FIVE: THE ROLE OF THE ENGINEER WITH RESPECT TO COST

RELATED MANAGEMENT
5.1 Introduction
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. In the next section
we will deal the role of the engineer with respect to cost related management under PPA & MDB
FIDIC.
5.2 Under PPA’S Standard bid document 2011

1. The Engineer shall have power to order any modification to any part of the works .(Clause
15.1)
2. The Engineer shall notify the Contractor of the nature and form of such modification. (Clause
15.3)
3. The Engineer shall, after due consultation with the public body and, where appropriate, the
contractor, decide as soon as possible whether or not the modification shall be carried out and
issue a change order to the contractor. (Clause 15.4)
4. The prices for all modifications ordered by the Engineer in accordance with GCC Clause
15.2 and 15.4 shall be ascertained by the Engineer in accordance with the following
principles (Clause 15.5)
a) where work is of similar character and executed under similar conditions to work
priced in the bill of quantities or price schedule it shall be valued at such rates and
prices contained therein; (Clause 15.5a)
b) where work is not of a similar character or is not executed under similar conditions,
the rates and prices in the contract to be agreed through negotiation between the
c) Engineer and the Contractor shall conform to the prevailing market price; (Clause
15.5b)
d) if the nature or amount of any modification relative to the nature or amount of the
whole of the contract or to any part thereof shall be such that in the opinion of the
Engineer any rate or price contained in the contract for any item of work is by reason
of such modification rendered unreasonable, then the Engineer shall fix such rate or
price as in the circumstances he shall think reasonable and proper;(Clause 15.5c)
e) where a modification is necessitated by default or breach of contract by the

Contractor, any additional cost attributable to such modification shall be borne by the
Contractor.(Clause 15.5 d)
5. The Contractor shall, on the order of the Engineer, suspend the progress of the works or any
part thereof for such time or times and in such manner as the Engineer may consider
necessary.(Clause 20.1)
6. If the contract is terminated because of a fundamental breach of contract by the Contractor,

the Engineer shall issue a certificate for the value of the work done and materials ordered less
advance payments received up to the date of the issue of the certificate and less the
percentage to apply to the value of the work not completed, as indicated in the SCC.
Additional Liquidated Damages shall not apply. If the total amount due to the public body
exceeds any payment due to the contractor, the difference shall be a debt payable to the
Public body.(Clause 22.1)
7. The Engineer shall, as soon as is possible after termination, certify the value of the works and
all sums due to the Contractor as at the date of termination.(Clause 25.2)
8. If the Intended Completion Date is extended after liquidated damages have been paid, the
Engineer shall correct any overpayment of liquidated damages by the Contractor by adjusting
the next payment certificate.(Clause 27.3)

9. The Engineer shall determine by measurement the actual quantities of the works executed by
the Contractor, and these shall be paid for in accordance with GCC Clause 64. Unless
otherwise provided in the SCC no additions shall be made to the items in the bill of quantities
except as a result of a modification in accordance with GCC Clause 15 or another provision
of the Contract entitling the Contractor to additional payment. (Clause 63.1)
10. The Engineer shall, when he requires any parts of the works to be measured, give reasonable
notice to the Contractor to attend, or to send a qualified agent to represent him. The
Contractor or his agent shall assist the Engineer in making such measurements and shall
furnish all particulars required by the Engineer. Should the Contractor not attend, or omit to
send such agent, the measurement made by the Engineer or approved by him shall be binding
on the Contractor. (Clause 63.1)
11. Within 30 days of receipt of the said statement for interim payment, it shall be approved or
amended in such manner that, in the Engineer's opinion, the application reflects the amount
due to the Contractor in accordance with the Contract. In cases where there is a difference of
opinion as to the value of an item, the Engineer's view shall prevail. On determination of the
amount due to the Contractor, the Engineer shall, within the same 30 days deadline, issue and
transmit to the Public Body for payment and to the Contractor for information, an Interim
Payment Certificate for the amount due to the Contractor and shall inform the Contractor of
the works for which payment is being made.(Clause 64.5)
12. The Engineer may, by an interim payment certificate, make any corrections or modifications
to any previous certificate issued by him and shall have power to modify the valuation in or
withhold the issue of, any interim payment certificate if the works or any part thereof is not
being carried out to his satisfaction. (Clause 64.6)
13. Within 60 days after receipt of the draft final statement of account and of all information
reasonably required for its verification, the Engineer shall prepare the final statement of
account, which determines: (Clause 65.2)
a) The amount which in his opinion is finally due under the contract; and

b) after establishing the amounts previously paid by the Public Body and all sums to
which the Public Body is entitled under the contract, the balance, if any, due from
the Public Body to the Contractor, or from the Contractor to the Public Body, as
the case may be.
14. The Engineer shall issue to the Public Body or to its duly authorized representative, and to
the Contractor, the final statement of account showing the final amount to which the
Contractor is entitled under the contract. The Public body or its duly authorized
representative and the Contractor shall sign the final statement of account as an
acknowledgement of the full and final value of the work implemented under the Contract and
shall promptly submit a signed copy to the Engineer. However, the final statement of account
shall not include amounts in dispute which are the subject of negotiations or amicable
settlement. (Clause 65.3)
15. When the Engineer has received the full and detailed particulars of the Contractor's claim that
he requires, he shall, without prejudice to GCC clause 44.4, after due consultation with the
Public Body and, where appropriate, the Contractor, determine whether the Contractor is
entitled to additional payment and notify the parties accordingly. (Clause 69.2)
16. The Engineer may reject any claim for additional payment which does not comply with the
requirements of this GCC clause.(Clause 69.3)
17. Within 21 days from receipt of the Contractor's detailed particulars of the request, the
Engineer shall, by written notice to the Contractor after due consultation with the Public
Body and, where appropriate, the Contractor, grant such extension of the intended
completion date as may be justified, either prospectively or retrospectively, or inform the
Contractor that he is not entitled to an extension. (Clause 73.3)
18. If a compensation event would prevent the work being completed before the intended
completion date, the intended completion date shall be extended. The Engineer shall decide
whether and by how much the intended completion date shall be extended.(Clause 74.2)

19. When the Public body wants the contractor to finish before the intended completion date, the
Engineer will obtain priced proposals for achieving the necessary acceleration from the
Contractor. If the Public body accepts these proposals, the intended completion date will be
adjusted accordingly and confirmed by both the Public body and the Contractor. (Clause
75.1)
20. The Engineer may require the Contractor to provide an estimate of the expected effect of the
future event or circumstance on the contract price and completion date. The estimate shall be
provided by the Contractor as soon as reasonably possible. (Clause 77.1)
5.3Under MDB FIDIC 2006
1) The Engineer shall obtain the specific approval of the Employer before taking action under
the following sub-clauses of these conditions (Clause 3.1)
Sub- clause 4.12; Agreeing or determine an extension of time and/or additional cost.
Sub-clause 13.1; Instructing a variation, except;
(i) In an emergency situation as determined by the Engineer, or
(ii) If such a variation would increase the accepted contract amount by less
than the percentage specified in the contract data.
Sub-clause 13.3: Approving a proposal for variation submitted by the Contractor
in accordance with sub-clause 13.1 or 13.2.
Sub-clause 13.4: Specifying the amount payable in each of the applicable
currencies.
2) The Engineer may issue to the Contractor (at any time) instructions and additional or
modified drawings which may be necessary for the execution of the works and the remedying
of any defects, all in accordance with the contract. (Clause 3.3)
3) The Engineer shall give notice to both parties of each agreement or determination, with
supporting particulars, within 28 days from the receipt of the corresponding claim or request
except when otherwise specified. Each Party shall give effect to each agreement or

determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration].
(Clause 3.5)
4) The Engineer shall take account of any evidence of the physical conditions foreseen by the
Contractor when submitting the tender, which shall be made available by the contractor, but
shall not be bound by the Contractor‟s interpretation of any such evidence. (Clause 4.12)
5) Before issuing a payment certificate which includes an amount payable to a nominated

Subcontractor, the Engineer may request the Contractor to supply reasonable evidence that
the nominated subcontractor has received all amounts due in accordance with previous
payment certificates, less applicable deductions for retention or otherwise.
Unless the Contractor: (Clause 5.4)

a) submits this reasonable evidence to the Engineer, or
b) i) satisfies the Engineer in writing that the Contractor is reasonably entitled
to withhold or refuse to pay these amounts, and
ii) submits to the Engineer reasonable evidence that the nominated
subcontractor has been notified of the Contractor‟s entitlement,
6) Additional costs of revised methods including acceleration measures, instructed by the

Engineer to reduce delays resulting from causes listed under sub-clause 8.4 [ Extension of
Time for Completion ] shall be paid by the Employer, without generating, however, any
other additional payment benefit to the Contractor.(Clause 8.6)
7) The Engineer may at any time instruct the contractor to suspend progress of part or all of
the works. During such suspension, the contractor shall protect, store and secure such part
or the works against any deterioration, loss or damage. The Engineer may also notify the
cause for the suspension. If and to the extent that the cause is notified and is the
responsibility of the contractor. (Clause 8.8)
8) Performance of the Contractor‟s obligations shall not be considered to have been completed
until the Engineer has issued the performance certificate to the contractor, stating the date on
which the Contractor completed his obligations under the contract. The Engineer shall issue
the performance certificate within 28 days after the latest of the expiry dates of the defects
notification periods, or as soon thereafter as the Contractor has supplied all the contractor‟s
documents and completed and tested all the works, including remedying any defects. A copy
of the performance certificate shall be issued to the Employer. (Clause 11.9)
9) Whenever the Engineer requires any part of the works to be measured, reasonable notice
shall be given to the Contractor‟s representative, who shall:
(a) promptly either attend or send another qualified representative to assist the
Engineer in making the measurement, and
(b) supply any particulars requested by the Engineer
10) Variations may be initiated by the Engineer at any time prior to issuing the taking-over
certificate for the works, either by an instruction or by a request for the contractor to submit a
proposal. (Clause 13.1)
11) Each provisional sum shall only be used, in whole or in part, in accordance with the
Engineer‟s instructions and the contract price shall be adjusted accordingly. The total sum
paid to the Contractor shall include only such amounts, for the work, supplies or services to
which the provisional sum relates, as the Engineer shall have instructed. (Clause13.5)
12) The Engineer shall deliver to the Employer and to the Contractor an interim payment
certificate for the advance payment or its first instalment after receiving a Statement (under
Sub-Clause 14.3 [Application for Interim Payment Certificates]). (Clause14.2)
13) The Engineer may in any Payment Certificate make any correction or modification that
should properly be made to any previous payment certificate. A payment certificate shall not
be deemed to indicate the Engineer‟s acceptance, approval, consent or satisfaction.(Clause
14.6)
14) When the taking-over certificate has been issued for the works, the first half of the retention
money shall be certified by the Engineer for payment to the Contractor. If a taking-over
certificate is issued for a section or part of the works, a proportion of the retention money
shall be certified and paid. This proportion shall be half (50%) of the proportion calculate by

dividing the estimated contract value of the Section or part, by the estimated final Contract
Price. (Clause 14.9)
15) Within 28 days after receiving the final statement and discharge in accordance with sub-
clause 14.11 [Application for Final Payment Certificate] and Sub-Clause 14.12 [Discharge],
the Engineer shall deliver, to the Employer and to the Contractor, the final payment
certificate which shall state: (Clause 14.13)
(a) The amount which he fairly determines is finally due, and
(b) After giving credit to the Employer for all amounts previously paid by the
employer and for all sums to which the Employer is entitled, the balance (if
any)due from the Employer to the Contractor or from the Contractor to the
employer, as the case may be.

CHAPTER SIX: COMPARISON BETWEEN MDB FIDIC 2006, PPA 2011 & CIVIL
CODE
N0 Subject Description PPA 2011 MDB FIDIC 2006 CIVIL

CODE
1 Modifications by Change Related to the concept of Related to variation Art 3031
Orders change in the works or order(Clause 13.1) Art 2625
variation in the
Works. (Clause 15)
2 Suspension Related to time and cost Notice for claims due to
claim. (Clause 20) suspension (Clause 8.9)
3 Termination Related to payment up on Payment after Art 3036
termination. (Clause 22) termination(Clause15.4)
4 Possession or access to Access to the site Right of access to the
the site (clause 31) site(2.1)
5 Advance payment Advance payment(clause 60) Advance Art 2634
payment,(Clause 14.2)
6 Price adjustment Criteria for price adjustment Adjustment in change of Art 3031
(Clause 62) cost(Clause 13.8) Art 2625
7 Interim Payment Related to issuing payment Precondition for issuing
certificate(clause 60) interim payment
certificate (Clause 14.6)
8 Final Statement of Related to the value of work Application for final
Account done & all further sums. payment certificate
(Clause 65) (Clause 14.11)
9 Acceleration Related to modification of Rate of progress (Clause
contract price (Clause 75.2) 8.6)

10 Defect Liability Correction of defects and Costs of remedy of

costs (Clause 8888.2) defects(Clause 11.2)

7. CONCLUSION AND RECOMMENDATION
7.1 Conclusion
Construction industry is considered to be dynamic industry which is constantly facing

uncertainties that make the management of costs difficult and consequently, causes cost
overruns. For this reason, cost overruns have been considered as one of the most critical issues
during the execution of construction projects. Therefore, the main objective of this research was
to identify the major causes and effects of cost overrun then to discuss the concept of price
adjustment based on the factors of cost over run on construction projects in Ethiopia. In order to
meet these objectives, some existing studies were reviewed and used a case study that constituted
of four different projects within the construction sector.
Based on the findings of the research, the following conclusions are drawn;
The major causes of cost overrun were identified as in adequate planning, additional
work at owner request, consultants delay in giving responses ,contractual claim,
addition and omission in BOQ ,incomplete design at a time of tender and variation
order .
Results of the study also shows 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.
From the study of the research effective cost control measures were monitoring cost
performance to detect and understand variances from plan, preventing incorrect,
inappropriate, or unauthorized changes from being included in the cost baseline,
informing appropriate stakeholders of authorized changes and acting to bring
expected costs within acceptable limits.

7.2 Recommendations
The following points are recommended to all parties in order to minimize and control cost
overruns in construction projects.
7.2.1 Expected from Client (owner)
Clients are the initiator and owner of the project who are active from inception to
completion, accordingly the following recommendation are forwarded to the client;
Should hire professionals to revise the bid documents such as technical

specifications, drawings, bill of quantities and the design of the project in a good way.
Advised not to depend on the lowest price contractor to execute the project, but have to
focus on experience, financial standing and capacity of the contractor.
A comprehensive client brief should be compiled at project inception and minimize

change orders as much as possible in order to avoid any time and cost overruns.
Should have technical staff who is able to manage the different stages of any project and
to follow the performance percentages, and also able to compare the actual performance
with the planned one.
Should allow sufficient time for proper feasibility studies, planning, design, information
documentation and tender submission.
7.2.2 Expected from Consultants
Consultants are one of the main parties in construction projects who interpret the client‟s
project requirement in to specific design and posses the supervision, accordingly the
following recommendation are forwarded to the consultant;
Comprehensive cost planning / monitoring during pre-and-post contract stage
Timely issuing of information to the contractor during construction stage
Adequate provision for contractual claims, such as, extension of time with cost claims

Timely Improvements to standard drawings during construction stage
Minimum errors in the bills of quantities
Adequate co-ordination at design phase
Appointment of highly qualified technical staff to manage the project in a good way.
Comprehensive site investigation should be carried out at the design phase of the project
in order to avoid variation (addition and omission) that are likely to occur during
construction.
Reviewing and approving design documents and drawings before tendering.
7.2.3 Expected from Contractors
Contractors are one of the key role players who participate directly on the construction
projects, accordingly the following recommendation are forwarded to the contractor;
Purchase the construction materials timely in order to prevent construction materials cost
increment.
Requests any clarification in a timely and adequate manner.
Monitor the quality of activities continuously and to set the required quality system in the
different activities of the project so as to avoid any mistakes that may lead to rework of
activities, and finally cost overruns.
Recommended to have proper contract management.

REFERENCE
 Thabiso Godfrey Monyane, 2013 Identifying causes of cost overrun and effective cost
control measure of public projects in the Free State Province; MSC
Thesis submitted to Tshwane University of Technology
 Fetene Nega,2008 Causes and Effect of cost overrun on public building construction projects
in Ethiopia; MSC Thesis submitted to Addis Ababa Institute of Technology
 Zinabu Tebeje,Getachew Teka,2015 Causes of contractor cost overrun in construction
projects: The case of Ethiopian construction sector; International Journal of Business and
economics research. Vol 4,No 4,2015
 Asteway Yigezu,2008 effect of un predictable price fluctuation on the capacity of
construction contractors; MSC Thesis submitted to Addis Ababa Institute of Technology
 Guide Line on Contract Price Fluctuation System, Version 1, 2011
 A Guide to Project Management Body of Knowledge,2000
 Lecture notes by Wubshit Jekale (Dr.Eng)
 PPA 2011
 MDB FIDIC 2006
 Ethiopian Civil Code 1960


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Cost & Cost overrun: its Regulation & Management under the MDB-FIDIC (2006) &PPA (2011) 2015

CHAPTER ONE: INTRODUCTION

1.1 Back ground of the study

1.2.1 General objective

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1.2.2 Specific Objective of the study

1. To define and discuss cost, construction cost and cost overrun.

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1.4 Scope and Limitation

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CHAPTER TWO: LITERATURE REVIEW

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2.2.2 Categories of cost

a)Direct construction costs

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i. Head office costs

ii. Site over head costs

2.2.3 Cost management

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Project Cost management

1. Resource 2. Cost 3. Cost 4. Cost

Table 2.1 Major processes in project cost management (PMBOK 2000)

1. Resource planning: - involves determining what physical resources (labor, equipment,

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Addis Ababa Science and Technology University

Addis Ababa Science and Technology University

 Monitoring cost performance to detect and understand variances from plan.

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Figure2.5 Earned Value Analysis (Lecture note by Wubishet Jekale)

Generally, EVM performance analysis and forecasting includes:

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b) Cost Variance (CV) = ACWP - BCWP

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2.3 Cost overrun

2.3.2 Causes of cost overrun

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No Causes of cost overrun Responsible parties

4 Additional cost due to variation work Consultant

5 Change in foreign exchange rate (for imported Government & others

No Hypothesized causes of cost overrun Responsible party

8 Encountering of unforeseeable physical obstructions Consultants & others

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9 Failure on the part of the employer to hand over Client

Source: - Fetene Nega (2008)

2.3.2.1 During planning phase

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2.3.2.2 During Design phase

2.3.2.3 During bidding phase

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2.3.2.4 During Construction phase

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Addis Ababa Science and Technology University

2.3.4 Effects of cost overrun

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2.4 Price adjustment

Price adjustment is an equitable risk-sharing mechanism, as payments to the contractor can be

2.4.2Types of price adjustment

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2.4.3Approaches for price adjustment

1. Risk proportion approach