AVOIDING COST OVERRUNS IN CONSTRUCTION PROJECTS IN THE UNITED KINGDOM

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AVOIDING COST OVERRU

Dissertation submitted in partial fulfilment for the of Degree of Master of Science in

AVOIDING COST OVERRUNS IN CONSTRUCTION PROJECTS IN

THE UNITED KINGDOM

By

Susana Gomez Arcila

Supervisor: Mr Michael Newton

issertation submitted in partial fulfilment for the of Degree of Master of Science in Programme and Project Management

The University of Warwick Warwick Manufacturing Group

Submitted August, 2012

ROJECTS IN

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BENEFICIARIO COLFUTURO 2012 i

ABSTRACT

Over the years, there have been improvements in the management of construction projects; however, the problem of cost overruns is still a critical issue in the construction industry. For this reason, this paper attempts to identify the main causes of cost overruns in construction projects, in the United Kingdom, and the Critical Success Factors [CSFs] that can help prevent these causes.

This research carried out a literature review which helped in finding the main causes of cost overruns on construction projects. In addition, the author also reviewed some existing literature regarding CSFs. Most of this literature focuses on the Factors that influence the overall cost performance of projects; however not many studies have been conducted to identify the CSFs that influence the cost performance of construction projects. For this reason, this dissertation aims to fill this gap, attempting to identify factors that can help avoid cost overruns on construction projects. To address this, the author created a list of CSFs, and some hypotheses, that are further investigated in this research.

Through a positivist approach, a multi-case study method was performed in this research. The multiple-case method constituted of 6 different projects in the construction industry, constructed by companies from the UK. Hence, two different hypotheses were tested and the conclusion suggested that there are certain Critical Success Factors that can help prevent the occurrence of cost overruns in construction projects in the UK. Therefore, the research identified CSFs that have an influence in the cost performance of projects.

This exploratory research has not only filled a gap in the CSFs’ literature, but it has also suggested a list of CSFs that can be used to improve the cost performance of construction projects. This research can be used as basis for further research along similar lines.

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BENEFICIARIO COLFUTURO 2012 ii

ACKNOLEDGEMENTS

I wish to thank my supervisor Michael Newton for his assistance, support and guidance throughout this research. I really appreciate his comments, suggestion and contributions to this project.

My appreciation also goes to the professionals who participated in the interviews because this project would not have been possible without their contributions.

I am also grateful to my family: Olga Elena Arcila, Juan Esteban Gomez, Carolina, Melissa and Daniel. Thank you, because you have always believed in me. It would have been doubly difficult to complete this research without your support and love.

I want to express my gratitude to my friends Juan Carlos Carpio and Andres Ortiz for their friendship, understanding and support. I really appreciate all the ideas and good advice they gave me all through this period.

My appreciation also goes to Johnnatan, Henry, Mario, Andres “Boyaco”, Juan Pablo and Marco for their friendship that made this year an incredible experience. Finally, special thanks to my friends in Colombia: Manuela, Daniela, Alejandra, Nicolas and Felipe, for supporting and encouraging me during all this period.

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BENEFICIARIO COLFUTURO 2012 iii

LIST OF FIGURES

Figure 2-1 Main causes of cost overruns ... 11

Figure 2-2 Common causes of cost overruns in Megaprojects of construction ... 14

Figure 2-3 Ten critical success factors ... 22

Figure 2-4 Critical success factors for each stage of the project lifecycle ... 22

Figure 2-5 Success factors, cause and effect relationship ... 23

Figure 2-6 Framework of factors affecting success of project ... 24

Figure 3-1 Elements of research process ... 36

Figure 3-2 Components of research design ... 40

Figure 3-3 Initial idea of multi-case studies ... 42

Figure 3-4 Final multi-case study design ... 44

Figure 3-5 Most common data collection methods for case studies ... 45

Figure 3-6 Research methodology adopted in this research ... 51

Figure 4-1 Multiple case studies ... 57

Figure 4-2 Process used to get data about main causes of cost overruns ... 59

Figure 4-3 Process used to get data about CSFs that were not present in poor cost performance projects ... 64

Figure 4-4 CSFs that could have prevented cost overruns in each of the case studies ... 69

Figure 4-5 Process used to get data regarding CSFs that were present in good cost performance projects ... 73

Figure 4-6 CSFs that influence cost performance ... 78

Figure 5-1 Lacking factors that could have prevented cost overruns in Cases 2, 4 and 6 ... 86

Figure 5-2 CSFs present in the good cost performance projects ... 88

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BENEFICIARIO COLFUTURO 2012 vii

LIST OF TABLES

Table 2-1 Main causes of cost overruns in construction projects in Turkey ... 9

Table 2-2 Main causes of cost overruns in Nigeria ... 10

Table 2-3 Summary of studies about cost overruns in construction projects ... 13

Table 2-4 Role and years of experience of respondents ... 15

Table 2-5 Main causes of cost overrun in the UK construction projects ... 16

Table 2-6 Critical Success Factors [CSFs] definition ... 19

Table 2-7 Critical Success Factors in construction projects ... 21

Table 2-8 Critical success factors ... 26

Table 2-9 Overall critical success factors for three project objectives: schedule, budget and quality ... 27

Table 2-10 Overall performance critical success factors ... 28

Table 2-11 Ranking of CSFs for cost performance and overall performance ... 31

Table 2-12 Top ten CSFs for budget performance ... 32

Table 2-13 Comparison of the CSFs identified by Hwang and Lim and the previous study .. 33

Table 2-14 Critical success factors that influence cost performance in construction projects 34 Table 3-1 Differences between Positivist and phenomenological paradigm by UWE ... 37

Table 3-2 Relevant situations for different research strategies ... 38

Table 3-3 Critical Success Factors that affect cost performance ... 41

Table 4-1 Main causes of cost overrun Case 2 ... 60

Table 4-2 Main causes of cost overrun Case 4 [ ... 61

Table 4-3 Main causes of cost overrun Case 6 ... 61

Table 4-4 Summary of main causes of cost overruns in poor cost performance case studies . 62 Table 4-5 Critical Success factors that could have help to prevent cost overruns in Case 2 ... 65

Table 4-6 Critical Success factors that could have helped prevent cost overruns in Case 4 .. 66

Table 4-7 Critical Success factors that could have helped prevent cost overruns in Case 6 .. 66

Table 4-8 Summary of CSFs that could have prevented cost overruns in poor cost performance case studies ... 68

Table 4-9 Critical Success factors that influenced cost performance of in Case 1 ... 74

Table 4-10 Critical Success factors that influenced cost performance of in Case 3 ... 75

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BENEFICIARIO COLFUTURO 2012 viii

Table 4-12 Summary of CSFs that influenced cost performance in the good cost

performance case studies ... 77

Table 5-1 Main causes of cost overruns in construction projects in the UK ... 83

Table 5-2 Main causes of cost overruns in Cases 2, 4 and 6 ... 83

Table 5-3 Main causes of cost overruns comparison with existent literature ... 84

Table 5-4 Summary of lacking CSFs in poor cost performance projects ... 87

Table 5-5 Summary of CSFs that were present in the good cost performance cases ... 89

Table 5-6 Summary of Critical Success factors that influence cost performance in Cases 1,2,3,4,5 and 6 ... 92

Table 5-7 Critical success factors that influence cost performance in construction projects taken from the Theoretical Foundation of this research ... 92

Table 5-8 Suggested list of CSFs that influence cost performance in construction projects in the UK ... 93

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BENEFICIARIO COLFUTURO 2012 1

CHAPTER 1

1 Introduction

1.1 Background of the Topic

Construction has become an important player in the economy of many countries, especially developed countries (Takim, 2005). As mentioned by Olawale (2010), this industry contributes to the GDP and employment rate of many nations and for this reason it is considered vital for the economic development of any nation. Moreover, the author also 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.

UK Contractors Group (2009) stated that although construction activities have decreased since the beginning of the recession, this sector has played an important role in the United Kingdom, due to the fact that it has helped to stimulate the growth of the economy. Firstly, the construction sector has shown to be dependent on an extended supply chain which contributes to the growth of the other sectors, such as manufacturing sector. Secondly, construction sector has also shown that it has a low rate of imports which indicates that investments and spending stay in the UK economy. Thirdly, construction is employing lower qualified and young workers, which shows that this sector gives job to many people that need this opportunity. Consequently, the employment rate has decreased in this country. Finally, construction has been considered as an investment that will benefit the country in the future. For example, the construction of new schools will contribute to the education of young people. Therefore, the economy of the UK will be improved with the increase of educated people (UK Contractors Group, 2009).

Many authors affirmed that construction projects usually present delays and cost overruns. These overruns are considered a critical issue in this business because they represent a loss of money for the contractors and owners (1997). This idea was also suggested by Morris and Hough (1987) who stated that, although the management of projects has been studied for many years, most projects either failed or present cost and time overruns. The author also affirmed that many projects are cancelled due to the lack of proper management which causes

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expenditures of significant amount of money over the original budget. This idea was reinforced by Leeman (2007) who also suggested that the failure of projects has increased in construction projects because the project contractors and owners do not use management methodologies that are useful to distribute resources properly.

The failure of construction projects has been discussed by many authors, who have not agreed on a single method to measure success in a project. However, Morris and Hough (1987) suggested three different measures to recognise if a project is successful or not. Firstly, they mentioned the project functionality which means that the project should function technically and financially. Secondly, the authors proposed a second measure about the management of the project, which indicates if the project meets the budget and schedule targets. Finally, the project should be evaluated depending on the performance of the contractors which analyse if they provide services that benefit the project. On the other hand, many other authors measure the success of a construction project assessing the time performance, cost performance and the final quality of the project (Chan, et al., 2004). Therefore, there is not a unique way of determining success in a project; however, cost performance is a critical issue to be considered in the success or failure of project.

1.2 Definition of the Problem

Construction can be considered as a dynamic industry which is constantly facing uncertainties. These uncertainties and the many stakeholders in these kinds of projects, make the management of costs difficult which consequently causes cost overruns. Therefore, cost overruns are considered one of the most critical issues during the execution of construction projects (Chan, et al., 2004; Doloi, 2011). As mentioned by Van Der Westhuizen and Fitzgerald (2005), the presence of cost overruns can be a reason for project failure. However this idea has been refuted by many authors who considered that project success depends on many other factors that should be assessed to conclude the success or failure of a project (Chan, et al., 2004). Moreover, there have been many studies that suggest that the success of a project depends on the presence of certain critical factors which can also change depending on the objective to be met (Iyer and Jha, 2005). In other words, some authors ascertained that there are some critical success factors that help to improve cost performance and prevent cost overruns.

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There have been many studies focused on Critical Success Factors [CSF’s] that improve the overall performance of projects, such as the projects carried out by Baker, et al. (1983), Morris and Hough (1987), Belassi and Tukel (1996), among others. However, much of the existing research is not focused on the construction industry and more specifically on those critical success factors that influence the cost performance of construction projects. For this reason, an attempt will be made in this study to identify if certain CSFs can help to avoid cost overruns.

According to the ideas mentioned above, this research aims to identify some critical success factors that can help to improve cost performance in construction projects in the UK. In order to meet this objective, some areas of study will be covered in the literature review. In the first place, this project tries to understand the main causes of cost overruns in construction projects in the United Kingdom. In the same way, this project also tries to identify existing studies that have researched critical success factors in construction projects. Finally, with the use of some studies that have researched about the CSFs that have an impact on the cost performance of construction projects, this research will create a theoretical foundation and propose some propositions to be confirmed or rejected with the help of some case studies of construction projects in the UK.

A positivist paradigm and a deductive approach are adopted in this research for the purpose of testing the propositions suggested in the theoretical foundation. In addition, a multi-case study strategy has been chosen to test the hypotheses. The case studies will be six construction projects in the UK with two different characteristics: good and poor cost performance. Moreover, three of these projects are similar in terms of cost performance, due to the fact that they present good cost performance during their execution. On the other hand, the other three projects had poor cost performance and they presented cost overruns after their execution. For this reason, it was essential to identify the meaning of good and poor cost performance in this dissertation. The key definitions of concepts in this project are:

Cost overrun: occurs when the final cost of the project exceeds the original contract value at the time of completion.

Critical Success Factors: are those factors that determine the success of the achievement of project objectives: Budget, quality and schedule.

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Good cost performance project: Project in which the cost overrun of the project does not exceed 10 percent of the initial budget.

Poor cost performance project: Project in which the cost overrun of the project exceeds 10 percent of the initial budget.

The case studies’ evidence was collected using two different sources: interviews of the project or senior managers in contractor companies in the UK and documentation, such as internet articles and news paper articles. Furthermore, the main idea of carrying out a multi-case study research is to confirm or reject the propositions developed after the review of literature. Therefore, the anticipated contribution of this project is to identify the main causes of cost overruns in the UK and the Critical Success Factors that can help to avoid these cost overruns.

1.3 Research Question and Objectives

Based on the definition of the problem, the objectives of the research were established. These objectives were:

1. To identify the main causes of cost overruns in construction projects, in the United Kingdom.

2. To understand the existing literature on Critical Success Factors and identify the most recent studies regarding CSFs in construction.

3. To identify the Critical Success Factors that can help improve the possibility of avoiding, or preventing, cost overruns in construction projects, in the UK

These objectives guided the process of the research and created the research boundaries. However, a research question was also designed to “scope” the project. The research question is:

1. What are the Critical Success Factors that can help prevent cost overruns in

construction projects in the UK?

Some secondary questions were also used to guide the research process and meet the objectives. These questions are:

2. What are the main causes of cost overruns in construction projects, in the UK?

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1.4 Dissertation Structure

As mentioned before, CSFs are those factors that help achieve the project objectives and increase the possibility of success on a project. The main objective of this research is to identify the CSFs that help avoid cost overruns in construction projects. For this reason, this dissertation is divided in different chapters, as follows:

• Chapter 1, Introduction: This section provides a background of the topic that is being researched in this dissertation. The main idea of this chapter is to explain the background of the problem, the objectives and the contribution made by this project. • Chapter 2, Literature Review: This chapter provides information about the main

subjects of this dissertation; cost overruns in construction projects, generic Critical Success Factors for projects and Critical Success Factors for construction projects. The review of these topics helps to meet some of the objectives of this dissertation. In addition, this chapter provides a theoretical foundation with the formulation of some propositions, which are the basis for the methodology research.

• Chapter 3, Methodology Research: This chapter provides the plan of the research. In other words, this section explains the research paradigm, approaches, strategies and data collection methods. In this project, a case study strategy is used to confirm or reject the propositions. In addition, this chapter provides some quality tests that help assess the validity and reliability of the research strategy being used.

• Chapter 4, Case study results and Analysis: this section provides the results from the case studies. After being reported, each case study is analysed independently and then some comparisons and cross-case analysis is carried out between projects. These results are essential for the research as they are used to confirm or reject the hypothesis. This chapter is the basis for the discussion section.

• Chapter 5, Discussion: This chapter uses the results and analysis from the previous chapter and makes a comparison with the existing literature. In addition, these results are used in this section to see the way in which they help confirm or reject the hypotheses. On the other hand, this chapter also provides a critical evaluation of this work including the limitations of the research.

• Chapter 6, Conclusions and Further Research: This section summarises the main issues of this dissertation and it provides an overview of the main findings. It also concludes if the project met the proposed objectives and the way in which this dissertation was useful to confirm or reject the hypothesis.

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CHAPTER 2

2 Literature Review

This chapter provides a literature review, which is divided in three different sections. Section 2.1 discusses how cost overruns are critical in construction projects and the way in which this problem is perceived as “business-as-usual” and not an exception. This section will also review some studies that have been carried out in the last few years, which aimed to find the main causes of cost overruns. This review is important for the purpose of this research as one of the main objectives of this research is to identify the main causes of cost overruns in construction projects, in the UK. Next, Section 2.2 presents a review of some studies about critical success factors for projects. In addition, this section aims not only to find the generic critical success factors, but also those factors that are considered critical for a successful construction project. Finally, Section 2.3 will use the previous sections to review some studies that focused on critical success factors that have an impact on cost performance, and can prevent cost overruns in construction projects. For this reason, this section will review three studies that are concentrated on this subject. Finally, these studies will be used to develop some hypotheses on which the research methodology and strategy will be based.

2.1 Cost Performance in Construction Projects

Construction has been considered as a dynamic industry which is constantly facing uncertainties in its budgets, processes and technology (Chan, et al., 2004). These uncertainties, the complexity of projects and the increase of stakeholders make the management of costs difficult in a construction project. These facts result in many of the time and cost overruns in the project (Doloi, 2011). Even though there have been improvements in the management of construction projects, the problems of cost and time overruns are still a critical issue in the construction industry (Reichelt and Lyneis, 1999). Due to the excessive cost and time overruns, construction projects usually have poor reputation (Raftery, 1994).

Cost overruns occur when “the final cost of the project exceeds the initial estimate or budget” (Avotos, 1983, p. 142). Nevertheless, the estimate or initial budget is constantly changing during the execution of the project. For this reason, it is important to be careful with the

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budget that is going to be taken into account to calculate the overrun of the project (Avotos, 1983). Some authors consider that the initial budget is created when the decision of commencing building is made (Flyvbjerg, et al., 2002; Odeck, 2004). On the other hand, some other authors uphold the idea that cost overrun should be found comparing the original contract value with the final cost of the project at the time of completion. The difference between cost overrun definitions may cause a difference in the magnitude of cost overruns that have been reported over the years (Love, et al., 2012).

Le-Hoai, et al. (2008) also considered that the magnitude of cost overruns may or may not vary depending on the size of the project, the location of the project and the type of project. For example, Eden et al. (2005) pointed out that although there is more information about cost overruns in public projects, this does not mean that there are no cost overruns in the private industry. In fact, the authors uphold the idea that projects of private sector tend to have larger cost overruns. On the other hand, Koushki, et al. (2005) expressed that cost and time overruns are common not only in large projects, but also in small and simple projects. This issue was also discussed by Frimpong, et al. (2003) who stated that overruns are more frequent and significant in large projects than small projects. Gkritza and Labi (2008) supported this idea and they also added that cost overruns are also more common in long duration projects. Nevertheless, Odeck (2004) contradicted this statement. He considered that large projects have fewer cost overruns because managers pay more attention to the management of these types of projects than the attention they usually pay to small projects.

2.1.1 Cost Overruns as a Rule not an Exception

Cost overruns are common in different type of projects and locations. In addition, cost overruns have become a norm, rather than an exception in the construction industry (Baloi and Price, 2003). As stated by Avotos (1983), it is normal to expect that the final cost of a project exceed the initial budget by 10 -20 percent. However, Morris and Hough (1987) summarised 40 reports about cost overruns in different types of projects and they concluded that approximately 50 percent of construction projects presents cost overruns. These overrun values are usually between 40 and 200 percent. Nevan Wright (1997, p.185) agreed with the author and he suggested that a good way to deal with these overruns is adding “50 percent to every estimate and 50 percent to the first estimate of the project”. Additionally, Olawale and

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Sun (2010) pointed out that the idea of cost overruns being a rule in the construction industry is applicable in the UK.

Some examples of important projects which were carried out in UK and presented cost overruns were mentioned by Jackson (2002). For instance, the construction of the British Library was finished in 1998 and its final cost exceeded the initial budget by more than three times, due to constantly changes in the personnel and its responsibilities. Another project that encountered cost overruns was the new parliamentary office located near the House of Parliament, which has been considered one of the most expensive buildings constructed in the UK. The main reasons for cost overruns were: the changes in inflation, problems of one of the underground stations under this place, delay in designs and approval of costs. Another example given by Jackson (2002) was the Guy's House which doubled the initial budget. This cost overrun was due to many reasons, such as significant design changes, delays in construction and changes in the construction requirements. Finally, it has been highlighted by the press that the Olympic Games 2012 is one recent project in the UK with a significant cost overrun (Syal and Gibson, 2012). King (2012) also added that the cost overrun of this project is approximately 2 billion pounds, which has been caused by many reasons, such as wrong estimation of resources and budget and problems with price negotiation with the main contractor.

2.1.2 Causes of Cost Overruns in Construction Projects

This section aims to understand the main causes of cost overrun. For this reason, it presents some results of different studies over the years of cost overruns in different types of construction projects in many different countries. Generally, the factors that have an impact on cost performance of the project and cause cost overruns are present from the estimating stage to the completion stage of the project (Baloi and Price, 2003). Therefore, understanding the main factors that cause cost overruns is important due to the fact that it helps to minimise the impact and create a strategic plan to face uncertainties in all stages of the project (Reichelt and Lyneis, 1999).

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2.1.2.1 Existing Studies of Cost Overrun in Construction Projects

In the past, Arditi, et al. (1985) carried out a survey using questionnaires which were distributed by email to 146 public organisations and 327 contractors in public projects in Turkey. The main idea of the authors was to understand the main reasons for cost overruns in projects that were constructed between the 1970s and the 1980s. They concluded that the main reason for cost overruns was the increase in materials’ prices, mainly caused by the fast growth of Turkish inflation in those years. In addition, the increase in inflation also made it difficult for contractors to buy materials at official prices and in the same way, sell their products at its official price. This fact was considered as the second most important reason for cost overruns. Shortages in resources, changes in design specifications and financial problems were some of the factors which caused delays in projects. These delays were considered the fourth reason for cost overruns in public projects in Turkey. Finally, the authors concluded that the fifth reason for cost overruns was the underestimation of cost at the time of creating the budget of the project. Therefore, the summary of the main causes of cost overruns found by Arditi, et al. (1985) can be seen in Table 2-1.

Table 2-1 Main causes of cost overruns in construction projects in Turkey (Taken from Arditi, et al., 1985)

Similarly, some studies were conducted in Nigeria by Okpala and Aniekwu (1988) who aimed to understand the main causes of high costs of construction projects. The study consisted of 450 questionnaires which were given to architects, contractors, engineers and owners in three different cities in the south of Nigeria [Port-Harcourt, Ibadan and Benin City]. The results were analysed taking into account the different professions and the role of each respondent in the project. Therefore, the authors concluded that the three main reasons for cost overruns in

Main causes of cost overruns in construction projects

in Turkey

Increase of materials' prices Fast growth of inflation.

Inflation increase make difficult for contractors to produce products at its

official price.

Delays caused by changes in design specification and financial problems.

Underestimation of cost at the moment of creating the budget of the project

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Nigerian projects were: “shortage of materials, finance and payment for completed works, poor contract management, price fluctuations and fraudulent practices” (Okpala and Aniekwu, 1988, p.243).

The study carried out by Okpala and Aniekwu (1988) was used in the following years as the basis for other studies in Nigeria. In 1993, Elinwa and Buba created a different questionnaire taking into account the factors highlighted by Okpala and Aniekwu (1988). In this study, 150 questionnaires were sent to professionals in three different cities in the north of Nigeria [Bauchi, Jos and Kano]. Moreover, Elinwa and Buba (1993) considered that the most important cause of cost overruns were the cost of the materials; as the authors mentioned: fraudulent practices, materials’ prices increment, high cost of machineries and poor planning. The following year, Mansfield, et al. (1994) distributed 80 questionnaires to contractors, and consultants’ companies in the capital of Nigeria, Lagos. The authors supported the main reasons highlighted before by other authors (Elinwa and Buba, 1993; Okpala and Aniekwu, 1988); nevertheless, the authors added that the lack of geotechnical studies before starting the construction and the delays caused by the involvement of complicated rules to check and approve construction processes, can also be reasons for cost overruns in Nigerian constructions. Although some of the causes resulted from these studies were similar, there were some differences that can be seen in Table 2-2.

Table 2-2 Main causes of cost overruns in Nigeria (Adapted from Elinwa and Buba, 1993; Mansfield, et al., 1994; Okpala and Aniekwu, 1988)

Main causes of cost overruns Okpala and

Aniekwu (1988) Elinwa and Buba (1993) Mansfield, et al. (1994) Shortage of materials

Finance and payment for completed works

Poor contract management

Price Fluctuations

Fraudulent practices

Cost of materials

High cost of machineries

Inaccurate estimates leading to delays

Lack of geotechnical studies before starting the construction

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Flyvbjerg, et al. (2003) stated in their book “Megaprojects and Risk: an Anatomy of Ambition” that the factors that affect cost performance and caused cost overruns in a developing country can be generalised to all developing countries because they have similar problems in construction projects. Moreover, this statement is reinforced by Kaming, et al. (1997) who interviewed 31 project managers of high-rise construction projects in Indonesia to find the main factors that influence time and cost overruns in this type of projects. The authors concluded that lack of materials due to the inaccurate planning and estimating, increase of materials’ cost, complexity of works, poor contractor management and unpredictable weather were the main factors that cause cost overruns in Indonesia. Another study that had similar results in a developing country was the research done by Frimpong, et al. (2003), who wanted to find the causes of delay and cost overruns in the construction of groundwater projects in Ghana. For this reason, the authors sent 125 questionnaires to owners, contractors and consultants. The results pointed out that the main factors that caused overruns in Ghana are similar to those in other developing countries. These factors were: the increase of cost of the materials, poor contractor management, problems with agencies’ payments, poor technical performance and inaccurate estimation of costs (Frimpong, et al., 2003). A summary of the causes mentioned by these authors can be seen in Figure 2-1.

Figure 2-1 Main causes of cost overruns (Adapted from Frimpong, et al., 2003; Kaming, et al., 1997)

Koushki, et al. (2005) carried out a different study in the State of Kuwait, due to the fact that it was the first research in this country which aimed to find the reasons for delays and cost increases in the construction of private residential projects from the standpoint of the owner; thus, the authors interviewed 450 owners of housing projects, which were chosen in 27 different districts in the country. The results showed that cost and time overruns were less in those projects where owners spend time and money in the pre-planning stage [design phase,

Increase of materials’ cost Poor contractor management Inaccurate estimating Degree of complexity of works Kaming, et al. (1997) Problems agencies’ payments Poor technical performance Frimpong, et al. (2003) Unpredictable weather

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contractors’ and materials selection] before starting the implementation phase. Additionally, the authors mentioned the major reasons for cost and time overrun: the first reason was that owners did not have enough money to spend during the first stage of the project and pay for someone to supervise the construction process. Secondly, the financial difficulties of contractors caused problems because contractors were not meeting the specifications of the job. Finally, the last factor was the delays caused by design changes and change orders. Similar results were obtain by Le-Hoai, et al. (2008) in a study carried out in Vietnam using 285 questionnaires, which were given to professionals of major projects in this country. The results coincided with those from the study in the State of Kuwait due to the fact that the lack of supervision, owners’ financial resources, financial difficulties of contractors and design changes were also part of the five more frequent factors that caused overruns in Vietnam. In addition, changes in the design and poor project management were also causes of cost overruns. The review of some studies has shown that the main causes of cost overrun in developing countries are similar in the construction industry which reinforced the idea suggested by Flyvbjerg, et al (2003).

More recently, Kaliba, et al. (2009) found the major causes of cost overruns in road construction projects in Zambia. The authors based the study on questionnaires, interviews and some case studies of construction projects in the country. Unlike some studies mentioned before, the main reason for cost overruns in Zambia, according to the results, was the inclement weather. However, the other reasons were similar to the studies carried out in other developing countries; for example, inflation, changes in the scope of the project, delays in schedule and lack of managerial and technical knowledge. Another recent study was conducted by Enshassi, et al. (2009) in Gaza Strip who wanted to find the main factors that caused cost overruns in construction projects in the country. With the use of 120 questionnaires, which were distributed among owners, consultants and contractors, the authors concluded that the main factors were the increase of cost of materials, shortages in materials and lack of experience and knowledge of workers. It is important to mention that this study pointed out an interesting factor that causes overspending in a project and was not been mentioned by other authors. This factor is the lack of leadership skills in the managerial positions of the project, which not only cause a poor management performance, but can also have an impact on the relationship with the owner or client.

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A summary of the main causes of cost overruns of these studies is shown in the table below.

Table 2-3 Summary of studies about cost overruns in construction projects [References in table]

Some studies of cost overruns in megaprojects have been carried out in the past years. Megaprojects have been defined as those construction projects that cost more than one billion dollars (Jergeas and Ruwanpura, 2010). Flyvbjerg, et al. (2003) defined megaprojects in the same way and they also mentioned that the main reason for cost overruns in construction megaprojects is the underestimation of costs and length of delays during the planning stage. Other factors mentioned by the authors were: the absence of a plan that takes into account not only the geological risks, but also the design and specification changes that the project can have in the construction phase, the lack of knowledge about changes in exchange rates between currencies and safety and environmental risks during the execution. These results were reinforced by Jergeas and Ruwanpura (2010) who aimed to find the reasons for cost and scheduled overruns in oil sands megaprojects in Canada. The authors surveyed 87 international senior project managers and the conclusion regarding the main reasons for cost overruns were similar to those expressed by Flyvbjerg, et al. (2003). The main reasons were: the lack of knowledge of the project and its complexity, inaccurate estimation of costs, the absence of a plan that copes with the changes in design and execution requirements and the lack of managerial strategies.

Author Year [City] Main Reasons

Koushki, et al. (2005) The State of Kuwait

Owner's financial constraints Financial difficulties of contractors Contractors did not meet the specifications of the job Delays caused by design changes and change orders

Le-Hoai, et al. (2008) Vietnam

Lack of supervision Owners’ financialresources Financial difficulties of contractors Changes in the design Poor project management

Kaliba, et al. (2009) Zambia

Inclement weather Inflation

Changes in the scope of the project Delays in schedule

Lack of managerial and technical knowledge

Enshassi, et al. (2009) Gaza Str

Increase of cost of materials Shortages in materials

Lack of experience and knowledge of workers Lack of leadership skill in the managerial positions

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Figure 2-2 Common causes of cost overruns in Megaprojects of construction (Adapted from Flyvbjerg, et al., 2003; Jergeas and Ruwanpura, 2010)

As it can be seen in Table 2-3, many of the studies that have been carried out over the years are concentrated on developing countries, and not many of them have been focused on developed countries. Although the review of those studies is useful to understand some of the main reasons for cost overruns because construction projects worldwide have some characteristics in common, these causes cannot be generalised because there are some specific conditions in each country that can influence these causes of cost overruns (Olawale, 2010). Studies concentrating on construction projects in the United Kingdom will be reviewed in the next section, as this dissertation is focused on finding the main causes of cost overruns in construction projects in the United Kingdom.

2.1.2.2 Studies Concentrated on the United Kingdom

Some studies of cost overruns have been carried out in the United Kingdom. A study made by Jackson (2002) attempted to find the reasons why construction projects spend more money than the initial budget. For this reason, the author mailed 500 questionnaires to quantity surveying practices, which are professional practices dedicated to estimate the cost of projects. The author also complemented the study with the analysis of some projects in that year, which were exceeding the initial budget. Moreover, he mentioned that the main reason for cost overruns is the changes in the design, mainly caused by clients. Additionally, the results showed that incomplete designs, lack of availability of information in the planning

Common causes of cost

overruns in Megaprojects

Underestimation of costs and length of

delays

The absence of a plan that takes into account geological risks and the

design and specification changes

The lack of knowledge about changes in exchange rates between

currencies

Safety and environmental risks

Lack of knowledge about the project and

its complexity

Lack of managerial strategies

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stage, absence of design details during the execution stage and inaccurate estimations, are severe factors that cause overruns in construction projects in the UK. Nevertheless, this study was complemented by Olawale (2010) in a more recent study.

Olawale (2010) not only distributed 250 questionnaires among the top construction and consultancy companies in the UK, but also interviewed 15 practitioners in construction projects. The first stage of the research was conducted using the questionnaires, which were distributed to 150 construction companies and 100 construction consultancies in the UK. These companies were selected according to the list of 150 top construction companies that is published annually by Building Magazine. Moreover, the rate of response was 44 percent [110 questionnaires]. As shown in Table 2-4, the majority of the respondents were working as directors or senior managers [71.82 percent] and project managers [11.80 percent]. In addition, approximately 84 percent of the respondents had more than 16 years of experience.

Table 2-4 Role and years ofexperience of respondents (Taken from Olawale, 2010)

Some interviews were carried out during the second stage of this research, which consisted of a 30 minute interview with each professional. In total, fifteen practitioners accepted to be interviewed. The interviewees were mostly contractors and three of them were working in consultancy companies. All of the interviewees had more than 20 years of experience. Furthermore, the questionnaire and interviews used a list of 20 causes of cost overruns which was created after a review of past literature. The respondents were asked to rank these factors in order of importance. Additionally, the respondents had the opportunity to include extra factors during the questionnaires and interview (Olawale, 2010).

To analyse the results, the author (Olawale, 2010) used the Relative Importance Index [RII] which was also used by Chan and Kumaraswamy (1997) and Iyer and Jhan (2005) in later

Roles of respondents Percentage Director/senior management 71.82% Commercual manager 2.73% 0-5 4.54% Contracts manager 1.82% 6-10 2.73% Project manager 11.80% 11-15 8.18% Quantity surveyor 1.82% 16-20 18.18% Construction manager 1.82% 21-25 18.18% Others 8.18% >25 48.18% Years of experience of respondents Percentage

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studies. Therefore, the author created a list of 20 factors which he considered were not only the main causes of cost overruns, but also the main factors that inhibit the control of cost in a construction project in the UK (Olawale and Sun, 2010). These factors are shown in Table 2-5 with the RII for each of the factors.

This study answers one of the objectives of this research which is “to identify the main causes of cost overruns in UK construction projects”. It can be considered as correct because it is a recent study in construction projects in the United Kingdom; the results, as mentioned before, are reliable, the rate of response is high and it takes into account the different perceptions of project participants [owners, consultants and contractors]. In addition, this study is a research carried out by a doctorate student in a well known university in the UK, which gives credibility to this study.

Table 2-5 Main causes of cost overrun in the UK construction projects (Taken from Olawale, 2010)

This research is going to use a definition of cost overrun based on the Olawale’s study. This definition is:

Main causes of cost overruns

Rank

RII

Design Changes 1 0.94

Risk and uncertainty associated with projects 2 0.89

Inaccurate evaluation of project’s time/OR duration 3 0.86

Non-performance of subcontractors and nominated suppliers 4 0.82

Complexity of works 5 0.81

Conflict between project parties 6 0.81

Discrepancies in contract documentation 7 0.8

Contract and specification interpretation 8 0.8

Inflation of prices 9 0.79

Financing and payment for completed works 10 0.78

Lack of proper training and experience of PM 11 0.77

Low skilled manpower 12 0.69

Unpredictable weather conditions 13 0.68

Dependency on imported materials 14 0.65

Lack of appropriate planning 15 0.62

Unstable interest rate 16 0.59

Fluctuation of currency/exchange rate 17 0.58

Weak regulation and control 18 0.58

Project fraud and corruption 19 0.55

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BENEFICIARIO COLFUTURO 2012 17 “A cost overrun occurs when the final cost of the project exceeds the initial the original contract value at the time of completion”

Working with a definition of cost overruns is useful because it will help during the execution of the interviews that are going to be carried out in the development of the case studies. This fact will be explained in the methodology research.

After reviewing the main causes of cost overruns, the next section will introduce the Critical Success Factors of a project and the specific factors that have an impact on cost performance. The idea is to find which of these factors are important to prevent cost overruns in construction projects.

2.2 Critical Success Factors

There have been many studies regarding the factors and issues that have an influence on the success of a project (Pinto and Mantel Jr, 1990). These factors have been called Critical

Success Factors [CSFs] which have been defined as those attributes that predict the success of

projects (Sanvido, et al., 1992). Many authors have suggested that some of the reasons behind the failure of projects are the lack of critical success factors during the execution of the project (Pinto and Covin, 1989). However, to understand the benefits of the critical success factors, it is important to define project success. The main barrier is that this term has been defined by many people and there has not been a consensus regarding its definition.

The purpose of this section is to define “project success” as a basis to find a definition of “Critical Success Factors” that is going to be used in this research. In addition, this section will also provide a review of some studies that have been carried out about the specific critical success factors that have an impact on the cost performance of a project and which of those factors can be used to prevent cost overruns.

2.2.1 Definition of Project Success

As mentioned before, there does not exist an exclusive definition of project success due to the fact that the meaning is different for each person, project team and company (Chan, et al., 2004). Pinto and Mantel (1990) also support the idea of the lack of a unique definition of

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project success. In addition, the authors also added that the project success should be assessed based on different criteria, which usually change depending on the eye of the beholder. The most appropriate criteria to measure project success are the project objectives. These objectives are also different depending on the person or the company that is assessing them (De Wit, 1988).

Some authors have suggested that time, cost and quality should be the basic criteria to measure project success (Chan, et al., 2004).. However, some others consider that “perceived performance” should be the right criteria to measure success, instead of time, cost and quality (Baker, et al., 1983). On the other hand, Van Der Westhuizen and Fitzgerald (2005) disagreed with Chan, et al. (2004), due to the fact that they uphold the idea that time, cost and quality are not the criteria to measure project success. The authors suggested that meeting these three objectives helps to have project management success. In addition, the authors defined project success as the combination of project management success and project product success. In other words, the authors conclude that if a project meets the time, cost and quality objectives and at the same time the end-product is considered as a success, it can be said that the project is a success.

The definitions above show that there are different ways of defining project success. However, in this research the meaning of project success will be based on Sanvido’s definition who stated that “success of a project means that the objectives of the project for a

given participant were met” (Sanvido, et al., 1992). Sanvido (1992) also mentioned that each

participant will have a different point of view, however, he also considered that cost, time and quality are an essential part of these objectives. Therefore, this definition was chosen for this dissertation, because this research concentrates on the problems and causes that construction projects face in order to meet the budget objective. For this reason, this definition of project success will help as a basis to find a definition of critical success factors, which is one of the main aims of this research, to find the critical success factors that help to avoid cost overruns in construction projects, which means to meet the budget objective of the project.

Having understood the definition of project success that is going to be considered in this dissertation, the next step is to define Critical Success Factors. This is important for this research because it is the basis of the development of this study. In addition, this definition

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will be used during the development of the case studies because it will help to have a unique definition of CSFs.

Critical Success Factors have been defined by many different authors and it has been seen that there is no unique way of defining this term (Hwang and Lim, 2012). For this reason, some of the author’s definitions are shown in Table 2-6.

Table 2-6 Critical Success Factors [CSFs] definition [References in table]

Author Definition of CSFs

Rockart (1982)

"Those few key areas of activities in which favourable results are absolutely necessary for a particular manager to reach his or her goals"

Walker (1994)

"Factors in which success is necessary in order that each of the major participants in a project has the maximum chance of achieving the goals"

McCabe (2003) Specific factors that significantly influence project performance

Rowlinson (1999, as cited in Takim, 2005)

"Fundamental issues inherent in the project which must be maintained in order for team working to take place in an efficient and effective manner. They require day-to-day attention and operate throughout the life of the project"

Sanvido (1992) "Factors predicting success on projects"

Belassi and Tukel (1996) "Factors outside the control of management which could _{determine the success or failure of a project"}

Chen (2011) "Input factors to the management system that leads directly or _{indirectly to the success of a project or business"}

Chua (1999), Kog (2012),

“Budget, schedule, and quality are the major goals in construction projects. CSF are those factors that determine the success of the achievement of these objectives”

As it can be seen in Table 2-6, some definitions have things in common, however it can also be seen that some of them have different perspectives. As mentioned before, this dissertation is focused on the cost performance of construction projects. For this reason, the definition of Chua (1999), which was also used by Kog (2012), can be considered as a pertinent definition in this dissertation. The reason is that the definition considered that CSFs are those factors that have an influence in the achievement of the objectives of the projects. This definition indicates that there are some CSFs that have an influence in the achievement of budget performance, which means that the project does not have cost overruns because it is on budget. Moreover, the definition to be used in this dissertation is:

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“CSFs are those factors that determine the success of the achievement of project objectives:

Budget, quality and schedule”

As mentioned before, working with a unique definition of CSFs is useful because it will help during the execution of the interviews that are going to be carried out in the development of the case studies. This fact will be explained in the research methodology.

Having clarified the definition of CSFs in this dissertation, the next section aims to review the generic critical success factors that have been found by different authors. Then, a review of more studies regarding this subject will be carried out; however, these studies will be focused on CSFs in construction projects. The next sections meet some of the objectives of this dissertation.

2.2.2 Generic Critical Success Factors

Iyer and Jha (2005) suggested that the identification of critical success factors helps to repeat success in projects. This idea was also considered by De Wit (1988), who also added that identifying the CSF is very useful for the project’s stakeholders, such as contractors, owners, clients and designers, due to the fact that after the identification of these factors, the stakeholders can learn some lessons from a project that can be useful in the future. In addition, mistakes in future projects can be reduced if the identified critical success factors are improved in this project (De Wit, 1988). Therefore, this section provides a review of some studies that were carried out in the past associated with CSFs in projects.

2.2.2.1 Baker, et al. (1983)

In 1983, one of the first empirical studies about CSFs was conducted by Baker, et al. who sought to identify the main factors affecting project success. The survey was based on successful and unsuccessful projects. Moreover, there were different types of projects, such as construction, services, manufacturing and transportation (Kog and Loh, 2012). Therefore, the CSFs mentioned by Baker, et al. (1983) can be seen in Table 2-7.

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Table 2-7 Critical Success Factors in construction projects (Adapted from Baker, et al., 1983)

2.2.2.2 Morris and Hough (1987)

The authors studied eight different projects in detail which were located in Europe and the United Kingdom. These projects had poor management and, in consequence, poor performance. For this reason, the authors aimed to find the critical factors that influence the performance of these projects. They mentioned some critical factors for project success, which were: Clear definition of project objectives, political sponsorship, schedule duration urgency, the manner of project finance, community involvement and implementation problems (Morris and Hough, 1987).

2.2.2.3 Pinto (1988-1990)

In 1986, Pinto and Slevin developed a tool called the Project Implementation Profile [PIP] with two different aims. Firstly, the authors considered that this instrument is useful to analyse the human elements of a project and their relationship with the management. Secondly, the authors also suggested that this framework might help managers to monitor ten critical success factors, which were identified during its development, in relation to the project (Pinto, 1990). The ten factors can be seen in Figure 2-3.

Critical Success Factors Clear goals

Goal commitment of project team On site project manager

Adequate funding to completion Adequate project team capability Accurate initial cost estimates, Minimum start-up difficulties Planning and control techniques

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Figure 2-3 Ten critical success factors (Adapted from Slevin and Pinto, 1986)

Later, Pinto and Prescott (1988) used the Project Implementation Profile to create a questionnaire to identify the critical success factors and the scores of each of them through the project lifecycle. In this research, the authors mailed 586 questionnaires to the Project Management Institute [PMI] and 69 percent of the questionnaires were returned. All types of projects, such as construction, IT, food and miscellaneous, were included in this research. Therefore, Pinto and Prescott concluded that the ten critical success factors shown in Figure 2-3 vary, depending on the phase of the project. This result can be seen in Figure 2-4.

Figure 2-4 Critical success factors for each stage of the project lifecycle (Adapted from Pinto and Prescott, 1988)

As it can be seen in Figure 2-4, the critical success factors are not the same in each of the project’s lifecycle. However, the factor called “Mission”, which is about having clear

• Clarity of goal and direction. Project Mission

• Willingness of managers to provide the necessary resources. Top Management Support

• Detailed schedule with all the actions requited for project implementation

Project schedule

• Communication, consultation and active listening to all impacted parties

Client consultation

• Recruitment, selection and training of the necessary personnel for the project team

Personnel

• Availability of the required technology and expertise to accomplish the specific technical action steps Technical tasks

• The act of ‘selling’ the final project to its ultimate intended users Client acceptance

• Timely provision of comprehensive control information at each stage in the implementation process

Monitoring and feedback

• The provision of an appropriate network and necessary data to all key actors in the project implementation

Communication

• Ability to handle unexpected crises and deviations from plan. Trouble-shooting •Mission •Top management support •Client acceptance •Mission • Trouble-Shooting •Schedule •Technical tasks •Client consultation •Technical tasks •Mission •Client consultation •Mission •Client consultation

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objectives and goals, is important in all the stages of the project (Pinto and Prescott, 1988). This result suggests that managers should always understand clearly the objectives and goals of the project. Additionally, they should continuously update the team members with any change of the project objectives and goals.

2.2.2.4 Gemuenden and Lechler (1997)

Gemuenden and Lechler (1997) carried out a research using questionnaires. These questionnaires were distributed among members of the German Project Management Society. The rate of response was 43 percent, which contained 248 successful and 190 unsuccessful projects. In this study, the authors suggested eight critical success factors and they found the cause and effect relationship between these factors [See Figure 2-5]. This framework has some similar factors with other studies, such as top management involvement, project leader, planning and controlling and project team. Nevertheless, this framework suggests the negative impact that goal changes and conflicts can have in project success. For this reason, these two factors were considered as critical factors because they are barriers that can be removed by other factors to achieve project success (Gemuenden and Lechler, 1997).

Figure 2-5 Success factors, cause and effect relationship (Gemuenden and Lechler, 1997)

Top Management Project Leader Project Team Participation Information/ Communicatio Planning/ Controlling Goal Changes Conflicts PROJECT SUCCESS

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2.2.2.5 Chan, et al. (2004)

Chan, et al. (2004) created a framework [see Figure 2-6] after a review of more than 43 articles, which were found in seven major management journals. The authors considered that project success depends on different factors, such as “project-related factors, project procedures, project management actions, human-related factors and external environment” (Chan, et al., 2004, p.155). Additionally, the authors suggested that these factors were all interrelated. This framework also took into account the research done by Belassi and Tukel (1996) and they complemented the framework with other studies. Chan, et al. (2004) suggested that this framework was useful for many reasons. For instance, the framework would help to select the members of the team identifying the level of development that team members need to have for a good performance in the project.

Figure 2-6 Framework of factors affecting success of project (Taken from Chan, et al., 2004)

As mentioned before, there is not a unique list of critical success factors for projects; however, many different lists have been suggested by different authors (Sanvido, et al., 1992). There are some similarities between the researches; nevertheless, the differences can be

Project Management Actions

1. Communication system 2. Control mechanism 3. Feedback capabilities 4. Planning effort

5. Developing and appropriate organization structure

6. Implementing and effective safety program

7. Implementing and effective quality assurance program

8. Control of sub-contractors’ works 9. Overall managerial action

Project-related Factors

1. Type of project 2. Nature of project

3. Number of floors of the project 4. Complexity of project 5. Size of projects Project Procedures 1. Procurement method 2. Tendering method Human-related factors

1. Client’s experience means whether he is sophisticated or specialized client. 2. Nature of client means whether he is

privately or publicly funded 3. Size of client’s organization 4. Client’s emphasis on low cost 5. Client’s emphasis on high quality 6. Client’s emphasis on quick process. 7. Client’s ability to brief

8. Client’s ability to make decision 9. Client’s ability to design 10. Client’s contribution 11. Project team leaders’ experience 12. Technical skills of the reject team

leaders

13. Planning skills of the project team leaders

14. Organizing skills of the project team leaders

15. Coordinating skills of the project team leaders

16. Motivating skills of the project team leaders

17. Project team leaders’ commitment to meet cost, time and quality 18. Project team leaders’ early and

continued involvement in the project 19. Project team leaders’ adaptability to

changes in the project plan 20. Project team leaders’ working

relationship with others 21. Support and provision of resources

from project team leaders; parent company External environment 1. Economic environment 2. Social environment 3. Political environment 4. Physical environment 5. Industrial relations environment 6. Technology advanced

PROJECT SUCCESS

AVOIDING COST OVERRUNS IN CONSTRUCTION PROJECTS IN THE UNITED KINGDOM