Establishing near-accurate cost estimates for infrastructural development projects is a difficult task. In most infrastructure based projects in Kenya in both the public and private sector; project cost overruns are common; most with variances greater than 10%.10% variance is the de facto figure. Most clients or project managers use this as their ideal ceiling for variances. However, overruns which are rarely foreseen occur. Ultimately they end up being a burden to the client and in some cases result in the projects stalling or excessive delays in the completion of works.
These price discrepancies are brought about by grey areas in the project. Some of which cannot be identified until the project has begun and contractual obligations have been taken up by the various actors (i.e. client, contractor, project manager etc).
Having these grey areas in construction projects is not good for the industry. Discrepancies may also arise from the initial ‘Engineer’s Estimate’ and the median values of bid documents received from the contractors. Such discrepancies also strain the client and push them to selecting a contractor with a bid closest to the pre-tender estimate without considering if the job may be completed to the expected standards in relation to the submitted bid.
For effective planning purposes and striking a balance in the industry; it would be of great importance to have near-accurate cost estimates:-
a) For the client -so that they can budget well
b) For the contractor -so that they can submit a competitive bid
c) For the project designer -so that they can advise the client appropriately
Large discrepancies between pre-tender estimates and actual bids for construction have a serious impact on the viability of a project. Owners, architects, engineers, cost consultants, contractors and subcontractors all have a vested interest in ensuring a high degree of cost predictability.
There isn’t a common statistical database on variances between pre-tender estimates and final bid results for the Kenyan construction market.
KEY COST DRIVERS
Cost predictability is usually brought about by a myriad of factors. The major cost variation drivers are listed below with a brief explanation as to how each factor affects the project cost estimate.
1. MARKET VOLATILITIES
Such include spike in global market prices and currency volatilities. This majorly affects mega projects (value greater than KES 1Bn). Currency volatilities are very short term (up to a day); while global market prices are gradual (at least a year).
2. PROJECT SCHEDULE CHANGES
When the projects have their schedules lengthened or a client who wants the project duration shortened. Both have a significant effect on cost.
3. QUALITY OF TENDER DOCUMENTS
Projects with many addenda reflect the quality of the design consultants and contribute to cost variances. Research studies have shown that projects with more than 3 addenda tend to have significant (more than 10%) variances in the initial estimated project costs. The number of addenda in any given project can be used as a criterion for future evaluation of design consultants.
4. RISK ANALYSIS AND QUANTIFICATION
MANY PROJECT UNDERTAKINGS ARE NOT SUBJECTED TO CRITICAL RISK ANALYSIS. MOST PROJECTS WILL TEND TO LIST THE RISKS THAT WILL BE ENCOUNTERED. HOWEVER, THESE RISKS ARE NOT QUANTIFIED AND SUBSEQUENTLY CANNOT BE ACCOUNTED FOR IN THE PROJECT COST ESTIMATE. THIS THEREFORE OPENS THE floodgates TO COST VARIATIONS DURING IMPLEMENTATION.
5. GROWTH IN PROJECT OBJECTIVES/SCOPE DURING DESIGN OR DEVELOPMENT
Projects which have a lot of public interest or a varied array of stake holders are highly subject to changes in their scope or objectives. Projects that also have a huge time lapse between design and implementation also fall under this category as changes in scope are inevitable.
6. PRESSURE TO MEET LIMITED BUDGET
Estimates should not be altered to meet limited budgets. If the estimate exceeds the budget, owners should achieve the intended result by either increasing the budget or modifying the scope of work.
7. MISUSE OF DATA OF SIMILAR PROJECTS
In the case where estimates are drawn up from previous projects, practitioners may not take into consideration the original estimate, final costs, market influences at the time of the original project, and variations between the previous project’s scope and the current one. The old estimates may also not take into consideration changes in source of materials, distance from borrow pits to construction sites, weather changes, inflation, and changes in legislation
8. CONSIDERATION FOR INDUSTRY-SPECIFIC COST INFLATION SHOULD BE GIVEN
MOST PROJECTS WILL CATER FOR MARKET INFLATION IN THEIR PROJECT BIDS. HOWEVER, INDUSTRY SPECIFIC COST INFLATION MAY ALSO APPLY TO PROJECTS. SUCH Industry specific elements should BE INCORPORATED IN ORDER TO MITIGATE COST VARIATIONS E.G. WATER, TRANSPORTATION, BUILDINGS ETC.
2.0 ACCOUNTING FOR PROJECT VARIANCE
In order to make cost-estimates more predictable, the following factors can be considered and included as costs in the project. They should be able to give a more realistic estimate with minimal variance.
This will account for
i) Market volatilities
Changes in the market may cause changes in project cost estimates. Such volatilities affect a wide population and their effects are enormous. For instance, the Thika Superhighway Project, started when the exchange rate between the Kenyan Shilling was KES 66 to the dollar but on completion was KES 100 to the dollar. The funding being dollar based therefore meant that the cost of the project drastically shot up.
Market volatilities majorly encompass spikes in prices and global trends. Instances of market volatilities include: the financial crisis of 2009, the strengthening of the dollar in 2015 and the depreciation of the British pound in 2016.
ii) Availability of materials;
Scarcity in the production of some raw materials especially in the international markets may significantly drive up the cost of a project. This has been witnessed in the production of iron core, which affected steel prices in 2008. Changes in the mode of mining for oil and its production caused price drops in 2014. These changes however take effect gradually (about a year).
iii) Political and legal interventions
Changes in the political and legal scene may also vary project costs. Such changes may include policy amendments, imposition of legal restrictions on certain activities such as mining; imposition of levies; imposition of other regulations just to mention a few. These changes will most often than not increase the projected cost of a project. It may mean a change in the choice of materials, increased labour costs, transportation costs, or material production costs. They are however not very common and also provide for relatively sufficient time to be incorporated.
2.2 INDUSTRY SPECIFIC COST INFLATION
In the project life cycle, between the design and implementation phase; inflation may occur. The cost of a project during design and implementation may vary due to inflation in the market. Many projects rarely adjust for inflation and if they do they use government inflation forecasts. However, government inflation forecast sheets only predict stable flat line inflation and spiKES in construction inflation are typically only adjusted after the inflationary event has happened.
2.3 SITE CONDITIONS
Stakeholders may attempt to speed up the project and get it out to tender sooner or shorten project timelines. This results in consultant investigations being shortened or eliminated. More often than not, it leads to surprises during construction when it is more difficult and costly to react to them. It is therefore prudent to allow consultants sufficient time and compensation to do thorough investigations of the project designs and costs.
In many undertakings, project analysts usually identify the risks in a project but they are not quantified. The absence of the quantification of this risks poses a challenge as they do not reflect on how they will affect the project cost. The risks and the variance that comes with it should then be appropriated to the total project cost.
2.5 MISUSE OF DATA ON SIMILAR PROJECTS
It is common practice and only natural to use historical data from previously carried out similar projects to get the estimate of a new one. This may work some of the times but is prone to variances. When using the history of similar projects, the following factors should be considered: the original estimate, final costs, market influences at the time of the original project, and variations between the previous project’s scope and the current one. The lessons learned from the historical project should also be taken into account and used to create better cost projections. An in-depth analysis on cost variations are stated in our Report No 6/2016 ‘Addressing Cost Overruns in Construction’ available our research portal http://engineering.lorientoutlook.com/research
WORKING WITHIN THE BUDGET
A complete project cost estimate is composed of hundreds of individual estimate items and considerations. These include construction techniques, raw materials, construction equipment, innovative ideas, site supervision, productivity factors, front-end specifications, and project scheduling among others. All of which play crucial roles in arriving at the final cost estimate of a project.
A successful outcome is achievable only where the complexity of the processes used is carefully understood and dealt with appropriately.