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Causes of Contractor Cost Overrun in Construction Projects: The Case of

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Article  in  International Journal of Business and Economics Research · January 2015

DOI: 10.11648/j.ijber.20150404.11

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International Journal of Business and Economics Research
2015; 4(4): 180-191
Published online July 12, 2015 (http://www.sciencepublishinggroup.com/j/ijber)
doi: 10.11648/j.ijber.20150404.11
ISSN: 2328-7543 (Print); ISSN: 2328-756X (Online)

Causes of Contractor Cost Overrun in Construction

Projects: The Case of Ethiopian Construction Sector
Zinabu Tebeje Zewdu1, *, Getachew Teka Aregaw2
1
Faculty of Business and Economics, Unity University and OVID Construction plc, Addis Ababa, Ethiopia
2
Faculty of Business and Economics, Unity University and Financial Training and Consultancy Plc, Addis Ababa, Ethiopia

Email address:
Zinabut@yahoo.com (Zinabu T. Z.)

To cite this article:

Zinabu Tebeje Zewdu, Getachew Teka. 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, pp. 180-191. doi: 10.11648/j.ijber.20150404.11

Abstract: Completion of a construction project with budget is frequently seen as a major criterion of project success by clients,
contractors, consultants and related stakeholders. It is here that project management becomes essential tool for the delivery of
effective projects than the traditional functional management. However, the construction industry is faced with challenges to
meet budget. This study is conducted to identify the top five cost over-run factors and survey is conducted on 140 respondents.
The samples were drawn using convenient sampling approach. Primary data is collected using the self-administered
questionnaires. While secondary data is collected through reviewing of related materials and the analysis is conducted using
SPSS version 20. As per the contractor’ response, the top five factors that causes cost overrun of construction projects were from
medium to high. On the other hand, the top five factors as per the response of consultants and clients ranged between high to very
high. The contractors outlined the top five factors that causes cost overrun in construction projects are poor planning, fluctuation
of price of materials, poor productivity, inflationary pressure and project financing in descending order.
Keywords: Cost Overrun, Project Management, Project Control and Project Success

(ECIDP, 2014).
1. Introduction The cost overrun on projects results in poor investment
Ethiopia is the fastest-growing, non-oil driven economy returns from the use of the project, delay in the utilization of
among African countries. The country has showed a the public facilities and extended inconvenience for the public.
remarkable growth over the past ten years. The average annual All of these problems exert a huge financial pressure on
growth GDP is 10.9% (UNDP, 2014). This figure is double of government, and they can hold back or impair planned
the Sub Sahara Africa and triple of the world average growths economic development (Li-Yin, 2006). Hence, identification
indicating that Ethiopia is one of the fastest economic growths of the root causes of the challenges and pointing the possible
in the world (ibid). As a result the contribution of the industry way out in consultation with stakeholders are critical factor. In
against the GDP is only 3% and this is lower than the doing so, it intends to identify underlying causes for cost
sub-Saharan African average which is 6%. The construction variation of construction projects. Moreover, it would serve as
industry trend in the past 10 years shows a yearly growth rate a basis for further research in the area. Such an understanding
of 12.43 and this shows a share of 5.3% of the country’s GDP would further address the most pressing problems of human
(ECIDP, 2014). lives.
Though the construction sector is given high prominence, 1.1. Ethiopian Construction Sector
several defects are being noted in the sectors that need
immediate action. One significant problem is the fact that The fast growth of the construction industry resulted in
current infrastructure and construction projects show increasing number of contractors joining the industry. During
significant cost variation (ECIDP, 2014). This is occurring in the period 2000 up to 2008, the number of contractors
spite of the fact that the Ethiopian Government played increased by 1.9121. Consequently, there are 7259 numbers of
significant role in assisting contractors by providing training,
supplying machinery, and by developing supportive guidance
1www.mwud.gov.et accessed on March 2, 2014.
181 Zinabu Tebeje Zewdu and Getachew Teka: Causes of Contractor Cost Overrun in Construction Projects:
The Case of Ethiopian Construction Sector

BC/RC/GC registered contractors for 2014/15 budget year, construction work performance in building construction does
according to the Ministry of Urban Development, Housing not progress as it is supposed to be, for the last 50 years.
and Construction of Industry Development and Regulatory
Bureau. Where the numbers of larger contractors up to level 1.2. Hypothesis
three are: 263 BC1/RC1/GC1; 73 BC2/RC2/GC2; 163 Hypothesis 1:
BC3/RC3/GC3 (Table 1). H0= There is no association between the response of the
Table 1. Number of Contractors and Their Trend . 2 contractors and consultants for cost overrun factors.
H1= There is an association between the response of the
Year of Registration contractors and consultants for cost overrun factors.
Category 1994 E. C. 2000 E. C. 2006 E. C.
Hypothesis 2:
(2001/02 G. C.) (2008 G. C.) (2014/15 G. C.)
(BC-1, GC-1, H0= There is no association between the response of the
35 56 263 contractors and clients for cost overrun factors.
RC-1)
(BC-2, GC-2,
3 3 73
H1= There is an association between the response of the
RC-2) contractors and clients for cost overrun factors.
(BC-3, GC-3,
30 62 163 Hypothesis 3:
RC-3)
Total from H0= There is no association between the response of the
68 121 499 consultants and clients for cost overrun factors.
Grade 1 to 3
Total from
941 1799 7259
H1= There is an association between the response of the
Grade 1 to 10 consultants and clients for cost overrun factors.
Where: BC = Building Contractor; GC = General Contractor and RC = Road
Contractor 2. Related Literatures
Considering the high role of the construction sector in the Completion of a construction project with intended budget
industry and the demand to participate more contractors in the is frequently seen as a major criterion of project success by
sector, the former Ministry of Urban Development and clients, contractors, consultants and related stakeholders. It is
Construction revised its guideline and developed the here that project management becomes essential tool for the
“Amended Directives for the registration of Construction delivery of effective projects than the traditional functional
Professionals and Contractors No. 23/2013”. This directive is management. The Project Management Institute Project
applied starting from July 8th, 2013. This directive allows the Management Body of Knowledge (PMBoK) Guide defines a
contractors to register in the same grade but with revised project as ‘‘a temporary endeavor undertaken to create a
project cost up to 18 times of the old legislation (Table 1). unique product or service” (PMI, 1996).
Where, the legislation specifies that contractors of category 4 Project Management Constraint 1: Cost Overrun and
to 2 are not permitted to build above twelve floors including Mitigation Measures
basement and similarly categories of 6 and 5 are not permitted Cost in a project comprises money and resources (people,
to build above eight floors (Table 2). equipment, and materials). The client usually wants the
project to be finished with the possible lowest cost and timely.
Table 2. Project Construction Cost Review and Contractors Categories “GC”,
“BC” and “RC”.
However, it is the project manager’s responsibility to adopt or
formulate a performance standard to track cost performance
Construction cost ( million Birr) (Larry, 2002). Several factors that cause cost overruns in
Category Legislation Grade
BC RC GC
construction projects have been identified in various places
Above Above
(GC,BC,R
Old 1
20 20
Above 20 and time. The basic reason for cost overrun is that most
C) Above Above contractors quote price based on their projected estimates.
New 1 Above 350
210 300 Unfortunately, the price change so quickly that the initial
Up to budget become completely unrealistic (Azhar et al, 2008).
Old 2 Up to 20 Up to 20
(GC,BC,R 20
According to Larry, (2002) project cost is influenced by the
C) Up to Up to
New 2
210 300
Up to 350 following factors: specifications of the end products (such as
Up to levels of performance, quality, and reliability); compliance
Old 3 Up to 15 Up to 15
(GC,BC,R 15 with governmental, institutional, or internal standards; and
C) Up to Up to technical requirements (such as a need to upgrade computer
New 3 Up to 270
160 225
hardware) and administrative needs (such as a company’s
In addition to the private sector, authorities and government financial policies). Chabota et al., (2008) discussed that the
major causes of cost escalation in Zambia’s road construction
agencies are involved in construction of infrastructures by
are bad or inclement weather due to heavy rains and floods,
employing in-house advisors. As a result, a considerable
scope changes, environmental protection and mitigation costs,
number of expertises have been employed. Nevertheless, the
schedule delay, strikes, technical challenges, inflation and
local government pressures. In his survey, among 60
2www.MoUDHC.gov.etaccessed on March , 2015. participants, (73%) indicated that the causes of cost escalation
 International Journal of Business and Economics Research 2015; 4(4): 180-191 182

are bad weather, (63%) indicated the cause as scope changes, the rest 24% of the projects are over- estimated.
(61%) indicated the cause as environmental protection and Olawale and Sun, (2010) performed a study on 150
mitigation cost, (54%) indicated the cause as schedule delay, construction companies, 100 consultants on construction
(52%) indicated the cause as strikes and the remaining 50% project organizations in the UK, which was also followed by
indicated that the causes of cost escalation are local face-to-face interviews with 15 experienced practitioners. In
government pressures, technical challenges and inflation. the study, a list of 20 factors were used for identifying project
Similar study by Luka, (2014) conducted in Nigeria with cost and time control inhibiting factors: inflation of prices,
fifty eight (58) respondents who are all construction fluctuation of currency/exchange rate, unstable government
professionals, revealed that the average impact of cost related policies, weak regulation and control, unpredictable weather
risks with standard deviation are associated with the following conditions, dependency on imported materials, low skilled
five factors: incomplete or inaccurate cost estimate manpower, risk and uncertainty associated with projects,
(0.5886±0.2948), inadequate program planning unstable interest rate, lack of proper training and experience of
(0.5257±0.1821), variation by client (0.4914±0.2077), design pm, lack of appropriate software, inaccurate evaluation of
variation (0.4743±0.2063), and price inflation projects time/duration, non-performance of subcontractors
(0.4514±0.2241). The average impacts of these factors and nominated suppliers, project fraud and corruption, design
represent the degree of potential loss on construction project changes, financing and payment for completed works,
cost in the construction industry. Another study conducted in complexity of works, discrepancies in contract documentation,
Malaysia by Ali and Kamaruzzaman, (2010) on 30 contract and specification interpretation disagreement and
respondents from construction firms, shows that cost overrun conflict between project parties. Accordingly, the top five
becomes critical issue in Malaysia construction and ranked 13 factors identified in inhibiting effective project cost control in
factors contributed to cost overrun. These 13 factors in descending order are: Design changes, Risk and uncertainty
descending order are the following: inaccurate/ poor associated with projects, inaccurate evaluation of projects
estimation of original cost, construction cost underestimation, time/duration, Nonperformance of subcontractors and
improper planning, poor project management, lack of nominated suppliers and complexity of works. The first factor
experience, poor contract management, inflation of project of design change is very critical and needs carful management.
costs, high cost of machineries, fluctuation in price of raw These top five factors were considered for suggesting
materials, unforeseen site conditions, insufficient fund, mitigating measure and accordingly 90 mitigating measures of
obsolete / unsuitable construction equipment and methods, preventive, predictive, corrective and organizational natures
and mistake in design. were derived by making intensive literature review and face to
Based on their findings, Ali and Kamaruzzaman, (2010) face discussion with 15 participants (Olawale and Sun, 2010).
ranked the following 11 measures in descending order to In Ethiopia, a study conducted by Nega, (2008) on
control construction cost: proper project costing and financing, predominant factors for cost overrun in public building
proper cost control competent personnel, efficient construction projects in Ethiopia are identified the following
management, risk management during project execution, major cost overrun factors. These are inflation or increase in
realistic cost estimation, appropriate scope definition, the cost of construction materials, poor planning and
appropriate contractual framework, establish training coordination, change orders due to enhancement required by
programs, increase supply of materials, and establish a system clients, and excess quantity during construction.
in design. A study made among 26 consultants using A study made on project management maturity in the
questionnaire in Palestinian building construction projects by Ethiopian construction industry by Abadir, (2011) found out
Ibrahim and Nabil, (2013), revealed a 100% cost overrun. The that 22%, 22%, 22% and 28% of the contractors cost
responses indicated average cost overrun between 10% and management process maturity is incomplete, perform
30% of the project’s estimated cost. The study identified 41 informally, perform formally and managed well, respectively.
cost overrun factors, of which 26 are critical ones. The top five Whereas, the cost management practice maturity is 10%, 48%,
factors prioritized by the consultants affecting cost overrun in 38% and 5% apply no practice, incomplete, basic and
building construction projects are: political situation, intermediate, respectively. His study pointed out that 90% of
fluctuation of materials price, level of competitors, currency the contractors prepare detailed estimate of cost of labor,
exchange, and economic instability. The researchers material and machinery. However, only 75% prepare detailed
suggested the following mitigation measures for the above budget, about 70% track cost of labor, material and machinery
discussed cost overrun factors: Training courses and separately, and 67% collect and use company’s historical data
workshops, provision of updated Material price and labor for preparation of cost estimate. His study further indicate that
rates, provision of sufficient time for tender submission, on only 1/3 of the contractors use computer tools for cost estimate
time payment, communication and coordination among preparation and about 2/3 update their budget regularly at least
project staffs and top management reaction to political and once in a month. The contractors perform formal financial
environmental issues. Similar study conducted in Palestine by management process.
Mahamid and Amund, (2012) among a sample of 169 road Harold, (2009) stated that in the 1980s the failure of a
construction projects, 100% of the projects suffer from cost project was largely a quantitative failure due to ineffective
deviation: 76% of the projects are under-estimated cost while planning, scheduling, estimating, and cost control. As a result
183 Zinabu Tebeje Zewdu and Getachew Teka: Causes of Contractor Cost Overrun in Construction Projects:
The Case of Ethiopian Construction Sector

project objectives had become a moving object. In effective grade one to three contractors are 499 and accordingly the
project management in small organizations (1 to 30 million sample size determined based on Table 3 and found out the
dollar projects), manual may be acceptable rather than sample size of 80.
computerized cost control. The consultant and contractors who had worked with the
Cost management is among the very important dimension selected contractors were asked to respond to similar
of project management. The Earned Value Analysis (EVA) is a questioners using quota sampling.
cost management tool that is used to evaluate cost According to the formula used to determine the sample size
performance of different types of projects. by Yamane (1967),

z 2 p (1 − p ) N
3. Research Design and Methodology n0 =
z 2 p (1 − p ) + Ne 2
3.1. Description of the Study Area
Where:
Ethiopia is located in the horn of Africa. It covers an area of
no = sample size
about 1.13 million square kilometers and the topography of
z = confidence interval corresponding to a level of
the country is rugged ranging with an altitude from 125m
confidence
below sea level to 4,620m above sea level. The country has an
p = population proportion
elevated central plateau varying between 2,000 and 3,000
N = population size
meters above sea level (Figure 1).
e = precision or error limit
Taking the value of N= 499, which is the total size of the
population (Grade one to three contractor), Z=1.96 (95%
Confidence Interval), p=0.5 and level precession e=10%, the
required sample size found were 80.
Again, taking Yamane (1967) formula for determining the
required response rate for the amount of sample size
determined, the researcher used the below method of
determination.

n
r=
1 + ne 2

Where:
n = sample size
r= required responses
e2= error limit or the level of precision) 10%
Accordingly, by assuming response rate of 56% the sample
size to be distributed was identified as 130 for the contractors
and finally able to achieve 75.4% of response rate.

Table 3. Sample size determination.

1 2
Population Sample Size
Figure 1. Map of Ethiopia. Low Medium High
51-90 5 13 20
3.2. Sampling Methods and Sample Size 91-150 8 20 32
151-280 13 32 50
Considering the homogeneity of the construction sector 281-500 20 50 80
from grade one to three in terms of formulation and category, 501-1,200 32 80 125
convenient sampling was adopted for preliminary and final 1,201-3,200 50 125 200
questionnaire distribution. Convenient sampling was used due 3,201-10,000 80 200 315
10,001-35,000 125 315 500
to the fact that the sensitivity of the question types and needs 35,001-150,000 200 500 800
some follow-up and further push to get reliable response and
to have high number of return of the questioners. Source: J Carvalho, "Archival application of mathematical sampling
techniques", Records Management Quarterly 18:63 (1984) as cited on OSPO,
Among the most important element of the research, the 2005.
sample size is the one which addresses the characteristics of
the whole file series with confidence. To stick with good 3.3. Validity and Reliability
statistical validity, the study made use of a representative
sample size. For this study maximum care is given to get the Reliability and validity in quantitative research reveal two
highest sample size (OSP, 2005). For the study the numbers of strands: Firstly with regards to reliability, whether the result is
 International Journal of Business and Economics Research 2015; 4(4): 180-191 184

replicable and with regards to validity, whether the means of showing the impacts of the independent variables on the
measurement are accurate and whether they are actually dependent variable.
measuring what they are intended to measure (Nahid, 2003).
Kirk and Miller (cited in Nahid, 2003) identify three types 3.4. Data type, Sources, and Methods of Data Collection
of reliability referred to in quantitative research, which relate Both quantitative and qualitative methods were used: in
to: 1) the degree to which a measurement, given repeatedly, step one qualitative analysis were done for identifying factors
remains the same, 2) the stability of a measurement over time, from literature and checked on selected respondents; in step
3) the similarity of measurements within a given time period. two quantitative data were collected using questionnaire
The questionnaire was reliable in that it used the same (Figure 2). This study involved largely the use of primary data
questions to all respondents and was answered in similar ways. for the purpose of empirical analysis. The primary data were
The questions were adopted from previously done studies obtained with the use of structured questionnaires and selected
which were subject to critics and the content validity was interviews. Secondary data were used for preparation of the
addressed in that all questions clearly represented all the questioner and to discuss the findings of the research.
variables intended to measure for the desired objective of

Figure 2. The two step approach for this research.

Part one: Questionnaire Survey regarding cost. The model in the questionnaire cost overrun
For the survey, pretested questionnaire was developed to factor was identified by conducting detailed literature review
assess factors for cost overrun perception. Preliminary (Luka, 2014; Ibrahim and Nabil, 2013; Mahamid and Amund,
questionnaires were sent to 10 professionals for their comment 2012; Abadir, 2011; Ali and Kamaruzzaman, 2010; Olawale
and adjustment. Their comments and inputs were incorporated and Sun, 2010; Azhar et al, 2008; Chabota et al., 2008 and
in development of the final questionnaire that was distributed Nega, 2008). Accordingly, different factors were tabulated in
and collected. to a questionnaire (Table 3).
The list of contractors was first obtained from online The questions were structured in such a way as to provide
archive. Online search was further conducted to identify their pertinent information on the extent of cost variation on
contact address and detail. The questionnaires were sent to projects. These questions were made simple and straight
different organizations via their email. Moreover, personal forward in order to ensure maximum responses from the
contacts with senior professionals in the field were used to respondents. For the questionnaire, Likert scale of “1= very
gather data and also to link to other potential respondents. little; 2= little; 3=moderate; 4=high and 5= very high” were
When linked to professionals through personal contacts, the used.
name of the construction company was recorded and The questionnaire distributed had two sections:
appropriate follow up was done to make sure that the Section I gathers basic background information about the
questionnaire was filled by the appropriate professional and to particular respondent. It includes questions asking the
ensure a good questionnaire response rate. type of organization, position, salary, educational level,
Respondents of the questionnaire consists of Grade one to year of experience etc.
three Building contractor (BC)/ General contractor (GC), road Section II consists of 41 cost overrun factors whereby
contractors (RC) of governmental as well non-governmental respondents were expected to rate based on their
bodies; consultants and clients. The survey enabled the importance. The causes of cost overrun of contractors
respondents to identify the challenge in the construction field study was made by classifying 41 factors in to five broad
185 Zinabu Tebeje Zewdu and Getachew Teka: Causes of Contractor Cost Overrun in Construction Projects:
The Case of Ethiopian Construction Sector

categories (cost estimation factor, construction items, Table 4. List of cost overrun factors.
project participants, environmental and financial) for S.N. Cost Overrun Factors 1 2 3 4 5 Cited by
mutual exclusivity. 1) Cost estimating factor
The questionnaires, along with the cover letter, were 1 Cost of labor A, H
distributed to the concerned company employee either in hard 2 Cost of machinery A, D, H
or soft copies whichever was convenient. Physical visits 3 Transportation cost A
and/or intensive telephone conversations were made to all the High machinery maintenance
4 A
cost
respondents. The purpose of the communication was to clarify
5 High interest rates by bankers A
some of the points found vague to the respondents in the 6 Wrong estimation method A,C,D, E, F
questionnaires, to follow up the responses, and to collect filled 7 Cost of insurance A
ones. Respondents were assured that their responses would be Fluctuation of prices of
8 A, D
kept confidential. materials
Bureaucracy in tendering
9 A
3.5. Data Analysis method
10 Waste on site A,B
The data collected through pre-tested structured Long period between design and
11 A
questionnaire were categorized and analyzed. Content analysis time of tendering
was further employed in the presentation of the results. The data 2) Factors related to construction item
Fraudulent practices and
were tabulated, analyzed and interpreted using SPSS (version 12
kickbacks
A
20). The five-point scale was converted to a Relative 13 Contract management A, D, I
Importance Index (RII) for each individual factor using the 14 Additional work A, B, G
following formula(Luka, 2014; Ibrahim and Nabil, 2013; 15 Duration of contract period A, I
Mahamid and Amund, 2012; Abadir, 2011; Olawale and Sun, 16 Contractual procedure A
2010; Azhar et al, 2008; Chabota et al., 2008 and Nega, 2008): 17 Frequent changes in design A, B, C, D, I
Relative importance index (RII) = Σw ÷ (H x N) Lack of adequate manpower or
18 A, B, D, I
technical staff
Where w is the total weight given to each factor by the
3) Factors related to project participant
respondents, which ranges from 1 to 5 and is calculated by an 19 Disputes on site A, B
addition of the various weightings given to a factor by the Lack of coordination between
20 A, G, I
entire respondent, H is the highest ranking available (i.e. 5 in construction parties
this case) and N is the total number of respondents that have 21 Poor financial control on site A
answered the question. 22 Poor planning A,C, D, G, H
Finally, an statistical test was conducted on cost control 23 Previous experience of contract A, D
Relationship between managers
ranking agreement or disagreement of the respondents 24
and labors
A
(contractor, consultant and client) with the help of spearman 4) Environmental factors
rank correlation coefficient. Where, the Spearman’s rank 25 Level of competitors A
correlation is a non-parametric test correlation varies between 26 Manipulation of suppliers A, I
+1 and -1, where +1 signifies perfect positive correlation and 27
Absence of construction-cost
A
-1 show a perfect negative correlation or disagreement. data
28 Economic instability A
Correlation coefficient value of ± 1 is said to be a perfect
29 Effects of weather A, B, I
correlation. In this study, we assume that a value lying 30 Government policies A, B, I
between ± 0.5 and ± 1 reflects a high degree of correlation, a Inadequate local production of
31 A, I
value lying between ± 0.3 and ± 0.5 reflects a moderate degree raw materials
of correlation, while a value lying between ± 0.1 and ± 0.3 32 Monopoly by suppliers A
reflects a low degree of correlation. It is possible to reject the 33 Number of competitors A
null hypothesis, when the absolute value of the obtained ρ is Number of projects going at the
34 A
same time
larger than the critical ρ (.254 for P.01) for N=98. 35 Political situation A
A correlation coefficient value lying around zero means that 36 Poor productivity A
there is no correlation. 37 Project location A
Spearman rank correlation formula: 38 Social and cultural impacts A
5) Financing factors
rs = 1 – (6Σdi 2⁄ (N3– N)). 39 Currency exchange A, I
40 Inflationary pressure A, B, C, D, G, I
Where, rs is the Spearman rank correlation coefficient, di 41 Project financing A, D, I
represents the difference between ranks for each case and N is
the number of subjects or pairs of ranks (Weinberg and 1= very little; 2= little; 3=moderate; 4=high and 5= very high
A (Ibrahim and Nabil, 2013); B (Chabota et al., 2008); C (Luka, 2014); D (Ali
Abromowitz, 2008; Cohen, 1988).
and Kamaruzzaman, 2010); E (Azhar et al, 2008); F (Mahamid and Amund,
For N > 30, the critical value from Spearman's (N=30, p 2012); G (Nega, 2008); H (Abadir, 2011); I (Olawale and Sun, 2010);
= .05) = .363 "close enough"
 International Journal of Business and Economics Research 2015; 4(4): 180-191 186

4. Result and Discussion as adequate for the study.

4.1. Demographic Table 5. Response Rate for the Structured Questioner.

The structured questionnaire survey is designed to Valid among

Group Distributed Returned Valid distributed in
determine the major causes of cost variation in construction percentage
projects in Ethiopia. 140 participants were questioned in the Contractors 130 104 98 75.4
survey. The respondents are categorized into three groups, Consultants 60 33 26 43.3
namely contractors, consultants and clients which, of course, Clients 40 24 16 40.0
are implementing agencies and financiers. The response rate
for the questionnaire survey for the above mentioned Profile of questionnaire respondents
contractors, consultants and clients are 75.4%, 43.3% and The academic qualifications of the respondents were
40.0%, respectively (Table 5). According to Sekaran (2001), a assessed. Accordingly, out of 140 participants 18, 78 and 44 of
response rate of 30% is acceptable for most studies; therefore, the respondents have diploma, bachelor and Masters Degree
as the response rate of this study is more than what is referred in engineering, respectively. The education qualifications of
as adequate by Sekaran (2001), the response rate is measured the respondents suggest sufficient educational qualification to
make the information acquired reliable (Figure 3).

Figure 3. Academic Qualifications of Total Respondents.

70

60

50

40

30

20

10

0
Experience: 0 - 4 Experience: 5 - 9 Experience: 10 - 19 Experience: 20 - 30

Figure 4. Working Experience of the Total Respondents.

As per the survey, out of the total 140 respondents 60, 46, company from 0 to 4, 5 to 9, 10 to 19 and 20 to 30,
26 and 6 of the respondents have experience in their current respectively (Figure 4).
187 Zinabu Tebeje Zewdu and Getachew Teka: Causes of Contractor Cost Overrun in Construction Projects:
The Case of Ethiopian Construction Sector

Table 6. Contractors Response for Cost Overrun Factors. 30, respectively. The profile and experience of the respondents
No. Contractors Response of Cost Overrun Factors Mean suggest sufficient exposure to make the information acquired
1 Poor planning 3.918 reliable.
2 Fluctuation of prices of materials 3.918
3 Poor productivity 3.714 4.2. Cost Overrun Factors
4 Inflationary pressure 3.673
5 Project financing 3.612 After identifying from literature different factors that result
6 Duration of contract period 3.571 in cost overrun of construction projects, questioner was
7 Poor financial control on site 3.551 prepared, incorporating 41 factors and the responses are
8 Monopoly by suppliers 3.469
ranked in Table 6. As per the contractors’ response top five
9 Contract management 3.469
10 Cost of machinery 3.408 factors that causes cost overrun of construction projects are
11 Inadequate local production of raw materials 3.408 identified. These factors are poor planning (3.918), fluctuation
12 Bureaucracy in tendering method 3.388 of prices of materials (3.918), poor productivity (3.714),
13 Currency exchange 3.347 inflationary pressure (3.673) and project financing (3.612)
14 High machinery maintenance cost 3.327
(Figure 5). All the factors are ranked from medium to high;
15 Lack of adequate manpower or technical staff 3.327
16 Number of projects going at the same time 3.306 this could be linked to lower acceptances of the fact and/or
17 Wrong estimation method 3.306 high debate on the factors. On the other hand, the top 5 factors
18 Number of competitors 3.265 as per the response of consultants and clients are ranged
19 High interest rates by bankers 3.224 between high to very high (Annex-A, Table 8).
20 Absence of construction-cost data 3.204
Poor Planning
21 Transportation cost 3.163
22 Previous experience of contract 3.163 The contractors claimed that out of 41 factors, poor or
23 Manipulation of suppliers 3.143 inappropriate planning is the first factor which contributes to
24 Cost of labor 3.122 cost overrun of projects. The response of the consultants and
25 Lack of coordination between construction parties 3.102 the clients ranked as 1st level with mean value of 4.231 and
26 Economic instability 3.102
4.500, respectively. This shows the need for improving the
27 Contractual procedure 3.082
28 Fraudulent practices and kickbacks 3.082 planning; this can be improved with the application of training,
29 Waste on site 3.061 techniques and software. In line with this, Luka, (2014)
30 Project location 3.041 investigated the construction cost overrun in Nigeria due to
31 Frequent changes in design 3.020 inadequate planning which is ranked as 2nd. Olawale and Sun,
32 Long period between design and time of tendering 3.000
(2010) also showed construction projects in the UK and found
33 Additional work 2.959
34 Government policies 2.959 out that out of 20 factors the 4th ranked factor is inaccurate
35 Relationship between managers and labors 2.837 evaluation of projects duration. Ali and Kamaruzzaman, (2010)
36 Effects of weather 2.796 as well showed Malaysian construction projects cost overrun
37 Level of competitors 2.735 due to poor planning which is ranked as 2nd. Nega (2008) also
38 Social and cultural impacts 2.653
showed the cost overrun in public construction projects in
39 Disputes on site 2.531
40 Cost of insurance 2.531 Ethiopia as mainly due to poor planning.
41 Political situation 2.122

Then again, out of the total 140 respondents, 14, 36, 64 and
26 of the respondents have the following total experience in
the construction industry from 0 to 4, 5 to 9, 10 to 19 and 20 to

Figure 5. Top Five Internal and External Factors Affecting Cost Overrun in Ethiopian Construction Sector.
 International Journal of Business and Economics Research 2015; 4(4): 180-191 188

Price Fluctuation of Materials as the 5th factor. Ali and Kamaruzzaman, (2010) also showed
The contractors’ rank of price fluctuation of materials Malaysian construction projects cost overrun caused by
(3.918) during construction as the 1st problem is comparable inflation is ranked as 7th out of 13 cost overrun factors.
with the responses by the consultants and clients (Annex-A, Ibrahim and Nabil, (2013) study in Palestine building
Table 1). Where, the consultants and clients ranked it as 2nd construction showed that currency exchange and economic
and 3rd factor for the cause of cost overrun with a mean of instability are the 4th and 5th cost overrun factors out of 41
4.154 and 4.000, respectively. Improvement in planning can factors. Nega (2008) as well showed the cost overrun in
also results in a better understanding level of material price public construction projects in Ethiopia is primarily due to
fluctuation regardless of the fact that the situation is partially inflationary pressure.
external and difficult to manage. This could be due to the Project Financing
booming constructions and contractors number in the The contractors ranked project financing as a 5th cost
country. One way to resolve this could be by increasing overrun factor. This is unlike the responses of the consultants
supply of materials. and clients as who ranked 25th (3.462) and 36th (2.500),
In agreement with this, Ali and Kamaruzzaman, (2010) respectively. It is a fact that one way or the other when cases
showed Malaysian construction projects cost overrun due to like delay in payment happens the contractors incur
price fluctuation of raw materials which is ranked as 9th out additional costs and/or results in delay of project which in
of 13 cost overrun factors and recommends increasing return result cost overrun. Hence, the provision of alternative
materials supply. Ibrahim and Nabil, (2013) who study in mechanisms such as availability of working capital and
Palestine building construction, also showed that price others can be a way out. In line with this, Ali and
fluctuation of materials is the 2nd out of 41 cost overrun Kamaruzzaman, (2010) showed Malaysian construction
factors. The basic reason of cost overruns as quoted by most projects cost overrun caused by insufficient fund is ranked as
contractors is prices based estimates, and unfortunately, the 11th out of 13 cost overrun factors. Ali and Kamaruzzaman,
price change so quickly that the initial budget figure (2010) recommend out of the 11 factors the arrangement of
becomes completely unrealistic (Azhar et al, 2008). Nega proper project costing and financing should be the 1st for
(2008) has also showed that the cost overrun in public success of project.
construction projects in Ethiopia is primarily due to increase The selected top five cost overrun factors can be
in cost of construction materials. categorized as internal and external as shown in Figure 5.
Poor Productivity According to PMBOK, project can be finalized within
The contractors ranked the poor productivity as a 3rd factor approved budget if project cost management incorporating
which results in cost overrun. This is comparable with the the three steps of estimating, budgeting and controlling costs
responses of the consultants and clients which are 4th (4.000) is managed well. Accordingly, the implementation of
and 2nd (4.125) out of 41 cost overrun factors, respectively. effective project cost management can eliminate or reduce
This could be improved by the adoption of proper planning poor planning as well poor productivity (Harold, 2009).
techniques and methods for project evaluation and However, the effect of price fluctuation of materials and
monitoring. project financing can be managed by both the contractor and
Inflationary Pressure the support from the stakeholders. The contractor can
The contractors’ ranked inflation as a 4th factor which minimize price fluctuation of materials by holding stock.
results in cost overrun. The consultants and clients also The client or government can increase supply and/or
ranked inflation as 9th (3.846) and 25th (3.25) which shows consider some price adjustment. The inflationary pressure is
the clients difference; instead, the clients pointed out other out of the contractor’s control; and, it should be considered
factors such as lack of adequate manpower or educated staffs, by the regulatory body to have some room for compensation.
project location etc as a primary cost overrun factor. It is
witnessed that the aggressive move of the country towards 4.3. Hypotheses Testing Results for Cost Overrun Factors
the achievement of its target to become a middle income For the assessment of correlation between contractors,
country by the year 2025 could be realized at the expense of consultants and clients of cost overrun ranked factors, the
inflation3, and the response of the contractors is the same as hypotheses checkup is as follow:
the above mentioned statement. The result of inflation could
be the main reason for the materials price fluctuation. Table 7. Cost Overrun Factors Response Correlations between Contractors,
In line with this finding, Chabota et al., (2008) stated that Consultants and Clients (Spearman rank correlation, r).
among the major causes of cost escalation in Zambia’s road
Contractors Consultants Clients
construction, the 5th ranked factor is local government
pressures, technical challenges and inflation which all scored Contractors 1 0.674 0.466
50%. Luka, (2014) also investigated the construction cost Consultants 0.674 1 0.573
overrun in Nigeria, and find out that price inflation is ranked
Clients 0.466 0.573 1
3
www.foreignaffairs.com/ethiopia-sponsored-section
189 Zinabu Tebeje Zewdu and Getachew Teka: Causes of Contractor Cost Overrun in Construction Projects:
The Case of Ethiopian Construction Sector

Hypothesis 1: consultants impartial view on the differences among the

H0= There is no association between the responses of the clients and contractors. Within the construction
contractors and consultants for cost overrun factors. administration, the consultants might be seen as more
H1= There is an association between the responses of the favorable towards the clients; however, the result of this
contractors and consultants for cost overrun factors. finding shows that the consultants have no interest of taking
Results displayed in table 7 above, r = 0.674, showed the side.
response correlation between contractors and consultants. As
Weinberg and Abromowitz, (2008) explained, the correlation
coefficient is a number between -1 and 1 that determines 5. Summary, Conclusion and
whether two paired sets of data are related and the closer to 1, Recommendations
the more confident we are of a positive linear correlation and
the closer to -1, the more confident we are of a negative This chapter deals with the summary of findings,
linear correlation. From the above stated facts, it can be seen conclusions and recommendations. As per the contractor’
that the null hypothesis is rejected and H1 is accepted by response, the top five factors that causes cost overrun of
showing high correlation. construction projects were from medium to high. On the
Hypothesis 2: other hand, the top 5 factors as per the response of
H0= There is no association between the responses of the consultants and clients ranged between high to very high.
contractors and clients for cost overrun factors. The contractors outlined the top five factors that causes in
H1= There is an association between the responses of the cost overrun of construction projects are poor planning,
contractors and clients for cost overrun factors. fluctuation of price of materials, poor productivity,
From the result displayed in table 7 above, where r =0.466, inflationary pressure and project financing in descending
which shows the existence of positive linear correlation. As a order.
result, the null hypothesis is rejected and H1 is accepted by Similarly, the top five cost overrun can be monitored by
showing medium correlation. cooperation among project stakeholders to create efficient
Hypothesis 3: project success. The results of spearman coefficient for cost
H0= There is no association between the responses of the overrun factor ranking of construction project between
consultants and clients for cost overrun factors. contractors and clients, clients and consultants, and
H1= There is an association between the responses of the contractors and consultants are 0.47, 0.57, and 0.67
consultants and clients for cost overrun factors. respectively showing very good correlation.
As displayed in table 7 above, where r =0.573, which The study bases the current environment of the
shows the existence of positive linear correlation. As a result, construction industry, however the construction industry
the null hypothesis is rejected and H1 is accepted by showing changes so fast. Thus, in the future, the investigation of
high correlation. factors result in cost overrun may be maintained constantly
The result of spearman coefficient between contractors with their mitigation measures. To conduct research in
and clients, clients and consultants, and contractors and different countries in order to grasp a more global view of
consultants are 0.47, 0.57, and 0.67, respectively. The result cost overrun factors in construction companies in practice
of spearman rank correlation coefficient for cost overrun may be determined. Applying the same study criteria to other
shows a higher correlation between contractors and countries could be examined. One could use some of this
consultants since they are the ones who have a direct burden study’s ideas but focus specifically on projects that
of the day to day routine work. The medium correlation experienced significant cost overrun. Further study of
between the contractors and clients could be due to conflict ranking the survey responses by profession and by sector
of interest on cost overrun. The result shows that the would result interesting findings. Study based on project size
and duration would result interesting findings.

Annex A
Table 8. Response of Cost Overrun Factors by Consultants and Clients.

No. Consultant reply of Cost Overrun Mean Client reply of Cost Overrun Factors Mean
1 Poor planning 4.231 Poor planning 4.500
2 Fluctuation of prices of materials 4.154 Poor productivity 4.125
3 Inadequate local production of raw materials 4.077 Fluctuation of prices of materials 4.000
4 Poor productivity 4.000 Lack of adequate manpower or technical staff 4.000
5 Lack of adequate manpower or technical staff 4.000 Project location 4.000
6 Poor financial control on site 3.923 Monopoly by suppliers 3.750
7 Economic instability 3.846 Poor financial control on site 3.625
8 Monopoly by suppliers 3.846 Cost of machinery 3.625
9 Inflationary pressure 3.846 Transportation cost 3.625
10 Cost of machinery 3.769 Long period between design and time of tendering 3.625
 International Journal of Business and Economics Research 2015; 4(4): 180-191 190

No. Consultant reply of Cost Overrun Mean Client reply of Cost Overrun Factors Mean
11 Waste on site 3.769 Frequent changes in design 3.625
12 Contract management 3.769 Lack of coordination between construction parties 3.625
13 Currency exchange 3.769 Inadequate local production of raw materials 3.625
14 Long period between design and time of tendering 3.692 Currency exchange 3.625
15 Additional work 3.692 Cost of labor 3.500
16 Number of projects going at the same time 3.692 Duration of contract period 3.500
17 Absence of construction-cost data 3.692 Social and cultural impacts 3.500
18 Manipulation of suppliers 3.615 Contract management 3.375
19 Transportation cost 3.615 Additional work 3.375
20 Duration of contract period 3.615 Number of competitors 3.375
21 Lack of coordination between construction parties 3.538 Contractual procedure 3.250
22 Bureaucracy in tendering method 3.538 Manipulation of suppliers 3.250
23 Wrong estimation method 3.462 Absence of construction-cost data 3.250
24 Contractual procedure 3.462 Economic instability 3.250
25 Project financing 3.462 Inflationary pressure 3.250
26 Fraudulent practices and kickbacks 3.462 Number of projects going at the same time 3.250
27 Government policies 3.385 Wrong estimation method 3.125
28 Level of competitors 3.385 Previous experience of contract 3.000
29 Relationship between managers and labors 3.308 Relationship between managers and labors 3.000
30 Disputes on site 3.308 Level of competitors 3.000
31 High machinery maintenance cost 3.154 Bureaucracy in tendering method 2.875
32 Previous experience of contract 3.154 Fraudulent practices and kickbacks 2.875
33 Frequent changes in design 3.154 Waste on site 2.750
34 High interest rates by bankers 3.077 Disputes on site 2.750
35 Cost of labor 3.077 Effects of weather 2.750
36 Number of competitors 3.000 Project financing 2.500
37 Political situation 3.000 Cost of insurance 2.500
38 Project location 2.923 High machinery maintenance cost 2.500
39 Social and cultural impacts 2.615 Political situation 2.375
40 Effects of weather 2.615 High interest rates by bankers 2.375
41 Cost of insurance 2.385 Government policies 2.375

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