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CHAPTER 5

TO IDENTIFY AND EVALUATE FACTORS AFFECTING


COST ESCALATION IN INDIAN BUILDING
CONSTRUCTION PROJECTS

5.1 INTRODUCTION

Construction Industry is the backbone of our economy. But being


an unorganised sector is always been surrounded by various problems relating
to quality, contract administration safety. One of the biggest problems is the
risk sharing demarcation between owner and the contractor. All the contracts
have been formulated to protect the interests of client. Owner doesn't want to
shell out any extra amount other than as stated in tender. But all civil projects
have construction phase of more than a year and above. Hence most projects
are subjected to cost escalation from the original approved cost. Cost
escalation associated with government construction projects differ according
to the country and the specific sector in which they are implemented. In this
chapter, the study carried out for identification and evaluation of factors
affecting cost escalation in Indian building construction projects are
presented. The preparation of preliminary list factor categories and factors
affecting cost escalation, questionnaire formulation and survey details,
analysis of survey responses for identification of factor affecting cost
escalation and brief discussion on each identified cost escalation factors are
presented. A case study analysis with respect to significant factors and factor
categories affecting cost escalation realisation and impact for six building
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construction projects is also presented. Cost escalation in building


construction used in the context of this study, is the increase in the cost of any
construction elements of the original contract or base cost of the a project due
to passage of time.

5.2 CONSTRUCTION CONTRACT

A construction contract is an agreement between two parties


(Constructor and owner) by which the constructor agrees to do the
construction of a structure and the owner in return agrees to pay the
constructor a price for construction as per (drawings, specification etc.). The
agreement has the legal booking and constraints conditions regarding the
course of action available in the case of deviation and/or default. Construction
contracts management therefore is not only concerned with construction
management but management of the contract management. When the
construction is executed departmentally by the owner/user the construction
management is his responsibility. When the construction is being done
through contract the construction management is the main responsibility of the
constructor who is actually a contractor but in order that the construction.
Management is done effectively and efficiently, it is necessary to execute the
contract and the contract management is the concern of all those who are
associated with the contract. The contract method of execution is represented
in Figure 5.1.
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Owner Contract Constructor

Construction
Management Construction of Project

Figure 5.1 Construction management: Contract method of execution

Contract is an agreement between two parties. By virtue of an


agreement two parties can enter into transaction which may be selling, or
buying any, commodity, borrowing or spending money, leasing, or hiring any
property rendering any service etc. Legal system of a country gives its people
freedom to enter into such an agreement. Any valid agreement creates
mutual rights and an agreement. Any valid agreement creates mutual rights
and obligation and, creates legal relations between parties entering into an
agreement. To ensure uniformity among these agreement to a set of rules is
formulated constituting the law of contract. The law of contract lays down
the conditions enabling the enforcement of the agreement between two parties
as per the law. Thus contract is an agreement, between two parties, satisfying
the conditions laid down by the contract law and hence can be enforced by
law. In India the law of contracts is contained in the Indian Contract Act
1872. In Government, all the projects are executed by awarding contracts.
The execution of a project/work has two stages viz. the Pre-construction stage
and the Construction stage.
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5.3 PROCESS OF IDENTIFICATION OF FACTORS


AFFECTING COST ESCALATION

One of the aims of this research is to identify significant factors


affecting cost escalation in Indian building construction project. The
methodology of identification of factors affecting cost escalation was done as
presented in Table 5.1. A mixed approach of interviews, questionnaire
surveys and case studies were used for the study (Thomas et al 2001;
Akintoye et al 1998; Wang et al 2000; Jefferies and Gameson 2002).

Table 5.1 Process of identification of factors affecting cost escalation

Stage Process Details


1 Preparation of  Study of literature including research papers
preliminary list of and case study reports.
factors and their  Unstructured interviews and discussions
categories with project participants, consultant/experts
for identification of factors contributing to
cost escalation and their category
2 Identification of  Questionnaire survey among middle and
significant factors senior level building construction project
contributing to cost participants for identifying relative
escalation importance indices and ranking of factors
contributing to cost escalation
3 Identification of  Questionnaire survey among middle and
significant factor senior level building construction project
categories affecting to participants for identifying significant factor
cost escalation categories contributing to cost escalation.
4  Detailed case study of six Indian building
Case study analysis
projects in terms of cost escalation factor
categories realisation and impact for
validating the survey results.
5.4 PRELIMINARY LIST OF IDENTIFICATION OF COST
ESCALATION FACTOR CATEGORIES AND FACTORS IN
BUILDING CONSTRUCTION PROJECTS
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A preliminary list of factors and categories contributing to cost


escalation associated with building construction projects in general and
unique to the Indian project environment was prepared based on literature
review (Gallo et al 1977; Paulson 1980; Williams 1980; Warszawski 1982;
Farid
et al 1985; Keng 1985; Elinwa et al 1993; Touran 1993; Blair et al 1993;
Williams et al 1994; Harbi et al 1994; Makarand Hastak et al 1996; Ahmed
et al 1998; Knight et al 2000; Knight et al 2000; Akpan et al 2001; Kiwus
et al 2001; Kiwus et al 2001; Dawood 2001; Dawood et al 2002; Dawood
et al 2002; Touran 2003; Wilmot et al 2003; Trost et al 2003; Wang et al
2004; Touran et al 2005; Touran et al 2006; Zou et al 2007; Kaliba et al
2008), interview with consultants/experts and discussions with building
project participants.

The preliminary list of cost escalation factors and their categories


prepared was further filtered through unstructured interviews with
consultants/ experts, project participants. Building construction project
participants available in and around Chennai were consulted / interviewed for
consolidating the list of cost escalation factors. About 25 such locally
available building project participants were interviewed. These experts/
participants included Government officers, contractors and consultants.
Thirteen cost escalation factors falling under five cost escalation categories
have been identified and finalised.
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5.5 CLASSIFICATION OF CATEGORIES AND FACTORS


AFFECTING COST ESCALATION

In the present research, thirteen cost escalation factors falling under


five factor categories have been identified. Based on literature review,
interviews/ discussions with Indian Building construction project participants
and case studies. The cost escalation factors relating to the various
participants and external factors involved in project execution have been
identified and categorised under five major categories is presented in Table
5.2.

Table 5.2 Classification of factors relating to categories causing cost


escalation in Indian building construction projects

Factor Categories contributing to Factors contributing to cost


Cost escalation escalation

1. Steel  Inflation
2. Cement  Exchange Rates
3. Brick  Environmental Protection
4. Coarse aggregates  Freight and Transportation cost
5. Sand and  Demand and Supply
6. Timber  Government Policies
 Taxes
 Interest Rate
 Power Tariff
 Raw Material Input
 Labour Cost
 Technolgy Upgradation and
 Price Increase by the
Manufacturer
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5.6 SURVEY RESEARCH

5.6.1 Questionnaire Survey Approach

Due to the non-availability of organised information relating to the


completed projects and including cost escalation of the project in Indian
building construction projects, a mail questionnaire survey approach was
considered. This approach is well recognised and widely used in both social
sciences and management research studies. In the area of construction
management, many researchers have used this approach (Kangari 1995;
Hartman and Snelgrove 1996; Chan et al 1997; Akintoye and Macleod 1997;
Ahmed et al 1998; Fing et al 1999; Shen et al 2001; Knight et al 2002;
Dawood et al 2002; Abinu et al 2006; Patrick et al 2007; Kaliba et al 2008).
In the survey research, factors affecting cost escalation in building
construction projects were identified.

5.6.2 Survey Questionnaire

The questionnaire for part-C (Questions C1 to B13 and B14 to


C15) survey was designed with the main objective to identify and evaluate the
factors contributing to cost escalation in Indian building construction projects
in India. The preliminary questionnaire was circulated among the twenty
experienced locally available experts in the field. Their suggestions with
respect to contents, structure, format and sequencing of the questions were
incorporated in the final questionnaire.

The survey questionnaire contains questions related to


identification of factors affecting cost escalation in building construction
projects in India. The questionnaire used in the survey is presented in
Appendix 1. Questions were relevant to the area of research. Questions C1 to
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C13 and C14 to C15 were related to the causes of cost escalation in Indian
building construction projects.

Questions for Identification of factors affecting cost escalation:


Thirteen factors under five major material categories have been finalised
through literature review, case studies and interviews were given in the
questionnaire and respondents were asked to indicate their response based on
their experience in construction projects in India.

5.6.3 Response - Questionnaire Survey

Survey was carried out among the two major participants of Indian
building construction projects - Government representatives (Clients), and
Contracting organisations (contractors). The survey was administered during
the period June to Dec 2008. Questionnaire survey included only middle and
top level officers who have responsible for execution of projects and powers
for strategic decision making in their respective organisations with respect to
building construction projects are included in the sample. Out of 215
questionnaires sent/delivered directly to the concerned, 119 responses were
received after personal requests and visits to their respective offices. During
such visits, along with questionnaire responses, discussions/ unstructured
interviews were also carried out with the above respondents. The response
rate of 56 percent is considered to be very good for this kind of a mail survey.
Though the total number of questionnaires sent and the responses received
were limited, the survey covered most of the known strategic decision makers
in the Indian building construction projects. The reliability of the survey
results is expected to be high because all the respondents are top-level
experienced management officials in their organizations
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5.6.4 Identification of Most Significant Factors Affecting Cost


Escalation

An all India questionnaire survey was conducted among two major


participants (Government representatives and consultants) of Indian building
construction projects to identify the most significant factors contributing to
cost escalation in Indian building construction projects. In the identification of
most significant factor contributing to cost escalation, 13 factors have been
formulated in the questionnaire, which was developed to sample the opinion
of construction managers on the extent to which each of the factors were
contributing to overall cost escalation on a typical building project in which
they are involved. The respondents were asked to adopt weights to the factors
1 to 5, where, ‘1’ is the lowest score and ‘5’ is the highest score. The score
assigned to each factor by the respondents represents the extent to which the
factor contributes to overall cost escalation on a typical building project.
However, using the Statistical Package for Social Sciences (SPSS), the data
were subjected to statistical analysis for further insight.

Data analysis: Chan et al (1996) and Aibinu et al (2006) used the


‘relative importance index’ method to determine the relative importance of the
factors causing delays in construction projects. The same method was adopted
for analysis of the data collected from the questionnaire survey, within various
groups as classified according to the role of the participants involved in the
Indian building construction industry. The five point scale was transferred to
relative importance index for each factor. The factor were ranked in order of
importance based on the relative importance indices values. These ranking
made it possible to cross-compare the relative importance of factors as
perceived by the two group of respondents i.e. owner and contractor. All the
numerical scores of each of the identified factors were transformed to relative
importance indices to determine the relative ranking of the factors. The
relative importance index (RII) was evaluated using the following expression:
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Relative Importance Index =  


 W 
 (0 ≤ index ≥ 1)
A  N 
 
(5.1)

where, W = weightage given to each factor by the respondents and ranges


from 1 to 5, W = total score assigned to the factor by the respondents;

A = highest weight (i.e. 5 in this case); and N = total number of respondents.


The factors were ranked in order of importance based on the relative
importance index values. The relative importance indices and ranking of the
13 cost escalation factors were done based on the perception analysis of
client, contractors and overall representatives of building construction projects
in India.

Results and Discussion: The details of factor name and factor


identification label are presented in Table 5.3.

Table 5.3 Cost escalation - Details of factor name and factor label

Factor Name Factor Label


Inflation C01
Exchange Rates C02
Environmental Protection C03
Freight and Transportation cost C04
Demand and Supply C05
Government Policies C06
Taxes C07
Interest Rate C08
Power Tariff C09
Raw Material Input C10
Labour Cost C11
Technolgy Upgradation C12
Price Increase by the Manufacturer considering market
condition C13
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The relative importance indices and rank of the 13 cost escalation


factors based on the perception of client representatives of building
construction projects in India is presented in Table 5.4.

Table 5.4 Clients responses to the ranking of significant factors causing


cost escalation (n=66)

Relative
Factor Factor
Factor Name Importance
Label rank
Index
Raw Material Input Cost C10 0.976 1
Power Tariff C09 0.958 2
Demand and Supply C04 0.936 3
Freight and Transportation Cost C05 0.924 4
Taxes C07 0.912 5
Inflation C01 0.903 6
Government Policies C02 0.888 7
Exchange Rates C06 0.873 8
Labour Cost C11 0.852 9
Interest Rate C08 0.839 10
Price Increase by the
Manufacturer considering
market condition C13 0.779 11
Environmental Protection Cost C03 0.761 12
Technolgy Upgradation Cost C12 0.742 13

The Client representative’s response to the relative importance


indices of the six most significant factors causing cost escalation in building
construction projects in India is presented in Figure 5.2.
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1.00
0.976 Impact of cost escalation
0.98
0.958
Relative Importance Index
0.96
0.936
0.94
0.924
0.92 0.912
0.903
0.90 0.888

0.88 0.873

0.86

0.84

0.82
Transportation

Taxes

Exchange Rates
Raw Material

Government
Inflation
Demand and
Power Tariff
Input Cost

Freight and

Policies
Supply

Cost

Figure 5.2 Clients response - Most significant factors causing cost


escalation

The relative importance indices and ranking of the 13 cost


escalation factors based on the perception of contractor representatives of
building construction projects in India is presented in Table 5.5.
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Table 5.5 Contractors responses to the ranking of significant factors


causing cost escalation (n=53)

Relative
Factor Factor
Factor Name Importance
Label rank
Index
Demand and Supply C05 0.966 1
Raw Material Cost C10 0.943 2
Transportation Cost C04 0.913 3
Power Tariff C09 0.891 4
Inflation C01 0.868 5
Taxes C07 0.849 6
Exchange Rates C02 0.796 7
Government Policies C06 0.777 8
Labour Cost C11 0.758 9
Interest Rate C08 0.743 10
Price Increase by the Manufacturer C13 0.721 11
Environmental Protection Cost C03 0.702 12
Technolgy Upgradation Cost C12 0.675 13

The Contractor representative’s response to the relative importance


indices of the six most significant factors causing cost escalation is presented
in Figure 5.3.
107

1.20

Impact of cost escalation


1.00 0.966 0.943
0.913 0.891 0.868 0.849
Relative Importance Index

0.796 0.777
0.80

0.60

0.40

0.20

0.00

Government Policies
Demand and Supply

Transportation Cost
Raw Material Cost

Inflation
Power Tariff

Taxes

Exchange Rates
Figure 5.3 Contractors response - Most significant factors causing cost
escalation

The relative importance indices and rank of the 13 cost escalation


factors based on the perception of overall group (clients and contractors)
representatives of building construction projects in India is presented in
Table 5.6.
108

Table 5.6 Overall responses to the ranking of significant factors


causing cost escalation (n=119)

Relative
Factor
Factor Name Importance Factor rank
Label
Index
Raw Material Input Cost C10 0.986 1
Demand and Supply C05 0.968 2
Power Tariff C09 0.952 3
Transportation Cost C04 0.950 4
Inflation C01 0.911 5
Taxes C07 0.908 6
Exchange Rates C02 0.868 7
Government Polices C06 0.851 8
Labour Cost C11 0.831 9
Interest Rate C08 0.817 10
Price Increase by the Manufacturer C13 0.773 11
Environmental Protection Cost C03 0.754 12
Technolgy Upgradation Cost C12 0.732 13

The relative importance indices of the six most significant factors


causing cost escalation according to overall group representatives in building
construction projects in India is presented in Figure 5.4.
109

1.00
0.986

0.968
Impact of cost escalation

0.952 0.95
0.95
Relative Importance Index

0.911 0.908

0.90

0.868

0.851
0.85

0.80

0.75

Government Polices
Raw Material Input Cost

Demand and Supply

Transportation Cost

Inflation
Power Tariff

Taxes

Exchange Rates

Figure 5.4 Overall group response - Most significant factors causing


cost escalation

Table 5.7 shows the relative importance indices and ranking of the
13 cost escalation factors based on the responses of client, contractors and
overall (client and contractor) group representatives of building construction
projects in India.
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Table 5.7 Clients, Contractors and overall responses to the ranking of


significant factors causing cost escalation in building projects
construction in India

Clients Contractor
Overall
response response
(n=119)
Factor Name (n=66) (n=53)
Facto Factor Factor
RII RII RII
r rank rank rank
Raw Material Input Cost 0.976 1 0.943 2 0.986 1
Non-availability of power supply 0.958 2 0.891 4 0.952 3
Demand and Supply 0.936 3 0.966 1 0.968 2
Transportation Cost 0.924 4 0.913 3 0.950 4
Taxes 0.912 5 0.849 6 0.908 6
Inflation 0.903 6 0.868 5 0.911 5
Government Policies 0.888 7 0.777 8 0.851 8
Exchange Rates 0.873 8 0.796 7 0.868 7
Labour Cost 0.852 9 0.758 9 0.831 9
Interest Rate 0.839 10 0.743 10 0.817 10
Price Increase by the
Manufacturer 0.779 11 0.721 11 0.773 11
Environmental Protection Cost 0.761 12 0.702 12 0.754 12
Technolgy Upgradation Cost 0.742 13 0.675 13 0.732 13

Note: RII – Relative Importance Index

The relative importance indices of the six most significant factors


causing cost escalation as perceived by the client’s, contractor’s and overall
representatives in building construction projects in India is presented in
Figure 5.5.
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1.20
Clients group Contractors group Overall group

Relative Importance Index 1.00

0.80

0.60

0.40

0.20

0.00
Power Tariff

Exchange Rates
Inflation
Raw Material Input

Transportation Cost
Demand and Supply

Taxes

Government Policies
Freight and
Cost

Figure 5.5 Clients, contractors and Overall group - Significant factors


causing cost escalation

5.6.5 Identification of most significant factor categories affecting cost


escalation

Six factor category (Cement, Steel, Brick, Sand, Stone aggregates


and Timber) were identified through case studies of six building construction
projects in India. The identified major materials components were formulated
in a questionnaire survey. Pair wise comparison scale for each set of major
factor category for cost escalation through Analytic Hierarchy process (AHP)
questionnaires were used and respondents were asked to indicate their pair-
wise comparison scale for individual cost escalation impact. The responses
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received were evaluated using expert choice software. A detailed case study
analysis of six building construction projects were carried out to validate the
survey findings on most significant factor category contributing to cost
escalation.

The relative weight age of the six significant cost escalation factor
categories as perceived by the client’s representatives is presented in Table
and Figure 5.6.

0.45

0.387
0.40 Cost escalation impact
0.35
0.311
0.30
AHP - Weightage

0.25

0.20

0.15
0.1 0.092
0.10
0.064
0.046
0.05

0.00
Cement Steel Brick Sand Stone Aggregate Timber

Figure 5.6 Significant factor categories affecting cost escalation as


perceived by the client’s group

As perceived by the client’s group, two most significant factors


contributing to cost escalation are steel and Cement categories. The timber
category was the least (among six categories identified) affecting cost
escalation in building construction projects in India.
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The perception analysis of client responses among CPWD, MES


and TNPWD representatives is presented in Figure 5.7.

0.45

0.40 CPWD MES TNPWD

0.35

0.30
AHP - Weightage

0.25

0.20 T

0.15

0.10

0.05

0.00
Cement Steel Brick Sand Aggregates Timber

Figure 5.7 Clients response: perception analysis among CPWD, MES


and TNPWD

The perception analysis of contractor representative’s response to


the relative weight age of significant factor category causing cost escalation is
presented in Figure 5.8.
114

0.40
0.366
Cost escalation impact
0.35 0.332

0.30
AHP - Weightage

0.25

0.20

0.15
0.102
0.10 0.083
0.073
0.04
0.05

0.00
Cement Steel Brick Sand Stone Aggregate Timber

Figure 5.8 Significant factor categories affecting cost escalation as


perceived by the contractors group

As perceived by the contractors group, two most significant factors


contributing to cost escalation are steel and Cement categories. Impact of cost
escalation of steel and cement are closer. The timber category was the least
(among six categories identified) affecting cost escalation in building
construction projects in India.

The perception analysis of contractor responses among CPWD,


MES and TNPWD representatives is shown in Figure 5.9.
115

0.45
CPWD MES TNPWD
0.40

0.35

0.30
AHP - Weightage

0.25

0.20

0.15

0.10

0.05

0.00
Cement Steel Brick Sand Aggregates Timber

Figure 5.9 Contractors response: perception analysis among CPWD,


MES and TNPWD

The most significant factor categories contributing to cost


escalation as perceived by the client’s, contractors and overall representatives
in building construction projects are presented in Figure 5.10.
116

Client's response Contractor response Overall response


0.45

0.40

0.35

0.30
AHP Value

0.25

0.20

0.15

0.10

0.05

0.00
Cement Steel Brick Sand Stone Aggregate Timber

Figure 5.10 Clients, contractors and overall’s response to the weight age
of significant factor categories causing cost escalation

From Figure 5.10, Steel and cement factor categories were


identified as most significant factor categories contributing to cost escalation
in building construction projects according to perception analysis of clients,
contractors and overall group. Timber factor category has the least impact
(among six factor categories identified) of cost escalation in the project
construction projects.

5.7 CAUSES OF COST ESCALATION - STATISTICAL


ANALYSIS

In responses of owner and contractor representatives in regard to


causes of cost escalation in building construction projects (C1 to C13) were
analysed. The statistical analysis include t-test, one way analysis of variance
(ANOVA). In order to evaluate the differences in perceptions among client
and contractor representatives t- test was performed and is also presented in
Table 5.8.
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Table 5.8 T-test: Responses to causes of cost escalation in building


construction project, their mean, standard deviation,
T-value and P – value

95%
Confidence
Organization Standard Mean
Factor N Mean Interval for T-Value P-Value
Status Deviation Difference
Mean
Difference
4.515
Owner 66 0.5036
2
C1 0.21 0.04 0.39 2.38 0.02**
4.301
Contractor 53 0.46347
9
4.439
Owner 66 0.50012
4
C2 0.25 0.08 0.42 2.98 0.00***
4.188
Contractor 53 0.395
7
Owner 66 3.803 0.43746
C3 0.09 -0.08 0.26 1.01 0.32
Contractor 53 3.717 0.49526
4.681
Owner 66 0.46934
8
C4 0.02 -0.15 0.19 0.25 0.81
4.660
Contractor 53 0.47811
4
4.621
Owner 66 0.4888
2
C5 -0.13 -0.30 0.04 -1.56 0.12
4.754
Contractor 53 0.43437
7
4.363
Owner 66 0.48473
6
C6 -0.01 -0.19 0.16 -0.15 0.88
4.377
Contractor 53 0.48936
4
4.560
Owner 66 0.50012
6
C7 0.01 -0.17 0.20 0.15 0.88
4.547
Contractor 53 0.50253
2
Owner 66 4.197 0.40076
C8 3.943 0.25 0.13 0.38 4.08 0.00***
Contractor 53 0.2333
4
4.787
Owner 66 0.41194
9
C9 -0.02 -0.17 0.12 -0.31 0.75
4.811
Contractor 53 0.395
3
4.878
C10 Owner 66 0.32887 -0.05 -0.16 0.06 -0.82 0.41
8
118

4.924
Contractor 53 0.26668
5
4.257
Owner 66 0.44065
6
C11 0.14 -0.02 0.31 1.73 0.09**
4.113
Contractor 53 0.46659
2
3.712
Owner 66 0.51932
1
C12 -0.10 -0.28 0.08 -1.11 0.27
3.811
Contractor 53 0.441
3
3.893
Owner 66 0.43426
9
C13 -0.14 -0.28 -0.01 -2.10 0.04**
4.037
Contractor 53 0.27472
7

$ Please refer to Question No. C1 to C13 of the questionnaire (Appendix A) for causes of
cost escalation
# T test of Ho : Significant mean difference between clients and contractors
Ha : No Significant mean difference between clients and contractors
*** Significance at 99% level ** Significant at 95% level * Significance at 90% level
In order to evaluate the differences in perceptions of clients and
contractors among CPWD, MES and TNPWD representatives ANOVA was
performed and is also shown in Tables 5.9 and 5.10.

Table 5.9 ANOVA – Owner responses to causes of cost escalation in


building construction project, their mean, standard
deviation, T – value and P – value

Escalation Standard ANOVA ANOVA


Factor N Mean
Cause Deviation F-Value P-Value
CPWD 32 4.53 0.51
C1 MES 17 4.35 0.49 1.50 0.23
TNPWD 17 4.65 0.49
CPWD 32 4.50 0.51
C2 MES 17 4.24 0.44 1.98 0.15
TNPWD 17 4.53 0.51
CPWD 32 3.69 0.47
C3 MES 17 4.00 0.35 3.04 0.06**
TNPWD 17 3.82 0.39
119

CPWD 32 4.72 0.46


C4 MES 17 4.65 0.49 0.19 0.83
TNPWD 17 4.65 0.49
CPWD 32 4.72 0.46
C5 MES 17 4.53 0.51 1.25 0.29
TNPWD 17 4.53 0.51
CPWD 32 4.41 0.50
C6 MES 17 4.29 0.47 0.30 0.74
TNPWD 17 4.35 0.49
CPWD 32 4.63 0.49
C7 MES 17 4.53 0.51 0.57 0.57
TNPWD 17 4.47 0.51
120

Table 5.9 (Continued)

Escalation Standard ANOVA ANOVA


Factor N Mean
Cause Deviation F-Value P-Value
CPWD 32 4.25 0.44
C8 MES 17 4.18 0.39 0.63 0.54
TNPWD 17 4.12 0.33
CPWD 32 4.88 0.34
C9 MES 17 4.76 0.44 1.78 0.18
TNPWD 17 4.65 0.49
CPWD 32 4.81 0.40
C10 MES 17 4.94 0.24 1.27 0.29
TNPWD 17 4.94 0.24
CPWD 32 4.31 0.47
C11 MES 17 4.18 0.39 0.55 0.58
TNPWD 17 4.24 0.44
CPWD 32 3.63 0.49
C12 MES 17 3.65 0.49 2.33 0.10**
TNPWD 17 3.94 0.56
CPWD 32 3.84 0.45
C13 MES 17 4.00 0.50 0.72 0.49
TNPWD 17 3.88 0.33

$ Please refer to Question No. B1 to B29 of the questionnaire (Appendix 1) for causes of
cost escalation

# T test of Ho : Significant mean difference between clients and contractors


Ha : No Significant mean difference between clients and contractors

** Significance at 95% confidence level; *Significance at 90% confidence level


121

Table 5.10 ANOVA – contractor responses to causes of cost escalation


in building construction project, their mean, standard
deviation, T – value and P – value

Escalation Standard ANOVA ANOVA


Factor N Mean
Cause Deviation F-Value P-Value
CPWD 19 4.4211 .50726 1.266 .291
C1 MES 17 4.2941 .46967
TNPWD 17 4.1765 .39295
CPWD 19 4.2105 .41885 .044 .957
C2 MES 17 4.1765 .39295
TNPWD 17 4.1765 .39295
CPWD 19 3.6842 .47757 .121 .887
C3 MES 17 3.7059 .46967
TNPWD 17 3.7647 .56230
CPWD 19 4.7368 .45241 .956 .391
C4 MES 17 4.7059 .46967
TNPWD 17 4.5294 .51450
CPWD 19 4.8947 .31530 1.658 .201
C5 MES 17 4.7059 .46967
TNPWD 17 4.6471 .49259
CPWD 19 4.4737 .51299 1.132 .330
C6 MES 17 4.2353 .43724
TNPWD 17 4.4118 .50730
CPWD 19 4.4737 .51299 1.261 .292
C7 MES 17 4.4706 .51450
TNPWD 17 4.7059 .46967
CPWD 19 3.9474 .22942 1.089 .344
C8 MES 17 3.8824 .33211
TNPWD 17 4.0000 .00000
122

Table 5.10 (Continued)

Escalation Standard ANOVA ANOVA


Factor N Mean
Cause Deviation F-Value P-Value
CPWD 19 4.8947 .31530 .652 .526
C9 MES 17 4.7647 .43724
TNPWD 17 4.7647 .43724
CPWD 19 4.8947 .31530 .179 .837
C10 MES 17 4.9412 .24254
TNPWD 17 4.9412 .24254
CPWD 19 4.3684 .49559 5.230 .009***
C11 MES 17 4.0000 .35355
TNPWD 17 3.9412 .42875
CPWD 19 3.8421 .37463 .143 .867
C12 MES 17 3.7647 .43724
TNPWD 17 3.8235 .52859
C13 CPWD 19 4.1579 .37463 3.295 .045*
MES 17 4.0000 .00000
TNPWD 17 3.9412 .24254

Please refer to Question No. B1 to B29 of the questionnaire (Appendix 1) for causes of cost
escalation.

# T test of Ho : Significant mean difference between clients and contractors


Ha : No Significant mean difference between clients and contractors

*** Significance at 99% confidence level; ** Significance at 95% confidence level;


* Significance at 90% confidence level
123

5.8 CASE STUDY APPROACH – IDENTIFICATION OF MOST


SIGNIFICAT FACTORS AFFECTING COST ESCALATION

A detailed case study analysis of six building construction projects


were carried out to validate the survey findings on most significant factor
categories affecting cost escalation. The case study research includes
interviews, discussions with construction managers, detailed study of project
documents and contracts. One of the main objectives was to check how far the
most significant factors identified through the survey research have adversely
affected the respective projects. A brief overview of the building construction
projects studied, overall impact of six “most significant factors causing cost
escalation” in each project and comparison of most significant factors impact
with results of the survey analysis are presented in Tables 5.11 and 5.12
respectively.
124

Table 5.11 Building Construction projects in India – Impact of cost


escalation study

Project
Building construction projects
details
Construction
Construction Construction
of Construction Construction Construction
Project of of residential
international of educational of Hostel of office
name educational hostel
terminal building-II building-II Building
building-I building-I
building
Type of
Item–rate Item-rate Item-rate Item-rate Lumsum Item-rate
contract
Form of
CPWD CPWD CPWD CPWD CPWD TNPWD
contract
ECPT 152.47 88.83 -- 10.44 436.30 55.00
Agreement
value in 153.19
70.99 80.40 10.59 457.30 43.47
(Rs.
Million)
Final value 85.44 84.80 18.70 494.0 32.20
0.47% above 12.25%
Tendered 1.36% below
the estimate below the -- -- --
percentage the ECPT
cost ECPT
Period of
10 months 12 months 8 months 12 months 15 months 17 months
completion
Date of
31.10-2005 16.8.2004 25.6.2007 30.1.2004 01.07.2004 20.11.2006
starting
Date of
completion
31.08.2006 15.8.2005 24.2.2008 29.1.2005 30.09.2005 19.04.2008
as per
agreement
Actual
date of 06.07.2007 28.12.2006 24.2.2009 15.4.2005 29.9.2006 09.07.2008
completion
Time delay 10 months 4 months 2 months 2 months
12 months
in 12 Months
5 days 13 days delay 15 days 20 days
completion

TNPWD: Tamailnadu Public Works Department CPWD: Central Public Works Department
ECPT: Estimate Cost Put to Tender
125

Table 5.12 Most significant factors realisation and impact in Indian


building constriction projects – Comparison

Most
significant
Cost
Building construction projects
escalation
factor
categories
Construction
Construction Construction Construction
of Construction Construction
Project of of of residential
international of Hostel of office
name educational educational hostel
terminal building-II Building
building-I building-II building-I
building
Type of
Item–rate Item-rate Item-rate Item-rate Lump sum Item-rate
contract
Form of
CPWD CPWD CPWD CPWD CPWD TNPWD
contract
Overall impact of most significant cost escalation factor categories
Cement 11.50 % loss 14.0% 10.5% 5 to 10% 11.0 % 10.0%
13.5%
Steel 14.0 % loss 16.50% 13.5% 10% 15.5 %

5.9 SUMMARY

In Indian Building construction projects, five significant factor


categories, along with thirteen significant factors have been short listed
through preliminary studies. All India survey (in two stages) among two
major participants of Indian building construction projects (Government
representatives and contractors) was carried out for identification of
significant factors affecting cost escalation. Identification of most significant
factor contributing to cost escalation, 13 factors have been formulated in the
questionnaire, which was developed to sample the opinion of construction
managers on the extent to which each of the factors were contributing to
overall cost escalation on a typical building project in which they are
involved. The relative importance index method was adopted for analysis of
126

the data collected from the questionnaire survey, within various groups as
classified according to the role of the participants involved in the Indian
building construction industry. The five point scale was transferred to relative
importance index for each factor. The factors were ranked in order of
importance based on the relative importance indices values. These ranking
made it possible to cross-compare the relative importance of factors as
perceived by the two group of respondents i.e. owner and contractor. All the
numerical scores of each of the identified factors were transformed to relative
importance indices to determine the relative ranking of the factors.

The perception analysis of clients representatives, eight most


significant factors affecting cost escalation in building construction projects
are Raw Material Input Cost, Power Tariff, Demand and Supply, Freight and
Transportation Cost, Taxes, Inflation, Government Policies and Exchange
Rates. The eight most significant factors causing cost escalation as perceived
by the contractors representatives are Demand and Supply, Raw Material
Cost, Transportation Cost, Power Tariff, Inflation, Taxes, Exchange Rates
and Government Policies. The overall ranking indicates that both the groups
felt that six most significant factors that can cause cost escalation in building
construction projects in India are Raw Material Input Cost, Demand and
Supply, Power Tariff, Transportation Cost, Inflation, Taxes, Exchange Rates
and Government Polices.

The five factor categories were formulated in the questionnaire,


which was developed to sample the opinion of construction managers on the
extent to which each of the factor category contributing to overall cost
escalation on a typical building construction project in which they are
involved. Pair wise comparison scale for each set of major factor category for
cost escalation through Analytic Hierarchy process (AHP) questionnaires was
used. The responses received from the respondent were evaluated through
127

Analytic Hierarchy process (AHP) software to evaluate the differences in


perceptions among client and contractor representatives. Based on the
perception analysis, descending order of significant factor categories
affecting cost escalation are Steel, Cement, Brick, Sand, Coarse aggregates
and Timber. From the study, it is found that impact of cost escalation in
building construction projects are mainly due to the escalation in prices of
steel and cement, followed by brick and Sand categories. The timber
categories has least impact of cost escalation among the six major material
categories identified. There was a fair degree of agreement between survey
based factors affecting cost escalation and the actual cost escalation impact in
building construction projects examined through the case studies. A majority
of the cost escalation factors, which affected the above projects, fall under the
Steel, Cement and Brick categories.

Hence, construction organization can make use of these findings


and cost escalation for these materials should be reimbursed based on actual
procurement prices and quantities consumed during the contract to minimize
the cost escalation