Cost Overruns in Public Construction Projects: Literature Review

Literature Review 1
COST OVERRUNS IN PUBLIC CONSTRUCTION PROJECTS
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Literature Review 2
Literature Review
According to Ameh, et al., (2010: 53), cost overruns refer to incurred expenditures above those
that are included in the budget which arise due to an initial underestimation of the project cost or
inflation of costs before the project gets underway. Amoa & Allotey, (2014: 58) describe it as a
failure to achieve the contract goals within the assigned contract budget. They are the most
widespread problem in construction sites all over the world, and this is especially true in
developing nations including Oman, where the actual cost of construction could turn out to be up
to 100% more than the budgeted amount (Kamaruzzaman & Ali 2010: 112). A comprehensive
worldwide research that was carried out by Lidelöw & Simu (2015: 54) found out that 9 out of
10 Public construction projects experience project overrun which defiantly shows that it is a
common problem in the construction industry. The opposite of this is cost under runs, and this
rarely happen. This has been attributed to the fact that as countries develop they undertake many
development projects, and they attempt to do them with the technologies used by developed
countries which they do not have experience with (Amu & Adesanya 2011: 62). Technology
applied in construction will vary with differences like terrain and location. The novelty of some
constructions in these areas means that there will be a lot of estimation and some of it is bound to
lack accuracy (Amu & Adesanya, 2011: 64). Problems that could arise from these to cause cost
overruns include inadequate preparation and planning for the project, wrongful estimates for
materials, overinflated costs of equipment acquisition, weather, condition of the site, increased
quantities of materials, incompetent workers, delayed start of the construction, and delayed
supply of raw materials and equipment (Azlan & Syuhada 2014: 250).
Ismail, et al., (2014: 12) propose budgeting as one of the most important aspects that is
considered before commencing a construction project and could potentially determine whether

Literature Review 3
the project will be undertaken or not. Normally great care is taken to ensure that the amount
budgeted for the different parts of the construction matches that allocated for the project
(Jamaludin, et al. 2014: 75). Public constructions especially have to be economical and
reasonable because their utility has to be explainable in the long run.
Kostka & Anzinger, (2016) mentioned in there report that project cost management is classified
into project resource management, estimation of cost, cost control and budgeting. Cost control
involves management of cash flow and project accounting, and these are the areas that need to be
observed the most for prevention or minimization of cost overrun (Kostka & Anzinger, 2016).
While some the causes of cost overruns, such as inflation, may be unavoidable, it is possible to
get enough information and consult enough experts in readiness for the project so that problems
such as design changes are not experienced (Lidelöw & Simu, 2015: 52).
Love, et al., (2012: 325) admits that although cost overruns are a problem in both developed and
developing countries, the factors causing them to happen are different for these two situations. In
developing countries the issues mainly stem from poor resource management, so it is essential to
find a way to keep costs in control so that they do not veer significantly from the budget (Memon
2014:1185). A study that was carried out in Nigeria, a developing country, showed issues like
fraudulent practises, inefficient planning, sudden inflation of material prices, and high cost of
machines led to cost overrun (Olawale & Sun 2010: 512). In contrast, a study done in the UK
showed inappropriate estimation methods, time constraints, commercial pressure, inadequate
information, development of design, unexpected conditions at the construction site, and poor
planning and management as the major causes (Memon, et al., 2010: 32). Distinct differences
can be noted from this review. Corrupt practices are not a prevalent issue in developed countries
as it is in developing countries. Cost is a bigger issue for developing countries than time

Literature Review 4
(Memon, et al. 2011: 60). Planning an however be noted as a shortcoming in both situations and
it is important to take measures to improve on it.
Major causes of cost overruns in public construction projects
Causes of project cost and time overruns
Unplanned costs- these can be either unexpected or overlooked. The period between the time
when the budget is drawn and when the contract signed and the construction commenced allows
for many financial changes that would mean that different figures from those indicated on the
budget would be needed (Mydin, et al., 2014). These changes would be in legal fees, material
costs, equipment costs, labor costs and others. To effectively manage public construction
projects of large magnitudes, as most public projects tend to be, future prices need to be
anticipated and catered for in the budget (Rahman, et al. 2013: 288). This can be done by
observing trends in costs of goods and services, and the controlling forces of supply and demand,
and using this information to estimate any changes that may occur. Unplanned costs can also
arise from inflation of material prices due to demand.
Communication breakdown- this mostly interferes with the supply chain relationship. The lines
should always be kept open to ensure that there are no shortages or such occurrences that could
make material prices to go up (Rahman, et al. 2011: 55).
Change in project scope- this is called scope creep and should be expected. In many instances a
project turns out being larger that the planners had originally anticipated. Constructions meant
for public use are expected to serve many people. The planning process for the construction
could possibly underestimate the population that will be making use of the construction, and in
the process make an inadequate budget or plan to make an inadequate construction (Rajan, et al.,