Analysis of Cost Overruns in Melbourne Construction Projects Report

This report investigates the issue of cost overruns in ongoing construction projects in Melbourne. The study explores the causes, which include technical challenges, over-optimism, and strategic misrepresentation, and analyzes their impact on project timelines and financial aspects. Employing a survey-based methodology with 26 questions distributed among construction firm employees, the research utilizes the Chi-Square test to analyze responses, revealing that factors such as rising inflation rates and slow decision-making processes significantly contribute to cost overruns. The report delves into the background of the construction industry's influence on economic growth, particularly in Melbourne, where infrastructural development and foreign investment are prominent. It also outlines the research objectives, questions, and hypotheses, along with a literature review that covers accuracy in cost estimates, causes of cost overruns, and measures to reduce them. The report concludes with an analysis of the findings, limitations, and suggestions for future research, offering insights into mitigating cost overruns and improving project outcomes. The project also includes a brief introduction to the Melbourne Metro Rail Tunnel project.

Running head: COST OVERRUN
Cost Overrun in Ongoing Construction Projects in Melbourne
Name of the Student
Name of the University
Author Note

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Acknowledgement
I would also like to take this opportunity to thank my professor without whose, constant support
and guidance, the research would not have been possible.
Firstly, I would like to thank God the Almighty in giving me the strength and courage without
which I could not have completed the entire study. Secondly, I would like to thank my family
and relatives who gave me constant support mentally and physically so that I can complete the
study on time. Lastly, I would like to give thanks to my peers and the friends who have helped
me in providing the appropriate information throughout the project and helped me in doing the
in-depth analysis of the research. Without their proper guidance, it is impossible for me to
complete the project.
Thanks and Regards,
Yours Sincerely,

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Abstract
The overrun in costs along with the delays in the schedule are a major problem in the world and
in the Australian context as well. Many dollars have been lost due to the delays that take place in
the construction projects. The main reason for cost overrun is based on three explanations that
are technical challenges, over-optimism and misrepresentations in a strategical manner. It is seen
that a majority of the construction projects have experienced cost overrun and this puts a huge
burden on the financial aspect for the owner of the construction companies. A total of 26
questions were distributed among the employees of the construction firms in Melbourne to
record their statements and the Chi-Square test of Pearson has been used to analyze those
responses. The result of the test has shown that the rise in then rate of inflation and the making of
decision at a slower pace have resulted in the cost overrun for a majority of the construction
companies along with the other issues as well.

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Table of Contents
Chapter 1: Introduction....................................................................................................................5
1.1: Background of the study.......................................................................................................5
1.3: Research problem.................................................................................................................7
1.4: Research objectives..............................................................................................................7
1.5: Research questions...............................................................................................................8
1.6: Research Hypothesis.............................................................................................................8
Chapter 2: Literature Review...........................................................................................................9
2.1: Accuracy of cost estimates.................................................................................................10
2.2: Causes of cost overrun........................................................................................................10
2.2.1: Technical challenges....................................................................................................10
2.2.2: Optimum Biases..........................................................................................................13
2.2.3: Strategic Misrepresentation.........................................................................................14
2.3: Measures to reduce cost overrun........................................................................................15
2.4: Summary.............................................................................................................................18
Chapter 3: Research Methodology................................................................................................38
3.0: Introduction........................................................................................................................38
3.1: Research philosophy...........................................................................................................38
3.1.1: Justification of the philosophy.....................................................................................38
3.2: Research approach..............................................................................................................39

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3.2.1: Justification for the approach......................................................................................39
3.3: Research purpose................................................................................................................39
3.3.1: Justification of the research purpose...........................................................................40
3.4: Research strategy................................................................................................................40
3.4.1: Justification for the research strategy..........................................................................40
3.5: Data collection....................................................................................................................40
3.6: Sample selection.................................................................................................................41
3.7: Data analysis.......................................................................................................................41
3.8: Ethical considerations.........................................................................................................41
Chapter 4: Analysis and Findings..................................................................................................42
Chapter 5: Conclusion...................................................................................................................88
5.1: Conclusion..........................................................................................................................88
5.2: Linking with the objectives................................................................................................88
5.3: Limitations of the research.................................................................................................89
5.4: Scope for future research....................................................................................................89
Reference List................................................................................................................................90
Appendices....................................................................................................................................95
Appendix 1: Survey questions for employees...........................................................................95

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Chapter 1: Introduction
The construction industry helps in influencing the economies of most of the countries, as
it provides the factors that are important for the growth of the economy. The World Bank had
shared a report stating that the annual growth of the Gross Domestic Product for a country is
between 6-9 percent due to the factors that help in influencing the construction industry
(Salunkhe & Patil, 2014). A report shared by United Nations Economic Commission for Europe
(UNECE) stated that the growth in GDP was around 4.5 percent in Turkey due to the
construction industry. This industry plays an important role within the economy, as it helps in
creating an impact on the output and the efficiency of the different industries (Gonzalez et al.,
2013)
1.1: Background of the study
The infrastructural development is one of the important things that helps in the growth of
the commercial sector, as it helps in meeting all the requirements that are present in the
infrastructural projects. The source of the funds mainly comes from the Public Private
Partnerships (PPP), which helps in taking in to account the investments done by the private and
the public firms so that road or rail construction can be done in an efficient manner (Ngacho &
Das, 2014). The cost overruns and delays have various implications on the economic and
political aspect of the countries, as the provisions of goods and services that are necessary for the
common public takes longer than the expected time. The present projects that are being done in
Melbourne are also facing serious issues from the government that is causing the projects to get
delayed and leading to an increase in the cost. The increase in the paper works regarding the
safety protocols that are to be maintained to undertake the construction projects by the

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companies. Cost overruns also result in reducing the factor of competition within the industry, as
it leads to an increase in the ratio of capital and output within the economy (Narbaev & De
Marco, 2013). Most of the important projects that are funded by the government are done based
on the money that they earn from collecting taxes from the citizens of the country and therefore
most of the taxpayers have the right to have a better knowledge regarding the proper use of the
money for the goods and services (Fulford & Standing, 2014). The lack of proper identification
results in delaying the projects, which leads to cost overruns and the policymaking guidelines are
also mislead. Most of the citizens of the country are of the perception that governments are not
capable of delivering the goods and services within the time that has been allotted by them and
this results in relying more on the private sectors. This also results in excess privatization in most
of the sectors, which also increases the cost within the economy (Ling et al., 2013).
An example of this would be the Australian city Melbourne, with its economy at a
booming level that has led to the rise in the infrastructural projects. This has led the government
of that place to allow a 100 percent Foreign Direct Investment (FDI) within the industry so that
the activities of construction can be carried out in a proper manner (Iqbal et al., 2015). The real
estate sector within Australia has grown from approximately 25 billion in the year 2005 to 80
billion in the year 2015. The development of the information technology facility has helped the
infrastructure companies in showing a major jump in its activities, as the efficiency of
communication has helped in easing out the procedure (Marzouk, El Kherbawy & Khalifa,
2013). The current project that is being undertaken in the city is Melbourne Metro Rail Tunnel
that will be one of the largest projects in construction that the city has ever had. The completion
of this project will help the citizens significantly. The place known as City Square will be fenced
so that the machineries can be installed in the area and the construction of the project can start.

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The project will be based on widening the roads and leveling the crossing intervals in the
Blackburn Road area, Mitcham and Heatherdale Road. The transport minister of the area had
stated that the construction will play a pivotal role in changing the situation of the local people.
The project will help the locals in reaching to their friends and relatives at a faster rate due to the
construction. Some of the places will remain closed, as it would help in completing the projects
within the stipulated time. The construction had already started from the end of 2017 and up on
its completion, it will help the locals in commuting the places at a faster manner. Presently, most
of the roads and the public transport system present in the area had been diverted to another route
so that the construction does not get hampered (Dow, 2018).
1.3: Research problem
There are many risks in the administration of the construction projects with respect to
budget and the scheduled delivery of the work within the stipulated period. The presence of these
problems such as the cost and over time has led to a delay in the construction projects. A report
prepared by Asian Development Bank (ADB) and African Development Bank (AFDB) showed
that most of the infrastructural projects were having cost overruns and it was in countries like
Pakistan, China, Korea and Iran (Narbaev & De Marco, 2013). The failures and the other weak
spots have to be taken in to consideration so that the research can be conducted in a better
manner. Melbourne has seen a rise in the cost overrun due to the failure of the companies in
meeting the deadlines under which the project had to be completed. This has led to the decrease
in the competition in the real estate market as well (Salunkhe & Patil, 2014).
1.4: Research objectives
The research will be based on the objectives that are as follows:

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 To evaluate the causes that leads to cost overruns in construction projects
 To analyze the measures that will help in reducing and mitigating the cost overruns in
construction projects
1.5: Research questions
The questions of the research will be as follows:
1. What are the causes that increase the cost overruns of construction projects?
2. What measures can be taken up for reducing the cost overruns in the construction
projects?
1.6: Research Hypothesis
The research will be based on the following hypothesis:
H0- The cost overrun in the construction projects does not hamper the quality of work within the
company
H1- The cost overrun in the construction projects does hamper the quality of work within the
company

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Chapter 2: Literature Review
According to Sovacool, Gilbert and Nugent (2014), most of the infrastructural projects
need to pass through several stages that is the project needs to be planned along with the
approval of the concerned authority so that the construction work can take place within a
particular area. It is seen that the lifecycle of these projects are divided in to three phases such as
the development of the concept, construction of the project and the maintenance of the work that
has been completed.
Figure 1: Project Lifecycle
(Source: Subramani, Sruthi & Kavitha, 2014)
The development phase deals with the project being sponsored so that the cost and the
funds can be estimated, which will be required so that the project can be completed. The date
within which the project is expected to be completed is announced as well. However, the date of
completion tends to be different than the date that was announced for completing the project
(Salunkhe & Patil, 2014). Time overrun can be defined as the delay that is present between the
initial planned dates of completing the project with that of the actual date when the project has
been completed. The difference in the time is measured in months. Thus the percentage of time
overrun can be defined as the ratio between the project implementation phase and time overrun.
Additionally, cost overrun can be defined as the difference between the initial cost of the project
and the actual cost that was incurred for completing the project (Flyvbjerg, 2014).

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2.1: Accuracy of cost estimates
The problems of procurement on the infrastructural projects that are larger in nature is of
an epidemic nature on a global scale. Most of the projects are completed either by the local or
national government along with the help of the organizations that are present in the private
sector. The escalations that are present in cost and the miscalculations in the estimation of time
can take place in the planning of the project in the initial stages than the time the project gets
approved from the authorities (Gonzalez et al., 2013). A research conducted by the international
bodies such as Nils Bruzelius and Bent Flyvbjerg across five continents and 20 countries
concluded that almost nine of the ten projects had a cost overrun and the escalation of cost on an
average was around 29 percent. It was seen that individually the rail projects had the largest
escalations in cost with an average of 46 percent and the cost overrun of bridges and tunnels
were estimated to be around 35 percent on an average. Another study that was published in the
Harvard Business Review showed that the cost overrun in countries like the United States and
Europe was estimated to be on an average of 27 percent (Flyvbjerg, 2014).
2.2: Causes of cost overrun
It can be grouped in to three categories such as the technical challenges, over-optimism
and the strategic misrepresentations.
2.2.1: Technical challenges
These challenges can take place in many ways, which are as follows:
 Scope for changes- It is seen that the orders where the changes are done based on the
decisions may lead to the escalations in costs. The changes may be inclusive of the
alterations within the facility such as the addition of transit lines, tunnels or stations that

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were not earlier in the plan. These changes are often instigated by the politicians, which
will help their constituencies in getting the benefit of the changes or the harm that can be
mitigated in the neighboring communities (Ngacho & Das, 2014). The orders of change
can also take place due to the variations in the initiation process of the contractors so that
the errors can be corrected and the facilities can be built in a better manner. The
infrastructural projects that are large in nature require many changes that are initiated by
the request of the stakeholders. These changes have to be negotiated and the approval of
the clients has to be sought, which is a costly and time-consuming process (Narbaev &
De Marco, 2013).
 Problems of handover- The construction projects that are larger in nature has to be based
on the involvements between the client of the government and the contractors along with
the subcontractors as well. There may be disputes between the parties, which may affect
the quality of the work in between the partners and may lead to minor errors in the
project that can cause delays and a rise in the cost of the projects (Ngacho & Das, 2014).
 Incomplete studies before approaching the project- The approval of the projects before
the process of construction in infrastructures often starts before the feasibility of the
technicalities and the studies made by the engineers are completed. This leads to the
escalations in cost, as the details regarding the projects are not confirmed earlier. These
problems occur mainly because of the government, as they accelerate the approval
process for the projects that are required on an urgent basis (Fulford & Standing, 2014).
 Material and labor cost escalations- The cost of the projects depend mainly on the
construction materials that are important so that the workers can start the project without
any delay. This occurs mainly during the time when the projects were built at the time of