A Comprehensive Analysis of Cost Overruns in NZ Construction Industry

This report provides a comprehensive analysis of cost overruns within the New Zealand construction industry, exploring the issue's prevalence and impact on the economy. The study begins with an introduction to the construction sector's significance in New Zealand, including its contribution to GDP and employment, while acknowledging the boom-bust cycles that affect productivity. The report then defines cost overruns and reviews international studies to identify causes, such as poor contractor management, material price escalations, and design changes. It examines the impact of cost overruns on project success and explores various control measures. The literature review covers diverse sources to understand the factors contributing to cost overruns and provides a detailed overview of the economic implications, including productivity declines and financial constraints. The report also discusses the importance of effective project management and planning to mitigate cost overruns, with the ultimate aim of understanding the complexity of construction projects and the associated financial risks.

Running head: COST OVERRUNS IN NEW ZEALAND CONSTRUCTION INDUSTRY
Cost overruns in New Zealand Construction Industry
University Name
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Authors’ Note

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Table of Contents
Introduction................................................................................................................................2
Construction Projects in New Zealand.......................................................................................2
Definition of cost overruns.........................................................................................................4
Cost Overruns in International construction projects.................................................................5
Review of Prior Evidences.........................................................................................................7
Categories of cost overruns........................................................................................................9
Measures of Control.................................................................................................................14
Measurement............................................................................................................................18
Conclusion................................................................................................................................20
References................................................................................................................................20

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Literature Review
Introduction
The issue of cost overrun in specifically construction sector is common throughout the world
as well as the construction segment is not an exception. The primary objective of the current
study is to identify both the causes of cost overruns in particularly construction projects. The
current section presents a comprehensive review of literature from diverse sources in a bid to
undertake the current study. The objective of this study is to evaluate cost overruns on
construction projects in New Zealand, different categories of cost overruns, different factors
affecting cost overruns particularly during implementation of costs of construction.
Construction Projects in New Zealand
The construction segment can be considered to be an important contributor to the economy of
New Zealand, presenting 8% of the gross domestic product, 10% of particularly national
employment, a contribution that is developing; diversifying and certain sections are
essentially becoming more effective as the segment develops (Chappell et al., 2018).
Nevertheless, the segment put up with a number of internal as well as external constraints that
limit overall productivity along with performance. The current segment throws light on value
of construction segment, the important role that it plays in the economy of New Zealand.
Nevertheless, it recognized that the boom-bust feature of the segment was necessarily an
issue, and was a barrier to enhance productivity together with overall performance. The main
focus of the government has the need to be developed for the segment, permitting it to
maintain and design skills.
Construction sector essentially plays a significant part of the economy of New Zealand

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In essence, the construction segment plays an important role in the economy of New Zealand,
thereby contributing towards higher level of employment, better businesses as well as
augmented gross domestic product. Essentially, the construction industry can be considered
as the fifth largest segment in terms of employment, consisting of 178.100 FTEs along with
53.600 FTEs in particularly construction associated services. In essence, this necessarily
accounts for approximately 10% of total employment across the entire economy. In
particular, one of the major 10 industries in terms of contribution to gross domestic product
of New Zealand is the construction industry. Shehu et al., (2014) suggests that the
construction industry replicates highest growth rate particularly between the year 2012 as
well as 2015. In addition to this, this accounts for approximately 10% of the entire
employment throughout the entire economy (Ibrahim & Shakantu, 2016). Thus, it can be
hereby mentioned that core construction contributes towards generation of around 26000
jobs, or in other words, one job out of every five new jobs that are generated in particularly
the nation New Zealand. Again, on the other hand it can be hereby mentioned that there are
several traditional sectors namely, agriculture, fishing as well as forestry between the
financial years 2012-2015 that presented approximately 330 new jobs chiefly over the same
time period.
As suggested by Sambasivan et al., (2017), roughly 54% of gross fixed capital of the nation
New Zealand was mainly facilitated through construction industry. In essence, this replicates
that the segment plays an important role in developing infrastructure stock of the nation New
Zealand that is necessarily then base of productivity as well as economic rate of growth.
Particularly, construction actions are focussed in three different regions namely Auckland,
Wellington as well as Canterbury. Presently, just about 25% of the entire GFCF investment
carried out by public sector entities (Waithera & Susan, 2017). This specific fraction is

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characteristically higher at lower points particularly in the construction sector cycle and it is
noted to be around 31% in the year 2010.
Definition of cost overruns
Particularly, in normal terms, cost overruns that are also known as cost escalation increase in
cost, or else overruns of budget can be considered as the excess of actual cost over the
approximated budget. As rightly indicated by Shehu et al., (2014), cost overrun can plainly be
indicated as when the final cost of the particular project surpasses the original
approximations. Also, this can be considered as the variance between original cost
approximation of a project and actual construction cost on conclusion of the entire work.
Cost overruns in construction projects can happen owing to varied reasons. A specific study
in Ghana regarded twenty six different factors that generated cost overruns in the area of
construction industry of specifically ground water projects. The overall results of ranking
from the viewpoint of three different parties engaged. This reflected that the most significant
cost overrun factors comprise of management of poor contractors, monthly difficulties in
disbursement, material procurement, and poor technical performance along with escalation of
prices of material (Ahiaga-Dagbui & Smith, 2014).
Cost Overruns in International construction projects
Cost overrun in particularly construction projects in Saudi Arabia (perspective of
contractors): Performance of cost of a specific project is normally an important
consideration for various construction parties. Over and over again, cost overrun can be
considered to be one of the most recurring issues particularly in the construction sector and
this can have an adverse influence on success of the project from the perspective of quality,
level of safety, overall quality, time as well as cost (Sovacool et al., 2014). Essentially, this

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study is undertaken to examine overall cost overrun in diverse construction projects in the
nation Saudi Arabia in a bid to recognize diverse reasons behind overrun of cost and their
significance as per contractors by means of a questionnaire survey.
Review of case of Jordan for analysing factors influencing
As mentioned by Senouci et al., (2016), majority of the construction projects in developing
nations are featured by overruns particularly in time. Particularly, this specific research was
undertaken in an attempt to recognize different facets for such overruns in characteristic
developing environment of Jordan. Again, a descriptive study was undertaken and two
different types of data were acquired. There are different overrun variables that were
extracted from prior academic literature and from a thorough assessment of perception of
around 30 engineers and thereafter ranked as per Severity Index. This study identified top 10
factors directing towards time overruns in particularly construction projects and treated by
employing Principal Component and Factor Analysis (PCFA) (Mulla & Waghmare, 2015)
“Study of association between time and cost overrun as well as productivity on
constructions”
As rightly indicated by Larsen et al., (2015), majority of construction sites, the most excellent
performance are unattainable with poor level of productivity leading to overrun of time and in
consequences escalation of cost of different projects. Analysis of article as per the views of
Olaniran et al., (2015), construction productivity has constantly declined. In essence, the
issue of lower level productivity is not restricted to the nation of Nigeria. Subramani et al.,
(2014) witnessed that construction efficiency in particularly the United Kingdom was lesser
than in loads of other European nations regardless of the encouraging ciphers witnessed
during the boom of 1980s. As such, it can be hereby said that there is not anything as perilous

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to a nation as a shrink in productivities as it generates inflationary stress, social disagreement
and mutual distrust (Saidu & Shakantu, 2016).
“Time overrun and cost effectiveness in the construction area”
In essence, project management is considered as the art of directing as well as coordinating
both human in addition to material resources all the way through the life of a venture by
utilizing up to date management techniques to attain programmed objectives of capacity, cost,
time with quality along with satisfaction of participants. Especially, the construction industry
is more often than not huge, intricate and dissimilar from other sectors. In essence, this
sectors calls for much investment and engages different categories of participants. However,
one of the most widespread actions in the system of administration is planning. Developing
the project plan can be regarded as the first thing that needs to be considered at the time of
carrying out any type of project (Senouci et al., 2016). Nevertheless, there are numerous
people who fail to understand the overall value of a scheme in saving particularly time,
money, along with many other issues.
Review of Prior Evidences
As indicated by Senouci et al., (2016), there are several research papers that are published
and numerous studies are undertaken on the theme of cost overruns in developing projects on
civil engineering. A study undertaken reflected that just 16% of all projects executed could
meet the three different criteria of performance. The three different criteria of performance
include completion of different projects on specified time, well within the predetermined
budged cost along with quality standard. Again, another study assessed the records of over
and above 4000 projects on construction and observed that projects are hardly ever completed
within the assigned budgets. In addition to this, it was also witnessed that cost overruns were
regular phenomenon in global construction industry. In essence, in an international study

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carried out on cost overrun concerns in transport communications projects containing 258
projects in approximately 20 nations, it was observed that roughly 90% of the adopted
projects encounter the issue of cost overrun and essentially performance of projects from
perspective of cost has not enhanced with passage of time, since it is the identical order of
scale as it was previously. Chappell et al., (2018) mention that cost overrun in particularly
construction projects can take place due to different reasons. Also, there are a number of
scholars who have examined different reasons of cost overrun in diverse nations. Particularly,
a specific study undertaken in Ghana regarded 26 different factors that generate cost overrun
in particularly creation of framework of ground water development projects (Shehu et al.,
2014). In essence, the overall outcomes of ranking based on the viewpoints of three involved
parties namely (Clients, contractors as well as consultants) pointed out that most significant
cost overrun facets are poor management of contractors, difficulties in payments on monthly
basis, procurement of material, meagre technical performances as well as hike of prices of
material.
Particularly, in Nigeria, approximately 42 different factors of cost overrun were examined.
Based on the study, it was observed that lack of familiarity, skills as well as experience of
contractors, movement in the materials prices, regular changes in design, non monetary
stability along with rates of high interest charged by different banks on their loans were
overriding factors generating cost overrun. Particularly, in the nation Kuwait, an extensive
study was undertaken on the residential projects carried out by private sectors (Ibrahim &
Shakantu, 2016). Essentially, the study reflected that contractor associated concerns; material
linked issues along with financial restraints were the most important reasons of overrun of
cost. Particularly, in Malaysia, a research work assessed huge projects and observed that flow
of cash and financial concerns encountered by contractors, poor management of site by
contractors as well as supervision, insufficient contractor experience, dearth of site workers,

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erroneous planning and arrangement by service provider were most rigorous factors whilst
alterations in project scope and repeated design alterations are least upsetting facets on cost of
construction (Sambasivan et al., 2017).
As indicated by Waithera & Susan (2017), a detailed study undertaken on construction
industry of UK detected 21 important factors leading to overrun of cost. However, the most
important factors among them are: design alterations, risk as well as uncertainty related to the
projects, erroneous estimate of time as well as cost, meagre performance of various
subcontractors and intricacy of works. Again, in yet another developed nation (specifically,
Canada), an extensive study was undertaken which intended to discover the causes for cost
along with scheduled overruns in particularly oil and gas mega construction projects. 87
senior project managers across global were surveyed for arriving at conclusion as regards the
primary causes for cost overruns (Shehu et al., 2014). However, the main concerns
discovered are: the deficiency of knowledge regarding the project and its intricacy, mistaken
costs estimation, nonexistence of a plan that deal with the alterations in design and necessities
of execution and the dearth of managerial stratagems.
Ahiaga-Dagbui & Smith (2014) mentioned that another research work was carried out to
examine the specific factors affecting the cost overrun on mainly high rise buildings in the
nation Indonesia. Results of the study indicated that the prime factors exerting influence on
cost overrun are necessarily cost enhancement of prices owing to inflation, imprecise material
approximation and extent of project intricacy. In the same way, in Vietnam, an extensive
research discovered that the major five facets generating cost overrun in huge construction
projects include improper management of site and administration, dearth of support in project
management, financial difficulties of owners and transformation in design (Sovacool et al.,
2014).

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Categories of cost overruns
Cost overruns due to inaccurate approximations
Different categories of cost overruns depend on different causes leading to the same. In order
to maintain overruns at a minimum level, it is important to undertake certain effective
strategies and processes of implementation to keep the construction projects within
constraints of budget. Whilst majority of stakeholders of a project are willing to get started
with the project, there are faulty schedules as well as budgets to commence with; the
construction project is necessarily headed for particularly overrun from day one. Owing to
competitive nature of particularly bidding procedure, approximations might suffer from
various wrongful anticipations of the scope of work counted in the specific project. However,
in several cases, certain projects will also be approximated on a one size fits all, with
opportunities of exceeding that initial estimate high (Senouci et al., 2016). Thus, it is
important to the success of the project to diligently carry out the process of pre-construction
planning and be accurate and at the same time realistic regarding deadlines of projects along
with costs from particularly architects as well as contractors. Approximating the project in an
accurate manner can be started in the RFP procedures. In essence, this is the chance where
architects, contractors as well as owners can express their issues over specific budget along
with timelines of the entire project. In case if any one of the parties seems to be unrealistic
regarding timing or else budget, then this can be considered as an immediate red flag or a
warning signal that this specific project can head towards an overrun. Although pre-
construction along with design services might perhaps contribute towards around 15% of the
budget in case if this procedure can successfully recognize potential concern before
construction actually starts (Mulla & Waghmare, 2015). In essence, this 15% shall
necessarily be nothing compared to the total amount of wealth saved for the overall procedure

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down the line. Due to this opportunity for savings of cost, pre-construction is regarded to be
an important as the building stage as it truly lays the foundation for an intricate project. In
essence, a solid phase of planning mainly before groundbreaking makes certain that that there
is a superior procedure of documentation, less confusion between managers and a solid
schedule of project.
Cost overruns due to errors in design of projects
In case if the plans of project designs are flawed, then it can direct the way towards overruns
of cost even though there is proper allocation of time as well as resources for appropriate
budget as well as schedule approximations particularly in the pre-construction planning
phase. As rightly suggested by Larsen et al., (2015), deficiency in design refers to poor
design, inaccurate or else incomplete plan. Olaniran et al., (2015) suggests that deficiencies
are extremely common and can be regarded as a pain point for different owners as well as
designers. Essentially, a study from Engineers Daily approximated that errors in designed
stood for approximately 38% of disputes of all construction projects. Concurrently,
incomplete otherwise inaccurate plans or schemes almost always lead to substandard work
from different contractors completing the work that can show the way to legal encounters
down the line. In the design phase itself, software for the construction projects can help in
decreasing risk of errors else wise incomplete designs. As rightly indicated by Ahiaga-
Dagbui & Smith (2014), management of project can be said to be better served with
particular software that can incorporate real time alterations into account. In case if the
project experiences unexpected alterations in the scope else wise one of the processes, then it
becomes comparatively easier to initiate these kinds of alterations into a dynamic digital
model of he entire landscape than to redraw explicit models on document. On the other hand,
to enable different contractors as well as sub contractors to develop as per specifications of
design, owners along with contractors need to convene on specific scope of the work as well

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as performance responsibilities in particularly the contract phase (Mulla & Waghmare, 2015).
In particular, this documentation have the need to include clear different references to
different specifications of project on design documents, warranties of the precise work that is
to be completed by contractors. Ahiaga-Dagbui & Smith (2014) say that this can be regarded
as a risk allocation chart and a procedure for different unforeseen concerns. Primarily, this
agreement needs to define different dispute resolution along with process of mediation, in
case if the disagreements take place during construction. In this regard, it can be hereby
mentioned that addition of added level of security can make certain that designs are
appropriate and expectations are clear and project. This in turn can also ensure that projects
do not undergo overruns owing to corrective actions in the phase of construction (Mulla &
Waghmare, 2015).
Improper planning for changing orders
In conjunction with errors in designs, change orders are yet another common reason for
overruns of cost in projects of construction. In essence, a change order stems when a specific
owner otherwise a contractor realises that designs are not working properly or might perhaps
attempt to introduce novel spaces, fixes or requirements after initial models as well as
budgets have been completed. Supplementary necessities will normally lead to superior costs
and that can obviously negate original project budget. In essence, supplementary time,
materials as well as man power necessary for completing novel initiative might also to be
categorised as an overrun of costs in case if the augmentation affect different other aspects of
entire project. As a consequence, alterations might perhaps be handled properly in the phase
of contract, at the time when a change order provision can be added to specify processes and
budget required (Mulla & Waghmare, 2015). In case if it is not addressed ahead of time,
different contractors might possible think about enhancing overall cost of contract
particularly in anticipation of alterations or disputes that could stem in case if they did not