Cost Management of Large Construction Projects in South Malaysia

Ade Asmi Abdul Azis1, Aftab Hameed Memon 2, Ismail Abdul Rahman2, Qadir Bux Alias Imran Latif2, Sasitharan Nagapan2

1Universitas Bakrie, Jakarta, Indonesia 2Faculty of Civil and Environmental Engineering, Universiti Tun Hussein Malaysia

86400 Parit Raja, Batu Pahat, Johor, Malaysia

Abstract—Achieving project completion within the estimated cost is fundamental criteria for success of any project. Hence cost management and control is very important consideration for ensuring cost performance. Various cost management techniques can be applied throughout the project life cycle to avoid poor cost performance and overrun of cost. This study focused assessing project cost performance and level of effectiveness of various cost management techniques implemented in large construction project in south Malaysia. Data collection was carried out through structured questionnaire survey which resulted in collecting 97 data samples. It was found that most of projects face cost overrun problem with an average overrun in the range of 5% to 10% of the total project cost. Most effective approaches of cost management adopted in construction projects were cash flow forecasting, tender budgeting/estimating and elemental cost plan. Value management and cost code system were rated as less effective technique. One of possible reason for low level of value management application in Malaysian construction industry may be unawareness of the benefits of value management. Realizing the advantages of value management, it should be considered to implement this method to achieve better cost performance.

Keywords-cost management, Large construction, cost management techniques, cost perfromance, south Malaysia

I. INTRODUCTION Cost management is one of major components of project

management and important tool to control and improve cost performance of projects. Project cost management helps in keeping the project within its defined budget. Poor cost management often result in cost overrun of project. Godey [1] states that cost management differs from cost control. It is a proactive process that focuses on the elimination of waste in business processes and procedures. Cost management is a strategic process that stresses the optimization of efficiency and focuses on the customer and on profitability. It is “a philosophy”, “an attitude” and “a set of techniques” to create more value at lower cost. Cost Management meets the need of both accurate costs and other relevant information for decision-making. Having accurate costs and creating more value at lower cost is vital need in the world of survival of the fittest [2]. Cost management promotes the idea of finding ways to help organization in making the right decisions to improve project performance. Cost management should be closely aligned to make part of corporate growth strategies; as the challenge is not just to lower costs of projects but also to “out

invest” competitors on growth. There basic principles for achieving effective cost management include the setting growth targets, tailoring cost-reduction targets, select cost cutting and improved organizational capabilities. Hence, effective cost management is very important to understand cost structure and analyzing the costs flowing through that structure [3]. Godey [1] states that cost management is a strategic process that focuses on the customer and on profitability. Effective cost management is a process consisting of six steps including:

a) Understanding of what causes the cost and revenue structure of the business

b) Understand and reduce inter-functional complexity c) Provide the tools to manage costs d) Involve employees in decisions e) Increase effectiveness and continuously improve costs f) Measure decisions against the strategic business plan

However, cost management in construction industry is less effective and most of projects fail to achieve successful project completion resulting in significant amount of cost overrun. Hence, this study focused on assessing cost management practices in construction projects. However, this study was limited to large projects i.e. the project with contract amount above RM 5 million [4] in south Malaysia which consists of states of Johor, Melaka and Negri Sembilan.

II. RELATED WORKS Cost is the fundamental and most significant consideration

throughout the life cycle of project. Hence, it is very important to keep cost control and management from the beginning of the project as lack of cost management leads to cot overrun of projects. Figure 1 illustrates cost management processes. It indicates that cost estimating processes uses information from existing cost database, contracts, design and production plans. On the other hand the information generated by the cost management system supports the design and production planning and control processes and should be used to update the cost database. Similarly to production planning and control, cost planning and control is a cyclical process. It uses information from the cost estimating and production control processes to provide feedback to the cost database that will be used in future project. As contracts, designs and production planning and control are dynamic, hence cost management systems must assume a pro-active character and be flexible to

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absorb changes that may occur [5]. Cost engineering and quantity surveying encompass a broad variety of cost management functions focusing on providing independent, objective, accurate, reliable capital and operating cost assessments usable for investment funding and project control [6].

Figure 1: Cost Management Process [5]

According to [7], cost management systems are composed of the following cost management techniques:-

A) Cost Planning and Control B) Estimating C) Budgeting D) Cash Flow Forecasting E) Financial Reporting and Cost Reporting F) Cost Code Systems g) Value Management H) Judgment

A. Cost Planning and Control Cost planning can be used effectively for evaluating the

project cost. More than 80% of project costs are determined during the initial stages of the design. Skilful and professional estimating and cost planning add real value by enabling informed decision-making from the outset. The general advantages of cost planning that proposed by [8] include:

• The tender sum is more likely to equate with the approved budget estimate

• There is less possibility of addendum in bills of quantities or re-costing being required

• Cost-effectiveness and a value-for-money design are more likely to be achieved

• A balanced distribution of expenditure is likely to produce a more rational design

• The amount of pre-tender analysis by the architect and quantity surveyor should enable more decision to be taken earlier, resulting in a smoother running of the project on site

• Cost planning provides a sound basis for comparing different projects

Process of cost planning consists of three phases including; (a) establishment of a realistic first estimate, (b) plan showing how this estimates should be spent among the various parts or elements of a project, and (c) monitoring process to ensure that the actual design details for the various elements can be constructed within the cost plan. According to [6] project cost controlling is team endeavour and the effectiveness of cost control depends on how well the basic project management practices are implemented on the project, including the

definition of such items as governance, owner organization and rosters, roles and responsibilities, project execution strategies, reporting and communications. Halpin [9] emphasizes that project cost control data are important not only to project management in decision-making processes, but also to the company’s estimating and planning departments because these data provide feedback information essential for effective estimates and bids on new projects. Thus a project control system should both serve current project management efforts and provide the field performance data base for estimating future projects as cited by [7].

B. Estimating The estimating technique is usually used in construction at

pre-tender stage to provide an indication of the probable cost of construction. This is an important factor to consider in the client’s overall strategy of the decision to build. Schuette and Liska [10] state that estimating is the fundamental process of answering the question “How much is the project expected to cost?” The financial commitment to a construction project is very large, and inaccurate project estimates can have a detrimental effect on all parties. The estimate also provides the basis for budgeting and control of the construction cost. During the project’s development and construction phases, the estimate may be reviewed and revised many times. An early price estimate which is too high may discourage the client from proceeding further with the scheme, and so the potential commission is lost. Alternatively if the estimate is too low, it may result in an abortive design, dissatisfaction on the part of the client or even litigation. The purpose of producing a pre-tender estimate into the following categories:

i) Budgeting – this decides whether the project should proceed as envisaged

ii) Controlling – this uses the estimate as a control mechanism throughout the design process

iii) Comparing – this uses the estimate as a basic for the evaluation of different design solutions [8]

C. Budgeting A budget is a financial evaluation of the future courses of

action set out in a business plan. It is a detailed plan which sets out in terms of money, the plans for income and expenditure in respect of a future period of time [12]. It is prepared in advance (normally for the year ahead) and reflects the financial consequences of the agreed strategies that are necessary to achieve corporate objectives. The budgetary process fits into the overall planning process, it evaluates the financial consequences of the plan and provides financial feedback so that plans can be monitored and revised [11]. The purpose of a budget system is to serve the needs of management in respect of the judgments and decisions it is required to provide a basis for the management functions of planning and control.

D. Cash Flow Forecasting Weetman [12] has explained that the actual cash flows are

equals to cash inflows to the enterprise minus cash outflows from the enterprise. Inflows and outflows of cash are caused by different factors and the enterprise will to try making clear the causes are. In the equation form as follows:-

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Cash Flow = Cash inflows to the enterprise – Cash outflows from the enterprise

Most construction projects are individual profit centres, each with its own cash cycle based on the costs of activities related to the project and on payments from a client, both of which are prescribed by a contract. Hyung [13] states that the typical cash flow on a construction project consists of ; cash out such as bid costs, preconstruction costs engineering, design, mobilization, materials and supplies, equipment and equipment rentals, payments of subcontracts, labor and overhead; and cash in such as billings less retentions, retentions, claims and change orders. The factors that affect cash flows are the duration of the project, the retention conditions, the times for receiving payments from the client, credit arrangement with suppliers or vendors, equipment rentals, and times of payments to subcontractors, etc. Cash flow at the project level consists of a complete history of all cash disbursement and all earnings received as a result of project execution. Many construction projects have negative net cash flows until the very end of construction when the final payment is received or advanced payment is received before starting the project. This is a typical situation when the final payment consists of retention money and the retention percentage is greater than the profit percentage of the project.

E. Financial Reporting and Cost Reporting Burke [14] states that financial report and cost report is to

record all the financial transactions, payments in and out, together with amounts owed and owing. This kind of information is essential for the top management in decision making and also for the financing of the project, as stated by Burges [15], it is an obvious need of senior management to know (a) financial performance to date, (b) anticipated financial performance of current year and (c) anticipated financial performance at the end of the project

Frisby [16] also considers that a successful contractor has a solid financial plan, a good knowledge of costs, accurate and honest cost report, etc.

F. Cost Code Systems Pilcher [17] states that an adequate coding system

simplifies the data-handling facility and also provides economy of storage in the case of a computer. A good and adequate system of coding is one that simplifies that task of referring to the items to be coded. The purpose of the cost code system is to enable huge of cost data to be identified and coded for the most efficient application of cost management throughout the contract period.

G. Value Management Value Management is a multi-disciplinary, team orientated,

structured, analytical process and systematic analysis of function which seeks best value via the design and construction process to meet the client’s perceived needs a proactive, creative, problem-solving service to make explicit the client’s value system [18]. The VM procedure also encourages the development of a value culture within the organization which eases the path to accomplishing desirable change. Thus, it can be summarized as a goal-setting process that aims to satisfy the

client’s project requirements as well as it concentrates on improving the relationship between value and the client. Fong [19] suggested that value management focuses on value rather than cutting cost and it does not means to sacrifice the quality of building for the sake of reducing cost.

H. Judgement None of the cost management techniques can be used

without the application of judgment [20]. Al-Tabtabai and Diekmann [21] point out that a good price forecasting technique needs to include both historical trend based data and competent “judgments” based on construction experience and knowledge. The relationship between judgement and other techniques can be summarized as: [technique] + [judgment] = [advice]. The good price forecasting technique include both historical trend based data and competent ‘judgement’ based on construction experience and knowledge [7].

III. Data Collection and Analysis Data was collected using questionnaire survey. A 5-point likert scale was used to understand the perception of practitioners as 1 for not effective, 2 for slightly effective, 3 for moderately effective, 4 for very effective and 5 for extremely effective. The hierarchal assessment of effectiveness of cost management techniques was calculated using Relative Importance Index (RII). The same approach has been used by various researchers to analyze the data collected from questionnaire survey as indicated in literature. Sambasivan and soon [22] also used same approach to investigate the causes and effects of construction delay in Malaysian construction industry. RII will be calculated with following expression:

Where;

RII = Relative importance index w = weighting given to each factor by respondents and it

ranges from 1 to 5 x = frequency of ith response given for each cause A = highest weight (i.e. 5 in this case) N = total number of participants

A total of 150 questionnaire sets were distributed randomly amongst the personnel involved in construction industry in the south Malaysia. As a result 103 responses were received back, of which 6 questionnaire sets were incomplete and as considered as invalid. Table 1 shows the summary of data collection.

Table 1. Summary of data collection No of questionnaire distributed 150 No of response received 103 No of invalid (Incomplete) responses 6 No of valid responses 97 %of of responses received 68.7 %of of valid responses against questionnaire distributed

64.7

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IV. RESULTS AND DISCUSSIONS The respondents involved in the survey have had several years of experience in handling various types of projects. The characteristics of the respondents participated in survey as summarized in Table 2.

Table 2. Demographic characteristics of respondents

Demography Frequency % Type of Organization Client 16 16.5 Consultant 25 25.8 Contractor 56 57.7 Type of projects Building 44 45.4 Infrastructure 15 15.5 Build-Infra 38 39.1 Size of Projects 6-10 Million 33 34.0 10-50 Million 39 40.2 Above 50 Million 25 25.8 Type of Organization BE 86 88.7 BSc 2 2.0 Diploma 7 7.2 ME 2 2.1 Type of Organization 0-5 years 19 19.6 6-10 years 21 21.6 11-15 years 24 24.7 16-20 years 15 15.5 More than 20 years 18 18.6

Table 2 indicates that the majority of the respondents were

working with contractor organizations i.e. 57.7% of respondent followed by consultants and clients with %age of 25.8 and 16.5 respectively. The respondents were involved in handling both type of project i.e. building and infrastructure. Majority of the respondents i.e. 80.4% had working experience of more than 5 years, 21.6% of respondents were engaged in construction industry for more than 10 years and less than 20 years, while 21.6% and 18.6% of respondents had experience of less than 5 years and more than 20 years respectively. This shows that the respondents were competent enough and capable to participate in the survey.

Data regarding cost management techniques was analyzed statistically using statistical software package SPSS v17.0.

A. Cost Perfromance Table 3 shows the cost performance of projects. Results

show that most of respondent (approximately 85%) agreed that

often they experience cost overrun problem. A significant number of respondents (60.8%) mentioned that most of times the overrun lies between 5-10% of project cost. Define abbreviations

Table 3. Cost performance of construction projects Extent of Cost Overrun Frequency % 0% 4 4.1 1-5% 15 15.5 5-10% 59 60.8 10-15% 8 8.3 More than 15% 11 11.3

B. Cost Management Techniques Survey results showed that various techniques were

adopted din construction projects. However, the level of application of cost management was very low. The study assessed the level of effectiveness of various cost management techniques as show in table 4.

Table 4. Effectiveness of Cost Management Techniques

Cost management Technique RII Rank Cash Flow Forecasting 0.79 1 Tender Budgeting/Estimating 0.77 2 Elemental Cost Plan 0.77 2 Financial Report and Cost Report 0.76 3 By Judgment 0.75 4 Value Management 0.74 5 Cost Code System 0.72 6 Working Budgeting/On-going Job Budgeting 0.65 7

Table 4 shows that most effective technique of cost

management was Cash Flow Forecasting with RII=0.79 followed by Tender Budgeting/Estimating and Elemental Cost Plan with RII=0.77. Although, value management is very effective method of cost management, however results show that value management and cost code system were lowest ranked method. One of the possible reasons may be that VM has not yet become widely practiced in the Malaysia. Hence actions should now be taken to exert its full potential to improve value for money for the clients of the industry. It is argued by Che Mat [23] that the clients’ understanding towards the VM concept is important as it is not just merely considering the cost but it considers the relationship between value, function, quality and cost in a wider perspective. It helps in eliminating the unnecessary cost which does not contribute to the project’s value, system and facilities [18].

V. CONCLUSION The study assessed the cost performance and level of

applications of various cost management techniques in construction industry in the southern part of Malaysia. The findings of study are summarized as follows:

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a) About 85% of the respondents agreed that most construction projects face cost overrun problem.

b) About 11.32% projects face cost overrun above 15%, where the normal range of cost overrun is between 0 and 15%.

c) Cash Flow Forecasting, Tender Budgeting/Estimating and Elemental Cost Plan were most commonly adopted and considered very effective cost management techniques

d) Value Management is very useful technique of cost management; however it has not yet become widely practiced in the Malaysia.

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