Nevertheless, the construction industries require cost estimation techniques/analysis scheme like other similar schemes aimed at foreseeing the future of the projects to accomplish the profitability targets. Due to large operations inherent in the construction industries, managers needed to imbibe the culture of forecasting activities in terms of costs control techniques in order to see future at the beginning of the project. These therefore justify the establishment of Project Control Department were cost controllers and cost estimators are domicile in the company

1. CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The growing need for construction of all types coupled with a tight monetary
supply has provided the Oil industry with a big challenge to control cost.
The idea of cost control analysis became necessary as a result of the inability of
companies meeting up with their budget proposals, actual costs during the
execution phase of projects under their scope and the inability of companies to
mobilize excess or dormant funds in some phases of activities and channel them
into needy areas.
According to Mendelson and Greenfield (2009) the remaining part of the twentieth
century would involve corporations, institutions and government in a race to
survive. The attendant dwindling economic fortune of nations’ economies around
the World have geared up the participant in these sectors (the client in particular)
to take up the challenge of ensuring efficient use of their resources to obtain value
for money in terms of performance.
The total cost of construction in normal circumstances is expected to be the sum of
the following cost: Materials, Labour, Site Overheads, Equipment/Plant, Head
office Cost and Profit. But in many parts of the world, particularly in Nigeria, there
are other costs to be allowed for.
1

2. These costs according to Mbachu and Nkado (2007) have obvious negative
implications for the key stakeholders in particular, and the industry in general. To
the client, high cost implies added costs over and above those initially agreed upon
at the onset, resulting in less returns on investment. To the end user, the added
costs are passed on as higher rental / lease costs or prices. To the consultants, it
means inability to deliver value - for - money and could tarnish their reputation and
result in loss of confidence reposed in them by clients. To the contractor, it implies
loss of profit through penalties for non-completion, and negative word of mouth
that could jeopardize his/her chances of winning further jobs, if at fault.
The primary reason for the establishment of cost estimation analysis is to
effectively mobilize savings in the cost effective activities to activities that
required extra cost. (Ohaka, 2005).
Nevertheless, the construction industries require cost estimation
techniques/analysis scheme like other similar schemes aimed at foreseeing the
future of the projects to accomplish the profitability targets.
Due to large operations inherent in the construction industries, managers needed to
imbibe the culture of forecasting activities in terms of costs control techniques in
order to see future at the beginning of the project. These therefore justify the
establishment of Project Control Department were cost controllers and cost
estimators are domicile in the company
2

3. The proposed work will investigate and report How profitability target could be
achieved using cost control techniques in a construction and also proffer solutions
to how cost can be minimized.
1.2 STATEMENT OF THE PROBLEM
The demand for more construction of all types, coupled with a tight monetary
supply has provided the Oil industry with a big challenge to cut costs. The problem
of high contract costs in all aspects of construction is becoming alarming. Hence,
substantial increases are being observed in Projects of all categories. Today, the
control of materials on construction sites is handled carelessly by planning and
purchasing departments as well as site supervisors and engineers of contractor's
organization. Also, ineffective application of various strategies for controlling
materials cost on sites, by the appropriate personnel in the contractor's team have
been leading to excessive expenditure on materials, which are above the
client's/contractor's budgeted cost (Omotoso, 2006). Improper control of materials
on construction sites has been posing various problems to contractors in realizing
reasonable profit margin. The cost of improper control of materials is borne by the
contractor. This fact is stressed by Omotosho (2006), further stressed that the
higher the level of improper control of materials on sites, and non-compliance or
inadequate compliance with the control strategies involved, the higher the loss to
the contractor in terms of profit making.
3

4. Abiodun (2002) revealed that it is not only the contractors that bear the brunt of
losses through improper control of materials and ineffective implementation of the
control strategies involved; the suppliers sometimes bear the brunt.
For instance, a number of cement bags, blocks, bricks, tiles, etcetera, which may be
rejected due to mishandling when loading from the source and offloading on site,
will affect the supplier's profit. Also, in the case of labour - only type of contract,
where the client supplies all materials to the site and the contractor only gets paid
for the labour provided, client will be the one to bear the loss.
This research work has been mounted therefore to examine how effective
control of materials which can be delivered through effective implementation of
the control strategies involved, can go a long way in reducing waste, construction
delay, dispute, avoiding substandard work and abandonment, so that Projects can
be executed and completed within reasonable time, cost and to the required quality
standard, thereby ensuring value for money for the client.
1.3 OBJECTIVE OF THE STUDY
This research is aimed at investigating how profitability targets could be achieved,
by studying the control strategies used to control material costs, the effect of cost
control techniques on project execution, examine if the material cost control
techniques are properly applied in project execution. More also to examine factors
4

5. militating against the application of the cost control techniques in project
execution.
1.4 RESEARCH QUESTIONS
The following research questions have been designed to help the researcher to
carry out this research work:
i) What are the control strategies used to control material cost?
ii) What are the effects of cost control techniques on project execution?
iii) Are the project material cost control techniques being applied in project
execution appropriately?
iv) Are there any factor militating against the application of the cost
control techniques in project execution?
1.5 RESEARCH HYPOTHESIS
The following hypothesis have been designed to guide the research work
i) HO1: Cost control techniques do not significantly affect the profitability
targets from executed projects.
ii) HO2: Cost control techniques do not significantly affect the productivity
of workers in project execution.
iii) Cost control techniques are not applied
c) Cost control techniques does not significantly change the profitability of projects
(Ho).
5

6. d) Cost control techniques does not significantly differ from cost estimating in
projects (Ho).
1.6 SCOPE AND LIMITATION OF STUDY
This research study is limited to the project activities and services rendered by
Saipem Contracting Nigeria Limited, Port Harcourt. In essence, the scope of this
research is limited to Saipem Contracting Nigeria Limited and their project
activities.
“Call me backs” while collecting data is one of the basic problems encountered
why carrying out this research work. The Human Resources Manager and Project
manager were too busy while this research work was in progress and the researcher
was always calling back on the managers and other staff to be able to get the data
required for the project work.
Also, the instrument used for analysis may not be 100% valid. The researcher
adopted a simple table expressed in numerical terms and percentages which can be
different from one fabrication and installation industry to the other.
Finally, rapid changes in Projects makes most statements made not valid over a
long period of time. The limitations above notwithstanding, the researcher was able
to obtain enough data to make the research work a success.
1.7 SIGNIFICANCE OF THE STUDY
The findings of the study would enable Clients, Contractors and Consultants give
an economic approach to construction work such that they would be able to
6

7. identify the dominating factors leading to high cost in Saipem contracting Nigeria
Limited.
The application of the solutions proffered to minimizing cost would restore client’s
confidence in consultants, reduce investment risks, and generally boost the
viability and sustainability of the industry
There is no doubt saying that the Projects are the hub of commercial activities in
any economy. This invariably makes a case for the construction especially in the
urban areas.
The cost controllers, cost estimators are in dire need of jobs where their inputs will
be a determinant to the company’s success rather than pursuing crude and obsolete
means.
This research study is therefore important as it is geared towards making the over
50% of the company’s populations domicile in the urban areas to experience a rise
in their standard of living which is yardstick for measuring a nation’s economic
standard. It is hoped that the important recommendations inherent in this research
study will be applied in taking the myriads of problems plaguing Saipem
Contracting Nigeria Limited in particular and other fabrication and installation
industries in general
CHAPTER TWO
LITERATURE REVIEW
7

8. 2.1 COST CONTROL IN CONSTRUCTION
During the execution of a project, procedures for project control and record
keeping become indispensable tools to managers and other participants in the
construction process. According to Dharwadker (2008), cost control can be
achieved by selecting the right man for the right job, the right equipment and tools
for the right work and the right quality of materials, in the right quantity, from the
right source, at the right price and delivered at the right time. Managers are
expected to be well equipped to execute the project, with due consideration to the
quality of work, yet within the estimated cost and limits.
2.2 PROJECT RESOURCES AND CONTROLS
Resource inputs at the project site which produce outputs in the form of work
include: men, materials, machinery and money. The success of a project depends
upon the performance of these input resources when controlling costs
(Hendrickson 2009). The clients should do everything possible to avoid
unnecessary delays as it is one of the leading causes of cost escalation.
2.2.1 MATERIALS
8

9. One of the big problems on most building sites is the large amount of materials
wastage due to varying circumstances (Butler 2008). This problem requires a
supervisor to constantly be on the lookout for the losses. According to Hendrickson
(2009), wastage of materials can take place during the procurement process,
storage, and during utilisation. Wastage during procurement can result from one or
more of the following causes: buying materials of wrong specifications, buying
more than the actual requirements to cater for unrealistic and unforeseen
eventualities, untimely buying of short-life materials, improper and unnecessary
handling of materials, and wastage in transportation. Wastage during storage can
occur due to the following reasons: damages and breakages during handling,
deterioration due to incorrect storage, incorrect maintenance and short-shelf life
and losses due to fire, thefts/vandalism, and exposure to extreme climatic
conditions. Other causes are lack of pre-work preparation and coordination,
improper accounting and poor storekeeping, negligent and careless attitude of the
supervisor, high rate of deterioration due to long storage at the place of work, and
over-issues from the central stores and failures to return unused surplus materials
to the stores. According to Chitkara (2005), some unavoidable wastages are
inherent during utilisation, but excessive wastage is of concern to the management
as it affects the productivity adversely, with consequences of extra costs. Most
problems relating to material wastage revolve around requisitioning and ordering,
9

10. receipt and checking of deliveries from suppliers, offloading and handling, storing
and protecting, and issuing, distributing and use of materials.
2.2.2 PLANT
In construction, some tasks are labour intensive, some predominantly employ
equipment, and some use a combination of both. While the actual work done and
the associated labour is accounted by the supervisor concerned, the equipment and
productivity control is undertaken to determine its employment time, the output
achieved, and its productivity at site (Hendrickson, 2009). The main purpose of the
control is to minimize wastage in utilisation so that the overall project cost is not
affected (Chitkara, 2005). Alinaitwe (2006) observed that industrializing
construction would probably reduce the cost of construction by about 30% which
would likely settle the back log of 25% of Ugandans without proper housing.
Labour productivity achieved at the site for a given work provides a measure of the
labourer’s efficiency and effectiveness and the level of site organisation. It shows
the total time for which the labourer was employed at work, the time he was
productive on work and the time he remained unproductive (Chitkara 2005).
Craftsmen use about 40% of available time on productive activities, and about 33%
of the time on non-value adding activities (Alinaitwe 2011). Productive times are
wasted for various reasons such as idle waiting, unnecessary travelling, late
10

11. starting, early quitting, unscheduled breaks, and delays in the receipt of tolls,
delays to receive materials and work instructions. Assessment of the level of
industrialisation in Uganda and the effect on productivity and other metrics were
done by Alinaitwe, (2011) and the results indicated that the cost of labour is of the
order of 30 to 40% of project costs. The metrics confirmed that labour is a
significant factor in the cost of buildings and more efforts are required to
industrialise the industry. According to Chitkara, (2005) cost control process
involves accounting of actual productivity, and comparing with the standard,
analysing the causes for variations taking remedial measures for improvement.
Raina (2010) emphasises the need for close supervision and good working
relationship.
2.2.3 TIME-COST RELEATIONSHIP
Chitkara (2005) said the relationship between time and cost is a very important
aspect in the control of costs on site as any variation in time has automatic
implication on cost. It is important to report and record all the works involving
materials, plant and labour on sites. This enables the contractor be able to know the
costs and expenses of the resources used on site and compare with the initial cost
budget. Various report techniques used include; daily or weekly and monthly
recording, schedule control, site daily diary report and the project budget.
2.3 COST FACTORS
11

12. A review of literature reveals that there are several factors affecting costs for large
buildings.
In a study of the Nigerian Oil industry, Omoregie and Radfort (2011) sampled the
opinions of Contractors, Consultants and Clients and they discovered 15 factors
responsible for project delays and cost escalation in Nigeria. Their survey revealed
price fluctuation as the most severe cause of project cost escalation which is
attributed to the limitation in exchange rate which in turn affects construction
material prices and general price level.
In another study, Elinwa and Silas (2012) identified 31 essential factors causing
High Cost of Buildings with fraudulent practices and kickbacks ranking second
(2nd) most important factor in Nigeria. Hussain (2009) noted that fraudulent
practices and kickbacks occasioned by greed are perpetuated by some major
players in the Oil industry.
Frimpong, Oluwoye and Crawford (2003), in a review of developing countries
such as Ghana identified some factors as underlying causes of delay and cost over
runs in ground water construction Projects. The five most important factors agreed
by Clients, Consultants and Contractors were monthly payment difficulties from
agencies, poor contract management, material procurement, poor technical
performances and escalation of material prices.
12

13. Furthermore, a study of the relative weight of ten major causes of business failure
in the United States of America revealed cost related factors as mostly
contributing to business failure. (Kangari,2009). They include: Bad profit,
management incompetence, lack of experience, inadequate sales, loss of market
and economic decline.
2.3.1 EFFECT OF WEATHER
Weather is the most uncontrollable factor amongst the other variables considered.
Temperature and humidity affect productivity of workers. If the temperature and
humidity are high, workers feel lethargic and lose physical coordination
(Frimpong, Oluwoye and Crawford, 2003)
2.3.2. INADEQUATE PRODUCTION OF RAW MATERIALS BY THE
COUNTRY
Ogunlana, Krit and Vithool (2006) noted that the reason for shortage of materials
could be the defective supply of materials occasioned by general shortages in the
industry, poor communication amidst sites and head office, poor purchasing
planning and materials coordination. Nigeria still imports cement when her cement
production potentials surpass any other African country except Egypt and that the
100 % raw materials required for cement production, is readily available in Nigeria
(Eyo -Ita - Eyo, 2011)
13

14. 2.3.3. SUPPLIER MANIPULATION
The major reasons for this factor as observed by Manavazhi and Adhikari (2012)
are monopoly control of the market by some suppliers, work stoppages in factories,
lack of industrialized materials, fluctuating demands forcing suppliers to wait for
accumulation of orders and difficulty in importing raw materials from other
countries.
2.3.4. GOVERNMENT POLICIES
Aibinu and Jagboro (2012) revealed that Government deregulation policies aimed
at liberalizing the economy since 1986 are responsible for the instability in prices.
It is therefore not surprising that fluctuation claims during these periods contribute
significantly to additional cost.
2.3.5. Contractor’s cartel
According to Omole (2006), the major Projects like heavy engineering, super
highways and general infrastructure can only be undertaken in Nigeria by a few
contractors. These contractors know themselves and therefore an indirect cartel is
formed. The contractors on tendering are in a vantage position to decide amongst
themselves who gets which contract and at what price. What appears on tendering
to be the lowest tender may be over 20% - 30% above the actual value of the job.
14

15. 2.3.6. INCORRECT PLANNING
Incorrect planning is one of the most important factors that affect cost of
construction. Contractors must be aware of all resources that he might need for any
project. The contractors, also, should utilize all resources in an efficient manner.
Proper scheduling is the key to utilizing project resources, if not, the project cost
will increase.
2.3.7. DESIGN CHANGES
This problem arose form inadequate project planning and management of the
design process. A quite distinctive example is the progress of West African Gas
Pipeline (WAGP). Asamoah (2012) reported that WAGP project has suffered a
number of setbacks, culminating in the escalation of its cost from an initial US
$500 million. One of the problems includes the changing of the initial plans to lay
the pipeline offshore to an onshore configuration.
2.3.8. FRAUDULENT PRACTICES AND KICK BACKS
This factor was the second most important factor affecting cost in Nigeria as noted
by Elinwa and Silas (2009). Hussein (2008) also noted that fraudulent practices
and kick backs occasioned by greed are perpetrated by some major players in the
Oil industry. The perpetrators of this act in the industry are predominantly found
15

16. within the rank and file of contractors, consultants and public clients as evident
from the report published by TELL (2002).
2.3.9. POLITICAL INTERFERENCE
Omole (2006) reveals that 80 percent of the contractors in Nigeria are indigenous
companies. The government agencies, in most cases are teleguided by the political
heavy weight to award contract to party stalwarts at very high prices.
2.3.10. RELATIONSHIP BETWEEN MANAGEMENT AND LABOUR
There is always a gap between the project management and labour.
This gap should be kept as small as possible, so that the relationship between
management and labour may be strengthened. They should work as a team to build
a project with minimum cost.
2.3.11. CONTRACT MANAGEMENT
Poor contract could be attributed to the manner in which contracts are awarded. In
most cases Projects are awarded to the lowest bidder (Mansfield, Ugwu and Doran,
2008).
Some of these low bidders may lack management skills and have less regard for
contract plans, cost control, over all site management and resource allocation. As
we know in the case of Nigeria, contracts are usually awarded to politicians and
well connected individuals irrespective of the apparent deficiencies in their
relevant delivery potentials.
16

17. 2.3.12. LACK OF COORDINATION BETWEEN DESIGNER AND CONTRACTORS
Contractors construct the project according to the project design. Normally, if the
design has any mistakes, the contractors may apply the mistakes without knowing
there are mistakes or without notifying and coordinating with the designer or the
client.
2.3.13. COST OF MATERIALS
Material price is subject to supply and demand and is affected by many other
things, including quality, quantity, time, place, buyer and seller.
Other factors affecting material cost include: currency exchange, low or high
demand, material specification, inflation pressure and availability of new materials
in the country.
2.3.14. ADDITIONAL WORK
Additional work is related to design changes, which is due to lack of detailed
briefing on the functional and technical requirements of the Projects by the clients
(Mansfield et al, 2008).
2.3.15. POOR FINANCIAL CONTROL ON SITE
Controlling the project financially on site is not an easy task .All resources need to
be controlled: labour productivity, material availability, material waste, good and
effective methods, using effective tools, equipment, good project planning and
scheduling.
17

18. 2.3.16. DISPUTES ON SITE
Dispute is a major obstacle for any project. Normally disputes will exist if work
does not match the contract document or if work is not included in the contract
document. Any dispute will eventually delay the project and increase project cost.
2.3.17. FLUCTUATION OF PRICE OF MATERIALS
Omoregie and Radfort (2009) surveyed contractors, consultants and public clients
and revealed price fluctuation as the most severe cause of project cost escalation in
Nigeria. This could be attributed to the limitation in exchange rate which in turn
affects construction materials prices and the general price level.
2.3.18 CONTRACT PROCEDURE
The contract document is the ground rule between all parties (contractors,
consultants and clients).One part of the contract document is the contract
procedure.
The contract procedure shows the type of contract, payment procedure constraints
and regulations within the contract. The type of contract affects the Projects
because of the risk involved in some types of contract(i.e. lump sum).Unclear
contract procedures will lead to disputes, project delay and cost overrun (Fisk,
2012)
18

19. 2.3.19. WRONG METHOD OF ESTIMATION
This factor could be attributed to the unpredicted inflationary trend, lack of
adequate training and experience at the senior management level, and fraudulent
practices Mansfield et al (2008)
2.3.20. WASTE ON SITE
It seems that the little waste of construction material on site should have a very
minor effect on the total material cost. However, this minor effect can reach up to
50 % of the total material margin of a project. So waste on site has to be
considered on tendering any project (Elinwa and Silas, 2013)
2.3.21. TRANSPORTATION COST
As the government increases the price of fuel, transportation companies raise the
cost of their services to cover the fuel increase and that obviously translates to an
increase in transportation cost.
2.4 COST MANAGMENT
For a project, cost management is an extremely important element of project
management to run it successfully. The management of costs is commonly
reflected in company’s strategic goals, mission statements and business plans of a
project organization in many ways.
There are three main functions to support companies’ cost system performance.
19

20. First, financial reporting function which is the system that present production
expenses in reports covering each period of interest such as cost of goods sold and
in inventory. Secondly, cost system can give the employees and operators
economic feedback, such as process efficiency and expense control. Finally,
according to cost information, companies can estimate the costs of products,
services, activities and customers for better control.
2.4.1 DIRECT COSTS AND INDIRECT COSTS
Costs can be divided into two main types: direct costs and indirect costs.
1. Direct costs
Direct costs are directly generated by the project. The cost of labor and materials
could be the best examples of direct costs. Generally, labor costs are viewed as
direct cost because of its relevance to the workers who actually are involved in the
project.
However, some labor costs might not be considered as direct costs for the project
such as the costs of support personnel. For example, the costs of accountant or
consultants that come from other organizations may not be allocated directly and
integrated as a part of the project, especially when their duties are servicing or
monitoring something that could be seen as extra in some sense.
To a project, the direct cost of materials is easy to calculate, as long as the types of
material required to accomplish the project are known. For instance, the direct
20

21. costs of building a library or holding a party for 100 people can be estimated with
fair accuracy, meaning these costs can be pinpointed in the project directly in a
systematic way.
Historically, to some industries like manufacturing, the costs of two resources were
applied to Projects directly and those were material costs and labor costs. There are
some reasons why these resources were assigned directly. First of all, these kinds
of costs accounted for a great number of the costs of the final product. Second, the
perspective of scientific management movement believed that making the usage
and consumption of these expensive resources under control was seen as very
important.
Finally, it was easy to measure the consumption of these kinds of resources by
each product. These three characteristics can justified the measurement costs for
estimating how much materials and how much labor will be spent on each product.
2. Indirect cost
Indirect costs are generally linked to two features, overhead cost and selling and
general administration cost. The former refers to all sources of indirect materials,
utilities, taxes, insurances, properties and repairs, depreciation on equipment, and
health and retirement benefits for the labor force. They could be quite complicated
to estimate as the costs could derive from different Projects and different works
within a company. Selling and general administration costs usually refer to
21

22. advertising, shipping, salaries, sales and secretarial support, sales commissions and
similar costs.
Tracking and relating these costs to Projects is not nearly as forthright compared
with the direct costs, so the procedures applied are different from organization to
organization. Measurement approaches could include flat rate (such as a
percentage multiplier from 20% to over 50% on top of direct costs) which is a way
to estimate the cost relative to the direct costs of a project framed as overhead
costs, or a project-by-project-basis-measurement which is based on individual
analysis.
2.4.2 COST MANAGEMENT SYSTEM
The main purpose of the cost management system is to maximize profits. In order
to maximize profits, the company has to face and succeed competitions that come
from either domestic or international companies, and to develop themselves
continually. In a nutshell, the two primary objectives to provide a cost management
system are global competition and continuous improvement.
22

23. Figure 2.1 Cost Management Systems
As illustrated in figure1, a cost management system needs: support and
commitment from senior management; the workers involvement in different
positions; and a self-perpetuating system of improvement which might help the
company to improve value added activities and decrease non-value added
activities.
2.5 WAYS OF MINIMIZING COST
There are several ways in which cost of construction can be minimized. Fisk
(2013) reveals two cost reduction measures. The first is the application of a value
engineering concept, which aims at a careful analysis of each function and the
elimination or modification of anything that adds to the project cost without adding
to its functional capabilities. He argues that by carefully investigating costs,
23

24. availability of materials, construction methods, procurement costs, planning and
organizing, cost / benefit values and similar cost influencing items, an
improvement in the overall cost of project can be realized. The second is to provide
comprehensive and error free designs and specifications to avoid misinterpretations
by the contractor or delay due to missing details.
According to Cooke and Williams (2011) recommended as cost reduction
measures the elimination In addition, Ashworth (2010) observed that profitable
firms may be generating their revenues from the elimination of waste at both
professional and trade practice levels.
Cost reduction measures also include: establishing firmly the requirements and
features of the project at the onset before getting started, preparing the project team
to do its best by getting members to sign off on capabilities and responsibilities,
staying diligent about keeping the project the project on the right path through
contract clauses that disallow significant changes once the project is underway,
effective human resource management or minimization of design / specification,
delivery and site wastes through the formulation and implementation of effective
material policy and material management. Through effective motivation, and
project tracking involving discerning early what area or paths are leading to dead
ends and applying early corrective actions.
24

25. 2.6 COST PERFORMANCE
“Cost is among the major consideration throughout the project management life
cycle and can be regarded as one of the most important parameters of a project and
the driving force of project success” (Azhar et al., 2008: : 7). Gido and Clements
(2003) mentioned that cost performance is an effective technique in project
management effort expended and it is widely accepted in the literature and
industry. Earned Value Analysis (EVA) is used to evaluate cost performance of
different types of Projects. Cost control, cost estimating, and cost budgeting are
three cost related processes that interact among each other and with other scopes of
construction Projects.
Besides that, Gido and Clements (2003) stated that there are four cost-related
measures in cost performance analysis which are used to analyze cost performance
of a project. The measure is used to evaluate the project whether the project is
being performed within the budgeted cost or whether it is in line with the actual
cost. The four cost-related measures are TBC (total budgeted cost), CBC
(cumulative budgeted cost), CAC (cumulative actual cost), and CEV (cumulative
earned value). Normally, cost estimation will be made before start a project so that
it can be controlled within cost budget. A project may require more than one
person and may occur more than once during the life of a project which depending
on the complexity of the project. It may be very simple or extremely complex
25

26. when managing the cost of project. In project management, it should also consider
the needs of project stakeholders in the project cost (Gido antd Clements, 2003).
It found that it is important to studies more detail on costs of building and it is
agreed by Ashworth (2009) found that “cost studies of buildings consist of the
application of the techniques and expertise of economics to construction Projects ”.
Also, it is to ensure available resources are used efficiently and to increase the rate
of growth of construction work in the most efficient manner
2.7 COST OVERRUN
Cost overrun is a very common phenomenon and majority Projects in Oil industry
facing this problem. Cost overrun occurs when the final cost or expenditure of the
project exceeds the original estimation cost, Avots (2013). Angelo and Reina
(2012) pointed out that cost overrun is one of the main problems in Oil industry.
The problem may found in both developing and developed countries. This problem
is quite serious and futher study on this issue is needed to reduce the problems.
There are some factors contribute to cost overrun in Oil industry which are found
from the researchers’ study. The factors are as follow:
2.7.1 INACCURATE OR POOR ESTIMATION OF ORGINAL COST
Peeters and Madauss (2008) stated that the biggest factor that contributes to
overruns of budget is inaccurate estimation of original or initial cost of a project. It
26

27. is because of technical problem on how to estimate project costs and also not
enough project information in the early stage of project.
2.7.2 INFLATION OF PROJECT COST
Harrison (2008) stated that inflation of project costs cause increasing of costs.
Inflation of materials, equipments, and labours costs may vary geographically
within a country, from country to country, and contracts of subcontractors with
suppliers may involve different inflation protection terms that agreed with a client.
As inflation goes up, interest rates will go up and the costs will increase too.
2.7.3 IMPROPER PLANNING
According to Frimpong (2003), improper planning and management experience
limitation caused failures of using technical. The processes to produce a product
become slower and take longer period to complete the project.
2.7.4 FLUCTUATION IN PRICE OF RAW MATERIALS
Price fluctuation causes cost overruns in most cases where it is hard to estimate the
cost accurately because it is objective. This happen caused by high inflation of
price in developing countries or the speculation of suppliers (Long et al., 2008).
2.7.5 POOR PROJECT MANAGEMENT
Poor of site supervision and management and poor project management assistance
contribute to problem of cost overrun in construction Projects. Poor of site
27

28. management reflected the weakness and incompetency of contractors. Skilful and
experience human resource is insufficient in site management (Long et al., 2008).
2.7.6 LACK OF EXPERIENCE
Chan and Park (2005) found that most of the contractors are lack of experience
especially in financial management. The distribution of the costs do not plan well
in the Projects. It might cause over of costs budgeted.
2.7.7 OBSOLETE OR UNSUITABLE CONSTRUCTION EQUIPMENTS
AND METHOD
Obsolete and unsuitable equipments and methods cause the progress of
construction works become slower. Some countries try to import or transfer the
modern technology into their countries. However, the method is unsuccessful
because lack of skilful human to operate the technology (Long et al., 2004a).
2.7.8 UNFORESEEN SITE CONDITIONS
Nega (2008) found that actual site conditions of a project are not usually
determined until excavation is completed. It is sometimes possible that site
conditions are overlooked by the initial review or conditions have changed due to
change of weather conditions or subsoil conditions. The unexpected conditions on
sub surface sometimes require fundamental redesign of Projects with high expense.
Changes of site conditions become a problem for machinery and supplies to move
in and out of the site. This also increase costs required.
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29. 2.7.9 MISTAKE IN DESIGN
According to Long et al. (2008), mistakes in design or poor design are caused by
the low competence designer. The approval design or drawing process becomes
low quality and ineffective especially for those with government-funded Projects.
The unrealistic design which found after the start the construction Projects has to
change and it could lead to cost overrun.
2.7.10 INSUFFICIENT FUND
Long et al. (2008) noted that delay of the Projects followed by cost increasing to
cover all the expenses during construction. Owners are not preparing sufficient
fund for project and pay on time as shown in contract agreement to contractor.
2.7.11 POOR CONTRACT MANAGEMENT
Ogunlana and Olomolaiye (2009) mentioned that many contractors in developing
countries have organizes their own commercial undertaking. They are good in
managing expense because they are familiar with the business of making money.
They pay low wages, submit low bids and low ability to plan and coordinate
contracts. They do not follow the agreement that stated in contract.
2.7.12 HIGH COST OF MACHINERIES
Chan and Park (2005) found that high cost of machineries is one of the market
related problems. Oil industry is mainly market driven where it is influenced by
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30. current market style. For example, when the oil needed to run machineries
increasing, the rental cost of machineries also increasing.
2.7.13 COST UNDERESTIMATION
In order to get project approval for the project, some parties have deliberated
underestimating of costs for their project. It is quite serious situation that occurred
on some project (Nega, 2008).
2.7.14 MEASURES TO CONTROL COST
There are some measures which are found from the researchers’ study to control
the cost s or to overcome the problems of cost overruns. The researchers have their
own opinion on how to solve the problems. The measures are as below:
2.7.15 PROPER PPROJECT COSTING AND FINANCING
Kaliba et al. (2009) stated that delays of schedule may occur caused of delayed in
payments due to complex financial processes in client organisations. Delay in
payment would cause financial difficulties to contractors and subsequently delay
the schedule to complete the activities on site. Interest could be charged on delayed
payments hence inducing cost overruns in the project.
2.7.16 COMPETENT PERSONNEL
Kaliba et al. (2009) mentioned that contractors, consultants, and clients should
ensure that they have the right personnel with appropriate qualifications to manage
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31. their Projects efficiently. It is better if construction manager have experience and
qualifications in project or construction management.
2.7.17 APPROPRIATE SCOPE DEFINITION
Nega (2008) agreed that only concern on the works required completing the project
successfully. Guard against incomplete identification of scope is important to avoid
frequent changes. Also, do not incorporate the works out of scope to avoid
unnecessary works.
2.7.18 PROPER COST CONTROL
Ashworth (2009) mentioned that one of the client’s requirements in respect of
construction project is assessment of its expected cost. Proper cost control is
important as it is the general trend towards greater cost-effectiveness and ensures
costs not solely in the context of initial costs, but in terms of life-cycle costs or
total cost appraisal.
2.7.19 RISK MANAGEMENT DURING PROJECT EXECUTION
Peeters and Madauss (2008) found out some approach to avoid cost overruns. In
any development project, there must be contain certain amount of risks. Therefore,
a risk management function needed to be performed by project manager to
determine and reduce the risks of the particular project. The aim of risk
management is to minimise any risk that might result failure to meet the project
requirements.
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32. 2.8 COST AND TIME GROWTH OF PROJECT CONSTRUCTION
Construction projects are notorious for running over budget and time Hester et
al.2011; Zeitoun and Oberlander 2013; Ibbs and Allen 2005. Change orders have
been found to be a major contributor to time and cost overruns Jahren and Ashe
2009, yet the impact that rework has on the cost and time performance of projects
remains unexplored in the construction management literature. Hence, supervisors
always learn details of projects so that cost and schedule growth could be
calculated for each project.
2.9 FORECASTING OF COST AND TIME IN OIL INDUSTRY
The nature of Oil industry is to be profitable in extremely competitive
environment. More specifically, the construction environment is continuously
changing and resulted to uncertain variable in project data. As a consequence,
Project Manager faced with performance problem in determining the accurate
project performance. In attempting to gain better profits, Project Manager needs to
make timely and informed decision. However, today’s deficiencies in monitoring
and control of project operation unable Project Manager to manage project
effectively and resulted to major cause of project failure (Al-Tabtabai 2006). When
controlling project performance, Project Manager should not only monitor cost and
time variances for actual project progress, but also to properly establish the actual
project status based on objective predictions of final project performance. At
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33. completion project performance can be predicted by comparing estimates of
planned total budget and final duration with their respective most likely forecasted
values (Ahuja et al. 2011). This, however, are necessary for Project Manager to
determine if corrective actions are required to minimize the expected variances
from planned performance Thus, forecasting is needed to predict the project
performance at completion based on current performance.
2.10 SIGNIFICANCE OF COST AND TIME FORECASTING IN THE OIL
INDUSTRY
In reality, the original estimates may be considered the first project forecast and, at
the point of project completion, the latest updated estimate (last forecast) and the
actual amount of what is being expended should be the same (Barazza et al 2004).
In controlling a construction project, Project Manager should understand the
importance of using project baselines which serves as a benchmark. This is to
ensure the project is running smoothly and early indication on deficiencies of
project can be identified. Thus, necessary corrective action can be made in due
time.
In current practice, project baselines or planned S-Curves is used to determine
variances in cost or schedule and to measure the earned value. In this context, it
explains why this method is widely used in Oil industry to measure the
performance of Projects. One of the advantages of this method is that it can
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34. identify any cost and schedule variances at the end of the project. However, there
is still lacked within this method of providing corrective action plans if negative
variances is identified. Therefore, the needs of forecasting performance variances
at completion is necessary to Project Manager in order to decide the suitable
corrective action plans and the effect on final project performance (Crandall et al
1982).
2.11 PROJECT TIME-COST RELATIONSHIP
Total project costs include both direct costs and indirect costs of performing the
activities of the project. Direct costs for the project include the costs of materials,
labor, equipment, and subcontractors. Indirect costs, on the other hand, are the
necessary costs of doing work which cannot be related to a particular activity, and
in some cases cannot be related to a specific project (Davison 2003).
If each activity was scheduled for the duration that resulted in the minimum direct
cost in this way, the time to complete the entire project might be too long and
substantial penalties associated with the late project completion might be incurred
(Dlakwa 2008). Thus, planners perform what is called time-cost trade-off analysis
to shorten the project duration. This can be done by selecting some activities on the
critical path to shorten their duration.
As the direct cost for the project equals the sum of the direct costs of its activities,
then the project direct cost will increase by decreasing its duration. On the other
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35. hand, the indirect cost will decrease by decreasing the project duration, as the
indirect cost are almost a linear function with the project duration (Khalil et al
2097).
2.12 REWORK COSTS
Various interpretations of rework can be found in the construction management
literature. For example, terms such as quality deviations Burati et al. 2007,
nonconformances Abdul-Rahman 2008, defects Josephson and Hammarlund
2009 !, and quality failures Barber et al. 2007 are often used, though these
definitions vary. Ashford 2012 defines rework as ‘‘the process by which an item is
made to conform to the original requirement by completion or correction.’’ The Oil
industry Development Agency 1995, however, defined rework as ‘‘doing
something at least one extra time due to nonconformance to requirements.’’
Essentially, rework can result from errors, omissions, failures, damage, and change
orders throughout the procurement process Love et al. 2006; Love and Li 2008.
Josephson and Hammarlund 2009 reported that the costs of residential, industrial,
and commercial projects range from 2 to 6% of their contract values. Similarly,
Love and Li 2008 in their study of rework costs for a residential and industrial
building found the costs of rework to be 3.15 and 2.40% of contract value,
respectively. In addition, Love and Li 2008 found that when a contractor
implemented a quality assurance system in conjunction with an effective
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36. continuous improvement strategy, rework costs were found to be less than 1% of
the contract value. The costs of quality deviations in civil and heavy industrial
engineering projects, however, have been found to be significantly higher. Burati
et al. 2007 studied nine major engineering projects to determine the cost associated
with correcting deviations to meet specified requirements. The results of their
study indicated that, for all nine projects, quality deviations accounted for an
average of 12.4% of the contract value. A significantly lower figure was reported
by Abdul-Rahman 2008, who found nonconformance costs excluding material
wastage and head office overheads! in a highway project to be 5% of the contract
value. Abdul-Rahman 2008 specifically makes the point that the nonconformance
costs may be significantly higher in projects where poor quality management is
implemented.
Notably, Nyle´n 2006 found that when poor quality management practices were
implemented in a railway project, quality failures were found to be 10% of the
contract value. Nyle´n 2006 further found that 10% of the quality failures
experienced accounted for 90% of their total cost. Here, significant proportions
76% of the quality failures were attributable to design-related issues, such as
erroneous documentation and poor communication between project team members.
As mentioned above, rework can also originate from change orders Knocke 2009;
Love and Li 2008. However, the extent to which change orders contribute to
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37. rework costs remains relatively unexplored. Research undertaken by Zeitoun and
Oberlander 2011 found that the median costs of change orders for 71 fixed price
projects were 5.3% of the contract value and 6.8% for 35 cost reimbursable
Projects . Similarly, research undertaken by Cox et al. 2009 in the U.K. revealed
that the costs of design-related change orders could range from 5 to 8% of the
contract value, even when projects are managed effectively, as most of the changes
are initiated by clients. The costs of change orders in the research reported by
Zeitoun and Oberlander 2011 and Cox et al. 2009 are similar to the rework costs
previously reported. A degree of change can be, and to a certain extent, should be
expected in construction, as it is difficult for clients to visualize the end product
that they procure. However, almost all forms of rework with the exception of that
caused by weather are preventable, since poor management of the design and
construction process typically causes such costs to occur.
2.13 IMPACT OF COST CONSIDERATION
When a modification is directed, the settlement of that modification includes not
only the cost and time change of the work directly affected but also the cost and
time impact on the unchanged work. The impact portion on unchanged work of a
modification is very difficult to determine. The scope of impact is very broad,
intangible, and susceptible to a large variety of situations (Ogunlana and
Olomolaiye 2008). Both continue to add that by far the greatest portion of impact
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38. costs results from acceleration or delays. In general, when delay effect can be
minimized, impact costs are reduced. Through the present, at least, impact costs
have been determined on a case-by-case basis for each particular situation. Very
few claims for impact are denied in their entirety. It is, therefore, necessary that the
claim be reviewed for validity by a team involving all-around expertise.
Impact costs are generally first presented by the contractor as "claimed" impact
cost as part of the proposal. The support for such “claimed” cost should also be
obtained and includes narrative, calculations, and planned rescheduling. To
determine the extent of the impact, the existing network schedule furnished by the
contractor must be developed to reflect actual construction as accurately as
possible. The modification work must be superimposed upon the original network
schedule in such a manner to minimize delay under the given requirements. The
revised network must then be thoroughly reviewed relative to the existing job plan
(Davison 2003).
This comparative review should indicate those areas that have been affected by the
modification. Once identified, each construction task must be analyzed for impact
and estimated judgmentally considering the influences caused by the change. Each
impact cost claimed should be classified as either factual or judgmental. The
factual costs are those which are fixed and established and can be determined
directly from records. These include rental agreements, wage rate agreements,
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39. purchase documents, etc. Once the item has been determined to be valid as a
factual impact, the item cost may be directly calculated. The amount of cost change
is either stated on the certification document or can be determined from the
scheduled time change of the construction progress plan (Christensen et al 2005).
Impact costs considered factual:
• Escalation of material prices
• Escalation of labor wage rates
• Change in equipment rates
• Increase from extending the storage period for materials and equipment
• Increase from extending the contract for labor cost and subsistence
• Increase from a longer period of equipment rentals or use
• Increase from a longer period of utilizing overhead personnel, materials, and
utilities
• Increase from a longer period of providing overhead and project office services
Judgmental costs are those that are dependent on variable factors such as
performance, efficiency, or methodology and cannot be stated factually prior to
actual accomplishment. These must be negotiated and be based upon experienced
judgments. Judgment or costs can be challenged but cannot be found erroneous if
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40. based on reasonable judgments of the conditions. Since judgmental factors appear
in the Government estimate and the contractor's proposal, results of negotiations
often depends on credibility and clarity of support documentation. When each
impacted activity can be analyzed for cost separately, the estimate of impact should
be prepared accordingly. However, sometimes the impact items are so interrelated
that it is best to develop a detailed plan for accomplishing the total remaining
revised contract work (Davison 2003).
Each remaining item in this plan would be coasted at the productivity and rate in
effect at the time the work is to be accomplished and the cost incurred. The same
scope of work under the original plan would also be separately costed at the
productivity and rates in effect at the originally scheduled time. The net difference
from the totals of these two estimates yields the cost of impact. Whatever the
method used, those impacts determined valid must be included and costed by the
most accurate method available. The estimator should avoid including questionable
impact costs in the initial government estimate unless each has been found to be
justifiable (Dawood et al 2007).
2.14 SUMMARY
In conclusion, the main factor affecting cost of construction as opined by the three
key players in the Oil industry is cost of materials. Since Quantity Surveyors are
cost experts they are in the unique position to examine these factors and take care
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41. to estimate, include contingencies in the budget, plan for, and mitigate the adverse
effects of these factors on the project cost. Clients, Contractors and Consultants
should give an economic approach to construction work such that they would be
able to identify the dominating factors leading to high cost of construction in
Nigeria and apply the proffered solutions to minimizing same so as to restore
client’s confidence in consultants, reduce investment risks, and generally boost the
viability and sustainability of the industry.
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