ENGINEER - Vol. L, No. 04, pp.

[53-60], 2017
© The Institution of Engineers, Sri Lanka http://doi.org/10.4038/engineer.v50i4.7275

Impact of Cost Control Techniques on Cost Overruns in

Construction Projects
S.N. Malkanthi, A.G.D. Premalal and R.K.P.C.B. Mudalige

Abstract: Construction industry plays an important role in the development of a country. The
success of any project will depends on how that project can achieve its objectives in terms of cost, quality
and duration. In order to achieve success in a project, it would be essential to plan that project well and
have a proper monitoring mechanism in place. Cost overrun is a major problem encountered by many
contractors as it makes the profit of a project less secure for the contractor in addition to causing many
other problems to all the parties involved. Good cost control techniques would be essential to solve those
problems. Thus, it is important to identify cost controlling techniques and their impact on cost overruns.
This study was done using a questionnaire survey conducted among C1-C5 grade contractors. The data
collected were analysed by converting them into quantitative values using percentage analysis and
weighted score analysis. The results indicate the cost controlling practices that are in frequent use and their
importance in minimizing the cost overruns in order to reduce over budget and overheads while securing
anticipated profits. Finally, it is suggested that CIDA (ICTAD) should encourage contractors to use cost
controlling techniques, by conducting training programs, awareness programs, etc. It is also suggested to
make the use of some of ICTAD documents mandatory.
Keywords: Cost overrun, cost controlling techniques, impact to project budget

1. Introduction the important aspects of a project such as the

Project planning cannot be completed selection of an appropriate method of cost
satisfactorily through planning and scheduling controlling, time of applying the technique, etc.
only. Project controlling which consists of Therefore, it will be essential for the
project monitoring and updating is the other construction industry today to use proper
important activity that can be carried out to project cost controlling. However, the relevant
accommodate the dynamic nature of bodies such as ICTAD, Ministry of Housing
construction work. Without proper control, and Construction etc., have not yet made the
even a well-planned and scheduled required rules and regulations or included
construction system can cause problems, appropriate clauses in their conditions of
delays and cost overruns. In general, most (if contract to overcome this problem. Thus, this
not all) construction projects experience time research topic was timely to address the above
delays and cost overruns during their mentioned problems. Through this research, it
implementation. Cost overruns are considered was expected to provide an in-depth
as one of the most critical issues encountered knowledge on how to follow good monitoring
during the execution of construction projects programs and cost controlling techniques in
(Susana, 2012). the construction industry.
Project control includes both progress control Given that background, the research objectives
and cost control. This research mainly of this study were set out to identify the cost
concentrated on cost control. As at present, the
construction industry is using different cost
Eng. (Mrs.) S.N. Malkanthi, AMIE(Sri Lanka),
control techniques. It is good to have B.Sc.Eng.(Hons)(Moratuwa), M.Eng. (Tokyo), Senior
knowledge on the effectiveness of those cost Lecturer, Dept of Civil & Environmental Engineering,
control techniques from the point of view of University of Ruhuna.
Email:[email protected]
contractors and how to use those techniques to Eng. A.G.D. Premalal, AMIE(Sri Lanka),
minimize cost overruns. B.Sc.Eng.(Hons)(Ruhuna), Civil Engineer, Central
The control of project cost is not an easy task as Engineering Services Limited.
Email:[email protected]
it requires knowledge on the application of cost Eng. R.K.P.C.B. Mudalige, B.Sc.Eng.(Hons)(Ruhuna),
controlling techniques. Therefore professionals Civil Engineer, Link Engineering (Pvt) Limited
working in the construction industry are Email:[email protected]
required to have theoretical knowledge on cost
controlling techniques. The project manager/
planning engineer or any other related
professional has to have an understanding on

53 ENGINEER
controlling techniques frequently used by techniques mentioned in the PMBOK are earned
contractors in the construction industry and to value management, to-complete index,
identify the impact of cost controlling techniques forecasting, variance analysis, and performance
on cost overruns. The research scope was limited reviews.
to C1-C5 contractors engaged in building projects.
Of the above techniques, earn value management
is one of the main techniques. The earn value
2. Literature Review system was firstly used by the Department of
Defence of the United States. There are some basic
The three elements or processes involved in cost steps as indicated below which have to be
management; namely cost estimating, cost followed before applying this theory (Liang,
budgeting and cost controlling (Owens et al., 2006) 2005).
are shown in Table 1.
 Divide the project into manageable parts of
Table 1 - Cost management elements authorized work for which there has to be work
breakdown structures (WBSs).
Element Description  Define the WBSs in such a way that each
Developing estimates and activity can be allocated a duration of time and
Cost measurements for the costs a cost, for its completion.
needed for a resource to  Allocate cost and effort to all parts across the
estimating complete the project tasks and entire project-essentially to establish a baseline.
activities.
Cost overrun of a project is simply defined as
Cost Collecting the cost estimates, exceeding the budgeted margin of the project.
combining them to develop an According to Nida & Azhar, (2008), there are 42
budgeting
overall cost and baseline. main factors affecting the cost overruns in the
Cost Managing and controlling construction industry in Pakistan. Price
factors that change or affect fluctuations of raw materials, modes of financing
controlling and payments for completed work, frequent
the budget.
design changes, high cost of machinery, improper
Management of construction cost is one of the planning, high interest rates charged by bankers
important tasks for achieving a successful project on loans given to contractors, unstable costs of the
completion. Unfortunately, it is very seldom that manufacturing materials, and the long period
effective cost management could be achieved and between designing & time of bidding/tendering
often a significant amount of cost overrun has to are some of these factors.
be experienced (Aris et al., 2013). Thus, the
According to ICTAD (CIDA) there have to be
availability of an accurate project estimates and a
several documents to maintain records for
project budget will be essential if the project is to
controlling the costs incurred to enable their
be delivered within the project budget. That
comparison with planned costs. Some of these
estimation and planning have to be done at the
documents which have been already published by
planning stage. By failing to keep an eye on the
ICTAD are as follows (ICTAD/CM/01): -
actual costs while the project is in progress, the
completion of the project within the budget will
 Unit cost sheet
not be possible (Susana, 2012).
 Weekly statement of direct labour cost
However, the poor cost performance of  Weekly statement of machinery hiring cost
construction projects is a common problem  Weekly statement of material cost
worldwide resulting in a significant amount of  Weekly statement of labour
cost overruns (Aris et al., 2013). The problem with subcontractor’s payments
cost control is not actually the techniques that are  Monthly statement of overhead costs
used, but rather the poor management of those  Monthly cost summary
techniques and the laxity in supervision  Weekly statement of output of works
(ICTAD/CM/01). (Value of work)
‘Project Management Book of Knowledge  Contractor’s monthly cost control table
(PMBOK)’ has explained some techniques which  Contractor’s monthly cost control chart
would be useful for monitoring and controlling
construction projects. Some of the advanced

ENGINEER 54
 It would be worthwhile to identify from among The data that were gathered were analysed using
the above mentioned documents, the documents Microsoft Excel. Graphs and bar charts were
that need improvements and the new techniques drawn using the information received for each
that need to be added to those documents. question. Most of the results were presented along
with the relevant number of responses received
3. Methodology expressed as a percentage of the total number of
This research depended on both qualitative and responses and it was presumed that the most
quantitative information obtained through a accurate answers were given by those
questionnaire survey conducted among representing the highest percentage.
professionals working at the level of project In some cases, relative index methods were
managers, site managers, etc., in the construction applied to ascertain the importance of the factors
industry. concerned. A five-point scale was used to calculate
The questionnaire was developed based on the the relative index. (very important-5 points,
information gathered during the preliminary important-4 points, fairly important-3 points, less
survey which was in the form of onsite important-2 points, not important-1 points). By
interviews. comparing the relative index values obtained for
different factors, the most critical factor could be
The preliminary questionnaire was prepared identified.
using the knowledge gained from the literature
review. The preliminary survey was conducted
4. Results and Discussion
as an open-ended interview based on the
The survey started by identifying the respondents’
preliminary questionnaire. It was useful in fine
backgrounds such as their experiences in terms of
tuning the final questionnaire and getting the
years and the number of projects in which they
involvement of the professionals working in
have been involved. It helped to ensure that the
construction sites.
data collected were reliable. The research was
At present, there are more than 1000 contractors mainly focussed on finding out the degree of
registered with the ICTAD under C1 to C10 understanding that the contractors had on cost
grades. The research scope was defined to get control methods. Figure 1 shows the results
information only for C1 to C5 grades. Sample size obtained which indicate that 67% of the
was selected thereafter considering the statistical contractors believe that they have more than 75%
approaches explained below and it was decided knowledge on cost control systems.
to consider a minimum of 23 contractors.
By using Chi-Squared Distribution
s = X2×N×P× (1− P) ÷ (d2 (N −1) + X2×P× (1− P))
s = required sample size
X2 = the table value of chi-square for 1 degree of 0% 100%
freedom at the desired confidence level with a 33% 75%-100%
value of 3.8415 (using statistical tables)
N = population size = 512 50%-75%
67%
P = population proportion (assumed to be .50 25%-50%
since this would provide the maximum sample
size)
d = degree of accuracy expressed as a proportion
of its value = 0.2

Margin of error = 20% Figure 1 - Contractors’ understanding about cost

Confidence interval = 95% control system
α = 0.05 and ν = 1
Hence, Survey results show that most of the contractors in
Required sample size = general are aware of the cost control techniques
3.8415 ×512 ×0.5 ×(1−0.5) that are available in the construction industry
= 22.977 ≈ 23
0.2 ×0.2 ×(512−1)+3.8415 × 0.5 ×(1−0.5) although their proper use was not much evident.
Cost control techniques were identified as a tool
The questionnaires were distributed at the for reducing cost overruns. MS Project, earn value
interviews and also sent through Google forms. management,

55 ENGINEER
and daily material & labour controlling are the The survey focused on the awareness of
cost control techniques that were identified as contractors about the ICTAD guidelines related
those that are currently being used by the to cost controlling. The results show that less than
contractors. Figure 2 gives the summary of the cost 50% of the contractors are not aware about those
control techniques that are being presently guidelines. Most of the contractors, however,
practiced. believe that important documents which at
present are mentioned as ICTAD guidelines
The contractors agreed that MS Project and earn
should be included in the conditions of contract
value analysis are the most important techniques
as a recommendation. Responses received in this
available for cost controlling. Although daily
regard are shown in Table 2.
material and labour controlling have been used as
Relative Index method was used to identify the
cost controlling techniques, they are not within the
critical factors that affect cost overruns. The key
scope of this research. It will be important if this
factor among them was the shortage of material,
factor can also be incorporated into MS Project
labour or mechanical plants which could be
software. Contractors who had already adopted
overcome by using the above-mentioned ICTAD
these techniques said that ease of monitoring and
guidelines. The responses received regarding
user friendliness are the factors that most
these problems causing cost overruns are shown
influenced them to use those techniques. Lack of
in Figure 3.
practices and lack of expertise are the main
barriers that prevent contractors from using them.
The contractors also suggested that ICTAD should
conduct regular training programs on these
techniques.

PERFORMANCE REVIEW 0.0

VARIANCE ANALYSIS 12.5
FORECASTING 12.5
TO-COMPLETE… 0.0
EARNED VALUE… 16.7
DAILY MATERIAL AND… 54.2
MS PROJECT 91.7

0.0 20.0 40.0 60.0 80.0 100.0

Figure 2 - Current practices of cost control techniques

Table 2 - Documents that contractors prefer to include in the conditions of contract

Preferred ICTAD(CIDA) documents Percentage
Unit cost sheet 12.5
Weekly statement of direct labour cost 41.7
Weekly statements of machinery hire cost 41.7
Weekly statement of material cost 33.3
Weekly statement of labour subcontractor’s
33.3
payments
Monthly statement of overhead cost 16.7
Monthly cost summery 58.3
Weekly statement of output of works (Value of
8.3
work)
Contractor’s monthly cost control table 8.3
Contractor’s monthly cost control chart 12.5

ENGINEER 56
Most of the contractors said that their project second only to material wastage (Figure 5). This
costs are over budgeted by about 25% (Figure indicates that, by using a proper project
4) due to many reasons. Among those reasons, controlling techniques, over budgeting can be
the lack of daily monitoring is found to be significantly reduced.

Relative Index
[LONG PERIOD BETWEEN DESIGN AND TIME OF… 3.91
[LOWEST BIDDING PROCUREMENT METHOD] 3.41
[INAPPROPRIATE GOVERNMENT POLICIES] 3.27
[HIGH COST OF MACHINERIES] 3.67
[WRONG METHOD OF COST ESTIMATION] 3.83
[IMPROPER PLANNING] 3.80
[FLUCTUATION IN PRICES OF RAW MATERIALS] 3.96
[POOR PROJECT (SITE) MANAGEMENT AND … 3.80
[DESIGN CHANGES AND DOCUMENTATION] 3.95
[EVER-CHANGING ENVIRONMENT OF… 3.95
[DURATION OF THE PROJECT.] 4.11
[QUALIFIED EXPERTISE.] 3.86
[ADDITIONAL COSTS TO CARRY OUT THE SYSTEM] 3.90
[DIFFICULTY IN COLLECTION OF STANDARD DATA.] 4.11
[SHORTAGE OF MATERIAL, LABOR OR… 4.26

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50

Figure 3 - Problems faced by contractors in controlling the costs on site

90%
78%
80%
70%
60%
50%
40%
30%
18%
20%
10% 4%
0% 0%
0%
100% 75%-100% 50%-75% 25%-50% 0-25%

Figure 4 - Over budget percentages

57 ENGINEER
Corrective measures were identified for over be recorded and it appeared that they will start a
budgeting of projects. Answers received from new project, as a completely new one. However,
the respondents were based on their experience there were some contractors who used their past
in overcoming cost overruns and in the lessons to make their current projects successful.
methods suggested to overcome the cost
overruns. Most of the contractors suggested the Many contractors tend to include a high-profit
daily monitoring of progress using MS project margin in the budget. If there is a method to
as the most preferable method (Figure 6). reduce this profit margin, it would be beneficial
not only to contractors but also to the client as
Many contractors do not use the lessons they well. Through this study, the reasons that compel
learned from their previous projects to ensure the contractors to increase the profit margin were
the success of their current projects because identified. Those reasons and contractors’
most of them do not use project management responses are shown in Figure 7.
systems. Thus, the past experiences could not

OVERHEAD INCREASE 37.5

TENDERING INEFFICIENCIES
33.3
(NO ADEQUATE RATES ETC.)

LABOUR MACHINE IDLING 37.5

MATERIAL WASTAGE 66.7

LACK OF DAILY MONITORING 41.7

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Figure 5 - Reasons for over budgeting

56%

27%
17%

Daily Monitoring Following ICTAD Forms Using earn value theory

progress by using MS of maintain cost records
project

Figure 6 - Corrective measures that can control over budget

ENGINEER 58
 DESIGN CHANGES 25.0

TENDERING INEFFICIENCIES 33.3

COMPENSATE THE OVERHEAD
33.3
INCREASE
TO COMPENSATE THE INCREASE
45.8
OF MATERIAL AND LABOUR…
LACK OF USAGE IN COST
58.3
CONTROL TECHNIQUES AND…
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0

Figure 7 - Reasons for increasing the profit margin

0%-25% 29.2

25%-50% 33.3

50%-75% 12.5

75%-100% 8.3

100% 0.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Figure 8 - Percentage overhead reduction due to cost controlling

According to the results shown in Figure 7, lack 5. Conclusions

of cost control techniques and monitoring is the
most critical factor will contribute to the According to the responses received, although
increase in the profit margin of a project. Thus, there are techniques to minimize cost overruns,
better cost control is essential for reducing the the contractors are not inclined to properly
profit margin. Compensation of the increase in implement them due to lack of resources. Even
the material and labor cost is the next reason for though contractors have been provided with
the increase in the profit margin. guidelines by ICTAD (CIDA), the majority do
not follow them according to the results
As shown in Figure 8, most of the contractors obtained.
also experienced a reduction in project
overheads through the use of cost controlling The contractors considered some of the
techniques. documents made available by ICTAD very
important. Hence, the authors would suggest
Based on their experience, most of the that the documents mentioned below be made
contractors believe that they can reduce about compulsory.
50% of their overhead cost by using proper cost
controlling techniques. Some contractors have  Monthly cost summary sheet.
already achieved more than 50% overhead  Weekly statement of machinery hiring
reduction through cost controlling techniques. cost sheet.
Thus, a proper cost controlling can be  Weekly statement of direct labor cost
considered as an essential component in the sheet.
construction industry.

59 ENGINEER
From the survey results, it can be concluded 4. LIANG, W. K., Cost control in construction
that the following are the most important cost project of the site, 2005.
controlling techniques:
5. Nida & Azhar, Cost Overrun Factors In
Construction Industry of Pakistan. First
 MS Project International Conference on Construction in
 Daily material and labor controlling Developing Countries, Advancing and
Integrating Construction Education, Research &
 Earn value management Practice, Karachi, Pakistan, August, 2008.
The barriers that impede the implementation of
6. Owens Jason, Scott Burke, Matthew
those techniques and the responses of the
Krynovich & DJ Mance, Project Cost Control
survey respondents about how those barriers Tools & Techniques, 2007.
could be overcome have already been
explained. The most important solutions 7. Paula, R. & Alfredo, S., Adding Qualitative
suggested by the contractors with regards to Context Factors to Analogy Estimating of
the action required by ICTAD (conditions of Construction Projects, Procedia- Social and
contract) are summarized below. Behavioural Science, Vol 74, pp 190-202, 2013.

 Conduct awareness programs on the 8. Project Management Body of

importance of MS project and earn Knowledge (PMBOK Guide),5th Edition,
Project Management Institute.
value management.
 Provide updates regularly through 9. Susana Gomes Arcila, Avoiding Cost
workshops, seminars, etc. Overruns In Construction Projects In The
 Train the responsible professionals. United Kingdom, Nature, 362(6420), pp 486-
486, 2012.
Further research can be done to validate the
conclusions of this research by considering C6
to C10 contractors and all of projects as well.
The authors believe that by following the
guidelines presented in this paper, it would be
possible to the contractors to complete their
projects successfully by ensuring their
anticipated profits.

Acknowledgement

Authors wish to acknowledge the assistance

given by all the professionals working in the
construction companies from whom they
collected the data for this research.

References
1. Azis A. A. A., Memon A., Rahman I. A, Karim
A.T.A., Controlling Cost Overrun Factors in
Construction Projects in Malaysia, Research
Journal of Applied Sciences, Engineering and
Technology, pp 2621-2629, 2013.

2. George Otim, Fiona Nakacwa, Michael

Kyakula, “Cost Control Techniques Used On
Building Construction Sites in Uganda”
Second International Conference on
Advances in Engineering and Technology, pp
267-373, 2011.

3. Guidelines for Effective Construction

Management, ICTAD Publication,
ICTAD/CM/01.

ENGINEER 60