Investigating the key risk factors affecting project cost overruns: a contractor’s perspective

Robertson AndrewStudent: Andrew Robertson
Year: 2015
Affiliation: University of South Australia
Level: Undergraduate
Thesis written in English

Cost overruns are a common encounter for contractors undertaking lump sum procured, commercial construction projects within the South Australian industry. This research endeavoured to investigate, identify and explore the contractor’s perception of the key risk factors contributing to these cost overruns. Then investigate how these risk factors are identified and the responses taken in mitigating their effects.
A semi-structured interview developed through findings of previous literature was conducted to gain a broader understanding of the subject area and source comprehensive data, relevant to the specific parameters of this research. The data was then utilised in the design of the subsequent questionnaire survey, with a list of risk factors shortlisted for further refinement. The questionnaire surveys were then distributed to industry and the results analysed. The perceived importance ranks of the surveyed risk factors were explored using the “Relative Importance Index” technique before cross comparing the results of independent variable groups created by categorising participant responses according to their demographical data, using “Spearman’s Rank Correlation Coefficient”. The trends in participant attitudes toward the risk response for each risk factor were then calculated and expressed as a percentage. Further questions were directed at gaining insight into the extent of Risk Management use, risk identification methods and how risk is accounted for in tender estimates by contractors.
The research findings revealed a general belief that contractor cost overruns are a common occurrence in South Australia, highlighting “accurate project scoping”, “budget management”, “disputes on variations”, “programming” and “omissions in estimates” to be the most critical contributing risk factors. The results further concluded the perceptions on the criticality of these risk factors to be similar across industry, regardless of the value of projects people are involved with or the years of experience they have in industry. Further analysis of the results showed a significant amount of variation in the choice of response strategies used by contractors to each of the surveyed risk factors. Interestingly, the results also highlighted the contractor response considered the most appropriate to four out of the five toped ranked risk factors to be “retain/ accept” the risk. The result indicating justification for their high ranking. Furthermore, it was revealed that “transferring” risk is broadly considered as an appropriate response strategy to the risk of “latent conditions and incomplete” or “insufficient tender documents”. Results on the accounting of risk in tender estimates has revealed a lack of formal risk exposure analysis supporting cost estimates or contingencies allowances. It has been further revealed that the current market condition have increased contractors “risk appetite”, directly affected their inclusion of risk in tender cost estimates. The extent of formal approaches to Risk Management procedures in the South Australian construction industry has been concluded as significantly low. However, research findings have shown the informal methods and procedures adopted by contractors to closely follow the fundamental steps of a formal Risk Management process. The most influential aspect in a contractor’s ability to take this informal approach is considered to be professional judgement supported by experience.
Organisations seeking to reduce risk exposure and the likelihood of cost overruns may find this framework as a useful guide to the management of risk in construction projects.




LinkedIn logoContact Andrew