FACTORS AFFECTING CONSTRUCTION COSTS FACTORS AFFECTING CONSTRUCTION COSTS IN SAUDI ARABIAIN SAUDI ARABIA

ByBy

Yaser Abdulla Al-JuwairahYaser Abdulla Al-Juwairah

Presented byPresented by

Shaikh Imran Abdul Shaikh Imran Abdul Qayyum GaniQayyum Gani

TABLE OF CONTENTSTABLE OF CONTENTS

INTRODUCTIONINTRODUCTION OBJECTIVESOBJECTIVES SCOPE AND LIMITATIONSSCOPE AND LIMITATIONS RESEARCH METHODOLOGYRESEARCH METHODOLOGY DATA COLLECTIONDATA COLLECTION DATA ANALYSISDATA ANALYSIS CONCLUSIONSCONCLUSIONS RECOMMENDATIONSRECOMMENDATIONS

INTRODUCTIONINTRODUCTION

The Demand for more construction of all types, coupled with a The Demand for more construction of all types, coupled with a tight monetary supply, provide the construction industry with tight monetary supply, provide the construction industry with a bigger challenge to cut costs.a bigger challenge to cut costs.

However, little has been done to minimize the problem.However, little has been done to minimize the problem.

Consequently, substantial increases are observed in project Consequently, substantial increases are observed in project costs.costs.

Therefore, it is important to identify the main dominating Therefore, it is important to identify the main dominating factors leading to high construction cost so that efforts can be factors leading to high construction cost so that efforts can be concentrated on those factors in order to reduce construction concentrated on those factors in order to reduce construction cost in Saudi Arabia.cost in Saudi Arabia.

OBJECTIVESOBJECTIVES

The main objectives of this study are as follows :-The main objectives of this study are as follows :- To identify the factors affecting construction costs of large To identify the factors affecting construction costs of large

projects in the Eastern Province of Saudi Arabia. The projects in the Eastern Province of Saudi Arabia. The research will answer the following questions,research will answer the following questions,

• What are the cost factors ranking according to What are the cost factors ranking according to contractors?contractors?

• What are the cost factors ranking according to What are the cost factors ranking according to consultants?consultants?

• What are the cost factors ranking according to What are the cost factors ranking according to

owners?owners?

CONTD….CONTD….

To find the agreement ranking factors between To find the agreement ranking factors between contractors/owners and consultants/owners.contractors/owners and consultants/owners.

To test the hypothesis that contractors, owners and To test the hypothesis that contractors, owners and consultants, generally agree on the severity rank of the factors.consultants, generally agree on the severity rank of the factors.

SCOPE AND LIMITATIONSSCOPE AND LIMITATIONS

This study is limited to large projects in the Eastern This study is limited to large projects in the Eastern Province of Saudi Arabia.Province of Saudi Arabia.

In the Selection process, there are two restrictions, namely:In the Selection process, there are two restrictions, namely:

• Restricted to large projects ( SR 5 million and above).Restricted to large projects ( SR 5 million and above).

• Restricted to the Eastern Province of Saudi Arabia.Restricted to the Eastern Province of Saudi Arabia.

RESEARCH METHODOLOGYRESEARCH METHODOLOGY

The Research Methodology is as follows:The Research Methodology is as follows: Literature review and Personal interviews with some Literature review and Personal interviews with some

contractors, owners, and professionals in the construction and contractors, owners, and professionals in the construction and consulting industries.consulting industries.

A Questionnaire, which is the output of the literature review A Questionnaire, which is the output of the literature review and personal interviews.and personal interviews.

QUESTIONNAIRE DESIGNQUESTIONNAIRE DESIGN

There are three main parts in the Questionnaire.There are three main parts in the Questionnaire. The First part is an introduction to explain the idea and The First part is an introduction to explain the idea and

purpose of the survey as well as the definition of the interested purpose of the survey as well as the definition of the interested area of study.area of study.

The Second part contains general information questions The Second part contains general information questions including annual volume, specialization, experience and including annual volume, specialization, experience and nationality of the company.nationality of the company.

The Third part concerns the cost factors in building The Third part concerns the cost factors in building construction projects.construction projects.

For each question, the respondents have five options. These are For each question, the respondents have five options. These are “extremely severe”, “very severe”, “severe”, “some what “extremely severe”, “very severe”, “severe”, “some what severe” and “not severe”.severe” and “not severe”.

DATA COLLECTIONDATA COLLECTION

A total of 280 Questionnaires were distributed(200 mailed, A total of 280 Questionnaires were distributed(200 mailed,

50 hand carried and 30 faxed). A total of 84 Questionnaires 50 hand carried and 30 faxed). A total of 84 Questionnaires

were received and analyzed. The percentage of respondent was were received and analyzed. The percentage of respondent was

about 30%. about 30%.

DATA COLLECTIONDATA COLLECTION

Table for Questionnaire ResponsesTable for Questionnaire Responses

POPULATIONPOPULATION DISTRIBUTEDDISTRIBUTED RESPONDEDRESPONDED % % RES.RES.

MIN.MIN.

REQ.REQ.

CONSULTANTSCONSULTANTS 7474 1919 25.6825.68 1919

CONTRACTORSCONTRACTORS 156156 5252 33.3333.33 4040

OWNERSOWNERS 5050 1313 26.0026.00 1313

TOTALTOTAL 280280 8484 30.0030.00 7272

DATA ANALYSISDATA ANALYSIS

STATISTICAL METHODS:STATISTICAL METHODS: The following Statistical Methods were usedThe following Statistical Methods were used

for the analysis of the data collected throughfor the analysis of the data collected through

Questionnaire.Questionnaire.• RankingRanking• Statistical TechniquesStatistical Techniques• CorrelationCorrelation• Tabulation and Cross Tabulation Tabulation and Cross Tabulation

STATISTICAL METHODS

RANKING CORRELATIONSTATISTICAL TECHNIQUES

CROSSTABULATION

BY SEVERITY 1) SPEARMEN 1) MEAN BY SEVERITY 1) SPEARMEN 1) MEAN 1) EXPERIENCE1) EXPERIENCE

INDEX CORRELATIONINDEX CORRELATION

1) COMBINED 2) RANK AGREEMENT 2) STANDARD 2) 1) COMBINED 2) RANK AGREEMENT 2) STANDARD 2) COST FACTORCOST FACTOR

RANKING FACTOR DEVIATION RANKING FACTOR DEVIATION CATEGORIES CATEGORIES

2) CONTRACTOR’S 3) KENDALL’S 3) STANDARD ERROR 2) CONTRACTOR’S 3) KENDALL’S 3) STANDARD ERROR V/S V/S

RANKING COEFFICIENT OF MEAN RANKING COEFFICIENT OF MEAN PERCENTAGE PERCENTAGE

3) CONSULTANT’S 4) CONFIDENCE 3) CONSULTANT’S 4) CONFIDENCE AGREEMENT AGREEMENT

RANKING INTERVALRANKING INTERVAL

4) OWNER’S 5) COEFFICIENT OF 4) OWNER’S 5) COEFFICIENT OF

RANKING VARIATIONRANKING VARIATION

CONTD….CONTD…. Hypothesis testing :Hypothesis testing :

Hypothesis testing was used in order to check whether Hypothesis testing was used in order to check whether

consultants, contractors, and owners generally agree on the consultants, contractors, and owners generally agree on the rank of severity of construction cost factors. In this case t test rank of severity of construction cost factors. In this case t test was more suitable. was more suitable.

The null hypothesis says that parties do not agree on the The null hypothesis says that parties do not agree on the severity rank of the factors and they differ in their responses.severity rank of the factors and they differ in their responses.

As tAs tobs obs > t> tcritical critical the null hypothesis is rejected and hence it is the null hypothesis is rejected and hence it is

concluded that the parties agree on the severity rank of the concluded that the parties agree on the severity rank of the factors and these parties are reliable in their responses.factors and these parties are reliable in their responses.

RESULTS AND CONCLUSIONSRESULTS AND CONCLUSIONS

The five most severe factors affecting the construction cost as The five most severe factors affecting the construction cost as

agreed by three set of professionals (consultants, contractors, agreed by three set of professionals (consultants, contractors,

and owners) are:and owners) are:

• Cost of materialsCost of materials

• Incorrect planningIncorrect planning

• Previous experience of the contractPrevious experience of the contract

• Contract ManagementContract Management

• Poor financial control in site Poor financial control in site

CONTD….CONTD….

Contractors have ranked the following factors to be most Contractors have ranked the following factors to be most severe:severe:

• Cost of MaterialsCost of Materials

• Incorrect PlanningIncorrect Planning

• Contract ManagementContract Management

• Wrong Estimation MethodsWrong Estimation Methods

• Previous Experience of the Contract Previous Experience of the Contract

CONTD….CONTD….

Consultants have ranked the following factors to be the most Consultants have ranked the following factors to be the most

severe factors affecting construction cost:severe factors affecting construction cost:

• Cost of MaterialsCost of Materials

• Wrong Estimation methodsWrong Estimation methods

• Incorrect PlanningIncorrect Planning

• Project FinancingProject Financing

• Previous Experience of the ContractPrevious Experience of the Contract

CONTD….CONTD….

Owners have ranked the following factors to be the most Owners have ranked the following factors to be the most

severe factors affecting construction cost:severe factors affecting construction cost:

• Cost of MaterialsCost of Materials

• Incorrect PlanningIncorrect Planning

• Poor Financial Control in SitePoor Financial Control in Site

• Previous Experience of the ContractPrevious Experience of the Contract

• Economic Stability Economic Stability

CONTD….CONTD….

The five least important factors as agreed by the three The five least important factors as agreed by the three professionals are:professionals are:

• domination of construction industry by foreign firmsdomination of construction industry by foreign firms

• currency exchangecurrency exchange

• insurance costinsurance cost

• social and cultural impactssocial and cultural impacts

• waste on sitewaste on site

CONTD….CONTD….

Incorrect Planning is the second major problem affecting Incorrect Planning is the second major problem affecting construction cost.construction cost.

Material cost is given the highest rank of all the 42 factors.Material cost is given the highest rank of all the 42 factors.

Project financing is the major factor in the financing factors Project financing is the major factor in the financing factors category.category.

RECOMMENDATIONSRECOMMENDATIONS

The following recommendations are the most important ones The following recommendations are the most important ones

that can be deduced by this study:that can be deduced by this study:

Effort should be concentrated in major factors affecting Effort should be concentrated in major factors affecting construction cost.construction cost.

Since the least agreement factor is between owners and Since the least agreement factor is between owners and consultants, it is suggested that this group should sit together consultants, it is suggested that this group should sit together and resolve all possible misunderstanding and reduce gaps and resolve all possible misunderstanding and reduce gaps between them.between them.

CONTD….CONTD….

Coordination and communication among various parties Coordination and communication among various parties working on the project is of a great importance to improve working on the project is of a great importance to improve management and control problems and reduce any avoidable management and control problems and reduce any avoidable delay.delay.

It is the responsibility of contractors to come up with a clear It is the responsibility of contractors to come up with a clear plan and strategy before starting a project.plan and strategy before starting a project.

Estimates based on updated price information should be Estimates based on updated price information should be considered in order to come up with a reasonable offer and considered in order to come up with a reasonable offer and avoid any wrong estimation.avoid any wrong estimation.

CONTD….CONTD….

Continuous update on material price list by the Government Continuous update on material price list by the Government

related agencies is recommended.related agencies is recommended.

The amount of experience of contractors should be given high The amount of experience of contractors should be given high

priority in the pre-qualification procedure.priority in the pre-qualification procedure.