Poor planning drives cost overruns in construction, pushing up property prices

By / Published April 22, 2015 | 8:56 am



Mortgages

Only one in 20 construction projects meet best in class management practices, leading seeing the majority of projects suffer cost over runs.

Yet clear planning and expert project management can eliminate these excess costs and delays for investors in East African property, said Azmeena Bhanji, Projects Coordinator at Kenyan real estate developer PDM Holdings, speaking today at the East Africa Property Investment Summit in Nairobi.

PDM, which won the Architectural Association of Kenya Excellence Award for the best commercial project of 2014 for The Courtyard, is one of Kenya’s longest standing developers, as builder of the city’s first high rise building, the IPS building, almost 50 years ago, as well as The Nation Centre in the 1990s. The group is currently developing Vienna Court, a Grade A office complex and conference center, on State House Road.

“We never commence building until the design and specifications are absolutely complete and well-coordinated and we have an in-depth understanding of the estimated construction costs and the construction timeline” said Ms.Bhanji. This puts PDM into a best-in-class bracket that PwC, in its 2013 analysis Correcting the Course of Capital Projects, notes is relatively rare, even globally.

In fact, cost overruns on construction projects are the norm across the industry, driven mainly by poor planning and design, which extends to inadequate or flawed scope, budget and schedule management; a lack of risk identification and project control systems and tools; ineffective decision making; and weak contract terms.

Less than 5.4 per cent of projects meet “best-in-class” predictability in terms of cost and schedule, according to the PwC report.

“Many situations may force a project to veer off the trajectory it was on with regards to cost and time, but with the right planning and risk assessment, this can be avoided,” said Ms.Bhanji.

The single greatest driver of excess costs in 30 per cent of projects are poor estimates during project planning, according to Insights and Trends, PwC’s global survey of project management leadership. The cause of this failure is a widening skills gap in engineering and construction, which sees practitioners without the experience to accurately factor in all the labour and material costs.

Accurate estimates of costs require a real knowledge of the practical realities of any procurement: “In one of our projects, for example, we needed to transport mazeras stone from MajiyaChumvi at the Coast to a site in Nairobi. As mazeras are transported in slates, breakages are almost inevitable. During planning, we factored in a 25 per cent loss arising from breakages. Also, during cutting at the site, there were off-cuts, resulting in chunks of the mazeras being unusable. This was factored in as well, at a 15 per cent loss, based on our understanding of the realities of sourcing mazeras,” said Ms.Bhanji.

Poor project design is another driver of cost overruns, with construction often starting based on incomplete designs. This sees building contractors subsequently requesting more information and later additions to the project, resulting in both cost overruns and delays. This can be avoided through detailed design review for completeness and conformance to the owner’s scope as well as interdisciplinary coordination prior to construction. Even in the event a design flaw arises once construction has started, fluid communication across the team of designers, project managers and contractors can minimize cost overruns.

“Recently, while constructing the parking area for a commercial development, we found out that the parking angle based on the initial design would mean we had fewer parking slots than anticipated due to the topographical lay out of the site. The alternative would have been to acquire more land for parking, at an increased project cost. To avoid this, we agreed with the designers to change the angle on the parking lot design, ensuring that costs remain unchanged and the project objectives were achieved,” said Ms.Bhanji.

Another key problem is ambiguity in the terms and conditions of construction contracts. This often sees execution and oversight roles poorly defined, seeing the project scope grow and costs rise, most especially when the contractor is given responsibility for oversight. The owner may want to complete the project on time and on budget, but the contractor may expand the scope of the construction so as to increase his profits.

Risk identification is also vital in ensuring that a real estate project stays within budget. A risk assessment, analysis and mitigation plan are an essential part of the pre-construction planning and budgeting process, said Ms.Bhanji.

“For a project that is well managed, overruns should not occur unless caused by an unforeseeable occurrence. For experienced developers, most disruptions will have been experienced before and can be foreseen. However, project managers, as well as the client, should be prepared for any eventuality, and as such the need for a contingency budget cannot be understated. This is generally between 5 and 10 per cent of the total project cost for use as an allowance to deal with these kinds of occurrences,” said Ms.Bhanji.

Incomplete specifications at the outset can also result in cost overruns, especially when finishes are being selected much later, and often with the desire to incorporate new innovations in the market. This is usually a client decision, but leads to escalations in cost, nonetheless, and can be pre-empted by incorporating all of the client’s decisions on the selection of materials, finishes and fixtures at the planning stage.

Other practices that reduce the potential for cost overruns include pre-qualifying contractors, so as to mitigate against undercutting to win contracts only to introduce hidden costs; and active project management at every stage of the project life cycle. Active involvement ensures adequate control of the project’s timeline and budget, and the rapid identification of any risks.

However, until such practices become more comprehensively adopted in East Africa, the effects of cost overruns will continue to impact investors, and also the users of buildings, in some cases resulting in higher-than-market rate rental prices as well as higher purchase costs.






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