Understanding Reasons of Cost Overruns in Construction Projects from Contractors' Standpoint

Abstract

Construction sector represents one of the biggest contributors to Georgian economy, it holds the 8% of total GDP of the country. Additionally, 8.83% of the total employed labor force of Georgia throughout all sectors works in construction. Therefore, it is important to understand the challenges that the industry faces. Worldwide nine out of ten project finishes with budget overrun. There is a wide range of past researches available that studied the factors influencing cost overruns in different countries, regions and for different types of projects. Most of these studies define cost overruns as the difference between the initially outlined budget to the final actual costs incurred. This type of definition takes into account the viewpoints of all stakeholders of the project simultaneously. In this particular research, the focus is on the point of view of construction companies. The research process is divided into three parts. The first part focuses on creating a list of all factors causing the construction project cost overruns. The second phase is dedicated to creating a questionnaire based on the final shortlist and gathering answers from experts working in construction. During the last phase, the results of the survey are analyzed, and further desk research is conducted in order to provide recommendations for risk mitigation. As a result, sixteen factors are studied, from which the most frequent and severe ones identified are inflation, delays in getting approval from the client regarding the decisions concerning the project during the construction and poor estimating about the project pre-construction. Several recommendations and tools are given for risk mitigation of cost overrun and protection against financial losses. Not all risk can be removed all the time, but examples of best practices exist and can be used against the factors that are the most common for a particular construction company.

Keywords: Construction Financial Management, Construction Cost Optimization, Project Risk Mitigation

JEL Classification: G30, L74, D24