Cost Escalation
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22-12-2010, 12:49 PM

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The Construction Industry has a major role in the development of Indian economy. This industry consumes about 40 to 50% of the national plan outlay and contributes to nearly 20% of the Gross Domestic Product. Escalation can account for substantial part of construction costs. For medium to large construction project and implimentations which take over a year of completion, the cost escalation is a major problem in administrating such contract. Main objectives are to identify construction cost escalation factors, to evaluate the factors affecting cost escalation in building construction project and implimentations, to measure and to manage cost escalation. Construction project and implimentations, private and public alike, have a long history of cost escalation. A large number of studies and research project and implimentations have identified individual factors that to lead to increased project and implimentation cost. A questionnaire was administered to two major participants viz. Government representatives (Clients), and Contracting organizations (contractors). An “Analytic hierarchy Process” was used to analyse the weights of main factors contributing to cost escalation. The result revealed that steel and cement were identified as the most significant factors affecting cost escalation; followed by brick, sand, coarse aggregates and timber. Case studies of six building construction project and implimentations were carried out to validate the survey findings.

The development and growth of the country mainly depends on successful implementation of infrastructure project and implimentations. However, the performance record in successful implementation of infrastructure project and implimentations in India has not been encouraging. Cost escalation is part and parcel of construction project and implimentations in India. Escalation in the construction market in recent years has been extremely volatile, and this trend is expected to continue in the near future due to competition for resources and skilled workers. This situation has created a great deal of uncertainty and nervousness among construction field. It was found that central and state government’s mega project and implimentations on an average annually face cost escalation of about Rs.400,000 to Rs.500,000 million.(Source: Ministry of statistics and programme implementation, Government of India). The wealth of any nation is measured by its performance in infrastructure provision through its construction Industry. The financial success of construction project and implimentation can be uncertain and at risk due to changes in escalation rates during construction (Blair, 1993). The success of a building construction project and implimentation is mainly influenced by to what extent of cost escalation identified and allocated to the construction project and implimentation.
The words “Cost escalation” in construction are defined as an increase in the cost of any construction elements of the original contract and base cost of a project and implimentation due to passage of time. Budgeting for cost escalation is a major problem in the planning phase of project and implimentations. Cost escalation consists of three key elements market variation, risk element and bias (Dawood and Bates).Contractors working in present day materials market may face significant losses or erosion of anticipated profits because many of them are locked into fixed price construction contracts where contractors bear the risk of material price cost increase .Inflationary trends in economy, boom in construction activity, seasonal effects and cost of borrowing money have increased the inherent risk present in construction project and implimentations(William 1994, Keller 1982). The professionals in the construction industry indentified delays and cost overruns of the project and implimentation as the principal factors leading to the high cost of construction. Materials and labour productivity factor cause unanticipated project and implimentation effects and cost escalation during construction. (Knight et all, 2000)

The objectives of this study include
• Identify construction cost escalation factors
• Evaluate factors affecting cost escalation in building construction project and implimentations.
• Measuring cost escalation
• Managing cost escalation

The scope of the study has been restricted to government building construction project and implimentations in specific to CPWD, MES, TNPWD building construction contract in India.

A number of factors are responsible for the recent increase in the cost of construction. The most immediate issues are
• Major natural disasters:
Natural disasters destroyed roughly three times as much property, creating a very high demand for construction materials and labour. This effect is likely to vary by region within the country.
• Increase in material cost
In the past few years a number of strategic materials like cement, steel, brick, sand, coarse aggregate, timber etc have seen significant increase in cost. Since materials represent around half the total construction cost of a project and implimentation, this would translate into a four percent per annum contribution to overall cost escalation.
• Regulatory climate
• Evergrowing demand for construction works
• Shortage of labours / skilled workers
The current high volume of construction is creating a high demand for skilled construction workers. In some regions of the country demand has outstripped supply, leading to reduced availability of workers. The shortages of skilled labour increase the contractor’s risk, by increasing the likelihood of delay.
• Market volatility
While direct changes in the cost of materials and labours have a impact on the cost of construction, the uncertainty over prices has created significant disruption in the bidding environment. When material prices are fluctuating wildly, bidders cannot lock in prices at bid time. Delivery schedules are often extended because material demand is so high. Volatility therefore makes contractors more likely to build risk premiums into their bids to cover potential increase in material prices, and suppliers more likely to wrap material quotes with an additional premium, to ensure that they will still be able to make a profit in case of spikes in material cost.


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