Cost estimation problems in Kuwaiti construction companies Essay
Accurate and thorough cost estimation constitutes a key success factor of construction companies. Cost estimation refers to the process of providing cost predictions of the cost of construction work as basis for the commercial process of tendering based on the cost predictions (Potts, 2008). This definition seems to describe cost estimation as a technical process. However, in actual practice, estimating the cost of construction work is a highly subjective process that depends on practice-base knowledge and experience. This finds reflection in the fact that experienced estimators in construction firms receive high salaries for the value of their work. There are different types of construction cost that requires thorough estimation. These are 1) estimates for conceptual planning, 2) estimates for feasibility, 3) estimates during engineering and design, 4) estimates for construction, and 5) estimates for change orders (Schexnayder & Mayo, 2004). All these cost factors require consideration in the estimation to provide an accurate and thorough prediction of cost that the construction would expect to require from the client in completing a construction product.
The importance and value of cost estimation to construction companies is the need to provide an accurate and very detailed estimation of cost for construction projects given the complexity of the construction process. Cost estimation details all direct costs together with the bottom line costs that construction firms expect to incur given economic trends (Potts. 2008). Often, actual large construction work occurs in the medium to long-term and involves multiple contingencies affecting cost based on expectations of cost variables based on the fluidity of market factors (Anderson, Molenaar & Schexnayder, 2007). The estimator should be able to incorporate these contingencies in the cost estimation to prevent losses for the firm during construction work but at the same time provide a fair price to clients.
The cost estimation should not be excessive to obtain approval and an agreement with clients. There should also not be any underestimation or the construction company would incur losses. Construction firms often engage in bidding for public sector construction work and quality and reliability of cost estimation determines the success of firms in obtaining contracts and fulfilling construction work without the company incurring any losses.
While cost estimation is an inevitable operating aspect of construction firms, the estimation process is highly complex. Uniform methods are necessary in completing cost estimation by using an exhaustive elements predicted to emerge during the construction process. Consistency ties up the different types of construction costs to provide a cohesive report on estimated costs for a construction project. Apart from using an exhaustive list of elements of cost, the use of best information in the detailed estimates is also important for accuracy (Schexnayder & Mayo, 2004).
However, cost estimation systems are constantly evolving. Given a market variables, the factors affecting cost change and new factors emerge. This requires knowledge management to support decision-making on cost estimates for different construction projects (Smith, 1995).
Multiple problems emerge in cost estimation. These could fall under the three categories: inappropriate risk assessment, inappropriate contract strategies, and human characteristics of the estimator (Smith, 1995). These problems require resolution to ensure a consistently accurate and detailed cost estimates for different construction projects. However, specific problems experienced by construction firms highly depend on the specific environmental contexts within which firms operate. The environmental context refers to the political system, legal and regulatory system, economic conditions, and socio-cultural factors affecting the construction industry and determining cost estimation practices and problems. Turner construction mission statement
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The construction industry in Kuwait is highly competitive to support the importance of accurate and detailed cost estimation as a source of competitive advantage in obtaining clients and contracts and the importance of addressing problems in cost estimation. In 2009, construction work in Kuwait should reach .71 billion in Kuwaiti dinar or 2.65 billion in US dollars. There is an expected decline in the growth rate of the construction industry in Kuwait as the impact of the economic crisis sweeping the globe. A decline by 2.28 percent should occur in the next couple of years and then a further decline to 1.03 percent before increasing by 1.6 percent by 2013. (Business Monitor International, 2009) The impact on the Kuwait construction industry is postponements of investments in construction projects, tight budgets of clients, and more stringent competition for private-public partnerships projects. These imply three things. One, construction firms in Kuwait have to develop cost estimation as a source of competitive advantage in obtaining clients. Another, cost estimation processes and systems should reflect the developments in environmental context. Last, new problems in cost estimation would likely emerge as influenced by the environmental context to comprise areas for improvement.
There are a limited number of studies covering cost estimation problems in the Kuwaiti construction industry and in the construction industry of similar Middle East countries. The scope of these studies is broad and considers cost estimation problems as only one issue or specific by considering the application of cost-estimation models.
Studies made on the construction industry of other Middle East countries considered cost estimation problems as one of the causes of delays in construction projects. Mezher and Tawil (1998) identified financial issues including cost estimation as the most important concern of owners in Lebanon. Architecture and engineering firms are more concerned with project management issues while contractors are most concerned about contractual obligations. While the study proved the importance of cost estimation to owners, this was unable to focus on cost estimation issues, the causes of these issues, and solutions. Odeh and Battaineh (2002) also focused on construction delays in traditional contracts and found that delays contribute to problems in cost estimation and cost estimation problems are an outcome of delays. The study recommended improvements in planning and decision-making on costs and financing, among others, to prevent delays. The study indicated some of the causes of cost estimation problems but without providing an in depth discussion.
Another study considered the application of a model for estimating bid mark-up by Turkish contractors. Dikmen, Birgonul and Gur (2007) studied the applicability of the case-based reasoning model (CBRM) in the estimation of risk, opportunity and competition ratings by contractors given that decision-making in these areas commonly depend on instinct. The model appears to reduce problems in cost estimation by improving the accuracy of risk, opportunity and competition estimation. This provided insight into risk, opportunity and competition assessment and estimation as an issue in cost estimation for the overall project.
The studies on the Kuwait construction industry cover cost estimation as an overlap of other issues in the construction industry and construction processes or as part of the broader issues faced by the construction industry. Existing studies do not specifically identify the cost estimation problems faced by the Kuwaiti construction industry given developments in the contemporary business environment, explore these problems in detail to determine root causes, and recommend ways of addressing these problems to improve cost estimation in individual firms.
Koushki and Kartam (2004) identified time delays and cost increases as the two problems faced by construction firms in Kuwait. Although cost increases comprise an independent variable, time delays also add to cost and cost problems lead to delays. In the case of residential projects in Kuwait, interviews of owners cited the common causes of time delays and cost increases as material selection and availability or access to materials in the local market. The study supports the importance of accurate cost estimation that should anticipate the costs involved in material selection and procurement. Including these factors in cost estimation would prevent the onset of these problems or mitigate the impact of these problems.
A later study by Al-Rasheid et al. (2005) also identified similar problems, slippage in project schedules and cost overruns, as the common problem in the Kuwaiti construction industry. A discussion of the reasons showed that the inability to address these issues during the preparatory stage, including the cost estimation process, is largely due to the traditional practice of addressing these problems in the implementation stage instead of preparing for it during the preparation stage. Construction firms need to adopt control systems to address these problems. The control systems should also encompass the cost estimation process, as a means of predicting these problems and mitigating the impact of these problems during implementation.
The two problems, delays and cost overruns, were also the problems that emerged in the deeper study of private residential projects by Koushki et al. (2005). Causes for these problems emerged from the study such as change orders, financial constraints of the owner or client, and limited experience in the rigors of the construction business. There are also reasons causing cost overruns, which are problems with fulfilment by contractors, availability and accessibility of materials, and financial constraints that could affect specifications. These problems also highlight the importance of cost estimation and the need to allocate sufficient time and effort towards the cost estimation process to address the issues regarding contractor fulfilment, material availability and accessibility, and financial limitations of the owner.
According to Kartam and Kartam (2001), accurate cost estimations relate to risk management methods, which comprise of preventive aspects that focus on ensuring that construction risks do not happen and mitigating aspects that ensure the readiness and effectiveness of actions taken in responding to the actualisation of risks. Cost estimation depends on identified risks and management activities while risks come from the cost estimation process. Cost estimation should be effective to encompass risks and risk management should be effective to keep costs under control. However, in Kuwait, many construction firms do not apply formal methods of risk analysis.
Anwar and Tuqan (2006) focused on information needs and use in the construction industry. This informs on cost estimation since predictions depend on reliable and updated information. The survey of 20 firms showed that these heavily rely on information issues by government agencies, trusted industry and institutional bodies, financial organizations, and the Internet. The least used information consists of those from personnel and statistical results. However, activities indicating information use by Kuwaiti construction firms are limited. This has implications on the accuracy of cost estimation. Better use of information should improve cost estimation processes.
These studies indicate or imply the different problems that affect and emerge from the cost estimation process in Kuwait and other Middle East construction industries. Since these problems emerged from studies focusing on other issues in construction but related to cost estimation, the proposed study would investigate in-depth on the internal and external factors affecting cost estimation in the construction industry in Kuwait and the problems involved in cost estimation. Results would come from secondary data and primary data based on interviews with construction firms. Understanding the problems would support recommendations on viable improvements.
Conducting an in-depth investigation of the cost estimation and problems in cost estimation in the Kuwaiti construction industry would support the importance of cost estimation in the contemporary context of construction and provide information to help construction firms improve their cost estimation capabilities to enhance competitiveness or build competitive advantage.
In completing the in-depth investigation, the proposed study will fulfil two objectives:
§ To provide a context of cost estimation in Kuwaiti construction firms based on information on various external factors and the manner that these influence the cost estimation practices of individual firms
§ To identify the problems in the cost estimation process, the causes of these problems, and viable solutions based on the experiences of construction firms in Kuwait.
In accomplishing these objectives, the study would seek answers to the following questions:
§ How do Kuwaiti construction firms achieve cost estimation?
§ How do internal and external factors influence the cost estimation practices of Kuwait construction firms?
§ What cost estimation problems are faced by Kuwaiti construction firms?
§ What causes cost estimation problems?
§ How can Kuwait construction firms address cost estimation problems and improve their cost estimation processes?
The study would employ both case study and semi-structured interview as the combination of methods that best supports the fulfilment of the objectives of the study and providing answers to the research questions.
The case study is appropriate in investigations seeking an in-depth coverage of contemporary complex phenomenon. This method requires context-based analysis of detailed information (Yin, 2003). The study on problems in the cost estimation of Kuwaiti construction firms is an investigation of a contemporary phenomenon since the focus is on cost estimation problems given the present business context. The case study can also answer questions on ‘how and why’ (Hancock & Algozzine, 2006). Most of the research questions of the proposed study are ‘how’ questions. This method also requires consultation of many sources of information (Noor, 2008). The proposed methodology would consider various sources of information.
A semi-structured interview is appropriate in collecting data based on a set of guide questions but at the same time with room for in-depth data collection through follow-up questions on the answers of the respondents (Bryman & Bell, 2007). The researcher will ask all the questions listed in the guide but the sequence could vary and the researcher could ask clarification or follow-up questions. The semi-structured interview could also involve a list of closed and open-ended questions (Wengraf, 2004). The rationale of using a semi-structured interview is to derive factual and comparable data by minimizing interviewer bias while at the same time allowing for in-depth data gathering through the open-ended questions or follow-up questions (Carruthers, 1990). Applying the semi-structured interview would maximize the data collected from the respondents.
The data collection process covers both secondary and primary data. Secondary information would come from books, journal papers, trade magazines, newspapers, government documents and reports, pertinent private sector reports, and online databases that provide relevant information. The study would also upon draw primary data by interviewing representatives of construction firms in Kuwait regarding their cost estimation processes and problems emerging from cost estimation. The interview questions reflect problems indicated by the review of literature and seek out new information based on the actual experiences of the construction firms.
Answers derived from the semi-structured interviews would be subject to collation, comparison and contrast to provide a list of problems as well as identify the common and differentiated cost estimation problems of the different Kuwaiti construction problems. The answers would also provide or indicate the causes of these problems. The presentation of results is through discussions responding to the research questions together with graphs and tables, as appropriate, with detailed explanations relative to the research questions.
The results of the study would provide an in-depth understanding of the nature of the cost estimation problems and the causes, based on the experiences of construction firms in Kuwait. This is the initial step in improving the cost estimation practices of construction firms in Kuwait. Improving cost estimation practices has significant implications on the profitability and sustainability of construction firms by ensuring accurate cost estimates to prevent losses. This would also have important implications on the quality of work relative to the price paid by owners. Accurate cost estimates and effective cost estimation processes ensure that the price agreed upon by the parties covers planned and unplanned costs to maintain the expected quality of work. Improved cost estimation also mitigates the impact of the problems or even minimizes problems in contractual obligations with sub-contractors and suppliers.
The results of the study would also contribute to filling the research gap on the limited in-depth information on the cost estimation problems of construction firms in the context of the business culture and environment in the Middle East, particularly Kuwait.
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