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Risk management and contingency sum of construction projects

Risk management and contingency sum of construction projects PurposeMost organisations do not have established guidelines for the estimation and management of contingency funds. The purpose of this paper is to identify the risk factors at the construction phase causing project cost overruns, and a reliable method for the estimation of contingency sum is established.Design/methodology/approachCombined qualitative–quantitative exploratory methods were used. Qualitative interviews were conducted with five expert practitioners working in a Public Works Department in Zambia to determine how contingency sum is estimated and to explore what risk factors should be considered. Quantitative regression used cost and risk data collected from 30 recently completed building and refurbishment projects.FindingsThe qualitative study indicated that the project budget overruns constitute a major issue. This finding is in line with the paired-samples t-test results which show that the difference between the total variations and the initial contingency sum tends to be significant. The regression analysis proved that the contingency sum was positively correlated to the estimated contract sum. The qualitative interview results and Pearson correlation analysis also showed that contingency sum and project complexity tend to have a significant correlation. The research also demonstrates that the type of works is not a direct significant factor.Research limitations/implicationsBecause the projects used for the study were relatively short, duration of the project and economic factor of tax rate, exchange rate and inflation rate were not examined in the multiple regression analysis. Further studies should be conducted on longer projects to test out whether these risk factors are significant in influencing the project contingency.Practical implicationsThe results demonstrate that the multiple regression method can be applied as a reliable tool to predict contingency sums. Accurate contingency sums and project budget estimates benefit construction clients and their project managers. Individual project conditions should be carefully examined when assessing the contingency.Originality/valueThis research establishes a reliable regression method for the assessment of the contingency for the pre-tender estimate which has significant impact on the project feasibility and cost control, using related risk factors involved in construction contingency and client’s contingency. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Management of Property and Construction Emerald Publishing

Risk management and contingency sum of construction projects

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References (34)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1366-4387
DOI
10.1108/JFMPC-10-2016-0047
Publisher site
See Article on Publisher Site

Abstract

PurposeMost organisations do not have established guidelines for the estimation and management of contingency funds. The purpose of this paper is to identify the risk factors at the construction phase causing project cost overruns, and a reliable method for the estimation of contingency sum is established.Design/methodology/approachCombined qualitative–quantitative exploratory methods were used. Qualitative interviews were conducted with five expert practitioners working in a Public Works Department in Zambia to determine how contingency sum is estimated and to explore what risk factors should be considered. Quantitative regression used cost and risk data collected from 30 recently completed building and refurbishment projects.FindingsThe qualitative study indicated that the project budget overruns constitute a major issue. This finding is in line with the paired-samples t-test results which show that the difference between the total variations and the initial contingency sum tends to be significant. The regression analysis proved that the contingency sum was positively correlated to the estimated contract sum. The qualitative interview results and Pearson correlation analysis also showed that contingency sum and project complexity tend to have a significant correlation. The research also demonstrates that the type of works is not a direct significant factor.Research limitations/implicationsBecause the projects used for the study were relatively short, duration of the project and economic factor of tax rate, exchange rate and inflation rate were not examined in the multiple regression analysis. Further studies should be conducted on longer projects to test out whether these risk factors are significant in influencing the project contingency.Practical implicationsThe results demonstrate that the multiple regression method can be applied as a reliable tool to predict contingency sums. Accurate contingency sums and project budget estimates benefit construction clients and their project managers. Individual project conditions should be carefully examined when assessing the contingency.Originality/valueThis research establishes a reliable regression method for the assessment of the contingency for the pre-tender estimate which has significant impact on the project feasibility and cost control, using related risk factors involved in construction contingency and client’s contingency.

Journal

Journal of Financial Management of Property and ConstructionEmerald Publishing

Published: Nov 6, 2017

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