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EFFECTS OF PRELIMINARY ESTIMATE ON FINAL ACCOUNT OF BUILDING PROJECTS

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CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Ever since the dawn of civilization, man has indulged in some form of construction activity. Even in ancient times, man created architectural Marvels which came to be regarded as wonders of the world including the pyramids of Egypt, the Great Wall of China, and the tower of Babel among others. 

Estimates for engineering construction and building project are extremely important for the financier. The primary function of this process is to produce a forecast of the probable cost of a proposed project before the detailed design and contract particulars are prepared (Onwusonye, 2006; Pratt, 2011). Prospective clients require budget estimate at the early stage of the project to manage and forecast their intended financial commitment before extensive work on the design is done. A feasibility estimate is therefore an important document that helps the client in carrying out a detailed study on the viability of his proposed project with a view to determining whether the investment is worthwhile.

Estimating therefore describes the technical process of predicting the probable costs of the project based of specified information (Akintoye, 2000). The estimating process is broadly divided into two types namely: feasibility and tender estimating depending on mainly on the stage of the project and amount and quality of available information (Pott, 2008). However, the use of one approach precedes the other in the project development life cycle thereby making the context of predictive accuracy an important discourse in cost management literatures.

The feasibility estimating has gained more interest based on its level of important to the overall cost performance of the project. Feasibility estimating is there probable assessment of the probable cost of project at the early stage of the project when the design is not fully developed. However, lack of theories on construction price forecasting is a major factor that has restricted empirical progress in cost forecasting (Akintoye, 2000).

One of the major problems facing the Nigerian construction industry and in the global perspective is the fact that most projects are completed at sums higher than their initial contract sum (Achuenu, 1994; Gundiri, 1998). As a result, initial contract sum is rarely relied upon for decision making. The contract price obtained at the pre-contract stage of construction projects form the contract sum; and it is the amount established for the project. The expectations are that this sum should not be exceeded. Despite the veracity of this fact in practice and research, building construction projects are rarely completed within the estimated cost (Chindo, Okoli, Fadason and Gandu, 2012). Studies by Elinwa & Buba (1993) cited in Chindo, Okoli, Fadason and Gandu (2012) established cost variances between 8 to 133%; and an earlier study by Giwa (1988) pegged cost variability at 113% between the feasibility estimate and final cost of the project.

The research space has largely developed towards the study of variance between contract sum and final account. The trend has left a significant gap in determining the events in the procurement process between feasibility phase and contract sum. This study argues that, the contract sum is developed from a comprehensive design information than feasibility estimate; hence the need to evaluate the relationship between the later estimate and the former. This study therefore seeks to examine the effect of effect feasibility estimate of final account.

1.2       Statement of the Problem

The feasibility of construction projects as decision tool is received with optimistic expectations, first that it may never be adequate; and second, that it may never be exhausted (Tate & Flanagan, 1997). This pessimism originates the spates of project cost performance failure over the decades. Construction projects across the globe are bedeviled by cost deviation and overruns. Flyvjerg (2005) found that construction projects are completed at about 28% above budget. Mahamid (2013) reports 16.73% cost deviation, the mean cost overrun of 7.9% is reported in Odeck (2004), and Cantarelli et al. (2012) reports cost deviation of 11%. Scarcity of world’s economic resources informs the increasing important to reconsider the controversial disposition of cost overrun. The wide infrastructure gap in many places are alarmingly high including Nigeria.

Cost differential is therefore perceived as endemic (Odeyinka, 2015) and the stakeholders in the construction sector are burdened to mitigate cost overrun. For the construction professionals to have credibility before the client, Mbachu (2012); Larkin et al.(2012); Odeyinka et al. (2012a,b)and Odeyinka (2015) suggested that as an obligation and the basis for reward, clients, contractors, financiers, and other stakeholders should carefully consider the expanding variance between feasibility and final account.

Other wide range implications of cost deviations are prominent. First the perception of the stakeholders in a project is affected (Hobbs, 2010). Project financing is difficult and possible abandonment is imminent. The most prevalent impact of cost deviation is delay and disruption. The effects and causes of delay and disruption is widely studied across geographical spread but the implications lean towards similar results (Aibinu and Jagboro, 2002; Sambasivan and Soon, 2007; and Haseebet al. (2011). These include time overrun, dispute, arbitration, total abandonment and litigations (Kikwasi, 2012). This study therefore seeks to determine the contribution of estimating to overall cost discrepancy between budget and final account.

1.3       Research Questions

The following are constructed to achieve the aim of the study:

-      What are the factors affecting the accuracy of feasibility estimating?

-      What are the preferred tools, level of use and level of accuracy feasible estimating?

-      What is the relationship between feasibility estimate and final account of building projects?

1.4       Aim and Objectives of the Study

The aim of the study is evaluate the effect of feasibility estimate on the final account of building projects with a view to enhance efficiency. The objectives of the study include the following:

·         Identify factors affecting the accuracy of feasibility estimates for building works;

·         Evaluate stakeholders’ preference, level of use and the accuracy of feasibility estimating techniques; and

·         Determine the effect of feasibility estimate on final account sum of building projects.

1.5       Research Hypothesis

The following hypotheses were constructed to achieve the aim of the study:

Ho1: There is no significant relationship between feasibility           estimate and final account.

1.6       Significance of the Study

This study has been necessitated by the fact that the first step towards solving a problem is to identify it. Therefore, if the idea behind the generation of feasibility estimate is well known and its effects on final account are identified and possible remedies proffered and implemented, it will reduce the anxiety being faced by clients in going into infrastructural project development due to high level of uncertainty of their financial commitment, thereby encouraging the growth of infrastructural development. It will also significantly reduce the incidences of project cost overrun.

Contractors and clients will benefit from this work since they are in no wining position when there is a fall in the level of infrastructural projects development. First, the evaluation will enhance improved project delivery and overall realisation of the project targets. Second, it will facilitate stakeholders’ assessment of their level of effort towards the realisation of projects’ set objectives across the various stages of the project. Third, the outcome will improve procurement in option used and the projects procured amidst enhanced effective assessment management of cost overruns.

1.7       Scope of the Study

There are construction industries in every state of the country; the study was restricted to construction industries and projects in Akwa Ibom State. This research has been limited by constraints such as time, money and related literature on the topic. The limited financial resource of the researcher is a major limitation and thereby resulted in limiting the study to Akwa Ibom State only. Due to hard time, cost of research materials are high, certain materials which could be useful may not be affordable.

The reluctance of professionals/consultants to give information to research students is clearly known, it becomes hard as potential respondent will always believe that the information might expose the firm or company.

1.8       Organisation of the Work

The project is divided into five chapters. Chapter one is the introduction. Chapter two is literature review. Chapter three is the research methodology where all the technique, procedure and tools of analysis of data would be presented. Chapter four is the data presentation and analysis. Chapter five is the summary, conclusion and recommendation. 

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