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COST ESCALATION FACTORS

Managing large construction projects must have good coordination between the human and non
human resources.
For a project to get approval from the deciding authority in an organization, It has to be within the
budget. The Project team is under pressure to estimate with an optimistic attitude (Akinci and
Fischer, 2004 pp. 6776.) so that it gets approval. This is very common if the project is funded by
public funds.
Some of the reasons for cost escalation in a project are:
Procurement Approach How the procurement team approaches procurement of certain items like
cement and steel can make a difference.
Project Schedule Change When budgeting the materials or services are based on the current time
and if the project takes time to take off (Callahan, 1998, pp. 1-59), these prices may no longer valid
and hence your original budget could be under. A typical example is the steel price in Kenya. This is
controlled by two main factors, the Dollar exchange rate and the price of raw material. Most steel
manufacturers would not like to maintain their prices for more than a month.
Unforeseen conditions As in the current construction project I am managing, the hardcore level
was deeper then what was designed which increase the excavation costs. This was due to preparing a
tender document before completion of geotechnical tests.
How do we control and plan for cost escalations:
1. We plan the procurement that is identify what is required when. Then look at the price
trend for lets say the past year. This allows us to know by what percentage the price has
been going up and the plan the purchase accordingly. If the price went up by 10% in last 12
months, we cost the purchase within the next year at 10% higher than the current market.
2. Contracts with Suppliers for Large critical items in the current project, we had contracts
with the cement and steel suppliers to supply the full required quantity over the construction
period at an agreed price. The Steel manufacturer agreed to maintain the price but asked for
a 30% deposit so that he can procure the raw material. This allowed us sustain a constant
price throughout the project.
Of course there is a contingency on the bottom figure.
To share an experience, When we were budgeting for the factory civil works, the consultants had
indicated that it could be completed in about Kshs. 1.2Billion. When the local consortium came up
with an engineers estimate it was around 2.1Billion and after floating the tenders, we received an
average bid of 2.2Billion. This was because the budget was prepared in 2006 but the tenders floated
in 2009. The exchange rate for US$ went up by more than 25% during that time and inflation was at
almost 7%. A lot of factors had changed in the 3 years.
Reference
Akinci, B., and Fischer, M. (1998)Factors affecting contractors risk of cost overburden. J. Manage.
Eng., 14(1)

Callahan, J. T. (1998) Managing transit construction contract claims,Transportation Research Board,
Transportation cooperative research program synthesis 28, National Academy Press, Washington,
D.C.