vii

TABLE OF CONTENTS

CHAPTER NO. TITLE PAGE NO.

ABSTRACT iii
LIST OF TABLES xiv
LIST OF FIGURES xix
LIST OF ABBREVIATIONS AND SYMBOLS xxiii

1 INTRODUCTION 1
1.1 BACKGROUND 1
1.2 NEED FOR RESEARCH IN THE AREA 2
1.3 RESEARCH OBJECTIVES AND SCOPE 8
1.4 ORGANISATION OF THE THESIS 9

2 LITERATURE REVIEW 11
2.1 INTRODUCTION 11
2.2 COST OVERRUN AND COST
ESCALATION IN GOVERNMENT
CONCTRUCTION PROJECTS INDIAN
SCENARIO 11
2.3 COST OVERRUN AND COST
ESCALATION IN GOVERNMENT
CONCTRUCTION PROJECTS WORLD
SCENARIO 13
2.4 PRICE ESCALATION CLAUSE IN
CONSTRUCTION CONTRACT 34
2.5 SUMMARY 38
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CHAPTER NO. TITLE PAGE NO.

3 RESEARCH METHODOLOGY 40
3.1 INTRODUCTION 40
3.2 QUESTIONNAIRE SURVEY 43
3.2.1 Professional Experience and
Validation of View Points 43
3.2.2 Factors Affecting Cost Overrun in
Building Construction Projects in
India 44
3.2.3 Factors Affecting Cost Escalation in
Building Construction Projects
in India 45
3.2.4 Price Escalation Clauses and
Adequacy of Compensation Paid to
the Contractor Based on the Presently
Used Escalation Clause in Contract 46
3.2.5 The Analytic Hierarchy Process (AHP)
Methodology 47
3.2.6 Relative Importance Index (RII)
Methodology 49
3.3 SURVEY RESPONSE 49
3.4 OVERVIEW OF STATISTICAL ANALYSIS 51
3.5 CASE STUDY APPROACH 52
3.6 SUMMARY 53

4 IDENTIFICATION AND EVALUATION OF

FACTORS AFFECTING COST OVERRUN IN
INDIAN BUILDING CONSTRUCTION
PROJECTS 54
4.1 INTRODUCTION 54
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CHAPTER NO. TITLE PAGE NO.

4.2 IDENTIFICATION OF FACTORS

AFFECTING COST OVERRUN 55
4.3 PRELIMINARY LIST OF COST OVERRUN
FACTOR CATEGORIES AND FACTORS 56
4.4 CLASSIFICATION OF CATEGORIES AND
FACTORS AFFECTING COST OVERRUN
IN BUILDING CONSTRUCTION PROJECTS 57
4.5 STAGES OF THE BUILDING PROJECT 58
4.6 AGENCIES/ PARTICIPANTS ASSOCIATED
WITH A PROJECT 59
4.7 SURVEY RESEARCH 61
4.7.1 Questionnaire Survey Approach 61
4.7.2 Survey Questionnaire 61
4.7.3 Response - Questionnaire Survey 62
4.7.4 Identification of Most Significant Factors
Affecting Cost Overrun 62
4.7.5 Identification of Most Significant Factor
Category Affecting Cost Overrun 74
4.8 STATISTICAL ANALYSIS – CAUSES
OF COST OVERRUN 78
4.9 CASE STUDY APPROACH –
IDENTIFICATION OF MOST SIGNIFICANT
FACTORS AFFECTING COST OVERRUN 88
4.10 SUMMARY 91
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CHAPTER NO. TITLE PAGE NO.

5 IDENTIFICATION AND EVALUATION OF

FACTORS AFFECTING COST ESCALATION
IN INDIAN BUILDING CONSTRUCTION
PROJECTS 94
5.1 INTRODUCTION 94
5.2 CONSTRUCTION CONTRACT 95
5.3 PROCESS OF IDENTIFICATION OF
FACTORS AFFECTING COST
ESCALATION 97
5.4 PRELIMINARY LIST OF IDENTIFICATION
OF COST ESCALATION FACTOR
CATEGORIES AND FACTORS IN
BUILDING CONSTRUCTION PROJECTS 98
5.5 CLASSIFICATION OF CATEGORIES AND
FACTORS AFFECTING COST
ESCALATION 99
5.6 SURVEY RESEARCH 100
5.6.1 Questionnaire Survey Approach 100
5.6.2 Survey Questionnaire 100
5.6.3 Response - Questionnaire Survey 101
5.6.4 Identification of Most Significant
Factors Affecting Cost Escalation 102
5.6.5 Identification of Most Significant Factor
Category Affecting Cost Escalation 111
5.7 CAUSES OF COST ESCALATION –
STATISTICAL ANALYSIS 116
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CHAPTER NO. TITLE PAGE NO.

5.8 CASE STUDY APPROACH –

IDENTIFICATION OF MOST
SIGNIFICANT FACTORS AFFECTING
COST ESCALATION 122
5.9 SUMMARY 124

6 STUDY THE TREND IN PRICES OF

MATERIALS AND COST INDICES IN BUILDING
CONSTRUCTION CONTRACTS IN INDIA 127
6.1 INTRODUCTION 127
6.2 IDENTIFICATION OF MAJOR COST
COMPONENTS OF BUILDING
CONSTRUCTION PROJECT 127
6.3 STUDY OF PRICE OF MAJOR BUILDING
MATERIALS IN INDIA 131
6.3.1 Trend in Price of Materials over the
Period of Time (2003 – 2009) 131
6.3.2 Trend in Monthly Percentage Change in
Price of Materials over the Period of
Time (2003 – 2009) 134
6.4 STUDY OF BUILDING COST INDEX IN
INDIA 138
6.4.1 Construction Cost Index 138
6.4.2 Trend in Building Cost Index (CPWD)
in India 139
6.4.3 Modelling Escalation Factor in Building
Construction Project in India 140
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CHAPTER NO. TITLE PAGE NO.

6.4.4 Forecasting Building Construction Cost

Escalation 141
6.5 SUMMARY 147

7 STUDY OF PRICE ESCALATION CLAUSE IN

BUILDING CONSTRUCTION CONTRACTS IN
INDIA 149
7.1 INTRODUCTION 149
7.2 OBJECTIVES 150
7.3 METHODOLOGY 150
7.4 NEED FOR PROPER ESCALATION
CLAUSES IN GOVERNMENT
CONSTRUCTION CONTRACTS 151
7.5 CURRENTLY USED ESCALATION
CLAUSES IN GOVERNMENT
CONSTRUCTION CONTRACTS 153
7.5.1 Escalation Clauses in Central Public
Works Department 156
7.5.1.1 Project completion time
6 months or less 156
7.5.1.2 Project completion time
between 0 to 18 months 157
7.5.1.3 Projects completion time more
than 18 months 157
7.5.2 Escalation Clauses in Military Engineer
Services (MES) 158
7.6 SURVEY RESULTS AND DISCUSSIONS 161
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CHAPTER NO. TITLE PAGE NO.

7.7 FINDINGS IDENTIFIED AND

RECOMMENDATION 170
7.8 CASE STUDY OF SIX BUILDING
CONSTRUCTION PROJECTS IN INDIA 173
7.9 SUMMARY 174

8 SUMMARY AND CONCLUSIONS 176

8.1 SUMMARY 176
8.2 CONCLUSIONS 178
8.3 RESEARCH CONTRIBUTIONS 186
8.4 SCOPE FOR FURTHER WORK 188

APPENDIX 1 189
APPENDIX 2 203
APPENDIX 3 258

REFERENCES 263

LIST OF PUBLICATIONS 273

VITAE 274
 xiv

LIST OF TABLES

TABLE NO. TITLE PAGE NO.

3.1 The pair wise comparison scale of the Analytic

Hierarchy Process 48
3.2 Details of questionnaire circulated and
response 50
3.3 Details of participants experience in building
construction projects 51
4.1 Process of identification of factors affecting
cost overrun 55
4.2 Classification of factors relating to categories
causing cost overrun in Indian building
construction projects 57
4.3 Cost overrun - factor category, factor name and
factor Label 64
4.4 Client responses to the ranking of significant
factors causing cost overrun in building
projects (n=66) 66
4.5 Contractor responses to the ranking of
significant factors causing cost overrun in
building projects (n=53) 68
4.6 Overall group responses to the ranking of
significant factors causing cost overrun in
Building projects (n=119) 70
 xv

TABLE NO. TITLE PAGE NO.

4.7 Clients, Contractors and overall responses to

the ranking of significant factors causing cost
overrun in building construction projects in
India 72
4.8 T-test : Responses to Causes of cost overrun in
building construction project, their mean,
standard deviation, T-value and P – value 79
4.9 ANOVA – Clients Responses to Causes of
cost overrun in building construction project 81
4.10 ANOVA – Contractors Responses to causes of
cost overrun in building construction project 84
4.11 Kendall Coefficient of Concordance Test 87
4.12 Building Construction projects in India –
Impact of cost overrun 89
4.13 Most Significant Factors Realisation and
Impact in Indian Building Constriction Projects
– Comparison 90
5.1 Process of identification of factors affecting
cost escalation 97
5.2 Classification of factors relating to categories
causing cost escalation in Indian building
construction projects 99
5.3 Cost escalation - Details of factor name and
factor label 103
5.4 Clients responses to the ranking of significant
factors causing cost escalation (n=66) 104
 xvi

TABLE NO. TITLE PAGE NO.

5.5 Contractors responses to the ranking of

significant factors causing cost escalation
(n=53) 106
5.6 Overall responses to the ranking of significant
factors causing cost escalation (n=119) 108
5.7 Clients, Contractors and overall responses to
the ranking of significant factors causing cost
escalation in building projects construction in
India 110
5.8 T-test: Responses to Causes of cost escalation
in building construction project, their mean,
standard deviation, T-value and P – value 117
5.9 ANOVA – Owner responses to causes of cost
escalation in building construction project,
their mean, standard deviation, T-value and
P – value 118
5.10 ANOVA – contractor responses to causes of
cost escalation in building construction project,
their mean, standard deviation, T-value and
P – value 120
5.11 Building Construction projects in India –
Impact of cost escalation study 123
5.12 Most Significant Factors Realisation and
Impact in Indian Building Constriction Projects 124
6.1 Forecasted Building Cost Index (CPWD)
from 2010 to 2015 142
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TABLE NO. TITLE PAGE NO.

6.2 Forecasting of building material cost – for 12

months (1 year) 146
7.1 Wholesale Price Index in India (Base:
1993-94) 152
7.2 Escalation formulae used in construction
contracts adopted by various government
departments/ agencies in India 154
7.3 Overview of the escalation clauses presently
used in construction contracts adopted by
various government departments / agencies in
India 155
7.4 Comparison of escalation formula with various
countries 160
7.5 Summary of responses regarding how the cost
escalation has impact on the construction
projects 162
7.6 Summary of responses in regard to what extent
does the compensation as per currently used
escalation clause reflect the actual escalation 164
7.7 Summary of responses in regard to whether
WPI is suitable for calculating compensation
for escalation 165
7.8 Summary of responses received from the
respondent on satisfaction level of escalation
clause in contract 166
7.9 Project duration for which the escalation clause
should be included 167
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TABLE NO. TITLE PAGE NO.

7.10 Details of weights of various groups in WPI

(Base 1993-94) 168

7.11 Adequacy of compensation paid to the

contractor based on the presently used
escalation clause in government contracts in
Indian Building Construction Projects 173
 xix

LIST OF FIGURES

FIGURE NO. TITLE PAGE NO.

3.1 Methodology framework of study of cost

escalation in Indian building construction
industry 41
4.1 Various phases of a project 60
4.2 Most significant factors affecting cost overrun
as perceived by the client’s group 67
4.3 Most significant factors affecting cost overrun
as perceived by the contractor’s group 69
4.4 Most significant factors affecting cost overrun
as perceived by the overall group 71
4.5 Most significant factors affecting cost overrun
as perceived by the client’s, contractors and
overall group 74
4.6 Significant factor category affecting cost
overrun as perceive by the client’s group 75
4.7 Significant factor category affecting cost
overrun as perceived by the contractor’s
group 76
4.8 Significant factor category affecting cost
overrun as perceived by the overall group 77
4.9 Significant factor categories affecting cost
overrun as perceived by the clients, contractor
and overall group 78
 xx

FIGURE NO. TITLE PAGE NO.

5.1 Construction Management : Contract Method

of Execution 96
5.2 Clients response - Most significant factors
causing cost escalation 105
5.3 Contractors response - Most significant
factors causing cost escalation 107
5.4 Overall group response - Most significant
factors causing cost escalation 109
5.5 Clients, Contractors and Overall group - Most
significant factors causing cost escalation 111
5.6 Significant factor categories affecting cost
escalation as perceived by the client’s group 112
5.7 Clients response: perception analysis among
CPWD, MES and TNPWD 113
5.8 Significant factor categories affecting cost
escalation as perceived by the contractors
group 114
5.9 Contractors response: perception analysis
among CPWD, MES and TNPWD 115
5.10 Clients, contractors and Overall’s response to
the weight age of significant factor categories
causing cost escalation 116
6.1 Construction of Office Building at Chennai 128
6.2 Construction of Educational Building – I at
Chennai 129
6.3 Construction of Educational Building – II at
Chennai 129
 xxi

FIGURE NO. TITLE PAGE NO.

6.4 Construction of Building at New Delhi 130

6.5 Trend in price of cement (2003-2009) in India 131
6.6 Trend in price of steel (2003-2009) in India 132
6.7 Trend in price of brick (2003-2009) in
Chennai region 133
6.8 Trend in price of sand (2003-2009) in
Chennai region 133
6.9 Trend in price of coarse aggregates 134
6.10 Monthly % ge change in price of cement
(2003 – 2009) in India 135
6.11 Monthly %ge change in price of steel (2003
– 2009) in India 136
6.12 Monthly %ge change in price of brick (2003 –
2009) 137
6.13 Average Monthly %ge change in price of
sand (2003 – 2009) 137
6.14 Average Monthly %ge change in price of
coarse aggregate (2003 – 2009) 138
6.15 Movement of CPWD Cost Indices (1958-
2008) in India 139
6.16 Yearly % ge change in CPWD cost index
(1958 - 2008) 140
6.17 Forecasting CPWD cost index for 5 years
from 2010 to 2015 142
6.18 Forecasted materials of cement for 12 months 143
6.19 Forecasted materials of steel for 12 months 144
6.20 Forecasted materials of brick for 12 months 144
 xxii

FIGURE NO. TITLE PAGE NO.

6.21 Forecasted materials of sand for 12 months 145

6.22 Forecasted materials of stone aggregates for
12 months 145
7.1 Prices of construction materials – Cement 151
7.2 Prices of construction materials – Steel 151
7.3 Prices of construction materials – Brick 152
7.4 WPI Vs. CPWD Cost index (1994-2007) 169
7.5 Cement – WPI vs Actual Market price 169
 xxiii

LIST OF ABBREVIATIONS AND SYMBOLS

Abbreviations
AAI - Airport Authority of India
ASCE - American Society of Civil Engineers
ANOVA - Analysis of Variance
AHP - Analytical Hierarchy Process
ADB - Asian Development Bank
BSNL - Bharat Sanchar Nigam Limited
CPWD - Central Public Works Department
CIDC - Construction Industry Development Council
CPI - Consumer Price Index
DSR - Delhi Schedule of Rates
EPC - Engineering Procurement and Construction
FI - Financial Institution
FM - Force Majeure
FDI - Foreign Direct Investments
GOI - Government of India
GOTN - Government of Tamil Nadu
GDP - Gross Domestic Product
L&T-ECC - Larsen & Toubro Limited-Engineering Construction &
Contracts
MES - Military Engineer Services
MOS&PI - Ministry of Statistics and Programme Implementation
POL - Petroleum Oil and Lubricant
RBI - Reserve Bank of India
SD - Standard Deviation
 xxiv

SPSS - Statistical Package for Social Sciences

TNPWD - Tamil Nadu Public Works Department
WPI - Wholesale Price Index
WBS - Work Breakdown Structure
WB - World Bank

Symbols

M 0 M1 - All India WPI for all commodities at the date of

agreement & for the quarter under consideration
C1 CI S1 SI MI - All India WPI for cement, steel, materials and POL the
FI F1
period under consideration
CI 0 C0 SI 0 S0 MI 0 - All India WPI for cement, steel, materials, and Fuel, Oil
FI 0 F0
as valid on the last stipulated date of receipt of tender
including extension, if any
P0 P1 - All India WPI for heavy machinery and parts for the date
of agreement & for the quarter under consideration
W0 - As for W1 but the index as on the last due date for receipt
of the tender
P - Base price of material as issued under authority of
DG(W), CPWD valid at the time of the last stipulated
date of receipt of tender including extensions, if any
X c X S Xm
Y Z - Component of cement, steel, materials, Labour and Fuel,
Oil and Lubricant expressed as percent of total value of
work
KM KL KP - Constant representing the percentage cost of materials,
Labour and Fuel respectively
W - Cost of work done
 xxv

VG - Gross value of work done at constant rates upto the last

date of the period of reckoning
VG1 - Gross value of work done during the period of reckoning
using value of vg for calculating VM1 and VM2
LI L1 - Minimum Wage in rupees of an unskilled adult male
mazdoor, fixed under any law, statutory rule or order as
applicable on the last date of the quarter previous to the
one under consideration
LI 0 L0 - Minimum Wage in rupees of an unskilled adult male
mazdoor, fixed under any law, statutory rule or order as is
valid on the last stipulated date of receipt of tenders
including extension, if
Pl - Percentage of labour, cement, steel, bitumen, fuel and
Pc Ps Pb Pf Pp Pm lubricants, plant and machinery and percentage of local
materials components
Q - Quantity of material used in the works since previous bill
B1 - The average official retail price of bitumen at 10C depot
at Chennai for the 15th day of the middle calendar month
of the quarter under consideration
B0 - The average official retail price of bitumen at the 10C
depot at Chennai on the date of agreement
F0 F1 - The average official retail price of High Speed Diesel
(HSD) at the existing consumer pumps of IOC at Chennai
on the date of agreement & 15th day of the middle
calendar month of the quarter under consideration
VM 2 - Value of materials upto the last date of the period of
reckoning for which price variation is adjustable as
worked out as per formula for VM
 xxvi

VB - Value of all materials (out of VG and VS) issued under

schedule ‘B’ plus value of all materials brought and paid
or payable to contractor under prime cost and /or star
rates
VS - Value of all materials lying at site for incorporation in the
work including materials issued under schedule B and
including materials brought and paid or payable to
contractor under prime cost sum and / or star rates
VM 1 - Value of materials but as on date of immediate preceding
period of reckoning
V - Variation in material cost
EM E L E P - Variation in prices of materials, Labour and Fuel to be
adjusted
VC VS VM VF VL V p - Variation in the cement, steel, materials, fuel, oil and
lubricant, labour cost, plant and machinery
W1 - WPI for all commodities published by economic advisor
to the Govt of India, as on the date of commencement of
the period of reckoning