In lump sum and unit price contracts, a contractor is motivated to control construction cost to eradicate or decreasethe possibilities of overrunnin

g the bid price and to achieve a reasonable profit. Cost control could be defined as the process by which a cost objective is used as a reference value against which an actual cost is compared for timely decisions [l 11. Saudi Arabia was undergoing a construction boom during the 1970s and early 1980s. The Saudi construction industry was characterized by high demand placed on contractors services [ 11. Contractors were operating at full capacity, realizing a very large profit margin. This environment did not encourage emphasis on project cost control. Nowadays, the situation is the opposite. The drop in oil prices in the international market, coupled with considerable oil production after 1982, decreasedgovernment revenues substantially, affecting the whole economic reduction in situation in Saudi Arabia. The construction industry was characterized by significantly reduced demand for contractors services [ 11. This situation may have driven many contractors out of the industry and may have forced the remaining contractors to be more competitive by controlling cost during construction.

country

Despite the importance of cost control, it was not addressedby researchers. This study is an attempt to inquire into the process by which, construction contractors in Saudi Arabia are using to control costs during construction. aND&dive off trine SGwiy The main objectives of this study are (1) investigate how contractors in Saudi Arabia control projects costs during construction and (2) investigate the strengths and weaknessesassociated with each method.

The objectives set for this study were achieved through the following phases:

The literature related to cost control was reviewed for studying existing conrol systems in the international arena in general and in Saudi Arabia in particular. It was not possible to fmd published work related to cost control systems in Saudi Arabia. However, several cost control systems were found in American, British, and Australian literature. Fiske [5] and Jaafafi and Mateffy [7] described the components of a cost control system. A system called COPE was developed to allow more effective implementation of critical path method (CPM) networks [lo]. Another control system was developed by Alcan Australian Ltd. to control a $200 million construction project [6]. Finally, the schedule and cost control system (SACCS) was introduced, which is a computerized cost control system with emphasis on construction labor cost.

Reviewing the relevant literature has contributed to the development of a structured questionnaire. The work of J&&i c.12.1

1993 AACE TRANSACTIONS

and mteffy [7,8] contributed substantially to the development of the questionnaire, which is divided into.three sections. The fist section listed questions soliciting information about the contractols organization (size, type of work, etc.). The second section contained questions seeking information pertinent to the system that is used to control cost during construction. The third section explored the effects of 31 factors on the frequency of reporting, work breakdown structure (WBS), and organization breakdown structure (OBS). Wase IIt Data Collection (Structumd Intelviews) A sample of 45 building contractors was selected randomly from the 1990 classified contractors list, which is published by the Dammam Chamber of Commerce. Selected contractors were contacted and consulted in their participation in the study. Interviews were scheduled with those contractors who expressed willingness to participate. Contractors who declined to participate were replaced by selecting new names randomly from the list. The selected contractors were interviewed over the summer of 1990. Interview sessionswere held with individuals who had the proper knowledge in cost control systems. Average interview time ranged between two to three hours. Some interviews were conducted in one meeting and other interviews were held in two sessions. Some contractors were given a copy of the questionnaire with detailed instructions in how to complete it. A short interview then followed. During the interview session, two copies of the questionnaire were used. One copy was for the key informant to complete, and the other copy was for the .intervieGer.

Measure ActualWork I I

LWeekty(23) 2. rvlonthly( 22)

l.FurchaseOrders(22)

3. FieldOrders ( 14)

1.Records of Man-Hours/work Items ( 24) 2. Personal Observations ( 26) 3. Tiiebcoks/job( 14) I

1. Recordsof Equipment hours/workitem ( 16)

2. Rental or Leasing Invoices ( 12) 3. CJpamrs T&sheets ( 6 ) I

1.LaborRate: a Basic Wage + on Cost ( 32 )

b. Just Basic Wage ( 13)

2. Feedback Records ( 19)

2. PIantRate: a Ownership + Operating Costs ( 26) b. Just OwnershipCost ( 7 )

1. BudgetedVS Actual Cost of Work DonetoDate(36)

1. Incentives( 31)

2. Budgeted VS ActualCostof each workTradePackage (6) 3. Budgeted VS ActualUnit Cost( 10) 4. ll@ periodUnit CostVS Commolative Unit Costto LastPeriod( 4 ) Flgulle l-Construction

1.Percentage ( 29)

1.InformalInvestigation ( 34) 2. Periodical Meetings (21)

3. InferenceLogic ( 12 ) 4. Work Study ( 5 )

2. Spot Costing ( 14)

-w

3.JobCard( 12) 4. Work Study ( 5 ) 5. Work force

Rearrangement (4 )

Cost Contml Practice for Contmcton in Saudi Ambia

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This section discusses the tools used by the contractors to control costs during construction. The results indicated that contractors in Saudi Arabia utilize a basic logic sequence in cost control. They start by setting the required budget. Then, they measure performance and report actual costs. They compare actual and budgeted cost testing for variances. Finally, if necessary, they apply measures for correcting the process. Figure 1 summarizes the construction cost control system that is used in Saudi Arabia. This chart illustrates the tools used in cost control according to their sequence of application. The mmrerals next to each tool represents the number of contractors using that tool. The total of contractors in each block may exceed the sample size (45) because multiple techniques within each tool are used by a single contractor.

The first step in cost control is breaking down the project into its parent activities and assigning a budget to each activity. These activities are related to the assigned budget by means of cost codes. These budgeted activities are continuously planned ahead every specific period of time. At the end of each period, the project cost status is evaluated and updated by project management.

The results showed the majority of the contractors are using either standard items headings pre-defined at head office (dividing the work into standard components and locations, such as all brick work) or work items headings specially tailored to project WBS methods to break down the work into the relevant activities. Dividing work into major structural components and locations is a third method that is used by contractors. Very few contractors break a project by dividing the work into main resources per period (plant, material, etc.). The contractors related the popularity of the standard items headings to the following: 1. It allows unification of procedures among branches inside and/or outside the Kingdom. By feeding these standard items into the computers, communication between the head office and the branches becomes easier. Most of the contractors who declared this advantage are not Saudis but rather foreigners with their head of&es located outside the Kingdom. It is simple and effective. Using this typical procedure, it is possible to manage many projects with miniuum~ number of employees. It coincides with projects specification breakdown.

2. 3. 4.

The contractors indicated that the method is not flexible when different types of projects are involved. Using special items headings is very effective to achieve the special needs of the projects handled. However, the contractors declared the .following disadvantages: 1. 2. 3. It is expensive to implement. This expense is due to raising the project and of&e overhead cost required to conduct new studies for WBS for each project alone. The contractors who use this method complain about the lack of standardization of items headings during project analysis, which in turn makes it difficult to compare the projects handled. This method lacks flexibility where totally new studies should be conducted to break down the activities of the project.

The main advantage achieved by dividing the work into major structural components and locations is the ease of implementing, especially for large-scale projects. In addition, it helps to understand the relationship among the project components. However, the main disadvantage in utilizing this method is the negligence of itemizing the job. For example,. all the concrete work done in one part of the lot is treated as one unit without further subdividing the work into smaller units, such as walls, slabs, etc. A general conclusion was drawn from the interviews that some contractors use their present methods because they are not fully aware of the other alternatives. On the other hand, some other contractors are forced to use specific methods, because C.12.3

1993 MCE

~APJ~ACTIOPI~

it is part of the company policy. Some of these contractors are foreign companies. The methods are formulated in their head of&es and applied as they are in Saudi Arabia. codes of account3 Cost codes are alpha-numeric codes that combine the work and the OBS with the relevant financial information. This labelling system helps in identifying what and where the item is, what is being done to the item, and who is responsible for the action [2,3]. The results indicated that many contractors dont utilize codes of accounts. Also surprising is that some contractors were found not to be aware of what cost codes are. So a lack of knowledge about the concept of cost codes is a noticeable issue. According to the interviewees, the main advantages for using cost codes are as follows: 1. 2. 3. Using cost codes is a good technique to express the quantity of the work done, equipment used, and personnel in the financial reports. Cost Codes are a good check for the losing activities of the project. Specialized services are distinguished from other construction or finishing work.

The main disadvantages experienced by the contractors in using cost codes are as follows: 1. 2. 3. buaet allocation During construction, the budget allocated to different activities and phases of the project can be quantified using three main sources: estimator price, historical records, and site analysis. The results indicated that contractors use the estimator pricing either alone or combined with one or both of the other two sources for budget allocation. Using the estimator prices alone has the advantage of using only @at was reserved for each part of the project. However, it may result in a high loss due to unforeseen site conditions that may cause overspending. Using the estimator pricing with the site analysis and historical site data has the advantage of a more realistic and accurate prediction of cash flow. Using this technique, the computed budget may be less or more than the original budget. A reconciliation of the original budget is then essential. pedod of shoti tern pbuudng In spite of the effectiveness of planning the work for the whole duration of the project, this effort should be supplemented by detailed plans continuously updated after every specific short period of time. These plans combine the work to be done, personnel involved, and the budgeted cost for the coming period. The results indicated that most of the contractors use one-week time frames for short-term planning. The advantages gained by using one-week time frames are as follows: 1. 2. One week is short enough to have an immediate action toward any cost deviation during the week. It enables more tight control of resources. More office and project overhead is required to collect, analyze, and report the data. Additional staff may be required to analyze the data. This fact is against the interest of small contractors who try to keep the minimum number of employees under payroll. For detailed codes, a computerized system may be needed, but many contractors cannot afford this.

In spite of these advantages, all respondents complained about the expenses involved in collecting, analyzing, and reporting cost C.12.4

11993 AArn

7r-iMNsAmoNs

data. Such expenses are due to the time spent as well as the number of staff required. For the period between two and four weeks, the following advantages are reported: 1. 2. 3. It allows enough time for resource mobilization to the site and arranging for the needed cash flow. This period was found a good compromise between the cost involved in very short periods of plamring and the loss of control due to very long periods. This period was found suitable to produce enough quantity of work that can be analyzed effectively, since the trend of the work cannot be judged or based on very short periods of time.

In spite of the above advantages, some contractors criticized this method as a longer than necessary period to correct serious cost deviations.

Actual cost is normally measured by calculating the cost of labor, equipment, and material.

Labor hours are normally charged by multiplying the hours consumed by the hourly rate of the laborer. The number of hours expended is obtained from a record of hours per work item, from personal observations, and/or from project time books. It was found that the majority of contractors depend on personal observations and records of hours per work item. The general trend that was noticed is that, as the contractor size decreases,the higher the dependence on personal observations. Two basic approaches are mainly followed to cost labor hours. In the first approach, the labor hour cost is calculated based on adding the basic wage and the on-costs. Such on-costs include housing, food, transportation, and other allowances. In the second method, just the basic wage is considered, while the on-costs are treated as overhead. The results indicated that most of the contractors use the first method. In spite of the utilization of the basic wage plus on-costs method, the contractors believe using just the basic wage is superior. For these contractors, the methods used are formulated by the company management and used by the engineers without any authority to commit. This fact is more dominant among large foreign contractors. Contractors who use just the basic wage declared the following advantages: 1. 2. It allows distinguishing between direct and indirect costs. By considering the on-costs as overhead, overtime is cheaper.

However, using just the basic wage is very disadvantageous for the contractors who treat the on-cost as a company overhead, where they cannot predict the actual project cost.

As in labor, equipment hours are usually charged by multiplying the number of hours consumed by the hourly equipment rate. The number of hours consumed could be obtained from records of equipment operating hours per work item or per the whole project, from hire invoices, from personal observations, and/or from operators time sheets. Very few contractors indicated that they use certain percentage of the equipments useful life to estimate the number of hours consumed. The results indicated that recording equipment operating hours for each work item is the most commonly used technique for all contractors. The accuracy in allocating the hours consumed for each work item justifies the expenses involved. However, for the contractors who rent or lease their equipment, they depend on the hire invoices. Depending on the invoices, as stated by the contractors, does not really reflect the real time spent by the equipment operator doing the job. For this reason, some of the contractors use the equipment operators time sheets alone or along with the hire invoices. Contractors whoiare dependent on recording the equipment hours for.the project as a whole suEer from the c.12.5

1993 AACE TRANSACTIONS

disadvantage of lacking the itemized hours recording. This shortcoming makes it impossible to evaluate work productivity, as well as negating an investigation of any cost or schedule deviation. Hire invoices are used in calculating equipment hours when leasing or renting equipment is practiced. However, lack of accuracy is a major shortcoming. Contractors who obtain expended equipment hours via personal observations complained from the unreliability of the data obtained. They said that personnel who observe and record equipment hours usually use their subjective judgements when recording data. Contractors who are using the percentage method (distributing the equipments useful life over their projects) explained they dont have enough equipment to justify the expense of calculating the relevant working hours. Instead, they just have limited and small equipment like compactors. For this same reason, some contractors dont calculate the equipment hours at all and, instead, treat the equipment expenses as overhead. However, those contractors admitted that their methods dont give a real indication about the real cost of constructing the project. Recording equipment hours per work item is most effective for the fifth grade contractors, while combining this method with operators time sheets is most effective for the fourth grade. However, it is important to note that the most popular methods are not the most effective. The main reason stems from the tendency towards using simple and typical procedures by the contractors. In addition, the lack of knowledge and the unstable market conditions have additional negative effects on this practice. The results indicated that most of the contractors use the owning and operating cost to calculate the hourly cost, and it is believed to be the most effective. The respondents who use this method described it as very effective in calculating the exact cost of the equipment. Contractors who use the ownership as a direct cost and treat the operating cost as site overhead suffer from the lack of work itemization for the machines. Some contractors dont distinguish between owning and operating cost; instead, the depreciable amount is divided into the machines useful life, while any extra paid cost is treated as general overhead. The main reason for using this method is the small percentage of equipment owned. In addition, the equipment is not continuously used where it is used for more than one project at a time. Due to this, there is no clear idea about the time the equipment is used for each project alone and the costs incurred. A general phenomenon concluded from the interviews is the low effort expended by the contractors in costing plant hours. This can be partially justified by the heavy dependence in building construction placed on labor rather than equipment. Due to this, some contractors dont even cost the plant hours and treat the paid expenses as general company overhead. chalging matelial consumed The first step to calculate the cost of material consumed is to allocate the relevant quantity. For all surveyed contractors, purchase orders, invoices, field reports, and receipts are the main sources of information to allocate material consumed during construction. Repotting Actual Cost The actual cost of work done is usually reported in the monthly cost statements. However, combining weekly and monthly cost statements seems more effective for most of the contractors. Using weekly cost statements has the advantage of direct attention to any cost problem. However, this method is expensive to implement. In addition, sometimes not enough quantities of work are executed to report the relevant cost. There are four main advantages for using monthly cost statements: 1. 2. 3. to coincide with financial reports, especially for salary payments; to coincide with governmental payments; and one month is considered a reasonable period to produce an acceptable quantity of work.

The main disadvantage experienced by using monthly reports is the negligence of labor productivity, where just the expenses incurred are recorded without any consideration of the rate of output or learning curve. Depending on the nature and size of the projects handled, the contractors combine both periods to achieve their C.12.6

advantages and minimize the disadvantages. By comparing these periods of reporting with the others-like the quarterly statements-the contractors found it the most economical and reliable technique for reporting projects costs. @orbvatiamce Tesuhlg In order for contractors to conduct cost variance analysis, they should first decide on the cost baseline against which construction cost is compared. The results indicated that estimator pricing is the most commonly used source of cost baseline.
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cod vadance Uesting

It was found that budgeted versus actual cost of work done to date is the most commonly used method that comprises the common denominator among most of the respondents, where it is either used alone or combined with other methods.
cod vmimwce calculation

Two methods can be usually followed to calculate variance: absolute numbers and percentage. Both methods are found to be used by contractors. The users of the percentage method reported the following advantages: 1. 2. 3. 4. The amount of variance can be compared with the size of the project and expected profit or loss. It forms a quick reference to the amount of deviation. It is easily understood by lower-level people and all project personnel. It is possible to compare the variance of similar work items in different projects constructed by different branches.

Some of the contractors who use both absolute number and percentage beneIit from the full comparison with the project size. However, the main disadvantage for this practice is the additional paperwork involved.

During construction, whenever any deviation in cost is spotted, the first reaction is to determine the cause of this discrepancy. Figure 1 embodies the techniques followed by the contractors to investigate any cost discrepancy. For most of the contractors, inference and logic, informal investigation, and periodical supervisory meetings form the common denominator for all the methods used. The other methods are intuition, spot costing, and work study. A very important point to be highlighted is the bigger the size of the project is, more formal and systematic methods are used to investigate the cost discrepancy, like spot costing and work study. The contractors who use the informal investigation of inference and intuition justified their effectiveness by their simplistic nature, which doesnt require thorough studies, especially for small and typical projects. However, these contractors admitted the lack of accuracy for just depending on these methods, especially whenever the size of the project gets bigger (the results are not reliable). In addition, due to these tried and true methods, a long time may pass before finding the true cause of the cost discrepancy. After determining the cause(s) of the cost deviation, the next step is to take the necessary corrective action(s). It was found that the most popular corrective action is the application of some kind of incentive schemes. These incentives range from the very simple forms of bonuses and an increase in overtime to the more formal ways of promotion and raise in salary. Most of the interviewees expressed their confidence in using incentives to correct any deviation by increasing the productivity of the workers. But there are major drawbacks experienced from using this method, and they are as follows: 1. 2. This method is expensive to apply especially when the technique used depends on increasing workers overtime. Many employees get used to this method, so their productivity during normal working hours is decreased to allow maximum of overtime.

C.12.7

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CONCLUSION This study explored the methods by which construction contractors in Saudi Arabia control costs during construction. The contractors were found to apply logic sequenceof budgeting, measuring performance, testing for variances, and correcting process for solving problems. ACKNOWLEDGEMENT The authors would like to express their thanks to King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia, for its moral support and to all the contractors who provided all the needed information for this study. REFERENCES 1. 2. 3. Al-Jarallah, M. December 1983. Construction Industry in Saudi Arabia. Journal of Construction Engineedng and Management. Vol. 109, No. 4, 355-368. American Society of Civil Engineers. 1985. Construction Cost Contml Manuals and Reports of Engineering Pmctice. No. 65, 57-79. Branch, K. 1987. Construction Management: A Method for Controlling Costs on Large Pmjects. 1987 ASCE Tmnsactlons. 152-l 56. Bullis, P. 1984. Practical Cost Contml: Techniques and Timing. 1984 AACE Tnmsactions. Paper A.l. Fiska, H. 1984. Cost Contml Techniques. The Cost Engineer, Vol. 22, No. 3. Francis, D. December 1986. An Owners Approach to Project Control. Cost Engineeling. Vol. 28, No. 12, 20-27. Jaafari, A. and V. Mateffy. November 1985. Key Issues in Controlling Costs on Constmction Ptvjects. Reseatch Report No. R411, School of Civil and Mining Engineering, University of Sydney. 8. 9. 10. 11. 12. 13. Jaafari, A. and V. Mateffy. December 1986. Games People Play with Cost Control in Austmlia. Journal of Construction Engineering and Management. Vol. II, No. 4, 566-581. Kerr, W. March/April 1977. Cost Contml Pmctice. AACE Bulletin, Vol. 19, No. 2, 57-60. Mester, S. and R. Harris. April 1975. COPE: A Construction Management Technique. AACE Bulletin, Vol. 17, No. 2, 41-49. Paulson, B. March 1976. Concepts of Pmject Planning and Control. ASCE Journal, Conshuction Division, Vol. 102, No. COl, 67-80. Peeples, D. April 1985. A Cost Engineering Control System Overview. Cost Engineering. Vol. 27, No. 4, 16-21. Valkenhoff, B. August 1981. Cost Perjbmrance Measumment. Cost Engineeting. Vol. 23, No. 4, 219-225. Dr. Ali A. Shash KFUPM # 1627 Dhahran, 3 1261, Saudi Arabia Samer Ahmad Zamel PO Box 2017 Al-Khobar-3 1952 Saudi Arabia

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