COST ESCALATION MANAGEMENT IN LOW-INCOME APARTMENT PROJECT

By

Ngo Quoc Thai

Abstract

             

Vietnam has become the official member of the World Trade Organization since 2007. This dramatic event unfortunately occurred at the same time with the worldwide financial crisis in 2008 and lasted to the present. Consequently, the real estate and construction markets are affected strongly by the inflation, the cost escalation and the tightly controlled credit strategy of the Government.

In addition, project implementation naturally requires a long time to finish, with a huge investment capital and various participating parties. Moreover, the governmental policies in the real estate market and construction industry usually change and overlap among authorities.

Generally speaking, real estate developers are facing with complicated issues of financial structure -  the cost escalation, the slump status  of business market; the  worst status  of  infrastructure and  the incompetency of management but above all it is the cost overrun  in most  of the projects. As a result, costs of housing industry in Viet Nam can be compared with the neighboring countries.

In order to survive, real estate developers must devote themselves to researching about potential cost escalation factors to find out the suitable strategies to reduce and eliminate their impacts. Developers realized that the risks which must be dealt with everyday require considerable foresight, attention to details and tenacity if problems can add costs or cause ineffective overrun. Therefore, most of the developers want to make the target cost plan is as much tightly controlled as possible.

Executive summary

Rationale of research

This research has been conducted to identify the factors involving cost escalation in Apartment projects.

Objectives of study

To study factors affecting cost escalation and project management activities which can be used to control cost escalation.

Methodology  

The exploratory research method is used to review the literature and study the cost management at different stages of project.

Findings and conclusion

Project value become uncertain by various reasons, and appears in each stage of project processes. Risk of cost escalation cannot be eliminated, but can be minimized, transferred or retained. There are some ways for risk arranging such as transferring, avoiding, reducing the negative effect or absorbing them. Among the risks, risk of cost escalation play the conclusive role and both parties have to endure  with many disputes if that factor are not foreseen and discussed to solution before contract signed.

The active and early identification, analysis and evaluation, with control measures can reduce the impact of cost escalation factors and urgently needed to ensure the feasibility and efficiency of the project. Cost escalation management should be valued and implemented from the first steps of the project and continue to maintain in all project implementation cycle.

The case in this report describes a practical implementation in the underground construction stage of an Apartment project. The project team obviously has revealed high-risk factors can seriously affect the success of the project. All lessons need to be conducted and learnt for experience.

The report just briefly describes the various factors of cost escalation that are normally influence to Vietnam construction industry. It is obvious that most popular factors are widely known in construction participants and investors. A standard mitigation plan of these kinds of risk should be prepared   which cover all of potential sources of cost escalation. This important issue should be discussed widely in project team include Owner‘s staff, consultants, architects, engineers, contractors.

In the process of integrating with the world’s economy, Vietnam has been influenced strongly by positive factors on the cost management, contract administration. There are many researches to control the cost escalation in construction projects. However, the following issues are still present and harmful for the success of a project:

·                     Inflation: This issue almost breaking all attempts to cost controlling.

·                     Government:  Bureaucracy, Fluctuation; Late in corruption defense.

·                      Contractual Risks : Understanding , obedience , respecting  the Law

·                     Lacking of transparency: An unclear environment is the major factor contributing towards cost escalation.

We do believe that engineers who address these escalation factors when assessing future project cost and who seek to mitigate the influence of these factors can improve the accuracy of their plan, their cost estimates and program budget. Author of this study do hope that the future of project management in Vietnam will be better, the cost escalation will be well management; these are also the purpose of our work.

Recommendation

For Project Owner

·         Foreseeing and prepare a contingency plan and preserve a maximum risk premium within budget.

·         Transferring partly through a complete strategy in contract

·         Applying policy of advance payment specified for price escalation to fix the price during construction time.

·         Maximizing profit margin to ensure the risk premium can cover the loss from inflation.

·         Postpone the large project until the financial crisis is over.

·         Put priority in recruitment the competent team. Periodic training to the staff.

·         Review the planning and executing work including selection of project delivery method, development of project documentation and selection of contractors.

·         Transparency must become core value in overall process.  Auditing and checking project management activities