Problems Affecting Contractor Cost: A Case Study In Indonesia

Construction is one of the ways doing business. As a financially risky business, construction will have sensitive behaviors towards the market cycle (booming, normal and recession) (Cooke & Williams, 2004). When the market is good the construction industry will rise great profit, however if the crisis comes, it will suffer more than any other industries. This is true because construction business is a capital intensive industry. It requires high up front capital investment to start and run the business. If the market is fierce and the demand is drop than the idle equipment will create waste cost. These will lead to the idea to point out that financial resources management is a key critical system to be installed in the management of a contractor company.

There are many financial problems during construction operation that need to be solved. The first main issues are in the operation point of view. The operation wise problems will address both revenue sides and cost sides because these two sides will determine the profitability from the operation (Fellows, et. al. 1988). The most important function that facilitates construction organizations to accomplish profit maximization is cost control (Charoenngam, 2001). A good construction company needs to know how to secure its timely revenue. A smart client tends to delay payment to safe opportunity cost (Harris and Mc Caffer, 2001).

The second issue which needs to be observed is the financing effect of the either project or head office operation and significantly its equipment procurement (Halpin, 1985). A company will have two sides of financial management these are operation management and equipment management. Operation management falls within short-term financial management. In another hand, equipment management is placed in long term financial arrangement (Ross, et. al. 2005). A company or project that is financed its assets/equipments mainly by its own cash basis will have quite different behaviors from those which borrow from the third parties or even leasing arrangement. This situation will create additional complication. Borrowing creates particular constraints on its operation and cash flow that must be generated to satisfy the money provider. Inadequate cash to pay its obligation will put the company into trouble (Barboza and Pimentel, 2001) and insufficient growth to attract shareholder will make the market company price toward shareholder drop. The exit methods that are common to happen are voluntary insolvency (liquidation), merger (Buehler, 2005), private work out, etc.

From the four big problem groups above, it is required for the contractor to be able to solve financial problems in the project level directly before the problem causing further damage to the company performance. The company needs to identify what kind of cost variances will likely to happen on site, develop the indicator and monitor the project financial performance. The same things also applicable to the company level cost variances solution. If the company fails to manage their short-term finance then what the company should do later on to secure its asset and sustain profitable. If they still can not manage the current financial problems then the contractor probably can suffer from bankruptcy and other solution such as liquidation, private work out will be discussed throughout this research. In summary the company needs to create a systematic decision support system to help them behave and solve its current cost variances before it is going worse and to provide the implication chains of its serious cost variances.

Mr. Ariono Dhanisworo Indra Budhi made a case study which main objective was to explain within a systematic approach, the problems affecting contractor cost which happened in Indonesia. The developed approach can be used by contractor as decision support system, in order to make right decision at the right time to save the shareholder interest. His study objective was subdivided into several sub-objectives to: (1) identify and classify the adverse specific problems arisen during construction period affecting contractor cost, (2) investigate the cause and implication of identified specific problems, (3) make recommendation on how to reduce the effect of the problems on contractors finance; and (4) derive model of explanatory critical parameters leading to cost variances.

CONCLUSION & RECOMMENDATION

Based on the data analysis, the major problems affecting cost variances with the general effect in Indonesian contractors are summarized in the table below.



As not all problems can be treated the same way, the solutions and preventive actions are developed from previous grouped unit of analysis.

His thesis abstract is copied and posted.

ABSRACT

As Indonesian contractors perform their business day to day they are subjected to hidden problems affecting their cost. Therefore the main goal of this research is to explain and explore the source cost during construction period specific to Indonesian contractors. The research is conducted with qualitative method: a case study from 6 companies as sample.
The research result is that the identified problems are not controlled by the contractor. These problems are hurdle escalation claim, bad intention change order, un-match between BOQ and drawing, and loss from government auditor volume re-measurement. The other problems are happened in finance department including interest rate increment, tax restitution problem, double taxation for interest income, late payment without interest rate compensation and promissory note problem. Serious identified crisis are also happened in legal department: client doesn’t pay on time, foreign design hidden error, fail claim to insurance company under CAR policy and permit to build a building without official written evidence from government. These cost harms need to be managed and controlled in integrated corporate management system to avoid unnecessary sub optimization.

Keywords: integrated cost; contractor; Indonesia; escalation; payment; change order; promissory note; design liability; insurance; CAR.