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EVALUATION OF PROJECT RISK AND THE DETERMINATION OF CONTINGENCY SUM FOR BUILDING DEVELOPMENTS IN NIGERIA

ABSTRACT

The construction industry is characterised with inherent risk and uncertainties as a result of its fragmented and competitive nature. This therefore makes it difficult to accurately estimate the cost of construction project. To achieve the objective of having work completed most especially within cost and quality, contingency sum is apportioned to cater for unforeseen items of work that may likely evolve. Therefore, this current study aims at evaluating project risks with a view to determining adequate contingency funds to improve project performance. A quantitative approach was used in obtaining data through structured questionnaires administered to the construction professionals practicing in the F.C.T. Abuja as well as survey pro forma to gather archival data on completed building projects. 402 questionnaires were returned (44.4% response rate) and found useful for further analysis and 47 projects were also considered suitable for the study. The data were analysed using Relative important index (RII), Severity Index (SI), correlation and regression analysis. The study revealed that deterministic method (percentage addition to base estimates) was the most commonly used method, contingency sum usually allocated to construction projects are inadequate and that other risk factors are not being considered in its allocation. The study concludes that contingency sum determination was insignificantly related to the perceived level of inherent risk (R2= 7%) in construction project; and also has a weak relationship with the cost overrun. Based on this, more scientific approach to estimating contingency sum should be employed instead of the experiential approach that often results into under or over estimation of construction cost and estimating professionals should pay greater attention to the effects of economic and environmental risk factors in allocating contingency sum.

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Construction by its nature involves certain unavoidable risks. There are many variables affecting the outcome of a building project especially its final cost. Contractors are required to accept a certain level of risk due to unforeseen costs that are incurred during construction. Risk is also a thing of concern for clients (Mak and Picken, 2000). To account for the various risk that lead to cost increase, many owners and contractors allocate a contingency amount to each project. Project owners allocate contingency fund to the budgets for proposed projects, while contractors attach a contingency amount to all their submitted bids. Ford (2002) postulates that, project budgets are one of the most important and widely used project management tools.

Project complexity and the inherent uncertainty of the financial performance of constructed facilities, development funding, and the control of costs and schedule makes exact budget needs impossible to forecast accurately. These characteristics also cause projects to deviate from plans. In the same vein, Akintoye and Fitzgerald (2000) identified the causes of inaccuracy in cost estimation, as lack of practical knowledge of construction process by those responsible for estimating function, insufficient time to prepare cost estimates, poor tender documentation, wide variability of sub-contractors price, change in owners requirements, poor communication between the estimating team and construction team. Cost estimation is particularly difficult in the construction industry, often leading to considerable cost overruns that are explained by large uncertainties and uniqueness of projects (Bukeret al).