Investigation of Price Escalation and Its Mitigation Mechanisms on Selected Building Construction Projects of Jimma Universityv

Abstract

The construction industry in developing countries is the major contributor to the countries’ overall economic development and hence requires huge investments. Project succuss is dependent on executing the projects within the planed time, cost and quality specifications. However, most construction projects are subjected to cost escalation from original approved cost. Price escalation in construction refers to the increase in the cost of any construction element of the original contract or base cost of a project. Price escalation is a serious issue for all parties of construction including clients, contractors and consultants. The cost monitoring of construction projects should be an ongoing process that should be applied every time in all projects since the causes of price escalation differs from project to project and according to stages of construction. The objective of this study was to assess the price escalation, factors responsible for escalation and mitigation mechanisms in selected construction projects. Questionnaire survey of twelve workers, interview of seven key informants and a detail case study of one project have been conducted from February 01 to 30, 2020 G.C on four selected Jimma University construction projects which were labeled from Project A to Project D. The main outcome variable, price escalation, was measured as the difference between the actual cost and adjusted bid cost. Data was entered and analyzed using SPSS version 20 and excel. Descriptive statistics like frequencies, percentages, ranges and mean was used to summarize the data. Relative importance Index scores have been generated and ranked for each of the factors affecting price escalation to see their relative importance. In this study it has been obtained that there was a moderate level of price escalation. Different factors were responsible for the price escalation. The prominent factors that are responsible for the observed price escalation were delay, price increase of construction inputs/inflation, decision delays, delayed material delivery, variation orders, foreign exchange rate/devaluation as well as poor planning and estimation. Majority of the factors were controllable with the due efforts of the contracting parties. The mitigation modalities the projects have been following included inserting escalation clause in contractual agreements, adjustment and claiming for finance and time extension. But they were seemingly not proper ways since they only give the legal basis for decisions and solving legal disputes rather than mitigating the escalation. Therefore, it is recommended that project scope determination, design approval as well as forecasting of feasible time and cost of the projects should be done before contract is signed. After work is started fast decision and approval of requests, close monitoring of progress of work as per predetermined work schedule and in advance procurements can have significant effect on mitigating the price escalation.