CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
Construction, like other industries, has been experiencing profound changes involving both the business environment and internal organization. In this context, new cost management information that provides better understanding and helps managing increasingly turbulent and complex production processes is needed. Activity-based costing (ABC) has been suggested as the leading contender method to replace traditional cost accounting systems, due to its capability to make the processes and activities performed in the organization more transparent and observable. Over the last decades, many industrial sectors have been experiencing profound changes involving both the business environment and the internal organisation. This process has been so deep and radical as to suggest that a new operations management paradigm has emerged (Bartezzaghi, 1999; Koskela, 2000).
In this new competitive and turbulent environment, effective cost management information has become extremely important to drive improvement efforts. However, besides the environmental, managerial and technological changes occurred in the last thirty years, the existing traditional cost management systems are very similar to the ones that have been used since the mid Twenties. In the face of all these changes, traditional cost account information has become mostly irrelevant and even dangerous for managerial purposes (Ploss, 1990). According to Johnson & Kaplan (1987), traditional management accounting information tends to be too late, too aggregated and too distorted to be relevant for production planning and control. The construction Project is a complex process in which many different actors are involved. The demand for quality assurance comes primarily from the central authorities via the client. Construction cannot be categorized as being strictly either a service or a manufacturing companies (Kubal, 1996), therefore the construction companies must combine quality concepts from both the service and manufacturing industries. The process itself is a transformation that adds value. Given the complexity of most organizations, it is important for quality management purposes to highlight, simplify and assign priorities to the major processes. The long-term performance of any building and its ability to satisfy clients' requirements depend both on decisions made by its designers and on the care taken and skill possessed by the workers at the construction site (Cheetham, 1993). One attribute, which is typical for the construction companies, is the ability to work in projects. In this respect, the construction companies is far ahead of other industries. Builders are used to starting from scratch with new conditions in every project and producing a finished product within a fairly short time. Many activities and actors have to be co-ordinated in a restricted time, in a small space and under various climate conditions. The possibility of influencing the final quality of the product is very small for those who are late in joining the race.
Over the last decades, many industrial sectors have been experiencing profound changes involving both the business environment and the internal organisation. This process has been so deep and radical as to suggest that a new operations management paradigm has emerged (Barkan, 1991; Koskela, 1992). The failings of the traditional management accounting systems have three important consequences. “Projects are complex, mostly new, risky and important undertakings for the organization undertaking the project. They are goal-determined tasks, since the objectives for the deliverables, the deadlines, the resources and the costs are agreed between the project owner and the project team” (“pm-baseline”, p. 10). Project is not any repetitive continuous process; it’s a one-time event. Each project is initiated by the need of an organization to deliver new products and solutions to the market in order to produce profit, knowledge or something else of the organization’s interest. The economic consequences of an investment through a project can be analyzed in a “Business Case Analysis” and “Feasibility Study”. The objective of a Business Case is not only to analyze immediate project costs and benefits, but also the resulting follow-up costs and benefits. The objective of a feasibility Study is to give us a hint in respect to the possible risks of not being able to achieve defined project objectives for whatsoever reason. Each project has it’s own main objective which is defined at the very beginning.
The purpose of this thesis is to review certain tools and techniques that can be used in order to help those responsible for managing a project to potentially better control and manage project costs. The fundamental role of a project manager is to meet the cost, time, performance and quality of the project. In a recent Standish group report IT project continue to struggle with only 29 percent completed on time, 18 percent failed or terminated and 53 percent behind schedule and over budget. Effective most management is essential to effective project management “increasingly Kem competition and the demand for shorter terms to market are driving innovative approaches withi the product creation process. Key opportunities for future improvements originate in initiatives that span both the process and technology environments. (layer et. al., 2002). It could be argued that the probability of greater success is quite low without the proper tools in place to control costs.” According to Ogunlana (2008), although the principle reasons, that causes delays are comparable across developing countries. Several factors pertaining to local companies social-economic, cultural issue and project characteristics also contributes to delays. Delay may occur as a result of the action or inaction on the part of owners, contractor, sub-contractor, consultants or the government.
1.2 Statement of the Problem
Construction cost control systems has been the subject of a myriad of studies. Despite their relevance in terms of both improving the cost estimate structure and integrating cost and schedule, they have hardly contributed to the integration of cost management and production. The information produced by Company cost systems can increase process transparency, providing guidance to identify non-value adding activities and take the necessary corrective actions. Notwithstanding the benefits of its application, Company presents some drawbacks when compared to traditional cost systems. Perhaps, the most important one is the larger amount of data usually needed in Company systems. Indeed, according to some authors, the excessive level of detail is a major cause of unsuccessful Company implementations.
This problem can be even worse when one considers unstable and complex production processes, such as those observed in the construction companies. For collection of primary data where interview is to be conducted the coverage is limited and for wider coverage a more number of researchers are required. A lot of time and efforts are required for data collection. By the time the data collected, analyzed and report is ready the problem of the research becomes very serious or out dated. So the purpose of the research may be defeated. It has design problems like how to design the surveys. The questions must be simple to understand and respond. Some respondents do not give timely responses. Sometimes, the respondents may give fake, socially acceptable and sweet answers and try to cover up the realities. With more people, time and efforts involvement the cost of the data collection goes high. The importance of the research may go down. In some primary data collection methods there is no control over the data collection. Incomplete questionnaire always give a negative impact on research. Trained persons are required for data collection. In experienced person in data collection may give inadequate data of the research.
There is a chance of bias. The informants may not answer some personal questions. It is a time-consuming process. Money and manpower requirements are very high. Some time the interviewers are involved in pressurising respondents to share their personal information. To study the topic of the research out of available instruments for research mainly questionnaire, interview and telephone/mobile phones have been used because these instruments were found suitable for data collection purpose. Mailed questionnaire has not been used because the need has not been felt during the study. Therefore, there is a clear need to discuss the use of Company concepts and principles in the construction environment. As other manufacturing concepts and practices transferred to construction, ABC has to be translated and adapted (Lillrank, 1995).
1.3 Research Questions
a. What are the cost data collected on project?
b. How adequate are the cost data collected on project?
c. What are the hindrances for cost data collection?
1.4 Aim of the Study
The aim of the study is assessing the collection of data for cost management in construction companies in Nigeria with the view to assess the effectiveness of cost management within the construction companies.
1.5 Objectives of the Study
a. To ascertain the cost data collected on project.
b. To determine the adequacy of cost data collection on project.
c. To determine the hindrances for cost data collection.
1.6 Hypothesis
H0: The cost data collected on project is not adequate.
H1: The cost data collected on project is inadequate.
1.7 Significance of the Study
Construction cost control systems has been the subject of a myriad of studies. Despite their relevance in terms of both improving the cost estimate structure and integrating cost and schedule, they have hardly contributed to the integration of cost management and production control systems. Besides the fact that construction cost control systems have not changed much since the Seventies, cost management and production control are still treated independently, as separated systems. From a managerial point-of-view, the effort to develop, implement and operate a cost system is justifiable only when the cost information provides effective support for decision making (Johnson & Kaplan, 1987; Krieger, 1997). Activity-Based Costing has been increasingly adopted in many industrial and service firms as a method to improve cost management in complex production systems.
Despite some similarities to the cost centre method or other traditional costing methods (Horngren & Foster, 1990), the underlying philosophy of ABC is considerably different. ABC is a costing system that is based on the idea that activities consume resources and product/services consume activities. The method is basically a two-stage approach for allocating indirect costs to products based on cost drivers of various levels. In the first stage, resource costs (labour, equipment and power) are assigned to those activities performed in the organisation. During the second stage, activities costs are assigned to the cost objects based on selected cost drivers (e.g., machine set-up, quality inspection and material handling activities), which express a causal relation between the activity demand and the cost object considered. Besides the fact that ABC permits to directly trace manufacturing costs to products, it is possible to determine the costs related to objects different from products, e.g., product family, services and clients. However, the main contribution of ABC to the operations management area is the process view incorporated by the method.
The information produced by ABC cost systems can increase process transparency, providing guidance to identify non-value adding activities and take the necessary corrective actions (Kaplan & Cooper, 1995). Notwithstanding the benefits of its application, ABC presents some drawbacks when compared to traditional cost systems. Perhaps, the most important one is the larger amount of data usually needed in ABC systems. Indeed, according to some authors (Krupka, 1992; Clough, et. al. 1991), the excessive level of detail is a major cause of unsuccessful ABC implementations. This problem can be even worse when one considers unstable and complex production processes, such as those observed in the construction companies. Despite its wide utilisation in manufacturing companies and its capability to increase the transparency of production processes, ABC has been poorly discussed in the construction literature. The few existing studies usually restrict the discussion of ABC concepts to academic applications (Maxwell et al., 1998). Therefore, there is a clear need to discuss the use of ABC concepts and principles in the construction environment. As other manufacturing concepts and practices transferred to construction, ABC has to be translated and adapted (Lillrank, et. al., 1995).
1.8 Scope of the Study
In order to complete the research within the stipulated time frame, this research will focus attention on the study of collecting data for cost management in construction companies in Lagos State, Nigeria.
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