The Interplay between the Contract Type and the Management of Cost Groups

Abstract

Construction projects are argued to be the most complex of all production undertakings (Baccarini, 1996). Williams (2002, 2005) states that the complexity of these projects is a contributing factor to project failures, such as cost overrun, which are commonly seen in infrastructure project (Cantarelli, Molin, Van Wee, & Flyvbjerg, 2012). As one of the first Morris & Hough (1988) describe that cost overruns are common and that many projects appear as failures, while Flyvbjerg et al. (2003) agrees with Morris & Hough, by stating that this is a long-lasting problem since cost estimates have not improved and cost escalations have not decreased in the past 70 years. However, between the 1990s and 2000s, western governments were reassessed and more tasks were privatized (England & Ward, 2007; Pollit & van Thiel, 2007). Governments expected that private contractors would be able to innovate more, deliver quicker, reduce costs, and operate more efficient (Savas, 2000) resulting in integrated contract types. This research aims to provide insight into the relationship between the contract type and the management of cost groups, in Dutch national infrastructure projects in order to improve cost management. To provide an answer to the main research question, a literature study has been performed followed by a statistical analysis of 68 infrastructure projects with contract types including, RAW (n=24), E&C (n=22), and D&B(M) (n=22). Combined with the expectations of the expert panel this study concludes that there is no relation between the contract types RAW, E&C, and D&B(M) and the cost management of Dutch national infrastructure projects. However, it has been observed that project members of a contractor overestimate the relationship that D&B(M) projects should have higher cost overruns. This study concludes that the cost performance, of cost groups other than engineering, differ insignificantly and marginally small between contract types with varying design responsibilities. Moreover, the expert panel assumes that more information leads to less uncertainty and risks resulting in less cost overruns. Which is a common reasoning as stated in the GWW market analysis performed by McKinsey. However, this study concludes that the unavailability of information depending on the moment of contracting does not have an influence on the uncertainty of the cost performance nor the cost performance itself. Therefore, this study does not believe that the “two-phase-process” as proposed by McKinsey will contribute to less uncertainty about the cost performance. Instead, this study illustrates that Dura Vermeer confidently applies percentages to estimate relatively small, often process-related indirect cost groups which on average incur a cost overrun. Therefore, both the client and contractor should improve the process of constructing large complex infrastructure projects in order to improve the cost performance.