Cost Overruns – Term Paper

Cost overruns are as a result of the mismatch between projected costs and the actual results. For most construction projects, projections are necessary for the project to go on smoothly and at the same tine be done within the three factors of performance, which are, time, quality and cost. As the study indicated, the main factor leading to cost overrun is the political situation, especially for a politically unstable region, such as the West Bank. The main reasons for this are that political instability leads to lack of predictability. With this kind of high unpredictability, it is hard for those involved to plan properly, because there are many variables that van affect the accuracy of their predictability. Without the project managers being able to plan effectively, it becomes harder for the project to be done within time, budget and expected quality. Time, for instance is a major factor that needs to be addressed because it is a cost driver. With political uneasiness, it is hard for projects to be done in time. This is because delays will happen when there are disruptions in the peace of the region. With time of project completion not being predictable, it is hard for the project to be done within budget. This is as a result of the fact that time affects the other aspects of project completion, such as quality and cost.

Every time there is a delay, more cost is added to the project. As a result, this could be the reason why unstable regions such as the West Bank experience more cost overrun and have higher risks of cost overruns. The other reason that can be attached to the reason why political instability is the most significant factor that affects the cost overrun is the fact that it has a direct impact on the economics of a nation or regions. With modern projects, international operations is almost always a necessary. This would mean that there is a flow of foreign currency meant for the project, and any political instability is likely to cause changes in the exchange rate. Although this was not a major variable in the study, it is feasible to conclude that political instability can lead to cost overruns through the foreign exchange rates that are affected by the political stability of a region. This would definitely change a lot of factors ranging from the cost of materials to labor cost.

It is also necessary to note that the political instability can lead to not only shifting foreign currency exchange rates but also to disruption of labor. With a region such as the West Bank, it would be necessary to note that when there is political upheavals, more people are likely to forgo work, which would then lead to high cost of labor. As a result, it is no surprise that political instability is cited as the most serious reason for cost overruns for construction projects in unstable regions.

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As the results indicate, over 45% of the respondents allocated an increase of 11% to 30% on consecution projects in the West Bank region, while , 41.7% of the participants  allocated 6% to 10% of cost overrun in such projects. These percentages are too high, especially considering that the projects are who millions of dollars, which would mean that even a 1% increase in the estimated cost would lead to a lot of money which was not planned for the project being injected to the project. This can be highly risky for construction firms that take out jobs on contracts because it can eat on the profits of the firm and render such projects unprofitable. It is also necessary to note that 8.3% of the respondents even estimated cost overruns of up to 51%. With such overruns rates, carrying out projects in such an area can be an impossible endeavor, whether for contracting firms or for those who carry out own projects.

While 72.9% of responders indicated that all of there are many factors for cost overrun, 16.7% attributed political instability to the problem of cost overruns. Construction projects, just like any economic endeavors, are affected by political problems in a big way. This could be because of, apart from the problem of unpredictability, the fact that political instability is something that is beyond the control of players that affect the economic at the micro level. Unlike other factors such as social issues that are easier to navigate, political instability is difficult to control, which would then make it harder for those affected to avoid its impact on their economic activity. However, as the results indicated, social factors also have a major impact on the way a project is planed and implemented and can affect how well a project will be able to stick to the projected costs, time and quality. For managers operating in such regions, mastering the art of navigating the unpredictable political labyrinth can be a big factor to help them deal with cost overruns.