Cost Escalation in Road Construction Contracts

Abstract

This paper presents a study of cost escalation in unit price road construction contracts. The aim is to investigate why the final cost of contracts differs from the agreed contract cost following tendering, both to identify causes of observed discrepancies and to suggest measures that could improve the planning and delivery of future projects. Road projects often consist of several contracts and as they account for the biggest costs of the projects, cost escalation in the contracts may increase the risk of project cost overrun. Even if contract cost performance is an important indicator of project success, it may be too simplistic to equate this with project success. It is quite possible to deliver a project within budget even if contract costs escalate, as long as the project cost contingency is adequate to cover such escalations. However, escalations in contracts increase the risk of project overrun and may lead to other problems such as conflicts and delays. The results show that most of the studied contracts experienced cost escalation. The main cause of the escalation was change orders to the scope that were not covered by the original contract. In addition, the results indicate that complexity represented by contract size, duration, and urban location increases the risk and size of cost overrun. Based on these findings, the paper presents some recommendations on how contract delivery can be improved as well as some implications for future research.