Cost Management Behaviour Under Cost Overruns of Japanese and Thai Construction Companies

Generally, the basic objective of a construction project is to implement the project on time within reliable budget and meet required quality. From the contractors’ point of view, cost control is an extremely important aspect because it is conducted to ensure that the project costs are monitored and kept within the project’s objectives and company’s requirements. Therefore, the contractors have to pay attention to it in order to maximize profit.

However, most of Thai construction companies are still facing with cost overrun and competitiveness nowadays. Previous study by Charoenngam and Sriprasert (2001) found that one reason is cost control systems are unsystematic and ineffective cost information management. Lack of reliable data, ineffective planning, insufficiency of updated data, or ineffective cost management is also critical problem that can lead to cost overruns (Construction Management Committee, 1999). Moreover, several project managers in several projects are incompetent in order to bring successful project within a given budget. Many companies have to face with untimely and meaningless cost status so that project managers cannot make correct decision and take corrective actions. It means that if management does not receive accurate information timely, right decision making will not be effective. As a result, productivity improvement cannot be attained.

Not only internal factors can lead cost overruns but also companies still face with several uncontrollable external factors such as oil price, market conditions, and interest rates. These factors affect project costs that may lead to cost overruns if lack of appropriate cost information management. Furthermore, continuous cost overrun in most of the projects of a company can lead to bankruptcy. Up to now, both inefficient cost information management and uncertain variables factors still are the problems affecting cost overruns in construction companies. In order to control high project cost and accomplish profit maximization, it is necessary to understand the current cost information management and manage problems occurring.

In Thailand, there are several ongoing projects that are managed by Japanese companies. Therefore, Japanese company has much influence to construction industry in Thailand. Moreover, when Japanese companies go and invest in any countries, they bring their culture, organization and management to that country. It is interesting to understand the cost management behavior in situation of cost overruns of Japanese construction companies and Thai construction firms. Therefore, the reactions under each management behavior of both Japanese and Thai firms are generated. Moreover, key factors influencing same or different reaction of both two groups will be understand.

Ms. Narumon Jongcharoensub made a study to understand the key parameters that influencing the same or different reaction of Japanese and Thai construction firms. Her study objectives were to (1) identify key factors affecting the cost management in each stage, warning, detection, analysis, and corrective action; (2) investigate the existing practice of cost overruns management in order to understand the management behavior especially the difference between Japanese and Thai construction companies; and (3) propose recommendation for improving of cost overruns management.

Ms. Jongcharoensub found out that cost management behavior under cost overruns consists of four stages wherein each stage has different key factors that make difference or similar behavior and reaction. These are:
Warning stage where the key factors are purchasing requisition procedures, sub-contractor payment procedure.
Detection stage where the key factors are cost detection style, timeliness to detect cost overruns, accuracy of cost overruns.
Analysis/ reporting stage where the key factors are ability to identify cause of overruns, ability to recheck cause of overruns, ability to forecasts cost at completion; .and
Corrective action stage where the key factors are flexible of corrective action, project manager’s behavior, feedback’s evaluation by project manager

Her research revealed that the companies’ strategies vary from one group to other, thus companies’ behaviors about cost management are also different. The Japanese companies try to put customers’ satisfaction as the top target whereas mostly medium-scale Thai companies concentrate on the cost. On the other hand, the large-scale Thai companies are in the middle. They try to trade off and balance between project cost and customer’s satisfaction. The differences in companies’ strategies make the cost management in Japanese companies and large scale Thai companies vary even though they are quite similar in cost management system. The research also found that the companies’ performance and project’s cost management in Japanese are the best while the small-scale companies are in the opposite side.

Key factors that affect cost management behavior in each stage

The similarity of Japanese and Thai (L) companies

The key factors appear in Japanese and Thai (L) is quite similar and the only difference in cost management is the company strategy which is the way manager does on-site. Since owner’s satisfaction is the most concern of Japanese companies, they always follow the owner and do not care in cost especially in urgent situation. Another difference is manager’s behavior. Japanese project manager will not blame the project team in the meeting, but he will call the staff who did mistake to discuss about cause and reason of that problem. This way is motivate the staff who did mistake in order to correct it. On the other hand, project manager from Thai (L) companies blame the staff who did the mistake in the meeting. Moreover, blaming with negative pressure is generated in Thai (L) companies. It discourages the staff who did mistake and indication to other staff to avoid mistake.

The difference of Japanese, Thai (L) and Thai (M) companies

From the findings, most of cost overrun management in Thai (M) companies are quite different. Medium Thai companies still have not got the factors that appear to be positive factor in cost management as follows:

Cost detection is centralized and Timeliness to detect cost overruns

On-site analysis is identified only cost overruns from quantity. Project manager or project engineer cannot save cost or minimize cost overruns at a given progress. This result affects the Timeliness to detect cost overruns which is one factor influences to minimize or prevent cost overruns. Cost overruns from excessive unit price will be known at nearly the end of project. Therefore, cost overruns are not handled at the beginning. Most of Thai (M) companies do not allow site personnel to know and manage cost on –site. This process will not motivate site personnel in cost control. Project manager and project engineer know only cost overrun in term of excessive quantity. This is the indirect way to know cost status but the real actual cost is not recognized from site personnel. However, cost detection is not decentralized in Thai (M) companies because corruption may be occurred. Moreover, money in Thai (M) companies is not much so they cannot give authority to personnel on-site. At this point, corruption is occurred in most of Japanese and Thai (L) companies when cost detection is decentralized. However, the amount of corruption compares with amount of profit is too little. Moreover, Japanese and Thai (L) companies cannot detect cost overruns by centralized because there are a lot of projects.

Timeliness to input data

Accuracy of cost overruns affects analytical cost overruns in term of identifying cause of overrun and the way to take corrective action. All companies, even Japanese, Thai (L), or Thai (M) companies obstruct with accuracy of cost overruns from human behavior. Since the attention and responsibilities of their staffs is limited. Most of staffs always wait to input collected data until report submitting. Therefore, many collected data is not accurate enough for project manager/ site manager to analyze.

Moreover, manipulating to cover up staff’s mistakes is always occurring from all of Japanese, Thai (L), or Thai (M) companies. Although, Japanese and Thai (L) companies still have quite sufficient form of collecting data and clear procedure for working, collected data always inaccurate and insufficient. Furthermore, inaccurate of cost overruns will also affect forecasting cost at completion. If amount of cost overruns are inaccurate so much, clear direction to correct the problems cannot be identified.

Her thesis abstract is copied and posted.

ABSTRACT

In order to maximize profit, cost control is an extremely important aspect because it is conducted to ensure that the project costs are monitored and kept within the project’s objectives and company’s requirements. However, cost overruns are still becoming common problems in the construction industry nowadays. Cost overruns create financial risk to both general contractors and owners. Moreover, Japanese companies have much influence to construction industry in Thailand and many projects on hand are managed by Japanese companies. Therefore, it is important to have a study on cost management behavior.

The purpose of this study was conducted to: 1) identify key factors affecting the cost management in each stage, warning, detection, analysis/ reporting, and corrective action., 2) investigate existing cost management practice in order to understand the behavior, reaction, and key parameters affecting different reaction between Japanese and Thai companies, and 3) To propose recommendation for improving of cost overruns management.

The data was collected from interview surveys in large scale projects of 3 groups consisting of Japanese companies, large scale Thai companies, and medium scale Thai companies. There were 3 companies conducted in each groups. The target group of this research is project managers, project engineers, site engineers. The findings were already discussed in detail and recommendations for improvement of cost overrun management were propose in this study.