Analysis Of Key Factors of Cost Overrun in Construction Projects Based on Structural Equation Modeling
Introduction
Cost overrun in construction projects remains a persistent global challenge, affecting both developing and developed nations with significant economic implications. Recent studies indicate that over 55% of construction projects in Malaysia and 65% of public projects in Jordan experience budget excesses, highlighting the universal nature of this issue.
This comprehensive analysis, based on the study "Analysis of Key Factors of Cost Overrun in Construction Projects Based on Structural Equation Modeling" published in Sustainability (2025), examines the primary elements driving these financial deviations.By utilizing structural equation modeling (SEM) and exploratory factor analysis (EFA), the research identifies 22 critical factors categorized into project management, resources and supply chain, and external environmental influences. Understanding these dynamics is essential for housing professionals, researchers, and policymakers aiming to enhance project cost-effectiveness and mitigate budget excesses.
Understanding the Scope of Cost Overrun in Construction Projects
The construction industry faces widespread difficulties in maintaining budgetary discipline, a problem that transcends socioeconomic boundaries. From major international events like the London Olympics to local infrastructure developments, cost overrun in construction projects is a common occurrence. Effective cost control is crucial not only for financial stability but also for preventing cascading issues such as project delays and economic pressures due to unexpected expenditures.
Previous literature has broadly categorized influencing factors into three levels: project management, resource supply chain, and external environment. Project management represents the factors that project teams can actively control, including planning, design, and construction monitoring.
The resource supply chain reflects the efficiency and stability of resource allocation, such as materials, equipment, and labor. The external environment encompasses objective conditions that are difficult to control, such as market fluctuations, policy changes, and force majeure events. This study builds upon these categories to provide a more systematic and precise analysis of the influencing paths of cost overrun in construction projects.
Methodology and Data Collection
To ensure robust findings, the researchers employed a multi-stage approach involving literature review, expert interviews, and quantitative analysis. Initially, 37 common cost overrun factors were identified from 30 high-quality academic articles published between 2010 and 2025. Through in-depth interviews with four industry experts, including senior project managers and supply chain specialists, this list was refined to 24 key factors relevant to the Chinese construction context.
Data were collected via internet-distributed questionnaires using a 5-point Likert scale. Out of 400 distributed surveys, 212 valid responses were analyzed, representing a diverse range of organizational types, including contractors, construction units, design units, and consulting firms.
The respondents possessed significant industry experience, with 77% having more than five years of work experience. This sample size met the statistical requirements for both exploratory factor analysis (EFA) and structural equation modeling (SEM), ensuring the reliability and stability of the results.
Key Dimensions of Cost Overrun in Construction Projects
The study categorizes the 22 critical factors into three main dimensions, each playing a distinct role in project financial performance. These dimensions are project management, resources and supply chain, and external and environmental influences.
Project Management Factors
Project management emerged as the most influential dimension, with a total effect of 0.892. This category includes factors such as improper contract management, unreasonable project plans, ineffective progress control, inadequate design, change orders, selection of the lowest bidder, errors during construction, premature bidding documents, site management effectiveness, and contractor efficiency.
Research indicates that poor cost estimation and budgeting practices, often driven by cognitive biases like optimism bias, lead to initial underestimates of 20–30%. Change orders and design changes are particularly detrimental, with some studies suggesting they explain up to 70% of cost overruns in public projects. The current study found that change orders (PM6) and construction errors (PM8) had the highest standardized path coefficients within this dimension, indicating their critical impact on cost overrun in construction projects.
Resources and Supply Chain Factors
The second major dimension, resources and supply chain, showed a substantial total effect of 0.847. This category encompasses material supply shortages and price fluctuations, shortage of equipment and spare parts, labor shortage, shortage of skilled labor, and supply chain disruption or supplier distance.
Material management challenges are extensively documented, with rising raw material prices identified as a primary cause of cost overruns in many regions. The adoption of new materials, while offering structural benefits, introduces new cost management challenges requiring careful cost-benefit analysis.
Supply chain flexibility, including vendor and sourcing flexibility, is crucial for mitigating risks associated with supplier distance and inventory limitations. In this study, material supply shortages (RS1) and supply chain disruption (RS5) demonstrated particularly high explanatory power, accounting for 98.0% and 95.4% of the variance, respectively.
External and Environmental Influences
External and environmental influences, while having a lower direct total effect of 0.623, remain significant contributors to cost overrun in construction projects. This dimension includes weak system and economic environment, market price changes, currency exchange rate fluctuation, force majeure events, project location constraints, corruption and fraud, changes in government regulations, and the impact of technological advances.
Factors such as inflation, market conditions, and unanticipated regulatory changes can cause project costs to deviate significantly from the original budget. Weak institutions and corruption further exacerbate these issues, leading to confrontational contracting and quality defects. Force majeure events, such as natural disasters or public health crises, also contribute to direct epidemic prevention costs and indirect losses from equipment idleness.
Interactions and Pathways in Cost Overrun in Construction Projects
One of the unique contributions of this study is its analysis of the interactions between the three main dimensions. The structural equation modeling revealed complex relationships that go beyond simple direct effects.
Amplifying and Mitigating Effects
The analysis showed a strong positive correlation (1.36) between project management and resource factors. This indicates that management deficiencies amplify resource-related problems. For instance, poor site management often leads to inefficient use of materials and labor, creating a cycle of increasing inefficiencies.
Conversely, negative correlations were found between external factors and both project management (-1.11) and resource management (-2.39). This suggests that effective internal management can help mitigate external challenges. A one-unit improvement in resource management can decrease the impact of external factors by 2.39 units, highlighting the buffering capacity of strong internal systems.
Cascading Effects
The model also reveals cascading effects, where issues in one area trigger chain reactions in others. Inadequate project planning affects resource allocation, which in turn compounds the impact on cost control. This reinforcing mechanism helps explain why initial management issues can escalate into significant cost overrun in construction projects if not addressed promptly. The high R² values across resource management factors suggest that strong resource management systems provide significant buffering capacity against various challenges.
Practical Recommendations for Mitigating Cost Overrun in Construction Projects
Based on the identified impact pathways, the study offers several targeted recommendations for improving cost control in construction projects.
Enhancing Project Management Systems
Given the dominant effect of project management, primary attention should focus on enhancing management systems. This includes implementing effective change management procedures, improved quality control systems, and extensive project-planning frameworks. Addressing cognitive biases in cost estimation and ensuring rigorous risk assessment during the pre-project phase are critical steps. Additionally, improving coordination among stakeholders and establishing effective communication mechanisms can reduce the frequency of change orders and design errors.
Strengthening Supply Chain Resilience
For the resource management pathway, organizations should develop dependable material supply networks with contingency sources. Implementing adaptable resource allocation methods and advanced supply chain management systems can enhance efficiency.
Establishing buffer systems and robust supplier connections is particularly important given the strong interaction between resource and management factors. Investing in supply chain resilience allows organizations to better handle market uncertainties and supply disruptions.
Building Environmental Resilience
To address external factors, organizations should focus on building environmental resilience. This includes establishing systematic risk assessment procedures and proactive alert systems for external changes.
Developing adaptable project frameworks and contingency plans can help utilize the potential for internal management to mitigate external challenges. While external factors have lower direct effects, their influence through resource availability and project execution necessitates comprehensive risk management frameworks.
Conclusion
This study provides a comprehensive quantitative analysis of the factors contributing to cost overrun in construction projects, moving beyond traditional single-factor analyses. By synthesizing numerous factors into three critical dimensions and revealing previously unidentified interaction effects, it offers a structured understanding of cost overrun mechanisms.
The findings emphasize that project management is the most influential factor, followed by resources and supply chain management, and external environmental influences.
However, the strong interactions between these dimensions highlight the need for an integrated management approach. For researchers, students, and housing professionals worldwide, these insights offer valuable guidance for enhancing project cost-effectiveness and mitigating budget excesses.
As the construction industry continues to expand globally, addressing cost overrun in construction projects remains essential for sustainable development and economic stability.