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Aim of Study: This study has focused on identifying the issues related to budget overrun faced by construction industry. Need of Study: Construction industry is very significant in contributing socio-economic growth of a country. Hence, Malaysian government has allocated huge amounts of money for construction development in recent years. Unfortunately, the industry is facing severe problem of budget overrun Research Approach: This study was carried out quantitatively by conducting questionnaire survey amongst the client, consultant and contractors. A total of 122 collected questionnaires (97 large projects and 25 small scale projects) were analyzed statistically using SPSS software package. Research Findings: The findings show that budget overrun is a common phenomenon in large as well as small projects. For large project, amount of cost overrun ranges from 5-10% of the estimated cost while in small projects, it was found as 10-15% of estimated cost. The major contributors to theses overrun in large projects are material and construction costs while in small construction projects, the causes are material and plant & equipment costs. Most of the respondents suggested that the effective methods of controlling these overrun are cost code system and value management technique. Limitations: Data collection for this was limited to construction industry of southern region of Malaysia. Importance and Contribution: The findings of the study gave a very clear insight about the budget overrun problem in construction industry. Determined level of implementation for various techniques and significant contributors of budget overrun will be helpful for practitioners and researchers in developing a better system for controlling budget overrun.
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International Journal of Civil Engineering and Built Environment
Vol.1, No.1, 2013; ISSN 2289 4497
Published by YSI Publisher
1
Budget overrun issues in construction projects of
southern part of Malaysia
Aftab Hameed Memon, Ismail Abdul Rahman
Faculty of Civil and Environmental Engineering, University Tun Hussein Onn Malaysia, Malaysia
Corresponding Author:aftabm78@hotmail.com
Abstract
Aim of Study
This study has focused on identifying the issues related to
budget overrun faced by construction industry.
Need of Study
Construction industry is very significant in contributing
socio-economic growth of a country. Hence, Malaysian
government has allocated huge amounts of money for
construction development in recent years. Unfortunately, the
industry is facing severe problem of budget overrun
Research Approach
This study was carried out quantitatively by conducting
questionnaire survey amongst the client, consultant and
contractors. A total of 122 collected questionnaires (97 large
projects and 25 small scale projects) were analyzed statistically
using SPSS software package.
Research Findings
The findings show that budget overrun is a common
phenomenon in large as well as small projects. For large project,
amount of cost overrun ranges from 5-10% of the estimated cost
while in small projects, it was found as 10-15% of estimated
cost. The major contributors to theses overrun in large projects
are material and construction costs while in small construction
projects, the causes are material and plant & equipment costs.
Most of the respondents suggested that the effective methods of
controlling these overrun are cost code system and value
management technique.
Limitations
Data collection for this was limited to construction industry
of southern region of Malaysia.
Importance and Contribution
The findings of the study gave a very clear insight about the
budget overrun problem in construction industry. Determined
level of implementation for various techniques and significant
contributors of budget overrun will be helpful for practitioners
and researchers in developing a better system for controlling
budget overrun.
Keywords: budget overrun, large projects, small project,
contributors to budget overrun, Malaysia
I. INTRODUCTION
Completion of any project within the estimated budget
is the basic requirement of the owners. To ensure this,
practitioners adopt various practices of budget
management and control. Budget management is a
proactive procedure which focuses ‘create more value at
lower cost’ by improving [1]. It can be achieved through
promoting the principles of continuous improvements and
helping the organization in making the right decisions at
right time. In spite of wide use of budget management
techniques, construction industry in Malaysia is facing
serious problem of overrun in budget as asserted from a
research project conducted by Abdullah [2] for
construction projects administrated by MARA Malaysia.
According to his study, more than 90% of MARA projects
faced delays with major effect of budget overrun. Further,
80% of Public Work Department (PWD) projects in 2008
experienced delays with major effect of budget overrun
[3]. Construction Industry Development Board (CIDB)
Malaysia highlighted that construction industry in
Malaysia is facing chronic problems like schedule delay,
budget overrun, defects and over dependent of foreign
workers as cited by [2]. Hence, budget overrun is very
important issue which needs to be controlled as it can
affect the development plan of any country. For effective
control of budget, there are several techniques applied in
construction industry worldwide which can help the
practitioners in controlling this problem of budget overrun.
Hence, this study is carried out in assessing the issues of
budget overrun and investigating various budget
management techniques applied in construction industry
and their relative effectiveness.
II. RELATED WORKS
Construction industry is regarded as fragmented
industry and every project involves myriad parties. Each
party is responsible for different activities which are
interrelated with each other in order to achieve full scale
project. Further it involves various types of resources
(majorly classified as material, manpower, machinery and
money) and different operations. In achieving proper
management and control of project budget, the expenses
and cost of projects is classified in different categories.
Broadly, construction cost can be classified into two
categories [4] as follows:
Direct cost: are attributable to a specific task of the
project.
Material - costs of material, e.g. Concrete,
welding rod, wastage, etc
Labour - costs of project workforce, e.g.
salary, overtime payment, etc
Plant and equipment - e.g. office equipments,
site equipment, etc. and also costs of delivering
goods to the site
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Indirect cost: cannot be directly attributed to any
specific task of the project.
General overhead cost of advertising, profit,
taxes, insurance, etc.
Job overhead cost of salary, office expenses,
etc
In order to control these, Tang [5] investigated 8
techniques in construction industry of Hong Kong. These
techniques are:
a) Budget Planning and Control
b) Estimating
c) Budgeting
d) Cash Flow Forecasting
e) Financial Reporting and Cost Reporting
f) Cost Code Systems
g) Value Management
h) Judgement
A. Budget Planning and Control
Since more than 80% of project costs are determined
during the initial stages of the design, hence early planning
and skilful estimation helps in adequate decision making.
For this, budget planning can be used effectively for
evaluating the project budget. Ashworth [6] stated that by
proposer application of this technique in construction
projects:
The tender sum is more likely to equate with the
approved budget estimate
There is less possibility of addendum in bills of
quantities or re-budgeting being required
budget-effectiveness and a value-for-money
design are more likely to be achieved
A balanced distribution of expenditure is likely to
produce a more rational design
The amount of pre-tender analysis by the architect
and quantity surveyor should enable more decision
to be taken earlier, resulting in a smoother running
of the project on site
Budget planning provides a sound basis for
comparing different projects
Budget planning process focused (a) establishment of a
realistic first estimate, (b) plan showing how this estimates
should be spent among the various parts or elements of a
project, and (c) monitoring process to ensure that the actual
design details for the various elements can be constructed
within the cost plan. Figure 1 shows the stepwise approach
for budget process.
Figure 1. Budget planning during the design and construction phases (Source: Ashworth [6])
Budget control is team endeavour and the effectiveness
of cost control depends on how well the basic project
management practices are implemented on the project [7].
Further, project budget control data helps project
management in decision-making as well as it helps
estimating and planning department for providing
feedback in preparing effective estimates and bids on new
projects [8].
B. Estimating
The estimating technique is usually used in
construction at pre-tender stage to provide an indication of
the probable budget of construction project. This is an
important factor of client’s overall strategy of the decision
to build. The estimate provides the basis for his budgeting
and control throughout the lifecycle of a project.
Depending on continuous progress and scope of project,
estimate may be reviewed and revised many times.
According to Ashworth [6] estimation may be classified
into three categories for the purpose of producing a pre-
tender as follows:
a) Budgeting this decides whether the project
should proceed as envisaged
b) Controlling this uses the estimate as a control
mechanism throughout the design process
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c) Comparing this uses the estimate as a basic for
the evaluation of different design solutions
C. Budgeting
A budget is a financial evaluation of the future courses
of action set out in a business plan. A budget is a financial
evaluation of the future courses of action set out in a
business plan. It is a detailed plan which sets out in terms
of money, the plans for income and expenditure in respect
of a future period of time [9]. It reflects the financial
consequences of the agreed strategies that are necessary to
achieve corporate objectives. The budgetary process fits
into the overall planning process, it evaluates the financial
consequences of the plan and provides financial feedback
so that plans can be monitored and revised [10]. The
purpose of a budget system is to serve the needs of
management in respect of the judgments and decisions it is
required to make and to provide a basis for the
management functions of planning and control. The budget
planning and relationship has illustrated in Figure 2.
Figure 2. Budget Planning and Relationship (Source: Weetman [9])
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D. Cash Flow Forecasting
Cash flow of a project is a complete history of all cash
disbursement and all earnings received as a result of
project execution. Cash flow of a project equals to cash
inflows to the enterprise minus cash inflows from the
enterprise i.e. Cash inflows to the enterprise Cash
outflows from the enterprise .
Inflows and outflows of cash are caused by different
factors and the enterprise will try to clear the causes [9].
Net cash flow of construction projects may be positive or
negative during project lifecycle until the very end of
construction if the final payment or advanced payment is
received before starting the project. This is a typical
situation when the final payment consist retention money
and the retention percentage is greater than the percentage
of the profit. According to Hyung [11], cash flow of a
construction project consists of cash out (such as bid costs,
preconstruction costs, mobilization, payments of
subcontracts, labour and overhead); and cash in such as
billings less retentions, retentions, claims and change
orders.
E. Financial Report and Cost Report
Financial report and cost report is used to record all
the financial transactions, payments in and out, together
with amounts owed and owing [4]. It helps the
management of organization in decision making and also
for the financing of the project. This helps in knowing (a)
financial performance to date, (b) anticipated financial
performance of current year and (c) anticipated financial
performance at the end of the project [12].
F. Cost Code System
The purpose of the cost code system is to enable huge
of cost data to be identified and coded for the most
efficient application of cost management throughout the
contract period adequate coding system simplifies the data-
handling facility and also provides economy of storage in
the case of a computer [13]. A good and adequate system
of coding is one that simplifies that task of referring to the
items to be coded.
G. Value Management (VM)
Value Management (VM) is a multi-disciplinary, team
orientated, structured, analytical process and systematic
analysis of function which seeks best value via the design
and construction process. It focuses on meeting client’s
needs. It is a proactive, creative, problem-solving approach
[14]. VM focuses on value rather than cutting cost and it
does not mean to sacrifice the quality of building for the
sake of reducing cost [15]. For successful VM application,
client understands towards the VM concept is important as
it is not just merely considering the cost but it considers
the relationship between value, function, quality and cost
in a wider perspective [16] whereby it eliminates the
unnecessary cost which does not contribute to the project’s
value, system and facilities [14].
H. Judgment
Any cost management techniques cannot be used
without judgment [17]. Tang [5] highlighted that “the good
price forecasting technique include both historical trend
based data and competent judgement based on construction
experience and knowledge”. The relationship between
judgement and other techniques can be summarized as:
[technique] + [judgment] = [advice]
III. DATA COLLECTION AN ANALYSIS METHOD
Survey amongst the practitioner involved in handling
small and large scale projects in southern part of
peninsular Malaysia was carried out for collecting data. A
5-point likert scale was used to understand the perception
of practitioners for significance of contributors of budget
overrun and the effectiveness of various methods of budget
management. For assessing significance of contributors of
budget overrun likert scale was used as: 1 for not
significant, 2 for slightly significant, 3 for moderately
significant, 4 for very significant and 5 for extremely
significant while for assessing effectiveness of budget
management techniques likert scale was used as: 1 for not
effective, 2 for slightly effective, 3 for moderately
effective, 4 for very effective and 5 for extremely
effective.
Gathered survey responses were analyzed statistically
using SPSS software package in calculating the ranking of
budget overrun contributors and effectiveness of budget
management methods based on the mean rank score. The
higher the mean rank score shows the higher is the
ranking. The formula used for the mean rank calculation
is;
n
R
M
M
R
max
=
Where MR is Mean Rank, R is Individual Mean Rank
of effect, Rmax
As a part of data collection, a total of 200 questionnaire
sets (50 in small scale projects and 150 in large scale
projects) were distributed randomly amongst the personnel
involved in construction industry in the states of Johor and
Melaka from southern part of Peninsular Malaysia. As a
result 103 responses were received back, of which 6
questionnaire sets were incomplete and as considered as
invalid. Table I shows the summary of the samples
collected.
is the Maximum Individual Mean Rank of
effect and n is the number of effects.
TABLE I. SAMPLING STATISTICS
Small Scale Projects Large Scale Projects
No of questionnaire sets distributed 50 150
No of questionnaire sets received 25 103
No of invalid (incomplete) questionnaire sets 0 6
No of valid questionnaire sets 25 97
% of questionnaires received against valid questionnaires received 50 68.7
% of questionnaire sets received against questionnaire distributed 50 64.7
www.zwgm.org International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014
5
IV. RESULTS AND DISCUSSION
A. Extent of Budget Overrun
The respondents were asked to confirm the issues of
budget overrun in construction projects they have handled.
They were required to select the approximate overrun in
terms of the percentage of the total project budget. It was
analyzed by frequency calculation with statistical analysis
as summarized in table II.
TABLE II. EXTENT OF BUDGET OVERRUN IN CONSTRUCTION PROJECTS
Extent of Cost
Overrun
Small Projects
Large Projects
Frequency
Percent
Cumulative
Frequency
Percent
Cumulative
0%
0
0
0
4
4.1
4.1
1-5% 5 20.0 20.0 15 15.5 19.6
5-10% 8 32.0 52.0 59 60.8 80.4
10-15% 5 20.0 72.0 8 8.2 88.7
More than 15% 7 28.0 100.0 11 11.3 100.0
Table II shows the budget overrun is common problem
in both small scale and large scale projects. As perceived
from the table, all the respondents stated that they face
budget overrun in their projects. Majority of these
respondents with 32% mentioned that their project overran
by 50-10% of the budgeted cost of the projects. This is
followed by 28% respondents mentioning that they face
overrun of more than 15% in their projects while 20% of
respondents faced 1-5% of overrun and 10-15% of budget
overrun. On the other hand in large scale project 4% of
respondents mentioned that their projects are completed
within budgeted cost and 96% of respondents faced
overrun in their projects. Of these, majority of respondents
with approximately 61% stated that they faced 5-10%
budget overrun in their projects. While 15.5% of
respondents faced 1-5% of budget overrun, 11.3% of
respondents faced more than 15% budget overrun and
8.2% respondents faced 10-15% of budget overrun.
B. Extent of Budget Overrun
Ranking of the contributors for budget overrun in small
scale and large scale projects was assessed by calculating
mean rank value of each contributor using statistical
software package SPSS v17. The results are presented in
table III.
TABLE III. RANKING OF CONTRIBUTORS OF BUDGET OVERRUN
Budget Overrun Contributors
Large Projects
Mean Rank Value
Rank
Mean Rank Value
Rank
Material Cost 7.42 1 7.13 1
Plant and Equipment Cost 6.38 2 6.05 3
Labour Cost 5.94 3 6.01 4
Construction Cost 5.94 4 6.45 2
Head Office Overhead 5.14 5 5.38 6
Sub-contractor Cost 5.10 6 5.82 5
Project Delay Cost 2.80 7 2.44 8
New Requirement of Owner 2.36 8 2.44 7
Table III shows that material cost is most significant
contributor of budget overrun in both small and large scale
projects as perceived by the respondents. One of the main
reason for material cost problem in Malaysia is monopoly
of the suppliers which results in sudden shortage of certain
material. Consequently, the industry players purchase the
material at higher rates. Further fluctuation in material
prices is also unpredictable factor and affects significantly
on material costs. 2nd ranked factor in small scale project is
found as plant and equipment cost for small scale project
while in large scale projects, this factor is 3rd ranked factor.
This may be because of the reason that in small scale
projects mostly contractors are not financially strong and
they bring the plants and equipments on rental for project
execution while large contractors have their own plants
and equipments. Respondents from small scale projects
placed labour cost at 3rd place while this factor is placed at
4th
C. Extent of Budget Overrun
rank by the respondents of large scale projects
In order to management the budget of project to reduce
the overrun, the respondents have been applying various
methods in their projects. The respondents were asked
about the effectiveness for each technique they have
practiced. The survey responses were assessed hierarchal
through mean rank value as presented in table IV.
The results in Table IV shows that in small scale
projects, respondents considered that “Cost code system”
is most effective technique while in large projects this
technique is considered slightly effectives and is ranked at
6th place. This is followed by value management
technique is placed at 2nd rank by respondents involved in
small scale projects and the same is placed at 5th rank by
respondents involved in large projects. One of the possible
reasons may be that VM has not yet become widely
practiced in large projects of Malaysia. Hence actions
should now be taken to exert its full potential to improve
value for money for the clients of the industry. It is argued
by Che Mat [16] that the clients’ understanding towards
the VM concept is important as it is not just merely
considering the cost but it considers the relationship
between value, function, quality and cost in a wider
perspective. It helps in eliminating the unnecessary cost
www.zwgm.org International Journal of Civil Engineering and Built Environment Vol. 1 No. 1, 2014
6
which does not contribute to the project’s value, system
and facilities [14]. On the contrary, Cash Flow Forecasting
is considered as most effective technique for budget
management in large projects while it is placed at 6th rank
by respondents involved in small scale projects. In large
scale projects, 2nd ranked technique rated is Tender
Budgeting/Estimating and it is rated as 5th ranked
effective techniques as perceived by respondents involved
in handling small scale projects.
TABLE IV. RANKING OF EFFECTIVENESS OF METHODS FOR BUDGET MANAGEMENT
Methods of Budget Management
Small Projects
Large Projects
Mean Rank Value
Rank
Mean Rank Value
Rank
Cost Code System 12.90 1 13.45 6
Value Management 12.46 2 14.23 5
Elemental Cost Plan/Comparative Cost Plan 12.14 3 15.29 2
Financial Report and Cost Report 12.10 4 14.87 3
Tender Budgeting/Estimating 11.90 5 15.29 2
Cash Flow Forecasting 11.82 6 15.84 1
Working Budgeting/On-going Job Budgeting 11.02 7 13.05 7
By Judgment with Experience and Intuition 10.58 8 14.64 4
V. CONCLUSION
Budget management is very crucial issue in achieving
the completion of projects within the estimated budget of
the projects. For this various techniques have been
implemented in construction projects but yet the
construction projects are rarely completed within budget.
Hence, this study assessed the performance of various
techniques of budget management and the significance of
contributors of budget overrun in small scale and large
scale projects. It will help the practitioners and researcher
in improving the criteria and application strategies of the
techniques considered as effective so that overrun of
budget can be controlled. This study was carried out by
survey amongst the practitioners involved in handling
small and large scale projects in Johor and Melaka states of
Peninsular Malaysia. The findings of the study are
summarized as follow:
1) All the respondents participating in survey
mentioned that they faced budget overrun in their
projects while in large project 95% of projects
mentioned that they face budget overrun
2) Majority of respondent in small as well as large
scale projects mentioned that mostly the overrun
faced in projects is 5-10% of the estimated budget
of project
3) In small scale projects major contributors of
budget overrun are material cost, plant &
equipment cost and labour cost. While in large
projects major contributors of budget overrun
include material cost, construction cost and plant
& equipment cost.
4) Cost code system, value management and
elemental cost method are rated as 3 most effective
techniques of management for budget in small
scale projects. As perceived by respondents
involved in large projects, top 3 effective method
of budget management are Cash Flow Forecasting,
Tender Budgeting/Estimating and Elemental Cost
Plan
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The construction industry is an industrial sector that is complex and dynamic. As a developing country, Malaysia recognizes building as one of the main contributors to the economy of the country. Hence, being one of the economic drivers, the construction industry needs to ensure it remains important and competent by venturing successful strategies applied by other sectors. The implementation of supply chain management, especially in the manufacturing sector, has been positive and has produced the expected benefits such as cost reduction, competitive advantages, improved productivity, value creation and better relations between parties. This study aims to review reported outcome on Bumiputera contractors’ supply chain network. Additionally, this study also intent to analyse the main categories of risk that affect the Bumiputera contractors’ project performance which related to their approach on supply chain management. Current research papers on relevance to the issue were critically reviewed. The results from the structured literature review managed to identifies that supply chain is not used extensively among the Bumiputera contractors. Additionally, risks associated with the supply chain network in construction industry can be further categorised into external and internal factors such as cooperative risk, financial risk, technology risk and economic risk. The result have aspired a better understanding between the supply chain management with sustaining project performance among Bumiputera contractors. This study is a part of an on-going contract research with the overall aim to model supply chain network using risk parameters which will be identified at later stage of this research.
... budget increase, cost increase, or cost growth (Love et. al. 2013). In Malaysia, various researchers have investigated time and cost performance issues. Memon et al (2011a) conducted a case study on 30 MARA (Majlis Amanah Rakyat) large projects and found that all projects has time overrun at an average of 23.74% of the contracted time period. While Memon et. al. (2014) through a survey in southern region of Penisular Malaysia found that for large projects, amount of cost overrun ranges from 5-10% of the estimated cost while in small projects, it was found as 10- 15% of estimated cost. Another study conducted by Endut et. al. (2009) in investigation of public and private sector revealed that, out of 30 ...
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Construction projects in Malaysia are currently facing a severe problem of time and cost overrun. It is increasing with the rapid growth in development. The problem of time and cost overrun in resulted from various factors. These factors occur in construction projects at various phases and have different level of risk which is very essential to determine. Hence, this study is carried out through risk matrix for assessing risk level of various factors of time and cost overrun throughout the life cycle of a construction project. This research work involved 35 common factors of time and cost overrun identified from reviewing previous studies published worldwide. For assessing the relatively of those factors and determining their occurrence in various phase of project lifecycle, structured interviews were conducted with 5 experts from construction industry. Experts were asked about the occurrence and severity level of each factor along each phase which were analyzed with average index calculation and risk matrix. The findings revealed that the factors have low and medium risk on time and cost overrun during planning and design phase. While, in the construction phase majority of factors have medium risks and 5 factors have a high risk on time overrun while 6 factors have a high risk on cost overrun. The findings of this study give a better understanding to construction practitioners for risk level of the factors causing time and cost overrun in each phase of construction projects. This will help the practitioners in taking proper actions for improving construction time and cost performance.
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Variation Order (VO) is a common phenomenon in construction projects. It involves an amendment of the original scope of work as in the contract. VO is caused from various factors. Variations often cause disputes and dissatisfactions among the parties involved in construction projects. Thus, it is very important to control VOs in a construction project. For this, the first step is to uncover and understand the causes and effects of VO. Hence, the aim of this study is to determine the significant causes and effects of VO in construction projects. Data collection involved the survey with a structured questionnaire consisting of 18 causes and 9 effects of variation orders identified through comprehensive literature review. Survey was carried out among client representatives, consultants and contractors involved in handling projects of Malaysian Public Works Department (PWD) known as Jabatan Kerja Raya Malaysia (JKR). A total of 101 completed questionnaire sets were collected against 200 questionnaires distributed among the practitioners. Collected questionnaires were analyzed with statistical software package SPSS and Average Index formula. The results of the study showed that in Malaysia's JKR projects often variation orders are occurred; these VO's are majorly caused because of unavailability of equipment, poor workmanship and design complexity. While most significant effects of VO on the projects are increased project cost, delay in completion and logistic delays. Early participation of professionals may be beneficial in reducing the occurrence of variations. Also, improved design and avoiding frequent design changes will be very effective in controlling the problem of variations.
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This chapter talks about the budget involving project management. Cost control tends to be the priority of many companies. The chapter covers the role of the project manager in the cost control process, and what that individual needs to do and know to effectively control costs. Cost control systems depend on a project cost code. This system of classifying costs and types of work is essential if the numbers collected in the job tracking process are to be useful to the project manager. The chapter focuses on many coding systems, and discusses specific tasks in project cost control. The project manager analyzes the information presented to determine the status of the job at the end of the reporting period. While labor and equipment cost reports identify the location of the problem, they do not reveal the cause of the problem. The chapter ends with a discussion on cost control issues.
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This practical guide to cost studies of buildings has been updated and revised throughout for the 5th edition. New chapters have been added on the RICS New Rules of Measurement (NRM) for order of cost estimating and elemental cost planning, and on the procurement of construction projects.
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Thesis (Ph. D.)--University of Wisconsin--Madison, 2001. Includes bibliographical references (p. 125-132). Photocopy.