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The IUP Journal of Management Research :
Cost Escalation as a Risk in Construction Contracts
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The increase in cost due to inflation has been a concern in the construction industry. In long-term projects, it becomes even more essential to know the cost for future planning and budget approval. This study attempts to adopt the probabilistic approach to put forth the prediction of cost escalation and compares the same with the actual cost and World Bank formula to demonstrate how the proposed method could lead to a more realistic way of forecasting.

 
 

Cost escalation refers to a change in the cost or price of specific goods or services over a period of time. In a construction project, it refers to the additional amount of money incurred to complete a project over and above the original budgeted cost. Determining escalation cost to an estimate is often the subject of fierce debate. This cost however needs to be included in construction estimates as it will help to include the economical changes within certain limitations. If forecasted in advance, this may also address the issue of bankruptcy on unplanned budget not anticipated in the beginning of project. Literature though reflects various studies undertaken by authors to predict cost escalation, and each method has its own merits and demerits. This study is an effort to put forward a probabilistic model to forecast escalation and also to evaluate its validity.

 
 

Management Research Journal