IMPACT OF CONSTRUCTION 
TIME OVERRUN 
ON THE VALUE OF REAL ESTATE 
JOSEPH N I M A L C H A N D R A H E T T I A R A C H C H I 
g£30)£S)@<3 
@®)03Q. 
DEPARTMENT OF BUILDING ECONOMICS 
UNIVERSITY OF MORATUWA 
MORATUWA 
SRI LANKA t lor I 
6 5 - O I 5 : £>R 
Submitted in Partial Fulfillment of the Requirement of the Degree of Master of 
Science in Project Management 
December 1998 
D e d i c a t i o n 
This Dissertation 
is dedicated to 
my father and mother. 
1 Declaration 
I here by declare that this submission is my own work and that, it contains no 
material previously published or writ ten by another person nor material which to 
a substantial extent, has been accepted for the award of any other degree or 
diploma of a universi ty or other institute of higher learning, except when an 
acknowledgement is made in the text. 
A 
N a m e : -N. J . H e t t i a r a c h c h i 
Depar tment of Building Economics 
Universi ty of Mora tuwa 
l s l December 1998 
* 
Contents 
CONTENTS 
P a g e 
Chapter 1 Introduction 
1.1 Background 1 
1.2 Aims and objectives 3 
1.3 scope 4 
1.4 Methodology 5 
1.5 Expected outcome 8 
1.6 Guide to dissertation 9 
Chapter 2 Analysis of current system of measuring liquidated 
damages and prior research work. 
2.1 Introduction 10 
2.2 Construct ion management aspects and the delay 11 
2 .2 .1 Planning techniques 11 
2 .2 .1 .1 Bar charts 11 
2 .2 .1 .2 Net work analysis 12 
2 .2 .1 .2(a ) Activity on ar row 13 
2 .2 .1 .2 (b) Activity on node • 14 
2 .2 .1 .3 Line of balance (LOB) 15 
2 .3 Determination of contract period 16 
2 .4 Current system of liquidated Damages 17 
2.5 shortfalls in current system in Sri Lanka 21 
2 .5 .1 Limitations 22 
2 .5 .2 T ime value of money 22 
2 .5 .3 Cash flow and real estate aspects 23 
Contents 
2.6.1 " C a u s e and prevent ion of de lays in 
bu i ld ing con t r ac t s " Janak ie , 1995 23 
2.6.2 "Pro jec t p lan ing for bet ter 
pe r fo rmance in cons t ruc t ion p ro jec t s" 
G u n a s e k a r a , 1993 27 
2.6.3 " C a s h f low forecast ing and moni to r ing 
for cons t ruc t ion projects in Sri L a n k a " 
Ra japakse , 1993 27 
2.6.4 " C o m p e n s a t i o n for loss of product iv i ty 
in cons t ruc t ion p ro jec t s " T a m i l c h e l v a m , 
1993 27 
2.6.5 "Professional neg l igence a n d Quant i ty 
surveyor 's prac t ice in Sri L a n k a " 
Ra thnaseka ra , 1995 28 
2.6.6 "Facili t ies m a n a g e m e n t for s h o p p i n g 
d e v e l o p m e n t " Ga jendran , 1995 28 
2.6 .7 "Effects of leadership style of 
a cons t ruc t ion m a n a g e r on project 
pe r fo rmance" W e e r a k o o n , 1997 28 
2.7 Conc lus ion 29 
C h a p t e r 3 D e t e r m i n a t i o n o f r ea l i s t i c L D 
3.1 In t roduc t ion 30 
3.2 Dec i s ion o f free marke t rent 31 
3.2.1 Supply and d e m a n d 31 
3.2.2 Facil i t ies m a n a g e m e n t 33 
3.2.3 Ra te of interest and secured rent 35 
3.3 Renta l analysis 36 
3.4 Der iva t ion of l iquidated d a m a g e s 38 
3.5 Al ternat ive m e t h o d 42 
3.6 Conc lus ion 43 
II 
Content 
Chapter 4 Effects of the overrun on real estate 
4.1 Introduction 45 
4 .2 Identification of construction cost and value 46 
4 .3 Loss of value due to delay 48 
4 .4 Identification of capital value and its behavior 50 
4 .4 .1 Graphical interpretation 51 
4 . 4 . 1 . 1 Capital value dropped during 
contract period including the delay52 
4 .5 Method of ascertaining capital appreciat ion 54 
4 .5 .1 Direct capital compar ison 54 
4 . 5 . 1 . 1 Locat ion 54 
4 . 5 . 1 . 2 Physical state 55 
4 . 5 . 1 . 3 Purpose of valuation 55 
4 . 5 . 1 . 4 T ime 55 
4 . 5 . 2 Cont rac tor ' s test 55 
4 .5 .3 Through interviews 56 
4 .6 Capital value Vs . liquidated damages 56 
4 .6 .1 Project A (Port) 58 
4 .6 .2 Valuation of project A as at 1998 58 
4 .7 Conclus ion 59 
t Chapter 5 The effects of improvements to the suggested L D system 
5.1 Introduction 61 
5.2 Different aspects of further improvement 
to the suggested L D system 61 
5.2 .1 Cost aspects 61 
5 .2 .2 Quality aspects 62 
5.3 Applicat ion of proposed L D system for 
different types of buildings 64 
5.3 .1 Residential buildings 64 
5 .3 .2 Commercia l buildings 68 
5 .3 .3 Industrial buildings 68 
5.4 Conclusion 69 
i l l 
Contents 
Chapter 6 Conclusions 
6.1 A c h i e v e m e n t of a ims and objec t ives 70 
6.2 S u m m a r y o f f indings 71 
6 .2 .1 . N e w L D system 71 
6.2.2 L D in t e rms of real estate 72 
6.2.3 Fa i rness o f exis t ing L D sys tem 72 
6.2.4 Necess i ty o f further i m p r o v e m e n t 
of the p roposed sys tem 72 
6.3 Fur ther d e v e l o p m e n t s to the research 72 
6.4 Limi ta t ions and crit ical appraisa l 
of the p r o p o s e d sys tem 73 
IV 
List of Tables 
List of Tables 
T a b l e P a g e 
1.1 Profess ionals and Con t rac to r s regis tered in 
va r ious inst i tut ions 2 
2.1 Profess ional opin ion on L D 18 
2.2 Re la t ionsh ip b e t w e e n delay and cont rac t s u m 24 
2.3 Re la t ionsh ip b e t w e e n delay and class of cons t ruc t ion 25 
2.4 T i m e pe r fo rmance related to c lass of cons t ruc t ion 26 
3.1 Accep ted rate of return 36 
3.2 Profess ional v iews on rental va lues 37 
3.3 Average rental der ived from rent schedu le 37 
3.4 Der iva t ion o f r easonab le rent 38 
3.5 Ren t Vs. Di s t ance 38 
3.6 Der iva t ion of actual L D 4 0 
3.7 C o m p a r i s o n of p r o p o s e d L D and cur rent L D 43 
4.1 Effects of de lay 50 
4.2 Profess ional v iews on capital apprec ia t ion 56 
4.3 Capital apprec ia t ion Vs Average dis tance 57 
5.1 D i m i n i s h i n g rate of rent 67 
V 
•List of figures 
List of figures 
F i g u r e 
Fig 1.1 Proposed Study 
Fig 1.2 Methods of Identifying proposed L D 
Fig 2.1 Typical bar charts 
Fig 2.2 Net work diagram 
Fig 2 .3 Typical Precedence diagram 
Fig 2 .4 Limitation on existing L D 
Fig 2.5 Relationship between time and loss 
Fig 3.1 Rental market in Colombo Fort 
Fig 3.2 Effects on project target 
Fig 3.3 Rent / o. c. Vs . Facilities Management 
Fig 3.4 L D Vs . Distance 
Fig 3.5 Derivat ion of actual L D 
Fig 4.1 Relationship between Value and Cost 
Fig 4 .2 Compara t ive study on capital value 
Fig 4 .3 Different behavior in property market 
Fig 4 .4 Capital appreciation 
Fig 5.1 Effect of economic life 
Fig 5.2 Relationship between rent and cost of travell 
Fig 5.3 Levels of rents against each zone 
Fig 5.4 Diminishing rate of rent 
VI 
Abbreviations and Acronyms 
Abbreviations and Acronyms 
A - Amount of Rs . 1.00 
A . D . B - As ian Deve lopment Bank 
B . O . I - Board of Investment 
C . A - Capital Apprecia t ion 
F. A - Floor A r e a 
C . A . F - Compound Amoun t Factor 
C . B . D - Central Business District 
C . V - Capital Va lue 
F . M - Facili t ies Management 
I . C . T . A . D - Institute for Construction Training and Deve lopmen t 
L D - Liquidated Damages 
m 2 - Square metre 
n - T i m e Period 
O . C - Occupancy Cos t 
P. A - Per A n n u m 
P . M - Per Month 
P . W - Per W e e k 
Q - Quantity Demanded 
R - Rent 
r - Rate of Interest 
T - T ime 
Y P - Y e a r ' s Purchase 
VII 
Acknowledgement 
Acknowledgement 
I have long list of individuals to w h o m I am indebted. It is difficult to list out all 
who helped me on this study and therefore at the very out set I express my 
indebtedness to every one who associated with me in this endeavor . 
It is my foremost duty to pay my gratitude to M r s . C. Weddikkara Head, 
Depar tment of Building Economics of Mora tuwa Universi ty , for guiding and 
leading me to complete the degree p rogramme in the best possible manner . 
I owe a great deal of gratitude to my supervisor Dr . Srinath Perera of the same 
department , who had a constant supervision and guidance to lead me in the 
correct path of the research. 
I shall also be very much grateful to my other supervisor Miss . Niza Zenudeen of 
the department of building economics who helped me in many ways in the 
process of this study. 
Special mention should be made of the activities of the former course co-
ordinater M r . P . E . O . O r u k o and I take this opportunity to extend my sincere 
thanks to him. 
I shall be very much grateful to all the lecturers of this degree p rogramme and 
also other non-academic staff of the universi ty. 
Last, but not the least I extend my sincere thanks to my wife Srimathie , little son 
Randika and two sisters who had to make sacrifices on my behalf to make this 
study possible. 
VIII 
Towards a realistic system of liquidated damages.. Abstract 
Towards a realistic system of liquidated damages... 
Abstract 
Construct ion industry in Sri Lanka is still in an infant stage and is in the process 
of developing its norms and concepts . It is not strange to exper ience drawbacks 
and-bottle - necks in this industry. Apar t form the unfavorable constraints, there 
are lapses caused by the failure to exerc ise duty o f care and wh ich results 
negl igence by the members o f the team in the construction process . This 
dissertation makes an effort to identify the de lays , caused by such lapses and 
their effects. 
A c c o r d i n g to equity principles the client w h o suffers as a result o f such time 
overrun has to be fully compensated in monetary terms. In this context it is of 
utmost importance to identify and suggest the most appropriate liquidated 
damages system. This dissertation makes an attempt to propose a system o f 
compensat ion based on loss o f market rent duly compounded to suit the purpose. 
A t the same time, exist ing liquidated damages system that has no proper basis has 
been cr i t ic ized as arbitrary and unrealistic. With the intention o f developing the 
process o f a construction project a new frame work for a realistic system o f 
liquidated damages has been introduced by this dissertation. Th i s system has been 
further enriched by the principles o f real estate valuation to arrive at the most 
reasonable system o f compensat ion. H o w e v e r , I wou ld recognize the limited 
scope o f this research and may come out with many valuable suggestions to 
improve and expand the proposed form o f compensat ion. 
1" D e c e m b e r 1998 J .N. Hettiarachchi 
IX