1.1 Research Background and Motivation
According to experts, in Vietnam, the total value of procurement packages applied in accordance with the Law on Tender accounts for some 20 percent of GDP, estimated at more than US$20 billion a year (Talk Vietnam, 2012). When it comes to public building construction bidding, the government, as the project owner will decide the bid winner based on the law of bidding, which is cost priority in Vietnam.
Therefore, in order to win the bid, the contractors in Vietnam have to lower their bids to as low as possible and later increase the bids so that earn profit for the project.
Actual evidence shows that many projects are won by bids that are deliberately lower, but which later apply for an adjustment in the scale of investment leading to increased levels of investment. In reality, the adjustment of prices has led to the situation where the prices of all projects have been driven up to levels higher than the bids with many contractors intentionally delaying the construction process to have the prices adjusted (VIR, 2013). One of the most important reasons for this problem is that the public project owners in Vietnam follow the most recent year’s Construction Cost Index without being able to predict the upcoming fluctuation trend of the Index. As a result, contractors often fail to match the project owners in terms of price so that they have to win the bid first by lowering the bidding cost, then earn profit later by making later further requests. Real figure shows that 100% of the bid winners in Vietnam have at least 01 price adjust request after they have already been awarded with the bid (Vietnam Report JSC, 2012).
2 Taiwan is a developed country while Vietnam is still considered a developing country. On the contrary, the two countries do have similarities to share, not only because of the proximity in geography but their cultures also are similar. Taiwanese construction groups also have quite some large investments in Vietnam and they did win bids in Vietnam (CECI with their awarded bids in Kon Tum province in Dak Lak and Quy Hop district in Nghe An). However, Vietnam’s construction industry does not have so many companies that are capable of building high-technology buildings or green buildings. That is the reason why overseas contractors are more likely to be awarded when it comes to high tech complex projects. However, most projects that have been awarded to overseas contractors are roads and bridges or industrial projects.
As a matter of fact, this study is carried out in order to give the overseas contractors an image of how different the construction market in Vietnam is in compared with an oversea country (Taiwan) along with some predictions on how the Vietnamese construction market will change in the next few years. Therefore it will help construction companies in investing in Vietnam’s construction market.
Cost is one crucial factor that decides the success of the bid and it is estimated based on the annual cost index published by the government. But one can only collect the data for a period of time while the company has to make estimations for the upcoming period. It is even more difficult for companies to make estimations when it comes to foreign biddings. It means that when a company chooses to invest in other countries, not only he has to compete with the other foreign investors but the company also has to compete with the domestic companies whose knowledge and domestic experience in their country surpasses him. In order to successfully win the bid in both domestic and foreign markets, one must be well prepared not only with the capitals, equipment and the resources but also he has to be well aware of the incoming
3 fluctuation that he is going to face. In other words, in order to succeed, one must actively catch the trend before it comes. Therefore, predicting the fluctuation trend in order to well calculate the project cost plays a significant role for project owners and contractors. Accurate prediction of Construction Cost Index can result in preparing accurate bids and preventing under- or over-estimations. Variations of Construction Cost Index are challenging for cost estimation and bid preparation.
In summary, this study is an analysis of data collected from Vietnam and Taiwan, comparing them to determine both similarities and differences in order to illustrate a general image for Vietnam and Taiwan’s construction companies. This image will help them to recognize some risks which they have to take into account when they decide to invest in the other country in the upcoming years.
1.2 Problem Statements
The nature of construction industry, which is characterized by constant variations in both domestic and international economic conditions, pressures to maintain schedules and costs under increasingly complex techniques, significantly hinders the accuracy of cost prediction process. Hence, it is not surprising that there are a large number of construction projects suffering profit lost due to cost overrun (Cheng.
M. Y, 2011). The most traditional way for cost estimations are to base on the government’s Construction Cost Indices that are annually published. However the costs of the current year are not published until the first or even the second quarter of the later year. As a matter of fact, depends on the size of the project and the time taken to estimate the costs, the final result might get a one or two years lag to the actual time that the project are being implemented. Typically, construction projects are executed
4 over a long period of time and in addition to that, prices of resources may experience substantial fluctuations (Issa R.R.A, 2000).
Fu and Liu (2010) conducted a study on factors that impact regional construction prices. Results of this study suggested that construction prices in interconnected market places are highly correlated. The authors also mentioned that the understanding of links among markets can be helpful in order to discover and explore the variations of the construction prices.
An empirical study carried out by Ashuri (2012) investigated the influence of various economic, strategy, and market variables on Construction Cost Index Fluctuations. Capano and Karshenas (2003) have pointed out that standard economic indicators can be useful variables for predicting cost escalations in the construction industry.
To predict Construction Cost Indices, the time series method has been utilized by various scholars. This method focuses on estimating the cost index by analyzing its pattern in the past and the extrapolating that pattern into the future. However, it is noted that since models based on the time series method often operate under the assumption of continuity, they are not capable of predicting a shift in trend of cost escalation. (Hanna & Blair, 1993).
To summarize, it is possible to predict Construction Cost Indices based on the data collected from the previous years. Using softwares also gives positive results.
However, when it comes to developing countries as Vietnam, such advanced softwares are still not widely used. It is not an optimized method for Vietnamese to get the first approach to predicting Construction Cost Indices. This research tends to use a different
5 approach with a simpler method so that it better suits the conditions of Vietnam nowadays.
1.3 Research Objectives
Due to the complexity of the problem, and the lack of technology and software-base knowledge in Vietnam, this study only demonstrates a simple approach to determine the relationships between the economic and construction indicators in both Vietnam and Taiwan. Then base on the results to forecast a short-term upcoming fluctuation trend of the Construction Cost Indices using the data collected. All of the research objectives are listed as follows:
1) To determine the similarities and differences between the economic and construction indicators in Vietnam and Taiwan in order to point out the fluctuation trend of Vietnam and Taiwan’s variables.
2) Help contractors from one country to have a general image of how the trend has been going in the recent years, therefore help them in investing in the other country’s construction market.
3) To be able to predict the near upcoming fluctuation trend from the data collected, therefore assist in the cost estimation work.
6
1.4 Research Scope and Limitations
Cost estimation for construction projects has always been a challenge in construction industry. Construction Cost Index forecasting methods have been broadly researched by many previous construction management scholars. Forecasting Construction Cost Index using another factor such as Energy Price has been implemented (Associated Schools of Construction, 2013). However, these methods are researched and applied only in some specific countries, and none of the methods are ever applied in Vietnam. The comparisons between economic and construction factors are also have not been implemented in Vietnam or Taiwan.
For comparison, this research uses 5 dataset collected from Taiwan and Vietnam construction industry to determine the relationship between them and then predict the fluctuation trend in the short upcoming time. The datasets used are listed as follows: Building Cost Indexes; Construction Cost Indexes; Materials Cost Indexes;
Labor Cost Indexes; Annual Bank Interest Rates. These data are collected from the genuine annual published information from Taiwan and Vietnam Government’s sources. On the contrary, due to the lack of data storage, technology and proper classification from Vietnam’s data source that these data were only taken from the 8 recent most years, just after when Vietnam joined WTO and started to join the global rule.
The research’s analysis is for the residential reinforced concrete buildings, which is the most common type of public buildings in Taiwan and Vietnam. Lack of steel building construction technology in Vietnam in the past has caused the missing in the data from Vietnam in comparison to Taiwan’s data. On the other hand, due to the method approach, it is not possible to accurately calculate how much the index will
7 increase or decrease. It is only capable of forecasting the upcoming fluctuation trend for both the construction and economic indicators. Finally, long-term trend prediction is not promising due to the geopolitical risks and also the high uncertainty in the operation environment of both Vietnam and Taiwan. As a result, investors and contractors should consider the risks associate with the country in which they are going to put their investment in.
Bank interest rates is one of the first indicators that will affect a country’s indexes directly. In construction industry, it affects the price of all the materials, equipment, machines and somehow affects labor costs. Therefore the total price of the building is increased. In Vietnam the building price is not only affected by the building cost, building locations are also taken into account when it comes to determine the price of the building. Price differs quite a large amount even in the same city or region.
This study however, does not consider Building Price into account due to the complication of data classification.
8
1.5 Procedure of the Research
The procedure of this research is described in Figure 1.1. As can be seen in Figure 1.1, this research contains of 5 parts. Each part describes the main process which contributes to the final conclusion of the research.
Figure 1.1: The procedure of research
1.6 Structure of the Research
Figure 1-1 shows procedure of this research. Base on the above steps, the framework of thesis is divided in five chapters as follows:
Chapter 1: Provides an overview, giving an account for the motivation and the objectives of this research, setting the research orientation, scope and discussing the research limitations, describing the research process and its structure.
Conclusions Data Analysis and result Data Collection and Methodology
Literature Review Topic Selection
9 Chapter 2: Reviews the past studies and methodologies on predicting Construction Cost Index using different construction and economic indicators. The scope of the literature review includes the whole industry and the construction industry.
Chapter 3: Explains the validity and the source that are used to collect the data.
It also proposes the framework of methodology used in this research. Comparisons criteria are also mentioned in this Chapter.
Chapter 4: Bases on the collected data and shows the results completed by analyzing these data.
Chapter 5: Summarizes the research conclusions and suggestions.
10