TREND IN BUILDING MATERIALS INFLATION OF CONSTRUCTION PROJECTS IN KADUNA

TREND IN BUILDING MATERIALS INFLATION OF CONSTRUCTION PROJECTS IN KADUNA

ABSTRACT

This research aim to investigate the trend of building materials inflation on construction project in Kaduna, by identifying the causes of inflation, inflation of building materials on construction project in Kaduna. To determine way of handling the trend in building materials. Inflation on construction project in Kaduna. A market survey was carried out on some selected building materials around Kaduna metropolis. The analysis of the data collected using linear trend analysis shows that the construction industry inflation is not equal to the economy wide inflation. The study recommended that the database for the construction sector in Nigeria should be properly developed as this will facilitate the development of future cost of project and in cost planning. And also professionals of the build environment should be involved in policy making as government policy can also increase in price level of building materials on construction cost.

CHAPTER ONE

1.0              INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The goal of countries is the desire to maintain a stable price level of goods and services.(Obiegbu, 2003).  This however, appears to be an uphill task given the incidence of inflation, presently ravaging developing economies of the world. Persistent increase in the price of construction materials has been one of the major problems to development and a contributing factor to frequent cost overruns and subsequently project abandonment (Obiegbo, 2003).

According to Obiegbu (2003), the construction industry is vulnerable to inflation in prices of materials. Materials needed for erecting and completing construction works could amount to about 35 – 45 percent of the total project cost while in some other projects, the materials cost may be as high as 60 percent (Obiegbu, 2003).

Nwachukwu (2004) further explained that in most projects, materials account for more than 50 percent of their production cost. Material resources are thus the heart and life wire of any construction projects. This simply means that increase in the cost of materials will affect the total cost of construction and subsequently housing supply in no small measure. According to Central Bank of Nigeria (2002), stressed that inflation is a social malady as well as a pervasive economic process whose effects are felt, to some degree, by every citizen and in all sectors of the economy.

Inflation is thus felt in the construction sector of the economy by the increase in construction material prices. Kaming et al., (1997) stated that an inflationary increase in material cost is the major cause of construction cost overruns in Nigeria. Wahab (1985) further established that the prices of building materials in Nigeria have increased steadily over the years and this inflationary trend has led to higher construction costs. These frequent increases give rise to cost overruns, claims, housing supply shortage leading to high cost of urban housing, accommodation, construction cost estimate losing usefulness within short periods, difficulty in forecasting and planning and frequent contract price variations, all of which often leads to project abandonment (Nwuba, 2004; Akwusola, 2007).

In a similar view, Onashile (2008) submitted that the Nigerian construction industry has been going through a very trying period and that project that would have help in uplifting the standard of living have either been abandoned or did not take –off at all due to lack of funds and rising cost of construction materials. Construction costs within a preceding year can move up to as about 30 percent.

Ashworth (1983) opines that inflation can have an important effect upon the financial consequences of alternatives design solutions. The calculation of cost –in-use of alternative design solutions is often done without considering the impact of inflation on construction material prices. In order to factor inflation risk into pre-contract investment analysis, the apprasier thus requires an understanding of the relationship between inflation and construction materials prices.

Inflationary effects on project appraisal are  significant and could pose difficulties to property developers. Pitcher (1994) argued that inflation will also affect the cash flows needed to be discounted (As cited in Oyediran, 2006)

Globalization, high returns on investment is no doubt attracting investors to Nigeria. These investors require adequate inflation forecasting techniques using the best, realistic information available at the time of the project cost planning and estimating process. However, with the ravaging effects of persistent price increases in Nigeria, some of these investors are also discouraged from investing in the construction sector.

1.2       STATEMENT OF THE PROBLEM

Over the years inflation has been a major economic problem to the economy of Nigeria. This study is aimed at assisting the impact of building materials on inflation. The significant level of correlation rate can be use to predict the price of building materials from the descriptive. It was discovered that inflation rate in Nigeria have been far from stable and have affected building material price non-uniformly other macro – economic factors such as importation, interests rate, gross domestic production (GDP) and political regimes also contribute to upward trend price movement.

The inflationary period is a time of high price of goods and services, this lowers the quantity and type of product (building materials) purchasable by the masses in Kaduna state at any point in time. The problem posed is that Kaduna dwellers others in the society are unable to purchase quality and quantities of desired building materials during inflation.

During inflation, income especially those materials that has fixed income earners and the very poor ones in the society are unable to meet the increasing price of building materials. This continues  as long as raging prices and falling purchasing power persists. The problem is the ability of masses to purchase building materials in the light of continued rising prices become reduced.

Equally of importance is the issue of inflation giving rise to             

It is also worthwhile to note that during an inflationary period saving decline, this is because a decline in saving result in low investment whereas low investment retards economic growth. However, no research work was carried out on the examination of handling trend in building materials inflation in construction projects.

1.3       JUSTIFICATION

This research will be of great benefit to the contractor, building materials suppliers, because it will help them know the causes and the way of controlling inflation on building materials.

1.4       AIM AND OBJECTIVES OF THE STUDY

1.4.1    Aim

(i)                 To investigate inflation of building materials on construction cost in Kaduna.  

1.4.2    Objectives

(i)                 To identify the causes of inflation on building materials on construction project in Kaduna

(ii)               To determine  ways of handling fund in building material inflation on construction project.

1.4       RESEARCH QUESTIONS

In order to guide this study and achieve the above stated research objectives, the following research question were formulated

·         What are the causes of inflation of our building materials on construction project in Kaduna

·         What are the ways of controlling inflation on building materials on construction cost in Kaduna?

1.6       SCOPE OF THE STUDY

He project work consist of inflation of building materials on construction project in Kaduna, ways of handling trend in building of materials inflation on construction project in Kaduna. This  research work was carried out in Kaduna metropolis. The reference point on which all comparison are based and the choice should be based on these principles, the year to be chosen as base should be  a stable  or a reasonable normal period and must not be too distant in the past.

           

CHAPTER TWO

LITERATURE REVIEW

2.1       INTRODUCTION

This chapter will comprises of the following secondary research, conceptual framework, theories of fit, empirical studies, summary and gap.

2.2       AN OVERVIEW OF INFLATION

The goal of most countries is the desire to maintain a stable price level (CBN, 1996) Oyediran (2003) supports this assertion by further surmising that price stability is one of the principal economic goals in any economy. Monye – Emina (2007) however argues that this appears to be a tall order given the incidence of inflation presently ravaging economies of the world especially developing countries.

Melberg (1992) defined inflation as a general rise in the price level in an area over a certain period of time. Iyoha et al (2003) explained inflation to be a condition of general and persistent rise in prices. An economy is thus regarded as suffering from inflation if it is undergoing a period of continuously rising prices. (Curwen, 1976). Inflation is measured in periods sufficiently long enough to eliminate bias arising from short – term. According to Wikipedia the chief measure of inflation is the inflation rate, which is the percentage rate of change of price index over time (CBN, 1996).

2.2       TYPES OF INFLATION

According to Roach (2002), the global monetary policy spot of emerging inflationary pressure throughout the economy. It looks unlikely to make the same mistake this time. Price took in the 1970s largely because of serious policy errors, policy maker now understand that rising inflation harms likely to stamp on inflation swiftly.

The real worry with rising inflation expectation less that they herald rates if growth stumbles. It is commonly argued in America that if the housing bubble were to burst and falling house price threatened to choke consumer spending, the global monetary policy would slash interest rates to prop up the economy as it did after the stock market bubble popped in 2001 - 2002. Anyanwu (1993), Iyoha et al., (2003) identified a number of forms of inflation to include; demand- pull, cost push, and open inflation

2.2.1    DEMAND -PULL INFLATION

This type of inflation emanates from excess of demand over supply. If the demand for goods and services increases considerably without corresponding increase in their supply, prices will increase. If the prices increase persist, the inflation will result for example, an increase income will increase the purchasing power to people. But if this is not matched with increased production inflation will occur. Demand -pull inflation is associated with period of trade boom.

2.2.2    COST -PULL INFLATION

This type of inflation is generated by increases in the cost of acquiring the factors of production. Workers may demand higher wages the cost of capital and land may have increased; generally producers are forced to pass part of their higher costs to consumers in the form of higher prices. In order to maintain their profit margins, if the prices increase persist inflation occurs.

2.2.3    OPEN INFLATION

This is a type of inflation generated by an increase in money supply without a corresponding increase in the volume of goods and services. Therefore too much money ‘clauses’ fewer goods resulting in a rising in the general price level. This could be brought about by excessive bank lending or over expansion of currency by the Central Bank.

2.3       INFLATION AND NIGERIA ECONOMY

Inflation is one of the interactable problems facing Nigerian economy. Inflation has been considered to be a direct result of the policies of the country’s government. The beginning of inflation in Nigeria can be said to be in 1951 when ministerial government was introduced. Fakiyesi (1996) mentioned that the Nigerian economy registered low rates of inflation in the years immediately after independence; this was mainly as a result of the civil war.

2.4       INFLATION AND CONSTRUCTION CONTRACTS

Onyechi (1990) opined that inflationary increases in contract sums for works are usual in Nigeria. He also mentioned that this inevitably arises in construction project because there is usually an appreciable true gap between prices offered and the actual purchase of resources for construction, since prices are usually not static. This situation is getting worse as days go by. The causes of these inflationary escalations are clearly beyond the control of the immediate contract participants-clients, designers and contractors.

Inflation in construction material prices affects the construction contracts especially where such contracts are let on a firm price basis. This implies that the client will not entertain any increase in the contract sum as a result of fluctuations in the prices of materials and labour. In order to prevent a situation in which high inflation erodes the contractor’s margins, the contractor factors inflation risk his pre-tender estimating processes (Ashworth, 1983). An understanding of the relationship between prices of construction materials over the preceding years and inflation rate is fundamental for pricing inflation risk at pre-contract stage.

Ramus (1981) also observed that in fluctuating price contracts, increases or decreases in material prices require that payment become due to the contractors from the employer and vice versa. In the Nigerian situation however, it is always a one-way direction of employer to contractor as a result of inflation.

In addition to this, provisions of the standard forms of contract which gives guidelines on methods of valuations or adjustment in calculation of the actual changes due to fluctuation inflationary trend on the economy is affected by severe inflation. For instance, clause 39, and 40 of JCT 1980, form of contract, include provision for adjustment for fluctuations, but because of the inherent problems encountered in valuation or calculation for any changes, these become mostly green area for dispute in contract administrations. Also, clause 38, of JCT 1980 which embodies the firm price contract (i.e contracts within one year), is rendered ineffective due to frequent witnessed within a year.

Okike (2004) argues that no matter the method used for reimbursement for fluctuation, the actual increases or decreases in costs and prices of resources used can never be fully assessed or recovered, and in most cases are more or less than the amount incurred from fluctuation.

2.3       CONCEPTUAL FRAMEWORK

 

Fig 2.3: Conceptual framework

Conceptual frame work is an analytical tool with several variations and contents. It is used to make conceptual distance and organized ideas. Strong conceptual frame work capture something real and do this in a way that is easy to remember (Calender, David, 2013)

2.4       THE EFFECTS OF INFLATION ON BUILDING MATERIALS OR CONSTRUCTION COST IN NIGERIA

2.4.1    Inhibited Innovations in Construction Methods and Materials Research

            Egan’s (1998) report found that the very low and unreliable rate of profitability within construction is an obstacle to sustainable healthy development. The report was of the opinion that increasing financial pressure are bound to be on contractors when initial budget figures become completely unrealistic and concluded that that the situation will damage the industry and jeopardize its existence.

            Xiao and Proverbs (2003) also argued that construction companies have a social responsibility to provide staff training, maintain a high level of health and safety of its workers, and invest in however, inflation in the cost of building materials had resulted in low and unreliable rate of profitability, and this has affected the performance of the industry in the area of innovations in construction method and material research.

2.4.2    Fluctuation in construction costs

            Maintaining steady cost projection on construction projects had been issue of serious concern both to the client and project contractors. Azhar, Farooqui, and Ahmed (2008) noticed that the estimates; unfortunately, the price change so quickly that the initial budget figures become completely unrealistic. On the Nigerian scene, Jagboron and Owoeye (2004) found that one of the most serious problems in the Nigeria construction industry is the project cost overrun, with attendant consequences of completing project at sums higher than the initial sum and concluded that project abandonment ensues in most cases.

2.4.3    Quality of Workmanship is affected

            According to Lam, Chan, Wong, and Wong (2007), one of the hallmarks of a develop construction industry is in the output of quality buildings and structures. The quality of workmanship in construction work is assessed according to the requirement of the relevant standard, and marks are awarded if the workmanship complies with the standard (construction industry development board, 2011).

            The study of Oladipo and Oni (2012), which reported the trend in the cost of building materials, has envisaged great danger of the construction industry and the nation’s economy in that there were instances of conflicts between building contractors and their clients over upward review in contract sums, and in a attempt to avert such conflicts and remain in the business, some contractors resorted to the use of substandard or insufficient materials of construction projects, which has contributed to cases of building collapse in the nation.

2.4.4    Risk of Project Abandonment

            Abandonment of projects has become a national menace in Nigeria’s infrastructural development as most clients are not adequately advised about the financial implications of the project to be embarked on (Ayodele & Alabi, 2011; Idoro & Jolaiya, 2010). According to these authors, the predominance of many uncompleted and substandard buildings was connected to the inflation and high cost of building materials. Their studies also affirmed that the situation may have a multiplier on the industry and may lead to fluctuation in the construction cost.

2.4.5    Volume of construction output is affected

            According to Fagbenle, Adeyemi, and Adesanya (2004), the output of the construction industry in Nigeria is quite low when compared with construction industry of many developed countries. Increase in the cost of building materials may degenerate to acute shortages of housing with millions of middle- and low-income families being priced out of the market for home ownership all across Nigeria. The observations from these studies were due to the high cost of building materials according to Anosike (2009) who found that Nigeria has more than 17 million housing deficit as of 2004.

2.4.6    Rate of employment is affected

            The construction industry’s workforce is extremely diverse and includes different types of individual working within construction such as unskilled workers, skilled workers craft, managerial roles, and administrative workers. According to research, maintaining and attracting the right people within the construction industry is a priority due to the scarcity of both skilled people and experienced managers. Ayodele and Alabi (2011) found that inflation in the costs of building material is killing the construction industry as many contractors are unable to forecast accurately the expected profile on the project, and the situation had contributed to laying-off of the workers and closure of firms in some extreme cases.                  

2.5       THE WAY TO CONTROL OF INFLATION ON BUIDING MATERIALS ON CONSTRUCTION COST IN NIGERIA

Anyanwuocha (1991), highlighted the control of inflation as

2.5.1    The Use of A Monetary Policy

The use of monetary policy tries to control the availability and-sue of credit. This type of policy is used by the central bank to reduce loading by commercial banks, thereby reducing the amount of money in circulation. A monetary policy open market reduces the supply of money involves the use of open market operations,   increasing the bank rate,   increasing the cash-deposit, ratio, the use of special deposit, use of directives, moral situation and finding.

2.5.2    The Use of a Fiscal Policy

A fiscal policy involves the use of government tax (or income) and expenditure policies to regulate the economy. It includes the following:

a.         Taxation Policy: the government could increase taxes on income of people consequently; there will be a reduction in their demand for goods and    services. The reduced demand would lead to falling prices assuming that the supply does not fall.

b.         It order to control inflation, government could increase currency such as Gold. This would be a return to the Gold standard. All of these policies achieved in practice through a process of open market operations.

2.5.3    Maximum Price Legislation

This is a method by which the government controls prices by fixing the highest prices at which commodities may be sold or brought. Once the government has decreed a maximum price for a commodity it become illegal for any one to sell above that price. In this way, the government can at least keep the inflation in considerable control.

2.5.4    Wage Freeze in The Labour Market

In the labour market where wages can be pushed up by excess demand, the government may adopt a policy of wages freezing to forestall inflationary wage increases. To freeze wages is to keep them from increasing. In this way, the cost of production can be kept down so that wages cost-push and demand -pull inflation are avoided or least control.

2.5.5    Surplus Budgeting

To control inflationary pressures, the government cam also resort to surplus budgeting, which means deliberate reduction of expenditure so that this is less than income in a given fiscal year. This results in the government with drawing more money from circulation than it is putting back. The effects are to diminish the supply of money, restrain the purchasing power and thus stem inflation.

2.5.6    Increase in Output Of Goods And Services

Another way to deal with the problem of inflation is step up the production of goods and services in the economy to match with any expansion in the supply of money. This averts the classical inflationary situation in which there is too much money chasing too few goods. The government can encourage the increased output of goods and services by a system of bonuses and tax rebate for producers who must meet their output quota and targets.

2.6       THEORY OF FIT

2.7       SUMMARY AND GAP

CHAPTER THREE

3.1       INTRODUCTION   

After review of some relevant literature on the effect of inflation on building materials on construction cost in Nigeria. The use of questionnaire was considered a veritable means of obtaining information from the respondents contact in their various industries.

3.2       RESEARCH DESIGN

In order to appraise the effect of inflation on building material on construction cost, questionnaire method of data collection was adopted.

The underlying philosophy of the questionnaire is the simplicity of the format which was devoid of ambiguity. The format primarily involves most suggestion, answers, that just need to be filled in order to facilitate the ease of response.

The questionnaire was introduced explaining the objective of the research and with assurance to the respondents that all information supplied will be treated confidentially.

3.3       POPULATION

The questions in the questionnaire was prepared and targeted to professionals, like quantity surveyors, builders, architect, economist, building material suppliers in Kaduna metropolis.

3.3.1    TARGET POPULATION

The target population of this research will comprise the help of the following professionals: such as quantity surveyors, builders, architecture, M and E, suppliers, economist. In Kaduna metropolis this will help the researcher to collected valid data from the population on the appraisal of inflation on building materials on construction cost in Nigeria.

3.3.2    ACCESSIBLE POPULATION   

A total number of 36 out of 50 questions that were received from the respondents. 

3.4       SAMPLING SIZE

This research work uses sampling techniques, random sample techniques of a element is the population ether by picking or obey in which every individual populace has an equal chance of being selected. A total number of 50 questionnaires were administered for the study.            

3.5       DATA COLLECTION INSTRUMENT

Due to the objective native of this study, the research instrument that was adopted is the use of primary/secondary data in order to obtain information or the purposed of the study.

            Primary data:- can be defined as information collected from sources such as personal interviews, questionnaire or surveys with a specific intention and on a specific subject.      

            Secondary data: - can be defined as information that is already available sone where, whether it is in journals, on the internet, in a company’s record or a large scale in corporate or governmental archives     

 

3.6       ACCESSIBLE DATA

The methodology used in the study was of relevant literature semi-structured questionnaire. The content was analyzed using, correlation coefficient, analysis of variance and regression analysis as statistical tools.

CHAPTER FOUR

DATA ANALYSIS AND SUMMARY OF FINDINGS

4.1       INTRODUCTION

This chapter presents the results obtained and the analysis of the findings in the light of the objective of the study.

4.2       DATA ANALYSIS

            Table 4.1: Analysis of the respondent to questionnaire

Distribution	Quantity	Percentage (%)
Total numbers of questionnaire sent out	50	100
Total number retrieved	36	72
Total number not retrieved	14	28

           

From the above, it was observed that out of fifty (50) questionnaire distributed, thirty-six (36) were properly completely and returned making up to 72% while there (3) were not returned representing 28%.

Table 4.2: Educational Qualification of Respondents

Qualification	No. of Respondent	Percentage (%)
OND	12	33.3
M.Sc	9	25.0
B.Sc/HND	15	41.7
Total	36	100

From table 4.2, 25.0% of the respondents have M.Sc, 41.7% of the respondents have B.Sc/HND, and 33.3% of respondents have OND and other qualifications respectively.

Table 4.3: Analysis of Respondent Organization

Organization	No. of Respondent	Percentage (%)
Consultancy	16	44.4
Contracting	11	4.0
Government (Min./Dept.Agency)	9	25.0
Total	36	100

The above table shows that 44.4% of the respondents are from consultancy and 4.0% of the respondents are from contracting and 25.0% represent government parastatal.

Table 4.4: Analysis of Working Experience of Respondent

Years of Experience	No. of Respondent	Percentage (%)
1-5years	9	25.0
6-10years	16	44.4
11-15years	8	22.2
16 and above	3	8.4
Total	36	100

The above table shows that 25.0% of the respondents have 1-5years, 44.4% of the respondents have 6-10years, 22.2% of the respondents have 11-15years and 8.4% of the respondents have 16 and above.

Table 4.5: Analysis of Respondents Professionalism

Profession	No. of Respondent	Percentage (%)
Building material suppliers	8	22.2
Contractors	10	27.8
Building material sellers	9	25.0
Clients	6	16.7
Some professional in construction industry	3	8.3
Total	36	100

From table 4.5,  it was observed that 22.2% are building materials suppliers, 27.8 are contractors, 25.0% are building materials sellers, 16.7% are clients while 8.3% are some professional in construction industry.

4.3       Regression Analysis of Variance

            Model Summary

Model	R	R square	Adjusted R square	Std Error of the Estimate
1	765(a)	585	349	2.91002

Analysis of Variance (ANOVA)

Model		Sum of squares	df	Mean square	F	Sig
1	Regression Residual Total	83.723 59.277 143.000	4 7 11	20.931 8.468	2.472	140(a)

a.       Predictors: (Constant) SD, A, D, SA

b.      Dependent Variable: Case No.

Coefficients of Variance

Model		Unstandardized Coefficient		Standardized Coefficient	t	Sig	95% Confidence Interval for B
1		B	Std Error	Beta			Lower Bound	Upper Bound
	(Constant) SA A D SD	61.191 -283 -611 -1.094 -550	37.387 254 400 505 1.025	-1.036 -916 -1.373 -302	1.637 -1.116 -1.527 -2.168 -536	.146 .301 .171 .067 .608	-27.214 -883 -1558 -2.288 -2.974	149.597 317 336 099 1.875

Table 4.3: Analysis of Respondent Organization

CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1       Conclusion

The result of the study showed that increase in building material on construction cost is not only caused by inflation. Other macro-economy factors such as importation, interest rate, Gross Domestic Product (GDP) also contribute to these increases and have an effect on the trend in price movement.

The research also showed that the construction industry inflation is not equal to the economy wide inflation. Furthermore, the simple polynomial regression analysis has further offered objective explanations of the relationship between cumulative inflation rate and building material on construction cost and as such the model obtained can also be further developed, by considering various specifications, stationary properties and incorporating error correction mechanisms to provide economic related variable for estimating purposes.

5.2       Recommendations

1.         There should be systematic reduction in the country importation level as this will in turn encourage the use of locally made building materials. Foreign/imported building materials on construction cost allow inflation of other countries to be transferred to Nigeria. Thereby resulting on high building material on construction cost even where there is relative stability on price level of the economy.

2.         The database for the construction sector in Nigeria should be properly developed as this will facilitate the development of future cost of project and in cost planning.

3.         Professionals of the built environment should be involved in policy making as government policy can also cause increase in price level of building materials.

4.         The construction material inflation rate (CMIR) for the Nigeria should be properly developed, as this using the average weighted aggregative price index (AWAPI) formula should be developed. The CMIR will be a better basic for the calculation fluctuation in prices of construction materials.