Content

Chapter 6 Conclusions……………………………………………………… 26

6.1 Conclusions………………………………………………………………………………….. 26

6.2 Research limitations………………………………………………………………………. 26

6.3 Recommendations………………………………………………………………………… 26

6.4 Direction for the future research……………………………………………………. 26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 1 Introduction

1.1       Research background

China initiated economic reforms and trade liberalization in 1979, which promoted its economic performance dramatically, globally china has joined the countries that have the fasted growing economies in the world. By 2013 china had an average GDP growth rate of 10% (Li, 2015). In addition, China has become the world’s largest manufacture and ranks the world’s largest foreign exchange reserve and the second-largest recipient of foreign direct investment (FDI). Therefore, China plays a crucial role in shaping the economy of the world.

 

Recently, real estate has become an important pillar in China’s economic development and serves as a barometer for its prosperity and economic growth. Due to transition of economic in China, the government implement a series of Macroeconomic control policies to manage the excessive growth of property prices (Fung et al., 2006). SMEs highly affected by the macroeconomic policies. The policies led to intensified competition between real estate enterprises (Chen et al., 2016). Owing to real estate industry increasingly fierce competition and real estate investment increases, the profit levels of empathy tend to decrease gradually. Reduce costs and to increase the market competitiveness is important for enterprises. Cost control management has become a hot topic in real estate industry (Song, 2014). There is a relevant study to look into the main insufficiencies with the predominant project cost and time control practices for building projects in the United Kingdom, and the study’s recommendations have been put forward as “critical”, “imperative”, or “helpful” processes for cultivating project control practice (Yakubu and Min, 2014).

 

Households consider real estate as an important investment, which influences peoples’ living environment and life standard. However, it is also a leading crucial risk for many. Furthermore, abnormal fluctuation of the construction prices can potentially lead to macro economic recessions. For instance, the Japanese economy dramatically hunched because of drop of the asset prices in the real estate sector. Following this case between 1991 and 2000 the Japanese construction industry and the stock market prices were highly inflated (Li, 2015). However, overheated economic activities resulted to collapse of the prices in 1992. After these activities Japan’s average GDP growth rate decline to less than 1 percent and in some cases they obtained a negative growth rate (Li, 2015).

 

Therefore, with the government of china resorting to adjustment of the real estate parameters (interest rates and regulations) and fixed asset investment through bank financing as an effective tool for macroeconomic policy (Yunfang and Tiemei 2007). It is clear that the growth of the construction industry will depend on future government plans and policies. However, the rate of consumption is expected to balance off the investment as the sole driver of economic development, as a result, it is very likely that the government will attempt to moderate the burden of construction in the GDP figures in a near future (Yunfang and Tiemei 2007). Also, when divided into sectors it is apparent that buildings including public, residential and industrial buildings remain the commanding share of the Chinese real estate market.  It is anticipated that on a nationwide scale this distribution will remain constant, although the situation can vary from province to province, hence making regional difference a conspicuous issue even in terms of pricing.

 

A closer analysis of the ‘prospects and design’ and ‘real estate development supervision’ subsectors present opportunities for the SMEs only on the account that there is market share and ‘project supervision.’ Furthermore, in the construction subsectors established and foreign entities impose strong regulatory constraints. It is revealed that licences are difficult to obtain or takes a long time to process if they are available at all (Yunfang and Tiemei 2007). In these regulations the Chinese government prohibit new materials and construction methods from being used and implemented in the domestic markets. These influences play a central role in determining the dynamism and the prices and cost of construction in the Chinese real estate industry. Therefore, to improve performance and competitiveness of enterprises, this dissertation will focus on cost and time control of construction project in China SMEs, and give some reasonable advices of adjustment and reform.

 

1.2 Research aims and objectives

Project execution phase is the longest process in the project life cycle and it typically consumes the most energy and the most resources. In order to realize the project construction cost and operation cost of the comprehensive monitoring, and reduce the total cost of real estate projects. Hence, this dissertation will focus on the cost control of project execution phase in a selected small and medium-sized real estate company, and look at how the company achieves the project, how this helps, its growth, and any drawbacks in the whole function. Then try to find improvement measures to the company that can take advantage of the project and improve effects of the corporate performance.

 

1.3 Contribution of this research

Doing business in the Chinese construction sector is a long-term preposition. Therefore, there is a need to establish an effective business model, understand the first evolving market in china, know the regulations and learn how to create a “China experience” in the construction sector. This makes the cost management issues in the sector both time-consuming and work-intensive. In addition, cash flow and time management estimations are vital issues for SMEs to penetrate the real estate sector. Although it is true that these hurdles are daunting, the possible rewards that can be obtained when a successful operation and cost management of the construction projects is determined are large. Therefore, the main contribution of this dissertation is to analyse the cost management factors that are linked to the regulations that are posed by the Chinese government in the real estate sector to help SME’s effectively manage their construction time and cost for successful operation.

 

In addition, the real estate industry is a new economic area in China’s gross domestic product in this modern era. However, the sector is facing unprecedented opportunities and challenges. Therefore, this dissertation analyses the cost and time management of the construction projects and designs to helps investors particularly the SMEs to understand the current situation in the Chinese real estate market to help them make viable future investment decisions. Finally, the dissertation contributes to the overall study of the Chinese real estate industry and the factors affecting housing prices and how these factors avoid influencing the operations of SMEs in the Chinese real estate market negatively.

 

1.4 Outline of the dissertation

This dissertation consists of four major sections. The first section introduces the topic of the study and gives a brief description of the background of the study. The section also provides the objectives of the study and the contribution of the research to the body of knowledge in the real estate market of china in terms of cost management of the construction projects.

The second section deals with the review of related studies to the topic under investigation. All the studies selected for review in this section have been tested for validity and reliability with an aim of delivering valid and reliable research findings.  This section also provides the framework of the research and give a specific guidance on what knowledge is available related to the topic under investigation, which is Analyzing cost management in real estate projects of Chinese SMEs. The literature review has been conducted in close association with the objectives of the dissertation. Finally, this section has provided the knowledge gap that is supposed to be filled with the research findings.

 

The third section provides the methodology employed in the study. This section also outlines the specific designs and data collection tools that have been used to collect and process the data collected in the research.

 

The final section deals with data analysis and presentation of the findings of the research. This section also encompasses the recommendations that the study recommends based on the findings that are drawn from data analysis and interpretation.

 

Chapter 2 Literature review

2.1 Introduction

Cost management in real estate’s projects has become necessary as a measure for effective management of both financial and material resources in Small and Medium Sized Enterprises (SMEs). According to Acebes et al. (2013) new programs have been implemented in an attempt to reduce the costs and schedule growth in real estate’s projects. The Chinese residents are involved in a number of Small and Medium Enterprises (SMEs) in the real estate’s sector, thus they are faced with the challenge of cost management in order to use the available financial resources and materials for the purpose of achieving the desired outcome of project success. The activity of cost management in real estate projects in Chinese SMEs mainly involve management of financial costs and time management so that the intended completion time can be attained and the expected outcome achieved (Batselier and Vanhoucke 2015). There are many activities that take place from the start of the project until it is completed. Since the emergence of Chinese real estate SMEs, various methods have been used as cost management procedures. One of the commonly used methods is the Earned Value Management (EVM). While the EVM was initially aimed at contributing to cost reduction, it has shifted gradually from management of costs to earned schedule. Nevertheless, there are other methods that have been effective in ensuring cost management in Chinese SMEs such as the Bayesian method and projects monitoring methods that enable the objective of cost reduction to be achieved.

 

This dissertation explains the developments of real estate SMEs in China in the context of the changes that have occurred in the financing and cost management to its present state, the challenges that the Chinese real estate managers have experienced in cost management, the opportunities likely to be beneficial to them. In addition, it presents the application of the EVM in real estate projects as a determining factor for cost management and the phases in which it is applied. This dissertation also explains the application of Bayesian Method during cost management in real estate projects. Finally, it provides a recommendation of the actual activities that the Chinese real estate managers need to undertake in order to promote the success of cost management and effective use of resources for the success of their SMEs.

 

2.2 Real Estates Cost Management in Chinese SMEs

The increase in the development of real estate SMEs projects in China has been brought by the challenges resulting from traditional housing and the manner in which land use has been achieved in the last three decades. There has been a shift in housing management from the government to Small and Medium Sized Enterprises (SMEs). The development of real estate SMEs has been necessitated by the need to ensure land is used adequately for the construction of rental estates at least costs (Caron, Ruggeri and Merli 2013). It has also been aimed at enhancing houses allocation to residents in fair and corrupt practices of government officials in affecting the development of real estate sector. There has been a rapid growth in real estate in China due to the demand for housing in China in the same manner as the emergence of SMEs that manage the projects. The management of real estate involves seeking the funds for the performance of the project activities such as seeking loans (Chen, Chen and Lin 2016). For instance, a number of SMEs in China tend to seek funds from the people’s Bank of China (PBC) or the Central Bank. These loans are subject to interests during repayment thus, there is the need to ensure effective use for the purpose of attainment of the project objectives. The opportunity that exists in the operation of real estate’s SMEs in China is that there is an increase in population and increased housing is one of the austerity measures that have been put in place to address the situation.

 

2.3 Challenges encountered by Chinese SMEs in Cost Management of Real Estates Projects

There exist a number of problems during real estate project management among SMEs in China. For instance, a number of real estate managers do not make the right estimates of projects. Present manner in which compilation of feasibility is done is not detailed and most projects are not adequately controlled. The estimation of costs in most projects are done with lower levels of precision and in some cases, not investigated (Czemplik 2014). Another challenge has been poor reliability of the compilation of project budgets. Most Chinese real estate SMEs at the investigation stage are not sufficient due to lack of exactness of a number of fundamental materials for design. Consequently, most designs are not rational and subject to changes during construction, resulting in a budget that is less reliable. In some cases, real estate working drawings are unpractical. The objective of working drawing budget is to create an organized strategy for construction and how to achieve the requirements of design using particular methods, as well as methods of arranging the construction period, management of workers and facilities in accordance with scientific principles (Chen, Li, Liang and Wang 2011). There have also been the difficulties in cost management for real estate SMEs during the creation of construction procedures. A number of real estate developers do not manage contracts in an effective manner. The manner in which construction is done is usually not perfect. Most procedures are not followed strictly and feasibility studies are less regarded to be important. Consequently, the budget created cannot be used as an effective method of controlling most real estate projects for SMEs in China.

 

Cost management in real estate projects in Chinese SMEs sector have not been achieved because there is inadequate management of contracts such as in the case of subcontractors and external employees (Fung et al. 2006). In some cases, a number of developers do not establish the costs of project quantities in a correct manner. Due to the inability of real estate developers to design project using management procedures, the scale in which the project is based increases and a rise in cost is observed. In some cases, the structure of financing is not reasonable and dependent on financial channel, which results into a rise in costs (Hunter et al. 2014). Presently, funds used in real estate activities in China are mainly obtained from domestic loans, funds from foreign institutions, and collections made by real estate companies. While methods of financing are few and in some cases immature, there are a number of limits. In certain cases, funds are not obtained in time. The processes of projects have been insured by seeking loans from banks. Consequently, a significant proportions of funds used in the construction are obtained in the forms of bank loans (Olawale and Sun 2015). The duration of the loan repayment is usually long and does not match with the returns on investments. The nature of real estate industry is a determining factor for lagged return on investment. When a particular financing channel is used, there is an increase in risks and costs, and an accumulation of bank loans, which results into an increase in cost of construction and pressures during later operations.

 

The processes through which cost control tasks are performed are not scientific and there is little knowledge of cost control while the systems used are imperfect and the resulting management costs are high (Song 2014). The reasons why the costs of projects management in SMEs have been high include: inadequate control systems and inability to manage and control systems in a systematic manner, resulting into difficulty in timely identification of costs that are out of control. There is also lack of knowledge of cost control and constraint mechanism. In most cases, there is greater emphasis on quality and the period in which the construction takes place rather than cost management (Willems and Vanhoucke 2015). The absence of system results into a situation of irregular expenditure and lack of integration of standards of management. Workers are also recruited in large numbers compared with the adequate number, thus inflating the cost of management of the SMES projects due to high compensation costs.

 

2.4 Methods for Cost Management in Chinese SMEs involved in Real Estates Projects

Various measures have been proposed for cost management in real estate SMEs projects such as building a scientific management system in the construction of real estate, ensuring the equipped measures are perfected, and investments are separated from other aspects of the project such as construction and management (Acebes et al. 2013). The construction procedures can also be reformed and ensure rationality is achieved. The administrative approval should be simplified and strengthened. Cost management has also been enhanced by performing perfect supervisory roles. The processes of supervisions have been made effective during the entire processes of undertaking real estate projects, bidding processes, design stages, construction, and supervision stage.

 

Cost management in some Chinese firms has been achieved by building and perfecting cost system. Batselier and Vanhoucke (2015), state that the main activities include: creation of organizations involved in cost management from the design, bidding, construction, management, and the actual construction. Strong cost management structures have been built with the focus on project managers for the purpose of enabling prediction of costs and making decisions. They have also build systems for information management and control of costs for the purpose of actualizing information and the process of obtaining feedback. The importance of information system is that it ensures pre-warning errors are detected, the contributing factors established, suggestions for resolving them made, and a dynamic cost management is achieved (Caron et al., 2013). They have also made up the right standards that enable operations to be performed and business operations have been optimized while management empowerment has been leveled. Responsibilities have been established in various positions during the projects, a check has been created, and mechanisms in which incentives are provided have been established. Standards in which cost controls are performed have been made and workers motivated to implement cost management methods while performing various tasks. There has also been an emphasis on designs, enhancement of contract management and compliance with design changes. Design constitutes the most important ring during cost control in real estate projects, thus it has a direct impact on the period of construction and the level of investment (Chen et al. 2016). Consequently, most real estate firms have selected design companies with the highest levels of reputation in building designs. By complying with the principle of convenience, reasonable design indexes have been selected as measures of managing costs of projects. Schemes have been selected in a proper manner and designs have been optimized for the purpose of decreasing the cost of investments. Contracts management have been strengthened and subcontractors have been adequately supervised. The changes of design have been managed strictly and changes in costs established for the purpose of reducing the impact of additional costs. Systems for changing the designs have been built and limits have been set for procedures to be followed during effecting changes (Chen et al. 2011). Cost management has also been achieved by ensuring the financing channels are enlarged and debt structures are optimized while financial risks are controlled. Various sources of funds have been sought and funds have been absorbed to be used in real estate construction. The amounts of loans from banks have been minimized and capital costs reduced. Construction companies have also been advised to get low fiscal interests and new channels of funding real estate projects have been recommended. Other forms of financing that can result into cost management include: re-engineering, issuance of corporate debts, financing in short-term duration, auctioning, and absorption of funds from foreign sources.

 

Cost management is also achieved by controlling the costs of management and reduction of expenditures. The system is then perfected and an effective constraint mechanism is built. The system is built up and the construction and financial system is strengthened. Responsibilities of positions and standards of practice are established and budget control is applied in the execution of the project (Czemplik 2014). Cost management can be effective if a management budget is created and the project participants comply with its requirements strictly. Costs are then checked in accordance with the financial system and budget. An examination is carried out on the expenditure indexes and management budgets are allocated in various functional sectors (Fung et al. 2006). A target and responsibility contract can be signed for cost management. It can also perform the role of controlling cost based on the contract and plan.

 

2.5 Earned Value Management as a Method of Cost Management of Chinese SMEs in Real Estates

Earned Value Management (EVM) has been used in establishment of scope, scheduling resources and integrating various methods in order to complete a particular project. It provides a comparison of planned completed work, the earned handicraft and the exact costs likely to be incurred to determine whether investment in real estate is in consistence with the plan (Hunter et al. 2014). In order to apply the EVM, the first approach is definition of the scope of the project to be undertaken. This is achieved by establishing the actual tasks that will be performed and creating a comprehensive budget for all costs to be incurred during the project. A mission and responsibility is assigned where the sub-units of tasks to be performed are established. A project schedule is then arranged (Olawale and Sun 2015). The Work Breakdown Structure (WBS) is established and the connection between different activities is determined. Time management and cost management is performed in this stage. The relevant resources and budget are assigned to the project. A link is created between the resource and budget. A time-cost curve is then created. According to Song (2014), a measuring basis is build by drawing the Budgeted Cost of Work Scheduled (BCWS) curve that complies with the plan and its main curve. The checkpoint is defined by establishing the civil work to be performed during the project and the equipment to be installed. Cost measurements should be done by determining units completed and the corresponding costs as the project continues. Percent completed is estimated as a fraction of the overall work to be performed. The next activity is the performance of forecast for the results in accordance with the parameters measured (Willems and Vanhoucke 2015). Effective cost management requires that the processes involved in the project should be controlled before the beginning of the plan. There should be logic relations between the processes. One of the measures used in EVM is cost performance Index (CPI) and is obtained by:

Schedule Performance Index (SPI) is obtained by:

The use of CPI has been significant in predicting the possible cost to be incurred in real estate investments but is occasionally used with CPI for the purpose of predicting the completion estimated cost of a project (Acebes et al. 2013). Corrective actions are then taken in response to variances in costs compared with the expected costs of the project at the planning stage. The final step of application of EVM is making management alterations. This is the process where managers make adjustments to the plans, redefine the checkpoints and enhance monitoring tasks.

 

2.6 Modifications that have been made in EVMs to Enhance Cost Management in Chinese SMEs

The objective of EVM is to determine the possible cost during implementation of a real estate project and determining ways in which they can be managed. Additional approaches have been proposed to enable cost management in a more probabilistic manner that enhancing the effectiveness of the EVM. According to Batselier and Vanhoucke (2015), Monte-Carlo Simulation has been used during generation of shapes used to interpret the EVM curves. Most Chinese construction sites managers use powerful computers to perform the simulation, but its effective application and the use of the function of distribution is effective in enabling cost management in real estate projects provided the software is focused on achieving a particular type of construction outcome. The EVM has also been modified by shaping the initial the EVM to enhancing control of the project time in a more effective manner, compared with the use of original edition method (Caron, Ruggeri and Merli 2013). While the EVM was initially built for cost and time management, most construction management activities use it during cost management only. In some Chinese SMEs projects, the EVM have been modified to enable decision making about implementation of changes in design changes in different phases of a project. The Schedule Forecast Indicator (SFI) is an additional tool used to manage project cost in conjunction with the EVM. The objective of SFI is to present information expressing the possibility of successfully cancelling an activity during different phases of a project (Chen et al. 2016). Prior to making a decision about implementation of a new design change, the construction project manager has to consider the possibility that the cost of the project and the completion date will be met. The use of SFI enables cancelling any disturbances resulting from changes in design in the early stages of the project compared with the later stages.

 

2.7 The Use of Baynesian Approach in Cost Management in Chinese SMEs

The use of Bayesian approach has been effective in enhancing the effectiveness of the EVM as a method of cost management in real estate projects in China. According to Chen et al. (2011), this is achieved by establishing cost efficiency of real estate investments trusts (REITs) by performing a probabilistic analysis of deviations of the costs of each REIT from a particular efficient cost frontier. It involves the use of historical information to establish the overall deviations from the cost frontier. The magnitude of REITs is calculated in each case, its impact on managerial inefficiency is established and the resulting return to scale is measured. In the application of the Bayesian approach to the EVM, the most delicate procedure involves the selection of the initial distribution (Czemplik 2014). This distribution illustrates the prior knowledge of the expert regarding trends in the project, possible opportunities in the future, patterns in the projects, and effects of corrective actions. The Bayesian approach involves the use of data records and information from experts to arrive at the estimates of cost of completion of a real estate project. More specifically, the impact that can be achieved from the data about the future are associated with typical patterns that are characteristic of similar projects such as curves that can enable their description, establishing areas of progress and the milestones (Fung et al. 2006). The Bayesian approach in cost management in real estate SMEs is performed by the use of two indices, namely: Cost Performance Index (CPI), and Schedule Performance Index (CPI). The assumption on which these indices are used is that they are affected by a high level of volatility due to changes in conditions every month. The modeling is done by performing data analysis using logarithmic transformation of the values of the indices. The log-normalcy and independence of the indices is established (Hunter et al. 2014). The implementation of the two tests is accompanied by exploratory data analysis. The second phase of the Bayesian approach is the elicitation of the expert knowledge into the distribution for the purpose of minimizing biases that result from cognitive aspects such as level of availability, and anchoring and adjustments or overconfidence (Olawale and Sun 2015). The elicitation stage constitutes an important process during the creation of the probabilistic model, due to its impact in minimizing risk that can be included in the model. The elicitation process is achieved by creating a set of questions that involve direct response from the experts through the provision of numbers or making an indirect choice between simple alternatives. A basic direct strategy during elicitation process is definition of density function quartiles. The third stage in the application of the Bayesian model is the establishment of the posterior distribution of the CPI and SPI.

2.8 Summary

This dissertation explains various methods of cost management used by real estate project managers in real estate in China. The increase in population in China and the need to create additional residential areas for the people has resulted into the allocation of the role to the private sector. Thus, a number of private real estate SMEs participate in the construction of residential apartments in China. In order to achieve this objective, they have obtained funds from financial institutions such as People’s Bank of China. There exist a number of problems they have encountered in cost management while performing the construction tasks in the real estate SMEs such as inability to create a budget that meets the actual costs incurred and the difficulties in the management of the real estates in an effective manner. The projects have also been affected by situations such as delay in the availability of funds to be used in their constructions, thus affecting completion times. Consequently, a number of cost management methods have been implemented such as performing supervision of the areas of expenditures and creating designs whose areas of expenditures during project implementation can be understood. The EVM systems have also been illustrated