Technical Journal, University of Engineering and Technology (UET) Taxila, Pakistan Vol. 20(SI) No.

II(S)-2015

Identification and Evaluation of Risk Factors

Affecting the Supply Chain Environment of
Construction Industry of Khyber Pukhtunkhwa
(KPK)
S.B. Khattak1*, M. Abas2, S. Maqsood1, M.Omair1, R. Nawaz1, I. Ul Haq3
1
Industrial Engineering Department, University of Engineering and Technology, Peshawar, Pakistan
2
Mechanical Engineering Department, Ghulam Ishaq Khan Institute of Engineering Sciences and Technology, Topi, Pakistan
3
Institute of Mechatronics Engineering, University of Engineering and Technology, Peshawar, Pakistan
*
Corresponding Author: sikandarbilal@uetpeshawar.edu.pk

Abstract-In today’s world supply chain management is
very important not only for manufacturing sector but
also construction. Implementing supply chain
management in the construction sector is very
difficult and complicated compared to manufacturing
due to the involvement of too many participants such
as contractors, subcontractors, designer, suppliers
and clients. Abundant literature is available, but
developing countries like Pakistan faces numerous
issues in construction projects. There are some basic
guidelines proposed by supply chain management,
which can be used as benchmark to scrutinize, to
coordinate, to reengineer and to improve continually
the whole construction supply chain. This research
work addresses and highlights external factors
affecting different performance indicators (Cost,
Quality and Time). The Analytical Hierarchy Process
is used to rank these external factors. At the end of
the study some recommendations are made which will
help to resolve the issues related to supply chain
issues.
Keywords-Supply Chain Management, Key performance
indicators, External Factors, Analytical Hierarchy
Process, Construction project.
I. INTRODUCTION
The manufacturing industry is one of the pioneer
industries, which presents the concept of Supply Chain
Management (SCM) as a novel and a vital tool to satisfy
a demand. It performs the business process in an
organized and well defined way. It saves time, boost
quality and realize a profit [i]. The concept of the SCM is
still in adopting phase by many construction firms
worldwide. Which means it is not still fully matured due
to its complication. Involving contractors, clients,
subcontractors, multiple supplier, designers and
consultants increases number of key stakeholders which
add complexity to construction supply chain [ii].
The construction industry in general is highly
fragmented with substantial negative impacts professing
low productivity, cost and time overruns, conflicts and
disputes, resulting claims and time consuming litigation.
The legacy of this high level of fragmentation because
project delivery process is highly inefficient in
comparison with other sectors [iii].
It is a fact that implementing the SCM concept in the
construction industry is complex because it needs new
innovations and the knowledge to achieve difficult goals.
Vigorous network of participants that operate to assemble
a number of opposing business objectives adds more
complexity.
The application of SCM in Pakistan construction
industry is still in the embryonic stage. Most of the
practitioners and researchers focus on the business
process projects and little research have been done in
Pakistan construction industry. Developed countries like
China, United States of America, and many European
countries are using SCM application in the construction
industry. But still these approaches are still to be
explored in developing countries. Use of traditional
methods to manage and initiate construction projects is
still in practice.
II. LITERATURE REVIEW
SCM is managed by effective participation of all
stakeholders.Its aim is to satisfy end user. concerned in
meeting the end user specification. The most vital goal of
the SCM concept is the full protection and fulfilling of
consumer requirements, optimizing the profit for the
company and reducing the extent of waste in terms of
three basic principles: time, cost and the quality.
Every domain has its own requirements and
management structure. SCM should be defined

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differently in different domains. The SCM particularly in
the building and construction industry deals with
management of materials and also has the relation
between contractors, suppliers, manufacturers and
distributors [iv]. Generally there are three types of
Construction Supply Chain (CSC) : the first one is the
primary supply chain which delivers material, second one
is the support supply chain which provides equipment,
and the third one is a human resource supply chain which
is concerned with the supply of labor [v]. CSC can be
divided into two main groups: materials chain and the
construction chain. This division helps to isolate the
procurement and management operations. These two
chains are interconnected through SCM database and
help to guarantee the smooth flow of information within
the different chain and results in increased cooperation
within the supply chain partners [vi]. Wangu [vii] have
developed a framework for integrated CSC and grouped
it into five domains and a supporting system as
performance measurement, risk management, selections,
conflict management, innovations, information
technology and communication system.
Numerous researches have been carried out to
identify the factors that affect the supply chain
environment [viii-xi]. Some factors could be controlled
by project team known as internal factors whereas the
external factors are defined as the factors that are not in
direct control of a project team. Prime consideration is
required to control these external factors, as it affects the
performance measures such as cost, quality and time of
the construction projects. The Significance of these
factors varies depending on the type of construction
project. Some associated with Pakistan construction
sector are: fluctuations in prices, inflation, delayed
payments, and incorrect method of cost estimation are
risk association [xii]. Sometimes the low bid is not the
most economical solution because it affects the
construction project in terms of over budgeting and
excessive delays. Now a day’s Pakistani construction
sector is facing the problem of financial capability of
contractor and supplier, due to which many construction
projects face delays and cost overrun [xiii]. The three
most important external factors that affect construction
projects include: bad weather condition, low labor
productivity and low quality of material [xiv]. For on
time material supplies the financial stability and
capability of supplier is very important. The supplier
needs to deliver material when promised. Beside financial
stability, bad weather and natural disasters may disrupt
supplies. They significantly affect the time and cost
performance of construction projects [xv]. The most
common external factors of delay are natural disaster in
Pakistan like flood and earthquake. The study also
acknowledged others which are: financial and payment
problems, poor management, shortage of materials and
equipment [xvi]. Cash flow is the most important power
of running construction companies. Lack of cash brings
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Vol. 20(SI) No.II(S)-2015
extra expenses to construction companies and decreases
the profitability. Late payment is one of the risky factors
that have an adversarial and disastrous effect on the
construction projects. Not only budget is affected, but
also adds delays and quality problems [xvii]. Shortage of
material, communication gap between the various parties
of construction projects, problem with subcontractors,
and lack of funding and poor site management causes
cash flow and quality problems [xviii] .
The Government changes policies rapidly which
affects the projects. The government enforces their own
selling prices and rates [xix]. Lack of effective project
management in Pakistani construction industry have
damaged its image in international market [xii]. The
Pakistan construction sector is facing the problem of
shortage of material because of low production. This
results in higher material prices. For successful SCM the
buyer and supplier relation is very important because of a
supplier is totally dependent on buyer revenue while buyer
focuses on low cost and good quality and on time delivery
[xx]. The issues which need to be addressed in supply chain
are communication, information flow, long term
relationship and quality [xxi]. SCM is a way of managing
the information flow or better communication. It is
important for problem solution and exchange of knowledge.
For this purpose computer integrated contraction has been
developed to improve communication and coordination
through the entire supply chain [xxii].
Literature review concludes that factors significance
varies from project to project and region to region. The
construction practitioner’s should be aware of these
significant factors and its impact on performance
parameters. This research is intended to highlight the risk
factors affecting the supply chain environment of
construction projects which are directly responsible for
cost overrun, time delays, and bad quality. Literature
review indicated that a construction project is futile if
time delays, cost escalation and quality deficiencies
occur. The project performance parameters selected in
consultation with experts (Academic and Field) are the
cost of the project, time taken by project and quality of
the project.
III. METHODOLOGY
Both internal and external factors were identified
primarily through a comprehensive literature review,
which were then shared with academic experts in a group,
discussed and were finalized after consulting the
construction practitioners. External Factors selected for
this research are shown in Table I.
A questionnaire was designed based on the internal
and external factors in relation to the project performance
parameters. The aim of the questionnaire is to take
feedback from construction practitioners about the
problem caused by these factors within and outside the
scope of a construction project and their impact on the
project performance parameters.
Technical Journal, University of Engineering and Technology (UET) Taxila, Pakistan Vol. 20(SI) No.II(S)-2015

TABLE I 18 ISO Certification Certified as a standard

EXTERNAL FACTORS
organization
S/ External Factors Description
No 19 Law and Order Strict control of crime and
Situation repression of violence
1 PC-1 Initial cost preparation
The questionnaire is divided into four portions. First
2 Funding Providing resources for portion is related to respondent qualifications (e.g. Work
the project experience, position in the company) where as company
information (e.g. Type of construction work performed,
3 Procurement Unit Inventory placing number of years in business, number of projects
of Contractors capability completed annually, total number of employees) is
included in the second portion. The third portion consists
4 Financial capability Contractor's ability to of a series of questions related to internal and external
of Contractor finance a contract factors with individual weights on a scale of 1-9. While
the last portion of the questionnaire relates the internal
5 Management team Members which make and external factors related to the project performance
of Contractor integral units parameters.
Then the questionnaires were shared with the
6 Communication Physical and construction practitioners, consultants, government
Infrastructure organizational structures officials and project managers. To make the research
needed for operation, use more reliable and useful a few group discussions were
of mail, telephone and cell also carried out by contractors and site engineers.
phone.
A. Response Profile
7 Escalation of Increase in price of the In Pakistan the top four categories of contractors as
Material Prices material classified by Pakistan Engineering Council (PEC) are
Class A (CA), Class B (CB), Class1 (C1) and Class (C2).
8 Technical Person Person in the team with The questionnaire was shared with One hundred and fifty
Availability technical Knowledge (50) CA, CB, C1, and C2 category contractors.
Government officials, private organization and academic
9 Cash Flow Inflow and outflow of experts opinion was also included. The survey is
cash for the project conducted through emails, mails and personal interview.
However, oe hundred and ten (110) questionnaire was
10 Shortage of Non Availability of
received out of which nine (9) were rejected due to
Material/ material and equipment
insufficient information. Table II shows the respondents
Equipment from market demography which highlights that most of the
respondents have more than 10 years experience.
11 Low Bid Maximum limits on cost TABLE II
RESPONDENTS PROFILE
12 Weather Condition Instability in weather S.NO Position Organization Experience
13 Bureaucracy and Structure and regulations 1 Executive Peshawar 20-23 years
Political Influence in place to control activity
and General Development
14 Terrorism Violent acts which are Director Authority
intended to create fear (PDA)

15 Regulatory Consulting firms to assure 2 General Contractor of 18-20 years

Authorities the work Director Class A and B

16 Government Laws and Procedures 3 Civil Irrigation 13-17 years

Policies from government Engineers Department
Peshawar
17 Inflation Decrease in the value of
money

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4 Quantity PDA and 16 years TABLE V

SPEARMAN'S TEST RESULTS
Surveyors Contractors of
S.No Categories Correlation
Class A and B Coefficient
1 CA-CB 0.451
5 Professors UET Peshawar 10-15 years
2 C1-C2 0.249
(Academic
3 CA-C2 0.262
Experts)
4 CB-C1 0.679
5 CB- Government 0.152
B. Validation of collected data
officials
Required data were extracted from the 6 Government officials- 0.374
questionnaires. Its reliability was checked with the help Private organization
of Statistical Package for Social Sciences (SPSS) 7 CA- Academic Expert 0.271
software using Cronbach’s alpha test. Table III shows the
summarized results of validity of collecting data, which is
100% valid. IV. DATA ANALYSIS

TABLE III Analytical Hierarchy Process (AHP) is used for

CASE PROCESSING SUMMARY analysis. For analysis the mean of the individual external
N % factors was calculated, which was used as input value for
Cases Valid 101 100.0 pairwise comparison matrix for the analytical hierarchy
Excludeda 00 000.0 process (AHP). Then the data was analyzed with the help
Total 101 100.0 of analytical hierarchy process developed by Saaty [23].
a. List wise deletion based on all variables in the The general AHP tree research is shown in Fig. 1.
procedure

The Table IV shows the cronbach’s alpha value. The

data are reliable when alpha value is greater than 0.70,
while less reliable when greater than 0.50 and less than
0.70. While not reliable when alpha is less than 0.50. The
data was highly reliable with a value of 0.850.

TABLE IV
RELIABILITY STATISTICS
Cronbach’s Cronbach’s Alpha Based N of
Alpha on Standardized items items
.850 .855 19
C. Correlation test

The questionnaires received were from different

organization and from different respondents. So it is
important to check the level of agreement among
different parties and accuracy in data. For this reason
Spearman’s rank correlation coefficient is used. It is non
parametric and distribution free test. Randomly, two
questionnaires were selected for each category for
performing correlation test. The table V shows the
results.
The value of correlation coefficient varies between
+1 and -1. Positive value near to 1 shows positive
agreement, while negative shows disagreement. As all the
values of correlation coefficient are positive and near to
+1. So we conclude that all the parties agree on rating of
factors and collected data is quite accurate.
Fig. 1 AHP Tree for External Factors
Microsoft EXCEL (Ms Excel), one of the most
commonly used software for data analyses and data
crunching is used. The responses from the questionnaire
were imported to MS Excel. AHP template was
developed in EXCEL. The general steps for AHP are
discussed below:
1. Construct a set of pairwise comparison matrix of
criteria.Pairwise matrix refers to weightage matrix of
individual factor. The pairwise weightage is similar
to From-To chart and is calculated by dividing the

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weights of respective factors. Put the values in Table IX

Difference of two Iterations
matrix like from-to chart as shown in Table VI.
First Iteration Second Iteration Difference
TABLE VI Priority Vector Priority Vector
COMPARISON MATRIX
0.25 0.25 0
Cost Quality Time 0.45 0.45 0
0.30 0.30 0
Cost 1.00 \0.56 0.83 Similarly following step 1-4 , the alternatives
1.80 1.00 1.50 (external factors) are compared with respect to each
Quality
criterion (cost, quality and time). So the resultant matrix
Time 1.20 0.67 1.00 obtained as a result of pairwise comparison is of the order
(12 X 3) as shown in Table X.

TABLE X
PERFORMANCE MEASUREMENT MATRIX
2. Perform the first iteration to normalize the matrix by
squaring the matrix, take row sum and divide each External Factors Cost Quality Time
row sum by its total sum, to get a first priority vector. PC-1 Preparation 0.0516 0.0466 0.0438
As shown in Table VII.
Funding 0.0534 0.0581 0.0600
Procurement Unit 0.0519 0.0553 0.0517
TABLE VII of Contractor
FIRST ITERATION
From- Cost Quality Time Row Priority Financial 0.0594 0.0575 0.0531
To Sum Vector Capability of
Chart Contractor
Management Team 0.0540 0.0559 0.0560
Cost 3 1.67 2.50 7.17 0.25 of Contractor
Quality 5.4 3 4.50 12.90 0.45 Communication 0.0478 0.0503 0.0555
Infrastructure
Time 3.60 2 3 8.60 0.30
Escalation of 0.0629 0.0625 0.0555
Sum 28.67 Material prices
Technical Person 0.0545 0.0611 0.0539
Availability
3. Again square the previous matrix to perform a Cash Flow 0.0591 0.0597 0.0574
second iteration, take it row sum and divide each row
sum by the total row sum to obtain second priority Shortage of
0.0555 0.0572 0.0597
vector as shown in Table VIII. Material/Equipment

TABL VIII
Low Bid 0.0563 0.0555 0.0535
SECOND ITERATION Bad Weather 0.0524 0.0505 0.0563
From- Cost Quality Time Row Priority
To Sum Vector Bureaucracy and
0.0498 0.0493 0.0534
Chart Political Influence
Cost 27 15 22.50 64.50 0.25 Terrorism 0.0601 0.0563 0.0586
Quality 48.60 27 40.50 116.10 0.45
Time 32.40 18 27 77.40 0.30 Regulatory 0.0421 0.0475 0.0453
Sum 258 Authority
Govt Policies 0.0488 0.0477 0.0530

4. Then take the difference of first priority and second ISO certification 0.0285 0.0348 0.0253
priority vector, shown in Table IX if the difference is Inflation 0.0617 0.0510 0.0542
negative, zero or near to zero, we said that the matrix
is normalized and consistent, the priority vector in Law and Order
second iteration is a result of AHP. Situation 0.0501 0.0431 0.0536

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Multiply the Table X with priority vector in Table The inflation results an increase in the prices of fuels,
VIII, to get AHP results. Th table XII shows the AHP equipments, and labor costs. On other hand taxation have
results in descending order. The highest impact factor the same impact in 2013-2014, and 2014-2015 budgets.
with AHP value of 0.0605 is escalation of prices while Government has increased taxes on both manufacturing
the lowest rating factor is ISO certification with AHP and service industries including both cement and
value of 0.0304. construction firms. As a result cement industry have to
increase their prices from 3 to 4%. Contractors not only
TABLE XI pay taxes on their business only but also on the material.
EXTERNAL FACTORS RANKING
To avoid such problems the contractor needs to buy
Ranking External Factors AHP material as early as possible. Buy it in bulk quantity to
Values take advantage of discounts. The contractor needs to
1 Escalation of Material 0.0605 make escalation clause in the contract applicable and
prices include those materials that are critical to escalation.
2 Cash Flow 0.0589 Developing trust with key supplier to get early
3 Terrorism 0.0580 information on material prices increasing may also
4 Shortage of 0.0575 benefit the team members.
Material/Equipment Second significant factor with an AHP value of
5 Funding 0.0575 0.0589 is cash flow. According to most of the
respondents the cash flow problem occurs because of
6 Technical Person 0.0573 ineffective utilization of funds, lack of proper process
Availability implementation, inflation and bureaucracy. In order to
7 Financial Capability of 0.0566 avoid such problems one need to discuss problems with
Contractor clients to address the problems in a timely manner.
8 Management Team of 0.0554 Financial stability of the client should be assessed prior to
Contractor signing agreement. Communicate openly and make a
9 Low Bid 0.0551 penalty clause in the contract if the client fails to fund the
10 Inflation 0.0546 project on time.
11 Procurement Unit of 0.0534
Contractor 0.061
12 Bad Weather 0.0527 0.061
13 Communication 0.0512 0.060
Infrastructure 0.060
14 Bureaucracy and Political 0.0507 0.059
Influence 0.059
15 Government Policies 0.0496 0.058
16 Law and Order Situation 0.0480 0.058
0.057
17 PC-1 Preparation 0.0470
0.057
18 Regulatory Authority 0.0455 0.056
19 ISO certification 0.0304 0.056

V. RESULTS AND DISCUSSION

Five most significant external factors are shown in

Figure 2. The most significant factor identified through
AHP analysis is escalation of material prices. The AHP
value of escalation of material prices is 0.0605.
Escalation of material prices simply means an increase in
prices of material that affect the performance of the
project. Most of the respondents have mentioned that the Fig. 2. Significant Factors
common cause of escalation in Pakistan is economic Terrorism with AHP value of 0.0580 is third
instability or inflation and too much taxes. Inflation rate significant factor. Terrorism in Pakistan has hampered the
ranges from 3% to 27% in Pakistan, with an average of business environment especially in KPK. According to
8.8%. According to analysts this average rate is very the respondents, terrorism has greatly affected cost and
much high and hampers the growth and development. time of construction projects due to supplier dropout.

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Tight security forces alternative routes to be choked for
traffic. Opened routes have several check posts. The
trucks containing materials has to wait for days at a check
post for security clearance. To avoid such problem the
contractor need to order material as early as possible to
avoid shortages. The government needs to concentrate
and relax transportation policy.
Fourth significant factor based on AHP is shortage of
material/equipment. Most of the respondents reported
that they are facing problem of shortage of
material/equipment because of supplier dropout. On time
funding, escalation of material prices, unnecessary use of
materials, under estimation of materials quantity and
pilferage on construction sites leads to supplier dropout.
The effect of the shortage of material/equipment can be
minimized by purchasing the critical material in bulk
quantity. Daily supervision of the material, and correct
estimation of the material can help in resolving this issue.
Preventive maintenance should be preferred rather than
corrective maintenance for equipment and vehicles.
Funding with an AHP value of 0.0575 is fifth
significant factor. Late funding by clients is also the
major problem faced by most of the respondents Funding
not only affect project performance but also create
financial problems. As the construction projects are
temporary in nature, but its outcomes are permanent. So
the funds should be allocated in short terms and must
release on time. If the funds are not provided on time, it
leads to time overrun, over cost, and quality defective.
VI. CONCLUSION
In this research the effect of external factors on key
performance indicator (Cost, Quality and Time) of the
construction projects is assessed. A questionnaire was
designed and then distributed among major group of
participants such as consultants, contractors and clients.
The identified factors were ranked based on AHP. The
factor with highest AHP value is escalation of material
prices which is 0.0605. Followed by Cash flow with
0.0589, Terrorism with 0.0580, Shortages of material and
equipment’s with 0.0575 and Funding with 0.0575.
A project manager must need to consider these
factors and try to diminish their effect at the start of
project by better supervision and maximum utilization of
available resources. Better planning from the beginning
and effective scheduling leads to a satisfactory project.
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