It’s safe to say that cost overruns in construction projects have become an industry-wide status quo. In fact, according to a study from KPMG, just 31% of all projects came within 10% of the budget in the past 3 years. Even more topical, current economic challenges are contributing to shrinking profit margins. Just at the start of 2023, first quarter construction profit margins dropped by 27% due to labor shortages and material costs.
With construction budgets being scrutinized more so than ever and overall industry productivity remaining a constant concern, construction professionals can’t really afford to accept overruns and shrinking profits.
To know how to address cost overruns in construction projects, it’s important to understand the root of the problem. Oftentimes, overruns hint at deeper issues in project management and from schedules and budgets being set improperly from the very beginning of the project. Although extreme weather or forces beyond human control can impact budgets, in most cases, a project’s overrun is a result of inaccurate analysis or planning before building even starts. In parallel with better planning, technology can also help to reduce the common problems or elements that contribute to cost overruns, ensuring you can maximize efficiency and profits.
Tracking costs and monitoring risk while keeping your construction project on budget isn’t easy. Attend our Protect Your Margins: Cost Management Event Series to build a better game plan.
To help you keep overruns at a minimum, below, we highlight some of the most common cost overruns in construction projects to be mindful of and provide some useful strategies and implementations you can take today to keep your project within budget.
While many of a project’s stakeholders are eager to get the project’s building started, if you have faulty schedules and budgets to begin with, your project is headed for an overrun from day one. Due to the competitive nature of the bidding process, estimates may suffer from wrongful expectations of the scope of work included in the project. In many cases, some projects will also be estimated on a one size fits all basis, with chances of exceeding that initial estimate high. Therefore, it’s vital to your project’s success to do your diligence in the preconstruction phase and be accurate and realistic about project deadlines and costs from architects and contractors. Estimating the project accurately can even be started in the RFP process. This is the opportunity where architects, contractors, and owners can express their concerns over budget and timelines of the project. If either of the parties appears to be unrealistic about timing or budget, this should be an immediate red flag that the project is heading straight for an overrun.
Even though preconstruction and design services may contribute up to as much as 15% of your budget if this process can successfully identify potential issues before construction actually begins, that 15% will be nothing compared to the money saved on the process down the line. Because of the opportunity for cost savings, preconstruction is considered just as important as the building phase as it truly lays the groundwork for a complex project. A solid planning phase before groundbreaking ensures that you will have a better process of documentation, less confusion between administrators, and a solid project schedule, all helping to reduce future expenses.
On the other hand, even if you allocate proper time and resources for accurate budget and schedule estimates in the preconstruction planning stage, if your design plans are defective, you’ll inevitably be destined for cost overruns in construction projects. A design deficiency is a poorly designed, inaccurate, or incomplete plan. Deficiencies are so common and a pain point for owners and designers alike that a study from Engineers Daily estimated that design errors accounted for 38% of construction disputes. At the same time, incomplete or incorrect plans almost always result in substandard work from the contractors completing the work, which can result in legal battles down the line.
Fortunately, these kinds of disagreements are completely avoidable in many situations. In the design phase itself, construction software can help reduce the risk of errors or incomplete designs by ensuring everyone is on the same page. Project management is much better served with software that can incorporate real time changes into account. If the project experiences an unexpected change in its scope or one of its processes, it is much easier to plug those design changes into a dynamic digital model of the landscape than to redraw models on paper.
Alternatively, to enable contractors and subcontractors to build according to the design specifications, owners and contractors should agree on the specific Scope of Work and performance duties in the contract phase. This documentation should include clear references to all project specifications on design documents, warranties of the exact work to be completed by contractors, a risk allocation chart or definition, and a process for unforeseen issues. Most importantly, this contract should define the dispute resolution and/or mediation process, if disagreements happen during construction so hefty legal fees aren’t added in addition to other overruns that could occur.
By adding an extra level of security to ensure designs are correct and expectations are clear, project’s won’t have to suffer from overruns due to corrective work in the construction phase.
Often in conjunction with design errors, change orders are another very common reason for cost overruns in construction budgets. A change order occurs when an owner or contractor realizes that a design isn’t working or might try to introduce new specs, fixes, or requirements after initial models and budgets have been completed. Additional requirements will generally result in higher costs, which will obviously negate the original project budget. The additional time, manpower, and materials required to complete a new initiative may also have to be classified as a cost overrun if the improvements affect other aspects of the project.
Consequently, changes can usually be best addressed in the contract phase, when a Change Order Provision can be added to specify procedures and budget needed, should a change occur. If it isn’t addressed ahead of time, contractors might increase their total cost of a contract up front in anticipation of changes or disputes could arise if they didn’t adequately plan for the overrun to begin with.
If you use certain construction software that allows you to connect all your workflows, you may have the ability to simulate different solutions for scope changes, and budget accordingly in the preconstruction phase. Calculating different solutions ahead of time will be a much easier process, and you may be able to find a new level of functionality while reducing the number of extra resources used.
Learn more: Construction Cost Management 101
Even with solid designs and no project changes, your project could still experience overruns if project administrators aren’t up to speed with your project’s progress. When even small errors occur between the administration team, the results can be catastrophic. Furthermore, if lines of communication between administrators are limited, problems that occur on one aspect of a project may not even become known to other project managers until it is too late. Many contractors and owners believe that the best solution for bad administration is to simply increase the size of the administration team. The logic goes, with more people on the job, administrators will be able to focus specifically on their area of the project. However, this might not be the best solution in the long run as increasing the number of people in administration could lead to collaboration failures that will almost certainly involve a cost overrun.
Instead of adding more to your admin team, equip them with the right tools. Project management software can help play the role of multiple administrators and be the centralized platform where all tracking of project activities and team collaboration takes place. Unlike traditional administration, software gives a skeleton crew the ability to view the project from multiple angles, keeping up with many possible scenarios at once. Concepts can be changed digitally and compared side by side to previous iterations of the project. When it comes to human errors in invoicing, accounting, and delivery monitoring that could contribute to overruns, software can also help to reduce this risk by synchronizing critical financial data and enhancing accounting collaboration by synchronizing critical financial data and enhancing accounting collaboration.
Administrative errors are rather easy to avoid with a software system that guarantees the accuracy of all project documents and gives alarms for deliveries. With the full extra support digitally, administrators will have full visibility and flexibility into a project to keep operations and logistics running smoothly.
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Design integrity, equipment condition, and quality control are just a few of the many aspects of a project that need to be kept on track during construction. Unfortunately, this does not always go as planned leading to severe cost overruns in construction projects. Personalities clash just as often as a project’s site changes unexpectedly. An inherent trust gap between owners and contractors may already exist because of the natural conflict of interest between the two parties and it can have devastating impacts on a project’s momentum. That being said, even if both sides maintain a professional relationship, some projects are just too large to keep up with every site change and news may travel too slowly across departments.
Improving on-site communication with construction software can reduce some of the issues with site management. With software, calculations and designs can be referred to digitally for a more accurate reading and different scenarios can be tested side by side to see which will bring the better outcome. Because digital calculations are assured to be precise (based on accurate inputs, of course) and software designs can be trusted to accurately depict on-site descriptions, decisions can be made quickly based on solid information, not office politics.
The right software also provides more opportunity for collaboration. Online access to designs and scenarios allows for greater communication from remote locations. Decisions can be made while project leaders are on-site, looking at an issue directly. Faster communication also leads to better decisions, as real-time insight can address a situation before it snowballs into a bigger issue and implicates the budget.
Let’s say that everything has been estimated correctly, the project plans are flawless and scope change is being managed effectively. Outside of all of that, overruns are still likely to occur if the team executing the work is not up to a certain level of standards. Poor and less experienced subcontractors can cause costly mistakes, delays and errors, even with the most impeccable designs and plans.
Unfortunately, when hiring subcontractors, many general contractors do not adequately qualify their project teams. Whether they are trying to work with the lowest bid or are just leveraging existing relationships, using the wrong team opens GCs up to massive risk.
General contractors who go through the extra steps to ensure subcontractor qualification will reduce the probability of experiencing significant cost overruns in construction. Today, fast and easy-to-use digital solutions are available to streamline qualifications. For instance, TradeTapp is one option that helps contractors to analyze subcontractor risk based on safety history, financial benchmarking and more.
Systematically reducing cost overruns should be a priority in your construction budget planning, if it is not already. Taking the time to evaluate the reasons for your own cost overruns and incorporating the right solutions will bolster your ability to execute complex projects with greater control. You also take home a bigger piece of the pie for your planning efforts, so why leave money just sitting on the table? Through proper planning and with the assistance of construction productivity software, you’ll start to significantly reduce overruns in your projects and bring in more profits. Don’t just accept the new normal of cost overrun in your construction projects—make sure that you have the right planning solutions and software to help complete your next project within budget.
We highly recommend downloading The Construction Cost Control Toolkit – a collection of digital resources built to help your teams standardize and accelerate their cost management workflows. You’ll get how-to guides, a checklist, and data-backed insight that’ll help you build a business case for improving your current cost management workflows. Everything in the toolkit is yours, completely free.