The construction industry is a bustling, fast-paced business that thrives on good communication, informed decision-making, and a high-quality project management system.
Ask construction project managers, and they will tell you: between scope, cost, and schedule, there is a lot to go wrong with the construction process.
Construction projects running over budget is a common issue. Construction cost overruns are an industry norm. According to The Journal Of Construction And Engineering Management, most project cost overruns occur during the construction phase.
When a cost overrun occurs, the project’s general contractor receives the blame. In reality, project stakeholders most likely share the responsibility. Project owners typically don’t spend enough money and time to ensure their construction documents are properly drafted to protect their bottom line.
It’s essential for you to take the time to understand the causes of cost overruns, how they can impact your construction project and what they can do to avoid them.
What Are Project Cost Overruns?
Cost overrun is a bit different than cost escalation, which describes a predicted increase in budget costs.
Cost overrun, also known as a budget overrun or cost increase, is an unexpected cost stemming from underestimating during the budget planning process. There are three different types of cost invaded:
- Psychological: Caused by the escalation of commitment, scope creep, or optimism bias.
- Technical: Caused by poor cost estimation or insufficient data collection during budget formulation.
- Political-Economic: Caused by intentional misrepresentation of actual cost, budget, and scope.
Any expense that causes a project to push past the set budget is an item that a project manager needs to be vigilant in controlling. Let’s look at five common causes of construction budget overrun and how you can prevent them.
Five Reasons For Construction Cost Overruns And What To Do To Avoid Them
On average, 9 out of 10 construction projects experience cost overrun. This means that the final cost of your construction project will exceed your initial estimate more likely than not.
Even so, there are common causes that you can keep an eye out for and avoid if you catch them in time. Here are the five most common reasons for construction cost overruns and what you can do to banish them from your project.
1. Deviation From Planned Project Scope
One of the biggest catalysts of cost overrun is scope creep. Design changes always throw a wrench in the project manager’s plans. They can come from clients, team members, or other stakeholders.
While these design changes may benefit the construction project, too many changes can turn into time overruns and push projects into unanticipated cost overruns.
Don’t increase your project score before considering the big picture, or critical path, of your construction project.
How To Avoid:
When your project remains on schedule, it also stays on budget. Use CPM scheduling services to ensure your construction project sticks to the projected scope.
A CPM schedule is essential because it helps construction managers keep a tight schedule to meet the desired day of completion and assist subcontracts in meeting deadlines for critical tasks along the way.
2. Contractors Don’t Review Documents Properly Before Bidding
Sometimes poor communication causes contractors and subcontractors to not fully understand the work required to complete their role in large projects. Once they realize the oversight, they will seek additional compensation for work they deem as not represented on the original plans.
Underestimating the scope of work will inevitably lead to the final cost of your infrastructure project exceeding cost estimates and blow a hole in your budget.
How To Avoid:
Owners need to include specific language in their agreement that states the contractor has reviewed the plans in full before submitting the bid.
The owner also needs to require the contractor to confirm they are fully aware of the specifications and project estimates and understand the design intent. The price includes all necessary work to meet the plan specifications.
This language is essential to protect project managers from cost overruns.
3. The Lowest Bid Is Accepted Automatically
There are many reasons why owners look for the lowest possible bid for their project. Unlike the public sector, private owners don’t need .to assess a large projects’ costs properly to select the lowest bid.
An experienced owner knows that the best bid may not be the lowest one. Some contractors will underbid only to drive up the cost through change orders for additional funds. Others may lack the cost estimating skills needed to properly assess a large projects’ costs.
How To Avoid:
Whoever is hiring on your project will be better off choosing a trusted contractor over the lowest bid.
When you choose a contractor with a proven track record of project delivery of construction plans like yours, the chances of schedule delays and budget issues will decrease.
4. Design Documents Are Incomplete
The most common project delivery method is design-bid-build. This means the owner hires an architect to design their construction project, obtains bids from contractors to build their vision, and finally, does the project.
Sometimes design errors on the project documents lead to increased costs during construction. These mistakes happen when the owners wrongfully assume that the architect has prepared a complete set of plans with every detail needed for the contractor to build.
Problems typically arise when contractors claim they based their bid on details not shown on specifications and construction plans. When this comes up during the construction process, the owner must incur additional costs.
How To Avoid:
Owners must insist that the owner-architect agreement contains language that requires the architect to produce a 100% complete set of drawings with full coordination to any documents prepared by engineers.
5. Poor Project Management
No project manager sets out to cause project delays or incur extra costs during their construction project.
However, lack of experience, poor communication, and inadequate planning can lead to project management issues.
When poor project management exists on a construction site, you may see signs like:
- Increased Scope Creep & Change Orders
- Productivity Issues
- Project Delays
- Poor Site Management
Poor construction management can occur at any point in the project life cycle and impact any project team member.
How To Avoid:
To prevent the challenges that come with each construction phase, you need someone to mitigate on-site and ensure the project’s best interests are considered in the decision-making process.
Secure construction management services from experienced industry professionals. Construction management services act as your eyes and ears on the construction site that handles risk management and ensures management issues don’t derail your project timeline.
Avoid Construction Cost Overruns And Stay On Budget
As you can see, many factors can lead to unbudgeted expenses that can derail a project.
Effective construction project planning is crucial for avoiding cost overruns and maintaining your project schedule.
Trust Ariabuild’s experienced schedulers to use their technical expertise and real-life construction experience to save you time, money and enforce your project timeline from beginning to completion.
Contact Ariabuild today to set your project up for success.
What is the average cost overrun for a construction project?
The average cost overrun on any given construction project is 16% minimum.
What is CPM Scheduling?
Critical Path Method Scheduling is a way to plan our projects step-by-step and anticipate potential issues in the construction process in real-time.
What are the benefits of hiring a third-party construction scheduling consultant?
Hiring a third-party construction scheduling consultant will help you avoid costly errors, help uncover problems, and offer actionable solutions to keep your construction project on track.