No one likes spending more money than initially planned. While shifting market prices and fluctuations in labor and material costs are to be expected in any industry, cost overruns in construction projects happen more often than not, and it’s a serious problem.
A recent and widely-quoted survey from KPMG noted that just 30% of construction projects came within 10% of their original projected cost. The same survey held that four out of five construction companies felt that financial risks to their business were rising. But what issues lie at the heart of the construction cost overrun problem?
A number of published studies have examined why so many projects go over time and over budget. Almost all of them point to the same challenges.
Here’s our list of challenges most likely to trigger your typical cost overrun.
What Can Cause Cost Overruns in Construction Projects?
Proper estimating is key to the success of any construction company. A strong estimating department ensures accurate bids are made and that profit margins are achievable. When an estimate is inaccurate or incorrect, things go wrong. But there can be any number of reasons why your estimator is failing.
Site visits are essential to the bid process, and it’s unlikely you’ll be invited to compete for a project without first attending a site meeting with your prospective client. No two sites are the same, so it’s critical to consider all of the variables at play—including considering challenges unique to the terrain and location.
Labor costs are probably one of the most difficult items to estimate, but they make up a big part of the budget. Estimating productivity and wage trends is challenging and perhaps the weakest link in the estimating chain, exposing you to project cost overruns.
Material costs can change rapidly, affected by fluctuating raw material and transport prices. Getting suppliers to lock down the numbers in advance can test the best estimator’s negotiating skills.
Pricing the risk in a project is an art in itself. Without risk, one can argue, where’s the reward? Yes, the rewards can be high in construction, but if you don’t build in enough contingency, then you are opening yourself up to construction overruns.
Site management
Managing a construction site is a far more complex job than it’s often given credit for. Yes, your manager needs to be authoritative, command respect, understand health and safety codes, and know construction codes, but the site also requires good recordkeeping and strong communication.
The site team is the first to know when something isn’t going to plan—perhaps it’s a late delivery, or maybe the materials delivered to site are an incorrect specification. Sometimes materials don’t get ordered at all, and who finds out first? The workers on the ground.
Investing in people is not easy. You need to develop loyalty, trust, and respect, but sometimes good people are just too hard to find, and you don’t have all the time in the world. Cost overruns in construction projects will be laid at your door, whether or not the site management made that phone call.
Daily reports from the construction site should be provided to the estimating team to help improve estimates and analysis for future projects.
Change management
Scope creep can ruin a great project. The client changes their mind, or worse, decides to delay a decision until the project is well underway. There’s a provisional sum in the contract, but they may have a ceiling cost you don’t know about, which is, most likely, inaccurate.
Being able to respond quickly to a change order can help take the sting out of some of these events, but they always cost time, including management and design time and time on site. Delays from design changes are not inevitable, and sometimes they are the result of code changes, but they all add up in the end to a construction cost overrun.
The type of project delivery (such as design-build or design-bid-build) can also positively or negatively affect cost overrun, with the right method minimizing change orders, thus minimizing cost through impact on time.
Due diligence
Vetting a contractor, checking their work history, and seeking out previous clients—these are all activities that are essential to building the confidence that a project will not incur additional costs. A contractor with a good track record that regularly brings projects in on time is what we all want.
We’ve all heard the motto that a contractor can talk a good job, but how well integrated is the supply chain? Is communication set up well, and has the contractor done this kind of work before? All sites are different to a degree, and sometimes a ‘how hard can it be’ attitude isn’t a bad thing.
Cash flow
Ninety-day payment terms might be good for a principal contractor, but for smaller subcontractors, it can be hard for them to play by the same rules. Some outfits might be perfect for the project, especially if they are new, but are usually put off by long waits for payment.
Construction should be about innovation and integration, keeping up with the new and the cutting edge. Having lengthy payment terms can be worked around if a supplier can be hired through an existing subcontractor and is happy with your terms, but this all costs time.
And of course, in this situation, there will be a markup too, with the overhead and profit margin negotiated by your commercial team—an instant project cost overrun.
Disputes
Incorrect contract management has always caused problems for contractors, clients, and supply chains. Getting the contract nailed down at the beginning saves problems later, especially if the scope changes.
Local communities can also change the course of any project. Planning disputes and protest groups with special interests can cause any number of delays, halt projects mid-stream, and tie up a project, sometimes indefinitely.
Need a better approach to controlling project cost overruns? Request a demo with ALICE today!