Cost Overruns: Why They Happen and How to Mitigate Them

Author: Rohan Patil
Published: January 26, 2024
Cost Overruns: Why They Happen and How to Mitigate Them

Introduction

Embarking on a construction project is akin to setting sail on uncertain seas. You may have charted your course meticulously with carefully planned budgets and schedules, but the harsh waves of reality often wash over these plans. According to research, almost 90% of large infrastructure projects face the storm of cost overruns, causing discord among contractors, owners, investors, and stakeholders alike. This article aims to serve as a lighthouse amid this tempest, shedding light on the reasons behind these cost overruns and offering a beacon of effective solutions to steer your projects back on course.

 

Why Cost Overruns Happen

Cost overruns in construction projects can often be traced back to three key factors: inaccurate estimates, scope changes, and delays.

  1. Inaccurate Estimates: Given the complex nature of large-scale construction projects, accurately projecting all potential costs can be a challenging endeavour. When there’s insufficient time allocated for the estimation process or when estimates are based on incomplete information, the potential for cost overruns is significantly increased.
  2. Scope Changes: Even when initial estimates are spot-on, the reality of the construction field is that projects often undergo changes. From upgrading materials to costly rework due to design flaws, inconsistent tracking of these changes can result in hidden cost increases.
  3. Delays: Finally, delays are another common culprit behind cost overruns. Whether caused by adverse weather conditions, permitting issues, subcontractor unavailability, or the need for rework, delays can erode productivity and push costs beyond the initial budget. The longer a project takes, the higher the likelihood of budget overruns.

 

The Importance of Cost Management

At the heart of thwarting cost overruns lies cost management. It’s a proactive effort to monitor and control the financial inputs and outputs of a project. Effective cost management can prevent budget overruns by offering real-time insights into project expenditures, thereby facilitating timely adjustments.

  • It paves the way for cost savings, allowing companies to utilise resources more efficiently.
  • It fosters improved project success rates by ensuring projects are completed within the estimated budget.

Case in point, companies like Bechtel Corporation have leveraged cost management strategies to avoid overruns, delivering projects like the Channel Tunnel and the Hoover Dam under budget. Hence, embracing cost management is not just a choice, but a necessity for businesses aiming to stay competitive in today’s dynamic construction environment.

 

Mitigating Cost Overruns: Best Practices

Minimising cost overruns in construction projects requires a proactive approach that addresses the root causes. Here are some best practices to consider:

 

1. More Accurate Upfront Estimates

Pour Substantial Time and Resources into Estimating:

Achieving accurate upfront estimates requires a dedicated investment of time and resources. Estimators should meticulously analyse project requirements, consider historical data, and consult industry benchmarks. Allocating ample time for this phase is critical to identifying potential challenges and mitigating the risk of underestimation.

 

Consider Third-Party Reviews:

To enhance the accuracy of estimates, consider involving third-party experts for independent reviews. External perspectives can provide valuable insights, helping to identify blind spots and refine initial projections. These reviews act as a safeguard, minimising the likelihood of oversights and miscalculations.

 

Utilise Comprehensive Estimating Practices:

Adopting comprehensive estimating practices involves accounting for all potential costs and risks associated with the project. This includes factoring in not only direct construction costs but also indirect costs, such as permits, inspections, and unforeseen challenges. Thorough estimating practices contribute to a more realistic and robust foundation for project budgets.

 

2. Control Scope Changes

Implement a Formal Change Order Process:

To prevent uncontrolled scope changes, establish a formal change order process. Any modifications to the project scope should undergo a rigorous evaluation, including an assessment of their impact on the budget and schedule. This disciplined approach ensures that scope changes are transparent, justifiable, and aligned with project objectives.

 

Mandate Owner Funding for Additions:

To further control scope changes, mandate that any additions to the project scope require direct funding from the owner. This financial commitment acts as a checkpoint, discouraging unnecessary modifications and ensuring that any expansions are thoroughly vetted and financially supported.

 

3. Build in Contingencies

Plan for Likely Delays:

Acknowledge the inevitability of delays in construction projects and plan for them accordingly. Drawing from past experiences and industry knowledge, project teams should develop realistic schedules that account for potential setbacks. Anticipating delays allows for better resource allocation and risk management.

 

Incorporate Contingency Funds:

Incorporating contingency funds into the project budget is a proactive measure to handle unforeseen challenges. These funds act as a financial safety net, providing the flexibility to address unexpected issues without compromising the overall project budget. Regularly reassess and adjust contingency amounts based on project progress and risk assessments.

 

4. Ensure Contractor Qualifications

Thoroughly Assess Contractors’ Financial Stability:

Before engaging contractors, conduct a thorough evaluation of their financial stability. Assessing their financial health ensures that they have the resources to complete the project successfully without resorting to cost-cutting measures that could compromise quality and timelines.

 

Review Project Experience and Skills:

Evaluate contractors based on their past project experience and the relevance of their skills to the current project. This includes checking references, conducting interviews, and verifying their ability to handle the specific challenges posed by the construction project.

 

Engage Contractors with a Proven Track Record:

Prioritize contractors with a proven track record of delivering projects within budget and on schedule. Past performance is often indicative of a contractor’s ability to manage resources efficiently and adhere to project timelines.

 

5. Exercise due diligence with suppliers

Many projects require collaboration with third-party suppliers. Their support may range from performing specific tasks to supplying key raw materials to subcontracting for product production.

Ensure your teams are doing their due diligence before establishing these key supplier relationships. Otherwise, these suppliers may prove prohibitively expensive and lead to avoidable cost overruns. To do this, review these key steps:

  • Understand the supplier’s capacity to complete the predefined tasks and meet company needs
  • Ensure the quotes given are accurate by completing detailed checks
  • Review the supplier’s track record to see if they have a successful project history with other companies
  • Do a thorough background check to confirm if the supplier can meet the predefined quality and timelines as mentioned in the contract deliverables

 

Utilising Technology to Prevent Cost Overruns

Embracing technology is another significant step in mitigating the menace of cost overruns. Project management software and data analytics tools are instrumental in identifying potential cost overrun scenarios early and enabling appropriate interventions.

For instance, software solutions like Procore or Oracle’s Primavera facilitate extensive cost tracking and management. They allow for real-time budget monitoring, enabling teams to stay on top of their expenses. They also improve communication and collaboration, reducing the chances of misunderstandings that could lead to costly errors.

Moreover, harnessing the power of data analytics can provide insights into patterns and trends. It can predict potential risks and enable proactive decision-making to keep the project within budget.

Companies such as Turner Construction and Skanska have successfully adopted these technologies, demonstrating that cost overruns can be minimized with the appropriate use of digital tools.

 

The Importance of Continuous Monitoring and Adjustments

A successful construction project is akin to navigating a ship through choppy seas – constant adjustments are vital to stay on course. Regularly monitoring costs and making necessary tweaks are essential practices in preventing cost overruns. It’s not enough to set a budget and hope for the best. You must keep an eye on it throughout the project’s lifecycle, making adjustments as needed.

  • Continuous Monitoring: This helps in tracking the project’s progress against the planned budget. Any deviation can be promptly addressed, preventing small discrepancies from escalating into significant overruns.
  • Periodic Adjustments: As the project progresses, unforeseen challenges may arise. Regular adjustments to the contingency plans can help in navigating these obstacles without straying from the budget.

These practices are not just about avoiding cost overruns but about steering the project towards success. Just like a vigilant captain ensuring smooth sailing, diligent cost management can lead to a successful construction project journey.

 

The Role of Company Culture in Preventing Cost Overruns

The culture of a company plays a pivotal role in preventing cost overruns. A culture built on transparency, accountability, and teamwork can significantly influence cost management. Open lines of communication can ensure that any potential cost overruns are identified early and addressed promptly. Furthermore, when each team member takes responsibility for their part of the project, cost accountability is enhanced.

For example, the construction company X-Corp has successfully avoided cost overruns in several projects due to a company culture that encourages ownership, collaboration, and continuous learning. Their team routinely reviews project costs and collaborates to find innovative solutions to potential issues.

Thus, fostering a healthy company culture is not just beneficial for employee morale but also crucial in managing costs and preventing cost overruns.

 

Conclusion

In the vast landscape of construction projects, cost overruns loom like unwelcome monoliths. Yet, they are not invincible titans. The keys to their defeat lie in careful planning, accurate estimations, and disciplined change management. Realistic upfront estimates, stringent control of project alterations, and thorough project planning form the cornerstone of successful construction missions.

Just as a ship without a compass is left to the mercy of the waves, a project without continuous monitoring is susceptible to budgetary drifts. Thus, continuous monitoring and timely adjustments are crucial. Moreover, a company culture rich in transparency, accountability, and collaboration acts as the very glue that binds these elements together, creating a formidable defence against cost overruns.

With steadfast commitment to these methods, the construction industry can inch closer towards accurate predictions, and lesser instances of cost overruns. This, in turn, promises a more stable, predictable, and successful construction landscape.

Related Articles

  • Construction cost planning

    Windows and Doors: Materials and Cost Factors

    Introduction Windows and doors are vital for any construction project, contributing to light, ventilation, and a building’s overall aesthetic. Choosing the right material can be...

  • Construction cost planning

    Contingency Funds: What Are They and How Much Should You Set Aside?

    Introduction Managing a project can be a challenging and complex process, with many factors and variables to consider. Despite the most thorough planning, unexpected expenses...

  • Construction cost planning

    The Impact of Project Complexity on Cost

    Introduction Project complexity is an unavoidable aspect of any project, significantly impacting overall costs. In today’s fast-paced and highly competitive business environment, project managers must...