How to Identify & Prevent Cost Overruns in Construction

Avoiding construction cost overruns is a project priority second only to timely completion and avoiding them should be the top priority for any project manager. Budget overruns are the bane of any project, construction or otherwise, and these planning oversights are potentially disastrous, and unfortunately common. According to KPMG, less than a third of all projects came within 10% of their initial budget in the past 3 years. Avoiding them is paramount to delivering construction projects to the satisfaction of your clients.

Most Common Cost Overrun Causes

Inaccurate Estimates

Inaccurate estimates are easily avoidable. They are most likely to come from a firm looking to underbid the competition. Overpromising on a budget and having costs substantially exceed the estimate is a sure way to lose clients. While estimate accuracy is important, and may make the difference between getting awarded a job and being passed over for it, you protect your business best by slightly overestimating, then delivering the project under budget. This will give project managers budgetary wiggle room should the project run over budget. Finally, if the additional budget is no longer needed upon timely completion, the boost in reputation will bring a firm more work and thus more money in the long run.

Poor Site Management

Site management is often out of the hands of a project manager, but this aspect of a construction project can easily be controlled for once a project manager has built a solid network of experienced site managers. Working with site managers who have demonstrated an ability to competently manage similar sites of construction or have a positive history of work with a firm will keep costs down by minimizing job injuries or avoiding overtime costs.Once connections have been made with outstanding site managers, they should be cultivated and treasured as a method of reigning in cost overruns.

Scope Creep

Scope creep is an unfortunate reality that arises out of the very human inability to accurately predict the future. Construction projects are subject to numerous factors beyond your control. Reworking a project plan is a natural part of construction projects, but keeping a close eye on how often and how expensive these reworks occur will tamp down the budgetary devastation that tends to come along with project redirection.

Late Payments

Late payments are one of the most easily overlooked reasons for a project to run over budget. Late payments often result in lost work or delayed work, which turns into wasted labor costs. A late payment will prevent the delivery of crucial materials to a construction site, resulting in schedule delays. Late payments can also damage the reputation a construction company has with distributors. These tarnished reputations can result in higher upfront costs, less flexibility with payment schedules, and, in some cases, subpar service from spurned distributors and service providers.Late payments have a hidden, cascading negative effect on a construction budget, and should be closely monitored if a project manager is having trouble nailing down the source of cost overruns.

How Can a Project Manager Avoid Cost Overruns?

Contractor Due Diligence

Contractors are similar to project managers in that past experience can be a predictor of future performance. Project managers should do their due diligence and check in on the past performance of a contractor. What are construction projects they have delivered in a timely manner? When a project has run behind or over budget, what drove that? How did the contractor handle it? As project managers build relationships with contractors they will learn who they can most rely on, and build a network of specialists that will deliver reliable, quality work in a timely manner and within the constraints of their budget. A little due diligence will go a long way in protecting project timelines and avoiding construction cost overruns.

Keep Change Order Provisions On Hand

Change order provisions are standard procedures and budgets that a team prepares ahead of time for the inevitable arrival of when there are design changes. Project reworks are commonplace during the construction phase of a project, and refusing to acknowledge that will lead to failure. By preparing change order provisions, changes can be addressed swiftly and predictably, allowing construction to resume with minimal downtime.

Never Stop Learning

Much of the construction planning phase is based on prior knowledge of similar projects, and assumptions based on previous work. A well-rounded project manager who takes the time to learn from past failures will deliver more accurate project plans and more precise construction budgets. Simply tracking and understanding basic performance data, like the number of projects that run 10 percent over budget and why gives a project manager needed information to make better decisions on their next construction project.

Don’t Shy Away From Construction Software

The human mind can only process so much information. Similarly, pen and paper are limited in their effectiveness when it comes to complicated projects. There are hundreds of moving parts at any given time, and software has the advantage of automation. Calculation errors and missed project deadlines are incredibly expensive mistakes. Lowering a project manager’s cognitive load and presenting accurate, automated information to a team is paramount in protecting a construction budget and delivering a completed product on time. A construction project is a difficult thing to manage. Small mistakes like a single missed payment or a bad hire can throw a wrench into a carefully presented project plan. Understanding common pitfalls, planning for them early on, and integrating software into your workflow will improve a project manager’s success rate and set them up for success and more lucrative projects in the future.

Dale Jakes

Dale Jakes is a writer for TechnologyAdvice.com, Project-Management.com, and ITBusinessEdge.com. In addition, he writes about technology, games, and music on sites all across the internet, as well as being a social media manager. Dale's willing to try anything once.