How to Identify & Prevent Cost Overruns in Construction

Cost overruns are major liabilities for project teams and stakeholders. Unfortunately, it’s more common than we’d like it to be. In a study published by Flyvberg Bruzelius covering 258 transport projects across twenty countries, 9 out of 10 experienced cost overruns. Besides putting projects at risk of defaulting, cost overruns are also extremely stressful to manage. That said, let’s talk about its most common causes in construction, and what you can do to prevent them.

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Top Causes of Construction Cost Overruns

Inaccurate Estimates

Cost overruns happen when the actual cost of a project exceeds its estimated completion cost. That said, one of the surest ways for a project to have a cost overrun is to have incomprehensive estimates.

However, there are many reasons why teams can give inaccurate estimates. Some of these are the pressures of project bidding, the lack of information, and over-optimism.

Poor Materials and Site Management

Materials management is the task of ensuring that the project teams obtain good quality materials in a timely manner and at a reasonable cost. This is extremely important because the cost of materials takes up the biggest chunk of a construction project’s budget.

Poor materials management can cause last-minute purchases or delays that push a team to incur rush fees. It can also be the reason for poor quality and shortages. This results in repurchases and additional unforeseen expenses.

Design Errors and Scope Creep

No construction project is the same, so the project plan will always involve intelligent guesses and calculated speculation. It will be extremely rare to encounter construction projects that won’t require changes or adjustments. However, having too many additions to the original scope and too many iterations can significantly harm a project’s budget.

Reworks can cause delays and additional labor and manpower. It’ll also affect materials, equipment rentals, and many other costly factors.

Late Payments

On many occasions, contractors rely on client payments to fulfill their duties. Without substantial cash reserves, this can cause contractors to be bottlenecked by companies and project teams with long payment processing procedures.

These delays can result in wasted work days and the need to compensate with schedule extensions — or worse, overtime.

Lack of Team or Contractor Experience

There’s a lot of pressure in construction projects. Apart from being expensive, they also involve a lot of people, whom the project is dependent upon for timely and quality work. A contractor’s lack of experience can result in poor quality work. This can require reworks or major adjustments, inflating the overall cost of project implementation.

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How to Prevent Construction Cost Overruns

Thorough Research and Estimates

Do as much research as you can about your site, location, business processes, and needed expertise to come up with the most accurate estimates. Evaluate historic data and meet with key experts. Consult your stakeholders, architects, and contractors, and make sure everyone is on the same page. When estimating with your team, be sure they’re evaluating realistic scenarios and not best-case situations. Make room for risk management and contingency planning.

While this may require a significant time investment, thoroughly going through your requirements phase can pay off massively during project execution.

Contractor Due Diligence

The timeliness and quality of your construction project will rely massively on the effectiveness of your contractors. Dedicate a good amount of effort in doing due diligence before finalizing your contracts and agreements. Look into their past projects — do they fulfill their commitments on time? Do they have good financial standings? What’s their capacity?

Before committing, do comprehensive background checks, so you won’t have to find out about their weaknesses the hard way.

Prepare Change Order Provisions

Changes and adjustments are inevitable for construction projects, so you might as well anticipate and prepare for them. Change order provisions are procedures and budgets that a team allots when there are design changes. This will help you respond more effectively, even in high-pressure situations.

Instead of panicking or being rushed into approvals, you can revert to your set standard operating procedure (SOP) and effectively evaluate and manage your new orders.

Use Construction Software

There are always a lot of moving parts in construction projects. This makes them extremely challenging to manage and keep track of. The cost of errors is also high; iterations and remedies can cost thousands of dollars.

An excellent way to lessen your chances of having things fall through the cracks is by using construction project management software. These tools can help you manage and monitor your projects and significantly reduce your administrative tasks and expenses. Forecasting and reporting will also be more efficient if you choose the right software.

Evaluation and Continuous Learning

Teams and project managers have to be diligent. But regardless of how well you plan, there could still always be some problem you’ll need to solve, or a situation you failed to predict.

Use it as a learning opportunity to make the most out of every situation. Make time to evaluate your projects and document your lessons learned. This way, you and your team can continuously expand your knowledge and foresight, increasing your capabilities for the next project.

Recommended Project Management Software

If you’re interested in learning more about top rated project management software, the editors at actively recommend the following:

Hannah Donato

Hannah Donato is a SaaS freelance writer for project management and productivity. Her works help SaaS brands become more relatable with actionable tips and relevant stories. Currently, she’s also an events manager and brand coordinator for a game development company in the Philippines, with four years of experience as a producer for games on multiple platforms.