When managing construction, the goal is to deliver high-quality projects on time and within budget. The construction industry is complex and challenging. Each project comprises a million moving parts, and one can quickly lose track of what is happening at the site or at each stage. The more effectively you can run projects, the more money you will make from them.
However, project cost overruns are a critical item you need to watch out for. It is one of the worst things that can happen to a project, resulting in significant time, cost, and quality impacts. Change orders, inaccurate estimates, or low productivity are some of the causes of budget overruns.
In this article, let us learn about cost overruns, their impact on construction projects, their causes, and how to avoid them.
Defining Cost Overruns in Construction
A project cost overrun is when a project’s price or expenses exceed expected. It could be caused by internal scope creep, lousy planning, external forces like inflation, or bad weather. It often reflects inefficient and ineffective planning, management, and control.
You can determine the cost overrun by comparing your current prices against your budget. You must add all its costs, such as pay, materials, subcontracts, and other expenses. Any charges not included in the original budget are considered part of the cost increase.
Common Causes of Construction Cost Overruns
Cost overruns can happen for many different reasons. The original cost estimate might have been wrong because it needed to consider something important. It could be unexpected events that cost more than anticipated or steadily rising material and labor costs. Budget leaks can happen on projects like building new buildings, making new technologies, and different government programs. This section lists some of the top causes of cost overruns.
Inaccurate Budget Estimates
Inaccurate estimates are often the top cause of cost overruns in construction. A construction project usually lasts for a few years, and most of the costs you have estimated during the start of the project may not be enough in the future. Even though accurate estimates are essential and could make the difference between getting a job or not, the best way to protect your business is to overestimate and slightly finish the project under budget. This will give project managers contingency in their budgets if the project costs more than planned.
Poor Site Management
Most of the construction project costs happen at the job site. However, once a project manager has built a strong team of professional site managers, handling this part of a building project can be easy. Working with site managers who have shown they can run similar building sites well or have a good track record with a company will reduce costs by reducing injuries and avoiding extra costs.
Scope Creep
There are many things you cannot control that can affect construction jobs. This is when scope creep comes into play. Reworking a project plan or having a few change orders play a regular part in construction, but you need to monitor how often and how much these reworks cost. This way, you can limit the damage to the budget and make sound business decisions.
Inefficient Risk Management
Every project manager makes plans, hoping to work out how they were meant to. As mentioned, a construction project comprises a million moving parts, making it prone to risks and delays. Unexpected internal or external events can cause a project to take longer or cost more than expected. An efficient and effective risk management system can help your company save time and money.
Lack of Communication Within the Team
Many projects fail because there is no communication and collaboration within the team. Not having an easy way for project managers and partners to talk to each other can cause delays that could have been avoided. Luckily in today’s modern world, you can utilize construction crew management to communicate with your team in the office or the field.
Delayed Payments
One of the easiest things to remember when a job goes over budget is that people must pay on time. When people are not paid on time, they often lose or put off work, which wastes labor costs. If payment is on time, essential supplies can get to a building site on time, pushing back the plan. When a building company pays late, it can hurt its image with wholesalers, resulting in delayed deliveries or services.
How Do You Keep Construction Costs From Going Up?
Construction projects are prone to many risks, some over price, some over time, and some over scale and scope. As the demand for construction services rises, mistakes become a considerable risk for the whole business. Even though the things that affect budgets, timelines, and results vary from project to project, if you know what could cause cost overruns, you will be better able to stop them. Here are some ways to make sure that your project costs do not go over budget:
Do A Cost Study
Before you start a construction project, a cost study is the best way to keep costs from exceeding budget. This will help you keep an eye on any possible risks and keep the project’s finances under control. Start with studying and analyzing data from your previous projects and learn from them. The more accurate your predictions are, the more likely the project will stay under budget.
Set Clear Goals and Expectations
Most of the time, project managers must deal with unexpected costs on big tasks. The more complicated the job, the more critical it is for both sides to know what to expect. Talk with your stakeholders and set clear goals from the beginning. This way, you can agree on the project’s scope and envision how it will turn out.
Research On Your Suppliers and Subcontractors
Construction projects often need help from third-party companies such as suppliers or subcontractors. You will work with these partners for the next few years, so make sure your team’s research before starting these significant source ties. If you work with an unprofessional third-party company, you may experience some problems with its services, leading to cost overruns.
Do a full background check to ensure that these trade partners can meet the quality standards and deadlines written into the contract. You can use subcontractor scheduling software to manage relationships with your trade partners.
Limit Scope Creep
Multiple change requests from end-users, internal team members, and other parties can cause the project’s costs to go up. Before accepting any changes to the scope, you should do a full check and ensure that the resources are also moved.
Create and Stick To Your Budget
A cost overrun happens because people do not realize how much work their project will take and are not ready to pay for all the extra costs. Include all prices in your original budget, even if you do not think they will significantly affect your project’s bottom line. This way, you will not have to worry about cost overruns later.
Have An Efficient Inventory Management System in Place
The goal of making a good plan for managing resources is to ensure you have enough resources to reach all of the project’s objectives. If you do not have the right amount of help when you need it, chances are you will have a work stoppage as you can proceed with the activity. Try to create a plan on how to use the available resources best and cut costs by eliminating processes that are not needed or do not work.
Keep A Close Eye on and Monitor the Progress
Keep an eye on how the project will keep costs from going up. You can use construction software with specific features catering to your project or organization. This way, you to find minor problems and stop them from getting bigger and threatening the project’s success. For example, you can use crew schedule management to keep track of your workers and ensure they are productive without overworking them.
Strive For Continuous Learning and Improvement
Much of the planning for a construction job is based on what has been done before and what assumptions can be made. A well-rounded project manager who takes the time to learn from past mistakes can make more accurate project plans and build budgets. You can get data from past projects and learn from them. You can also do monthly check-ins on how your projects are doing and see if things are not working and need improvement.
Do Not Take Shortcuts
Remember to do things right the first time, especially on bigger jobs. Cutting corners can cost more in the long run because you may have to restart your work or replace some of your supplies if they are not good enough. This can cost much more than using high-quality products that need only minor changes to be ready. Taking a meticulous approach and keeping track of important project details can boost your project’s chances of success.
Use A Construction Scheduling Software
Giving your team the right tools and technology can help improve project performance and keep costs from increasing too much. You can keep track of project resources well, and it can also help schedule tasks better so that resources are well-spent. It can offer powerful features to help you streamline and improve your processes, boosting your organization’s profitability and productivity in the long run. Through its workflow automation, you can avoid tedious tasks and focus on the essential parts of project management.
