5 Avoidable Causes of Cost Overruns in Construction Projects

5 Avoidable Causes of Cost Overruns in Construction Projects

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Construction overruns have become an industry-wide status quo in the past few years. According to a study from Engineers Daily, design errors accounted for almost 38% of disputes in construction. However, with the project budget and costing being scrutinized more so than ever before, construction professionals can’t afford to accept this as the new norm with the prevalent industry productivity issue.

To learn how to handle and address cost overruns in construction project, the first step is understanding the root cause of the problem. Generally, overruns are just side effects of even deeper issues in project management for construction- with budget and schedules not being correctly set in place during the construction phase as the top cause. Even though forces beyond human control such as extreme weather and global pandemic can impact budgets, a project overrun results from inaccurate planning and analysis before the construction even starts in most cases. Apart from better planning, technology can also be a good tool in helping reduce common factors that contributes to cost overruns to ensure maximum efficiency and profits for your construction company.

In today’s blog, we will help you keep your cost overruns to a minimum by highlighting its most common causes in construction projects. Additionally, we will also include helpful strategies and implementations to manage construction projects within budget.

Let’s dive into it.

Wrong Project Estimates

 

While the project stakeholders are eager to get to the project’s construction phase, if you have faulty budgets and schedules, to begin with, your project is already headed to overruns from day one. Because of the competitive nature of the bidding process, especially during peak season, estimates may suffer from wrongful assumptions and expectations of the scope of work included in the project. In most cases, some projects will be estimated on a general standard or in one size fits all basis, with a high chance of exceeding the initial estimate submitted in the bidding phase.

Therefore, it is critical to a project’s success to do your diligence in the beginning stages and be realistic about managing construction costs and deadlines from the designing team and the contractors. Estimating the project accurately can begin in the RFP process. This is the perfect opportunity for owners, architects, and contractors to express their concerns over the timelines and budget of the project. If any of the stakeholders appear unrealistic about timing and costs, this should be an immediate red flag from the get-go that the project is heading straight for an overrun.

Major Project Design Errors

 

Even if you allocate proper resources and adequate time for accurate schedules and budget estimates in the pre-construction planning stage, if your design drawings are defective, you’ll set your project up for cost overruns in an inevitable future. Design deficiency is an inaccurate, poorly design, and incomplete plan. Design deficiencies in construction projects are so common and a frequent pain point for owners and designers. Additionally, incorrect and incomplete plans usually result in substandard output from contractors who translate the designs into reality, resulting in legal issues down the line.

Fortunately, these types of disagreements are avoidable in most cases. In the design stage itself, construction scheduling software can help minimize the risk of errors and incomplete design plans by ensuring that everyone is on the same page and by setting up a frequent meeting with the rest of the team to ensure that the plans, timeline, costs are realistic even as it progresses to further stages of the construction phase. Project management is better handled with software that can incorporate real-time adjustments and changes into account. Suppose the project suddenly encounters unexpected changes in the scope or one of its processes. In that case, it uses much more accessible to plug those adjustments into a dynamic digital model than to redraw the models from scratch.

Alternatively, for general contractors to build according to the design specification of the project, the owner and the contractors should have an agreement in the Scope of Work and perform necessary documentation in the contract phase. This documentation should contain an apparent reference to all the project specifications reflected in the design documents, warranties of the work scope to be done by respective contractors and subcontractors, a risk allocation definition or chart, and a mitigation process for any unforeseen issues that might arise. Most importantly, this document should specify dispute resolutions and mediation process if unfortunate disagreements happen during the construction stage so hefty legal fees won’t affect other overruns that might occur throughout the project’s development.

Not Considering Change Orders

 

Usually, in conjunction with design issues, change orders are common reasons for cost overruns in construction projects. A change order happens when an owner or member of the construction team realizes that a design isn’t working as expected in the planning phase or might try new fixes, specifications, or requirements after initial budgets and models have been settled. Additional requirements will result in higher costs, which will generally negate the original project budget. The supplemental materials, time, workforce necessary to complete a new initiative may also be classified as an overrun if the said improvement affects the other aspects of the construction project.

Consequently, change of work can typically be addressed in the contract phase of a project, when a Change Order Provision can be included to prepare the budget and the procedures needed, should a change occur down the line. Suppose it isn’t addressed from the beginning. In that case, contractors might raise their total contract cost upfront in anticipation of the adjustments and changes that could arise if they didn’t adequately plan for the project’s overruns.

Administration Errors

 

Even with a good design and no change orders, a construction project could still encounter overruns if project administrations won’t keep up with your project’s progress. Even if minor errors occur in the project administration team, the result can be catastrophic at best. Moreover, if the communication with the administration team is limited, issues that arise on one aspect may not even be known to other project engineers until it’s too late. Many owners and contractors believe that the best solution to a lousy administration is to increase the administration team members. The logic is with more people in the job, and the administrators will be able to prioritize and focus on their respective project areas. However, this might not be the most cost-effective solution in the long run. More people in administration means more risk in collaboration operations that will most certainly involve cost overrun.

Rather than adding more workforce to the administration team, equip them with the proper construction tools. Construction management software, like Pro Crew Schedule, can help play the role of multiple administrators. Unlike conventional administration, the right software can give a team the ability to view the project from various angles, keeping up with numerous iterations easily and in real-time. Administrative errors can be easily avoided with a software system that ensures all the project documents and supplies inventory. This way, administrators can have complete flexibility and visibility into a project to keep logistics and operations running smoothly.

Poor Site Collaboration

 

Quality assurance, design integrity, and equipment condition are just a few of the many aspects of a construction project that must be kept on track. Unfortunately, this does not always work as planned, leading to cost overruns in construction projects. Personalities clash as often as a project scope changes unexpectedly. A trust gap between owners and contractors may naturally exist due to conflict of interest between the parties and dramatically impact a project’s momentum. That being said, even if all the stakeholders maintain a professional relationship, some projects are too large-scale and complex to keep up with every change on-site, and updates may travel slowly between all departments.

The correct construction software provides more opportunities for collaboration for all the stakeholders, whether on the construction site, in the office, or remote. Online access to documents and designs allows more excellent communication, and decisions can be settled faster. Faster communication also translates to better decisions, as real-time recommendations can be addressed before it snowballs into a much bigger issue and implicate the budget.

Key Takeaway

 

Systematically reducing construction cost overruns should be your priority in the planning phase of your project, if it’s not already. Taking time to evaluate why cost overruns happen and incorporating digital solutions will enhance your ability to manage complex construction projects with greater control and faster speed. Through proper planning and with the assistance of construction scheduling software, you will significantly reduce project overruns and bring in more profits.

Don’t just accept the cost overruns in your construction projects and treat them as something normal. Ensure that you have the right tools and software to help complete your next project according to the budget.

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