Construction Budget Overrun Problem – Causes and Solutions

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Construction Budget Overrun Problem – Causes and Solutions

Over budget is a common problem in the construction scene. Apart from project delays, most contractors foresee construction cost overrun as an inevitable situation. In fact, in the past three years, only one out of three projects can achieve 10 percent of their original budget plan. Furthermore, data showed that big construction projects like airports or hospitals exceed as much as $400-700 million of the budget.

While most blame the contractor’s poor construction project management, in reality, project owners have their share in the responsibility too. Some would spend very little time in checking the construction project plan and other documents before they give their go signal.

But as early as the project bidding, contractors should’ve already been accurate with their quotations. Most owners reference their actual budget in the quotation during the bidding. To win, some contractors lower their quotes to impress the owner with how they can deliver complex projects at such a low cost.

Then when construction starts, there are also a couple of factors that contribute to the project going out of the budget.  We made a rundown of these causes to warn new contractors and project managers on what they should watch out for in their first project.

Common Causes of Construction Cost Overrun

1.Wrong forecasts

It is a must for any construction project – big or small- to have a solid foundation. The job specification of every crew and overall budget should be well planned and well-written. It is helpful to research or consult your state on the reasonable labor cost and your suppliers at their lowest prices. Failure to properly come up with a budget estimate will lead to confusion, disputes, and costly mistakes.

2.Labor costs

Labor cost takes a big part of the construction project’s budget. To save, some contractors would hire newbie laborers and train them. But this isn’t the most efficient solution. While hiring newbies can cut almost 30% of the labor cost, their mistakes and slow turnover lead to almost 40% loss of the budget.

The solution is to keep your skilled crew members happy in the workplace. It is much cheaper to give some bonuses than backup 40% loss. Check our blog on how to motivate your crew members to find out some strategies on how you can keep your workers loyal and working efficiently for you.

3.Poor communication

Miscommunication is one of the leading causes of confusion in the construction site. Some subcontractors deliver inconsistent reports to their contractors so they aren’t updated with the progress of the project. Mistakes like wrong material are hidden and later, the owner ends up wondering where the budget went wrong. This will then lead to project delay and cost overruns.

This is why it’s important to invest in a reliable communication system. Construction project management software these days like Pro Crew can provide a good communication channel. And not only will the owners, contractors, subcontractors, and crew members be able to communicate in real-time, all of them will be able to see the overall project status from where the project is up to how much of the budget is already consumed.

This helps everyone to come up with an alternative plan when the project and the budget aren’t going on the right track.

4.Poor Subcon and Contractor Management

The order of the project greatly relies on the project leads. They are responsible for guiding all crew members on what to do every day. This is why contractors and project managers should map out the tasks of their members very carefully so they can minimize delay which is one of the most costly reasons for over budget.

This is where the best construction project management software comes in. Tools like Pro Crew are relatively inexpensive compared to the losses you’d suffer from when you don’t make sure that everyone’s updated with their supposed daily tasks. This software can even cut off other extra costs from printing or delivering documents via courier.

5.Weather

Like how it’s the major cause of delay in construction, it is also a major cause of over budget. Too much rain or snow or other acts of nature like a tornado can stop the construction for a couple of days. If unlucky and struck with a tornado, there are phases of the project that should be reconstructed too. This means a lot of extra budgets. Members are also continuously paid even when they can’t work because of the weather.

6.Design Errors

No matter how perfect your time and resource allocation is for an accurate budget estimate if your design is defective, you will still see delays and overruns in the future.

The design is a crucial part of the construction project. Any deficiency will lead to repeating the work. It the error is in the foundation and you are already on the third floor, you might see accidents going down and you’ll have to repeat down from zero. Sometimes, when lives were placed at risk, legal battles will even take place.

This is why it is important to have the design reviewed by experts like experienced engineers before the project starts. Even when there’s a slight change in the plan, it should still be checked by an engineer to make sure that the change won’t lead to disputes and more errors.

Handling Budget Overruns

Knowing all the causes mentioned above will greatly help the contractor and the project owner in planning for countermeasures and alternatives. Of course, there are still other causes that may point to deeper issues in project management. This is why it’s important to find a skillful and experienced project manager. He may not foresee every problem that can result in over budget, but knowing that he’s quick to come with an efficient Plan B will help minimize extra expenses.

Here, we highlight some preventive measures that might not eliminate cost overrun in your project but will at least minimize it.

1.More Accurate Project Estimate

Problems in budget often start with inaccurate project estimates. Fortunately, it can be avoidable when your design is complete and thoroughly reviewed by the right personnel like engineers. This will minimize the need to do corrective work in the construction phase.

Like we also mentioned earlier, it helps to consult your suppliers for you to be able to allot the right budget for your materials and equipment. Other costs like labor and operational costs will always change but estimating the working days plus possible delays and the rates will help you come up with a reasonable budget that will cover the cost even when delays happen.

2.Include Change Orders in Your Plan

In the construction, there should always be a Plan B when the original design isn’t working. This can only be decided when the construction is already ongoing but with an alternative, at least, you won’t have to halt the whole operation until you come up with another plan.

The additional time and manpower or change in materials when new specs or requirements are introduced is better planned in the contract phase. Change Order Provision should then be specified when computing the budget so that the owner will be ready if such changes happen. This will avoid the project from suffering from delays which leads to cost overrun.

Having a construction project management software like Pro Crew will also help when these changes happen. Of course, you will need to inform everyone about the change so the crew won’t go on as originally planned when it is the new order that is already being implemented. This can be efficiently done through the software where attachments of the change order can be posted so everyone will know how they will adjust to the new plan.

3.Ensure Collaboration

Project progress, design integrity, quality control, budget, and equipment condition are just some of the many aspects that should be monitored daily in construction. They don’t always go as planned so it helps the contractor to see where the project is heading by looking into these factors daily.

Unfortunately, monitoring all these isn’t as easy as it sounds. The construction is a huge workplace so it helps a lot to have a construction project management employed in the project to have a bird’s-eye view of everything that’s going on at the site.

Improving on-site communication is also a must so that important information is quickly disseminated.  The right software will have features that will allow better communication than through phone calls. It should also allow more opportunities for collaboration through real-time updates and file sharing.

4.Hire the Right Team

Like we mentioned, finding the right crew is challenging. But those who go through the extra mile to ensure that they are not getting substandard work will greatly reward them along the way.

In the construction where lives rely on the hands of the workers who create a structure, there’s no room for low quality work. Safety is dependent on quality so if you don’t like to see legal battles in the future, which is costly and energy-draining, then you should make it right as early as the hiring process.

Conclusion

Always expect your project to go beyond the budget. Leave a room for extra expenses and let the project owner understand these extra funds that you should have access to when problems start to happen.

Take time to evaluate every possible cause and their corresponding solutions so you can plan for alternatives. This will help you incorporate the right remedies and execute them with greater control.

With proper planning and the assistance of the right construction software, you can reduce – if you can’t avoid – project over budget. Make sure that you have the right planning and management solutions so you can act on problems immediately.

3 thoughts on “Construction Budget Overrun Problem – Causes and Solutions”

  1. Pingback: 7 Tips on Writing Winning Construction Project Bids | PRO CREW SCHEDULE

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