How to Prevent Cost Overruns
The key to preventing cost overruns is in knowing the reasons why cost overruns happen and having the ability to recalibrate a project before it becomes over budget, behind schedule, and beyond recovery.
Unfortunately, it has become the norm that construction projects will be over budget and behind schedule. However, the reality should be the opposite.
It should not be acceptable or even expected that a construction project, regardless of size is going to result in cost overruns and schedule stretching.
My goal with this post is to provide real insight into how you can prevent cost overruns from ruining your project. It’s important that you and your colleagues understand the trickle-down impacts that cost overruns have on your company, your community, and your relationships with key project stakeholders.
It’s critical that you work with an independent party like, PCS to ensure that your construction project is feasible. Rely on PCS to do a thorough cost estimation, to ask your contractors the hard questions, to take a deep dive on every line item on your schedule – be confident that before you start digging that your project can be completed on-time, on-budget, and on-scope.
What is a Cost Overrun?
A cost overrun happens when a project incurs unexpected and unanticipated costs. These costs are in excess of the planned budget.
Cost overruns are often referred to as a cost increase or as an underrated or budget overrun. Regardless of the term, the reality is that the construction project has exceeded its planned budget and is likely behind schedule as well.
In its 2017 Global Construction Survey, KPMG revealed that only 31% of projects surveyed over a 3-year period came within 10% of the estimated budget.
This is a challenging number, one that is hurting communities and its citizens who are impacted by the long-term effects of cost overruns and schedule delays.
Why Cost Overruns Happen
Cost overruns happen as a result of a series of missteps that result in inadequate planning, scheduling, cost estimating, and project oversight.
“A capital project is rarely derailed by a single problem; it usually takes a series of failed steps along the way to put a project in jeopardy,” says Daryl Walcroft, PwC US Capital Projects & Infrastructure partner.
“And often the blame can be spread among the owners, designers, and building contractors.” (Correcting the course of capital projects, PwC)
In an April 2013 PwC article, Walcroft further emphasized that owners can be unrealistic in their expectations; contractors, misleading in their progress reports; and architects prone to errors and delays in their designs. Further complicating matters, they all may fail to communicate effectively.
To help emphasize these points made by Walcroft, it’s important to understand why cost overruns occur:
- Ineffective project governance, management and oversight
Everyone involved in the project is keen to get started. This can lead to lack of project oversight, management review, and critical analysis of project feasibility.
- Unexpected site conditions
We saw this with Boston Big Dig project – those doing the work on-the-ground were not prepared for the discovery of uncharted utilities, archeological discoveries, unexpected ground-water conditions, environmental problems, weak soil, and unexpected hazardous materials.
- Late design/poor project definition
When a project is not clearly defined, all too often, there are last minute changes to the design. This can and does occur at any point during the project – requiring all decision-makers and employees to quickly pivot according to the evolving project scope.
- Inadequate communications and slow decision making
On-going and honest communication is critical. It’s key that issues are identified early on – when there is the time and money to adjust the scope of the construction project. Any delay on signing off on a contract or approving a decision results in delays that further impact the bottom-line of the project.
- Weak/ambiguous contract terms and lack of incentives to control costs
An independent party, such as PCS, is critical in ensuring that the contracts are doable and viable. All too often the construction project is derailed by contracts that are not fully vetted and reviewed.
- Poor risk identification, management and response strategy
With any project, particularly with those that are ground-breaking or one-of-a-kind, it can be challenging to identify all risks associated with the project. This impacts the cost estimation process and ultimately the project budget and schedule.
- Inexperienced management team
People retire. People leave companies. When this happens, there is an experience gap. When this experience gap occurs, the inherent knowledge required to make decisions and ask questions is gone. This can result in problems with planning, scheduling, and project oversight.
- Design errors and omissions leading to scope growth and/or re-work
Scope creep can and will break a project. When changes are made in the middle of a project, the budget is typically blown. Any change in scope requires new materials, new staff, and schedule adjustments. It’s key that everyone understands the full impacts of change orders on a project’s overall goals and feasibility.
- Insufficient planning and inaccurate cost estimating
You want your project to happen. You’re excited about the new hospital, airport, school etc. However, this excitement can often result in optimism bias. It’s easy to overlook problems or questions when everyone wants the project to happen.
What are the Impacts of Cost Overruns?
The impacts of cost overruns run deep – impacting key company stakeholders, company employees, governments, and the very communities the project was supposed to serve. Along with this is the lack of trust citizens have in their government’s ability to manage future construction projects.
The reality is that there is only so much money. When a project runs into issues with planning, scheduling, oversight, and front-end review – the money to make up for these errors has to come from somewhere.
- Companies are forced to shift internal budgets, lay-off staff, and drop future projects to accommodate for the cost overruns and delays of the current project.
- Governments are forced to cancel future projects, to cut corners in municipal planning, and to effectively break promises to the people they serve.
- Citizens lose their jobs, are forced to pay higher taxes, and to suffer the long-term consequences of cost estimation and oversight errors. For example, budgets are shifted from one project to pay for the current project – resulting in the cancelation of things like road improvement, school and teacher support (salaries), hospital infrastructure growth, etc.
Consider my very personal experience with the impact of cost overruns: over a decade ago, the family church of my mother had to abandon its construction plan – all because the costs were not correctly estimated upfront.
This is why it has become my mission to protect construction clients and their interests.
This only happens when you work with an independent capital cost advisor. Trust in PCS to independently and objectively quantify the complex relationship between ideas, architecture, engineering and construction.
PCS does this at the start of the project to eliminate big problems at the end. Big problems that cost everyone in the short- and long-term.
Contact us to learn more about the PCS mission to Improve Cost Certainty™
in the construction industry and how we can help you prevent cost overruns and project failure.
About the author
Lee Thomas, MBA is the chairman and CEO of Project Cost Solutions. Lee has over 20 years of hands-on operational process experience under his belt. He is deeply committed to seeing your construction project succeed.