Proper Planning to Prevent Cost Overruns
The construction industry is plagued by misunderstanding surrounding cost overruns. Too many people assume that cost overruns are simply a part of construction.
This is an incorrect assumption. However, we understand how this confusion over cost overruns and construction happens. Take a quick look at your local newspaper or your favorite local news website and you’ll see news articles about construction projects that are behind schedule, overbudget, and stalled.
And yes, this is happening. But what you don’t read about are the construction projects that succeed and do come in on-budget and on-schedule.
At PCS, we know first-hand that with proper estimation, planning, oversight, budgeting, scheduling, and management – construction projects, even megaprojects can succeed as planned.
This is what we do at PCS – we make sure your construction project can and will be a success. We do this because we know the realities and impacts of construction projects that are delayed, over-budget, and fail to deliver on their promises.
Think of these statistics from Bent Flyvbjerg, a project management expert at Saïd Business School at Oxford University:
- Rail Projects: go over budget by an average of 44.7% and usage rates are overestimated by 51.4%
- Bridges and Tunnels: on average incur 35% cost overruns
- Roads: 20% of road construction incur cost overruns
Flyvbjerg wrote in his 2014 paper What You Should Know About Megaprojects, and Why:
Performance data for megaprojects speak their own language. Nine out of ten such projects have cost overruns. Overruns of up to 50 percent in real terms are common, over 50 percent not uncommon. Overrun is a problem in private as well as public sector projects, and things are not improving; overruns have stayed high and constant for the 70-year period for which comparable data exist. Geography also does not seem to matter; all countries and continents for which data are available suffer from overrun.
And this is exactly why we want you to understand how proper planning can ensure that your construction project does not run into the same fate as so many projects before you have. It’s time to do things differently and to change how everyone involved in construction thinks about cost overruns and their real-life implications.
Why Cost Overruns Happen
Cost overruns happen when the project experiences unexpected costs. These surprise costs can happen for a number of reasons including:
- Poor project planning
- Mismanagement and communication errors amongst stakeholders
- Scope creep and change orders
- Mistakes with the initial construction budget
- Lack of independent oversight and review
- Unanticipated environmental conditions
It’s important to note that a high cost overrun does not always equate to an equally behind schedule project. For example, the Channel Tunnel had a cost overrun of 80% of the planned budget but was only one year behind schedule.
Interestingly with the Channel Tunnel project, many of the cumulative costs that forced the overrun had to do with delays with equipment and unanticipated environmental conditions – situations that normally force a much longer schedule lag than one year.
To learn more about why cost overruns happen, read our recent blog: How to Prevent Cost Overruns.
5 Planning Tips to Prevent Cost Overruns
“If you fail to plan, you are planning to fail,” said Benjamin Franklin in the mid-1700s. This quote has stood the test of time and is one we think of often when reviewing the latest news and status of major construction projects.
The following 5 planning tips to prevent cost overruns, might seem straight-forward and obvious, but frankly too many people neglect the obvious when it comes to setting themselves up for construction success:
1. Accurate Project Estimation
The project estimate needs to be accurate. If there are any mistakes in the budget, schedule, plan, equipment needs and access, contractor availability, and design – your construction project will suffer from cost overruns.
Often inaccurate project estimates happen when the project stakeholders are eager to get the project through the approval process and start digging. This is where an independent team such as PCS can make the difference. Make sure you’ve got an independent cost adviser working for you to give the project estimate the due diligence it needs to ensure success.
2. Independent Project Oversight
Every stakeholder involved in the construction project has a vested interest in seeing it get approval and financing. A vested stakeholder’s view of a construction project may only confirm their preferences in order to move the project forward. This means that it’s very easy to inadvertently overlook problems with the project – both obvious and hidden.
This is why you need to take advantage of independent construction cost oversight. When you work with a team of cost advisers who do not have any attachments to your project, you get an unbiased review and analysis of your project’s viability.
Look for a company that works with you from start-to-finish to improve the cost certainty of your project. This includes everything from managing budgets to resolving disputes all with the goal of getting your project completed on budget.
3. Basis of Cost Estimate (BOE)
A BOE is used to define the time, resources, and money required to successfully complete a construction project on-schedule and on-budget. When developed properly, you can clearly understand the key factors that can determine the success or failure of your project, including:
- Project scope
- Pricing basis
- Cost risks and opportunities
- Any deviations from standard practices
A BOE is a key part of your planning process with the end goal of preventing cost overruns, scope creep, limiting change orders, and staying on-time and budget.
4. Change Order and Scope Creep Readiness
Of course, proper design review with a fully developed BOE, should ensure that scope creep and change orders are not part of your construction project. However, we know from experience, that stakeholders may want design changes or there may be issues with project materials that force change orders and subsequent extra costs and delays.
The key is in being ready for the possibility of change orders and scope creep in your construction project. During the contract negotiation phase, make sure you include change order provisions – these should detail the plans, steps, and budget for any required change orders or scope creep. This can help prevent contractors from increasing their costs to accommodate the extra work.
5. Communicate Often and Clearly
Everyone involved in the construction project must be communicating the successes and failures of the project as they are happening. The moment there is a break in this communication chain, problems will slowly but surely start to creep into your project.
Keep the lines of communication open – this means that the people doing the digging and building should feel confident to bring up any issues or concerns they have with the project. The sooner problems are identified, the quicker they can be resolved without them becoming barriers to success. Fortunately, new innovations in technology are being developed for constructors, and managers to link all construction stakeholders better, and faster.
Cost Overruns Don’t Need to be the Norm
No one wants to be involved in a project that experiences cost overruns. No one does anything willfully knowing that a cost overrun could be the result.
Often mistakes in planning happen because your team is overly optimistic and excited about the project, there are unreasonable project benchmarks that cannot be met, or the project team lacks the expertise to competently manage and review the construction project.
Contact PCS to learn how we work with you from start-to-finish to keep your construction project on-budget, on-schedule, and on-scope. We’re there with you during the planning phase, construction phase, and for the project post-mortem.
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.