Why Do Construction Cost Overruns Happen?
Construction cost overruns happen when a project incurs unexpected and unanticipated costs. These costs are in excess of the planned budget.
Along with being over budget, the construction project is likely behind schedule. This adds up to a range of problems for the project stakeholders, taxpayers, construction contractors, and citizens relying on the completion of this project.
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 number should encourage people involved in approving, reviewing, estimating, and funding construction projects to take action.
Top 5 Reasons Why Construction Cost Overruns Happen
At PCS we believe there are five fundamental reasons why construction cost overruns happen.
It’s important to remember that just like in any business, nothing happens in isolation. When one part of the construction project breaks down, for example, planning errors or estimating mistakes, this has a carry-over effect on the rest of the construction project.
“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)
The five fundamental reasons why construction cost overruns happen:
- Ineffective Project Governance, Management, and Oversight
At the outset of a construction project it’s critical that everyone involved in the project stays focused on the ultimate goal of the project – successful construction on-time and on-budget.
With attention to this goal, it is easier to get decision-makers, stakeholders, investors, and others involved in the project to slow down and make time for thorough project oversight, a management review, and a critical analysis of project feasibility.
- Unexpected Site Conditions
So often, the teams doing the work on the ground are not prepared for the discovery of uncharted utilities, archeological discoveries, unexpected and potentially dangerous ground-water conditions, environmental and infrastructure problems, weak soil, and unexpected hazardous materials.
This underscores why it is so important to do a thorough site review and to discuss all possible issues that could interrupt and add cost to the project. Stakeholders and construction teams should conduct thorough feasibility studies to understand the technical requirements of the project.
- Poor Project Definition Poor project definition inevitably ends up forcing change orders, scope creep, and scheduling changes. Before any funding is secured, contracts are signed, or materials are ordered, the project definition must be clarified and vetted. Again, using feasibility studies including economic, operational, and scheduling feasibility studies will reveal any issues with the project and help refine the project scope and goal.
- Inadequate Communication and Decision Making
On-going and honest communication is critical. Too many construction projects are derailed with miscommunication. Emails aren’t read or sent, meetings are missed, and key decision-makers fail to communicate with one another.
It’s key that issues are identified early on- when there is time and money to adjust the scope of the construction project. Any delays on signing off on a contract or approving a decision results in delays that further impact the bottom-line and success of the project.
- Design Errors and Omissions Leading to Scope Creep and Change Orders
Scope creep and change orders can and will break a project. When change orders are made in the middle of a project, the budget is typically no longer viable. Any change in scope requires new materials, new staff, schedule adjustments, and additional funding.
To prevent change orders and scope creeps, construction teams and stakeholders should work with an independent team to complete a Basis of Estimate, feasibility assessments, design reviews, scheduling analysis, and vetting of personnel.
What Are the Impacts of Construction Cost Overruns?
The impacts of construction cost overruns are wide-ranging and long-lasting. A quick Google search reveals the general skepticism most people have with any construction project being completed on-time and on-budget.
This negative reputation tarnishes the entire industry, making it harder for stakeholders to secure funding and to win the public’s trust. Construction cost overruns force:
- Companies to shift internal budgets, lay-off staff, and drop future projects to accommodate for the cost overruns and delays of the current project.
- Governments to cancel future projects, cut corners in municipal planning, and effectively break promises to the people they serve.
- Citizens to lose their jobs, 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.
For real-world examples of the impacts of construction cost overruns, read:
- What Lessons Can Be Learned From the Boston Big Dig
- What is Happening with California High-Speed Rail?
- Scope Creep and Cost Overruns Overwhelm Ireland Construction Projects.
5 Ways Planning Can Help Prevent Construction Cost Overruns
These five must-do planning steps can help prevention construction cost overruns:
- Accurate Project Estimation: avoid mistakes in the budget, schedule, plan, equipment needs and access, contractor availability, and design with thorough and honest project estimates. Devote adequate time and resources for project due diligence.
- Independent Project Oversight: work with a team of cost advisers who do not have attachments to your project to give you an unbiased review and analysis of your project’s viability.
- 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. A BOE allows you to clearly understand the key factors that can determine the success or failure of your project.
- Change Order and Scope Creep Readiness: 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.
- Communicate Often and Clearly: both the successes and failures of the project need to be communicated openly and honestly. Keep the lines of communication open and make it clear that everyone working on the project has the right and freedom to raise issues and concerns.
Cost Overruns Shouldn’t Be Part of Your Construction Project
You do not want to be involved in a project that is caught-up in construction cost overruns. It’s time to break the cycle of construction cost overruns.
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.