Cost overruns in building projects have been a common occurrence in the industry. In reality, according to a KPMG report, just 31% of all projects fell within 10% of the budget in the last three years. Construction workers, on the other hand, can't afford to accept the new standard, particularly when project budgets are scrutinized more than ever before and overall sector competitiveness remains a constant concern.
Construction projects usually span months or years, and there are a lot of moving parts during that period. It may be difficult to separate all of those parts to determine which will contribute to increased production and which will result in project delays.
Considering the source of cost overruns in building projects is crucial before figuring out how to deal with them. Overruns also indicate broader problems with project management, as well as plans and budgets that were set incorrectly from the start.
While extreme weather or factors beyond human control may have an effect on budgets, most project overruns are the product of poor preparation or preparation prior to construction. In addition to improved planning, technologies may assist in reducing the typical complications or factors that lead to cost overruns, meaning that production and profits are maximized.
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What Is Cost Overrun in Construction?
Any unforeseen accrued cost(s) that allows a project to increase the total budget (terms) you've committed to with the customer is known as a cost overrun, also known as a cost overrun or budget overrun.
This can happen for a variety of causes (which we'll go through in the next section), but it's mostly due to an underestimation of the project's real expense at the budgeting and project scoping stages.
In light of this, Irvine Bookkeeping has prepared a list of 3 leading causes of unpredicted project costs and explained how you might deal with them.
Common Cause of Cost Overruns in Construction Projects
1. Not Have A Good Time Management
One of the most common drawbacks of a building project is time control. As employees spend a large amount of their day waiting to start running, the entire project breaks down and becomes incredibly expensive.
Nearly 90% of construction jobs, according to the USG + US Chamber of Commerce, consider the industry to be unproductive. Construction staff sometimes spend up to half of their day waiting to start their portion of the job. This downtime could be greatly decreased with proactive construction labor management, resulting in a substantial increase in worker morale on the job site.
2. Inaccurate Project Estimates
Although many project stakeholders are excited to begin construction, if the schedules and estimates are flawed, to begin with, the project is expected to overrun from the outset. Estimates may suffer from erroneous assumptions of the scope of work involved in the project due to the competitive nature of the bidding process. Any projects would be calculated on a one-size-fits-all basis in certain situations, with a strong probability of missing the original estimate.
As a result, it's important to do your research during the preconstruction process to be transparent and practical with architects and contractors about project schedules and costs. The RFP method can also be used to begin correctly estimating the project. This is the opportunity for planners, builders, and owners to discuss their concerns about the project's budget and deadlines. If one of the parties seems to be unrealistic with the project's timeline or budget, this should be a red flag that the project is on the verge of going over budget.
>> Read More: How to Manage Construction Cash Flow
3. Not Take Control of Contractors’ Financing
Construction is not like other companies, such as a retail store or a repair shop, which organize a line of goods or provide a service in exchange for money.
Contractors who "receive payment by finishing part or more of a project" face a unique financial challenge: balancing multiple projects and budgets. They must be able to certify that sufficient funds are available to complete projects and pay employees, ensuring that construction does not halt and deadlines are met.
You have to be able to certify sufficient funds are available to undertake projects and make payroll, ensuring the building doesn’t cease and timelines don’t erupt.
Construction Bookkeeping has many years of accounting experience in the construction industry and we understand the problems you face in estimating and planning each project. Contact us now to get an overview of your company's budget and your ability to complete your project without running into cost overruns.
4. Client Delays Cause Contractor Payment Delays
Delays in contractors' progress payment by the client can lead to cost overruns in construction projects. When contractors face delays in receiving payments for completed milestones, cash flow issues arise. As a consequence, they may struggle to pay subcontractors and suppliers promptly, causing disruptions in the project timeline. The delay in obtaining necessary materials and labor can extend the project's duration, resulting in additional expenses. Moreover, contractors may incur financing charges or penalties due to late payments. Prolonged payment delays can strain the contractor-client relationship, leading to disputes or legal actions. Ultimately, these challenges create a ripple effect, causing significant cost overruns and jeopardizing the project's successful completion.
5. Contractor's Financing Difficulties Impact Projects
Contractors facing financing difficulties encounter significant hurdles in project execution. Limited access to capital, cost overruns, or delayed client payments can impede securing funds for materials and labor, leading to project delays. Seeking alternative financing may incur higher costs, adding to project expenses. Strained financial obligations can affect subcontractor payments and project management. Inadequate financing hinders critical milestones, risking reputational damage and client relationships. Proactive resolution of financing challenges is crucial for smooth project execution and maintaining industry standing.
6. Price Changes of Material and Labor Impact Construction Projects
Price changes in material and labor cost during construction projects can significantly impact budgets. Fluctuations in costs due to market conditions or availability can lead to cost overruns. Contractors may need to revise budgets, causing delays or compromising on quality. Moreover, increased material costs can disrupt the availability of resources, further delaying projects. To manage these challenges, contractors must monitor market trends, negotiate with suppliers, and plan for potential fluctuations. Effective cost management and contingency planning are essential to navigate price changes successfully and ensure projects stay on track and within budget.
7. Scope Creep's Impact on Construction Project
Scope creep refers to the expansion of a construction project's original scope beyond the initial plan. It occurs when additional tasks or features are introduced without proper evaluation. Unchecked scope creep strains resources, causes delays, and compromises work quality. It also leads to cost overruns, as the budget may not account for the added work. To manage it, clear communication, project documentation, and regular reviews are crucial. Adjustments to the scope, timeline, and budget are necessary to prevent unexpected issues and maintain project focus. Contractors must proactively address scope creep to ensure successful project outcomes.
8. Impact of No Risk Management in Construction Projects
In construction projects, the absence of proper risk management can lead to serious cost overruns. Risk management involves identifying and addressing potential risks to the project. Without it, projects are susceptible to uncertainties like delays, cost overruns, safety hazards, and disputes. This can result in significant financial losses due to unexpected expenses and project delays. Additionally, without contingency plans, teams may struggle to handle unexpected challenges effectively, further contributing to cost overruns. To ensure project success and prevent cost overruns, proactive risk management is essential. It requires planning, monitoring, and adaptability to changing circumstances. By addressing risks early on, construction companies can minimize adverse effects on the budget and increase the likelihood of successful outcomes.
9. Poor Communication And Collaboration
Ineffective communication and collaboration can cause cost overruns in construction projects. When stakeholders fail to communicate clearly, misunderstandings can lead to delays and errors. Without proper collaboration, teams may duplicate work or overlook details. Slow feedback and decision-making can hinder progress, extending timelines and increasing expenses. Disputes and contract issues can also arise due to poor communication. To prevent cost overruns, projects need open and transparent communication among all stakeholders. Emphasizing collaboration fosters efficient workflows and better problem-solving, increasing the likelihood of completing projects on time and within budget.
>> Read more: Why is An Accurate Estimate Important ?
>> Read more: What is an Estimate?
Strategies to Fix Cost Overruns in Construction Projects
Thorough Planning: Conduct comprehensive project planning to identify potential risks, allocate resources effectively, and set realistic budgets.
Effective Risk Management: Implement proactive risk management strategies to anticipate and address potential issues before they escalate.
Transparent Communication: Foster open and clear communication among all stakeholders to ensure everyone is aware of project status, challenges, and changes.
Scope Management: Regularly review and manage the project scope to prevent unnecessary expansions or changes that can lead to cost overruns.
Efficient Project Management: Utilize efficient project management techniques to optimize workflows, monitor progress, and keep projects on track.
Contingency Planning: Develop contingency plans to address unforeseen circumstances and mitigate their impact on the project budget.
Supplier and Contractor Relationships: Cultivate strong relationships with suppliers and contractors to negotiate better prices and minimize cost fluctuations.
Continuous Monitoring: Continuously monitor project finances to identify potential cost overruns early and take corrective actions promptly.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
Not sure how much your construction business made? Irvine Bookkeeping tracks every dollar that enters and exits each job so you may accurately determine your income.
Call Irvine Bookkeeping now for a Free Quote!
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