The Top Causes of Construction Cost Overruns
Most construction companies have to deal with cost overruns, impacting nine out of 10 projects. A review of the studies of cost overruns found a total of 173 causes of construction cost overrun, but only a few appeared frequently enough to qualify as top causes of overruns. Ultimately, to reduce exceeding budgets, construction companies must become aware of the most likely causes of overrun and how to avoid them.
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The Extent of Cost Overruns in Construction Projects
Problems with exceeding budgets and schedules are common in the construction industry, and larger projects have bigger issues. Compared to smaller construction projects, large jobs were up to 80% over their budgets and took up to 20% longer than expected. Across all sizes of construction jobs, a survey found only 31% came within 10% of their budgets and 25% within 10% of their deadlines.
With a minority of companies finishing within their budgets, it's clear that cost overrun is an issue. While larger projects have a greater chance of more frequent overages, even small projects aren't immune to exceeding their predicted costs.
However, companies don't have to resign themselves to always passing their schedules or budgets — technological innovations, better communications, improved planning and other methods can help mitigate some of the top causes of construction cost overruns.
Common Causes of Construction Cost Overruns
With cost overruns being so common, companies that can improve their record of finishing on time and within their budgets can set themselves apart in such a highly competitive industry. The first step toward improving operations is understanding the causes and identifying which plague your operations. Then, work on correcting these issues to reduce or eliminate cost overruns.
Below, you'll find several causes of cost overruns in construction projects.
1. Errors in Project Estimates
When project estimates are too low, cost overruns are inevitable. Unfortunately, errors in estimates can occur for several reasons, many of which relate to human error. A few examples include:
Misunderstanding a Project's Scope
Often, the biggest mistake in creating estimates is failing to embrace the full scope of the project and include all aspects of it in the budget. The estimator may not have all the information needed due to mistakes in the plans or specs conveyed by the client. Alternatively, site-specific issues may not make their way into the project budget estimate, such as possible weather delays in rainy locations. To avoid these issues, experienced estimators need to have all the information about the project possible before creating a cost estimate.
Making Clerical Mistakes
Another possible source of project error issues comes from basic math errors or clerical mistakes in transferring information from paper to software or between computer programs. These issues are sometimes inevitable, but you can reduce their prevalence. Remembering to double-check the math or having another person verify the estimates could catch these mistakes before they cause financial problems.
Failing to Track Trends
Failing to keep track of trends in the prices of construction projects over the years can also lead to underestimating budgets. Without this information, many operations can have cost overruns. Across multiple studies assessed in a literature review, inflation contributed significantly to cost overruns from inaccurate project estimates. Shifting costs in building materials, equipment and labor each year increase the difficulty of creating sound estimates year to year.
Taking inflation into account can mitigate this issue. While inflation can raise prices each year, often, the cost of construction materials can exceed that percentage. For instance, from July 2020 through July 2021, the consumer price index for all goods rose 5.4%. Compare that to the 23.1% increase in construction input costs over the same time span.
This difference in construction costs compared to costs of living indicates why a project estimator shouldn't use inflation alone to create project estimates for material cost increases. Looking at past material costs and the current market can help provide better pricing estimates for construction projects.
2. Not Planning for Change Requests
A change request can include anything that alters the scope, specs, plans, design or requirements for the construction project after the project manager sets the budget based on the project estimate. These types of requests will happen on almost every project — and not planning for them can cause delays and cost overruns. Note that larger projects tend to be more complex and have issues that may require a greater number of change requests than smaller construction jobs.
The causes for them can include incorrect project estimates or communication delays when creating the original specs and plans. Occasionally, the client wants a change of direction for the construction, which can also require a change order. Regardless of the causes behind them, when you don't have a plan, change requests can lead to cost overrun.
Major change orders can affect other aspects of the construction job, such as the timing of when to schedule contractors, rent equipment or work on certain parts of the project. Adding extra time and funds into a contract clause during the planning stages could reduce the impact these alterations have on finishing the job within your budget. Another method of preventing change orders from causing serious issues is using software to predict how changes in the work’s scope can impact the cost and timeline.
3. Inefficient Site Management
Workers on the job site and on the design side of the project need effective site managers to connect their contributions to the work. These on-site managers must do what they can to ensure everyone functions as an efficient team with an eye toward quality. To do so, they may need to solve interpersonal conflicts or explain expectations clearly to everyone.
A specific issue with site management is misplaced equipment. Using a checkout system and a designated position for borrowing and returning tools is a low-tech method of keeping track of these items. Alternatively, high-tech solutions can track worker locations on the site to ensure they remain on task and in their designated areas. These same solutions can track active work hours to reduce the chances of worker mistakes caused by too much time on the job.
All errors on the job site require extra time to correct, adding days to the project, which can undercut the budget. To avoid delays, site managers can encourage workers to ensure quality and use software and technological innovations to make achieve a high level of accuracy. For instance, underground lasers improve the precision of pipe laying by giving workers a designated path of where the piping will go at grades from -15 to 40 degrees and up to 400 feet.
Another way to improve site management is with lean principles. Crews that use lean methods cut costs up to 15% and reduce project time by 30%. The four main lean methods applicable to construction all work to reduce inefficiencies, improve workflow and keep the project moving forward. These methods include:
- Alignment: Lining up workflows to optimize efficiency
- Improving work pace: Coordinating the pace of work to keep the project moving forward during regular shifts while allowing for corrections or rework during overnight hours or on weekends
- Just-in-time construction: Moving resources to the job site to allow for better flexibility to changes
- Feedback loops for improvement: Constantly assessing processes and making improvements daily
4. Lack of Communication
It's no secret that communication is vital to all types of projects, whether in the construction industry or another sector. A majority of companies that have high levels of communications finish projects on time and within budget. In one review, only 48% of operations with minimally effective communication finish within their project budgets. Improving communications could be one of the simplest ways to prevent cost overrun in any industry, even construction.
This fundamental skill is especially essential for connecting the various teams working on a construction project. Without clear goals and instructions, teams may make time- and money-wasting mistakes. Additionally, clients should fully communicate their expectations to reduce the number of change orders required. Plus, good communication with the estimator gives them the best chance to fully understand the scope of the job and create the most accurate project estimate.
Certain communication errors can also occur when someone in the process makes assumptions instead of asking questions. For instance, when an individual assumes that their architect has all the specs included with the plans, they may make time-wasting mistakes. Instead of asking about the specs on the plans, which contractors usually contribute, the individual may go forward and create project estimations that are too low because they don’t include vital information on specs. This low estimate leads to cost overruns that could've easily been prevented.
5. Poor Scheduling
The poor scheduling of people and equipment can contribute to project delays and additional costs. Not aligning rental equipment with the time it'll be in use on the job site leads to rented machinery that's paid for but left unused. Though rental equipment can help you save money, like any tool, site managers must use it appropriately by aligning equipment rental schedules with the parts of the project that will use those tools.
Creating a proper employee schedule is also vital to providing efficient, money-saving construction. Not having the right teams on-site when they need to work can delay operations. Coordination could involve dividing a job site into separate parts and having subcontractor groups work on different areas at the same time in a well-orchestrated arrangement. Additionally, project planning software programs can help site managers to keep track of all the teams contributing to the project and make scheduling easier.
6. Forgetting Hidden Costs
Often, construction projects incur hidden costs that may not go into calculations for the total project estimate. These costs may include permits, time for project delays or correcting errors or acquiring labor.
Permits
Depending on the location, the number of permits can vary. These need to be part of the estimation from the beginning of the project to prevent the permitting process from becoming a hidden cost.
Delays
Obstacles with acquiring resources, site complications or weather delays can extend a project. In 2021, some projects experienced delays of up to six months for roofing materials or up to a year for steel. These delays extend the start date for projects, which may lead to higher inflation rates added into the project once the job does begin.
For projects that have already started, employees still require pay even for delayed days, raising the total cost of the job. As a solution, integrating delays into the plan may reduce these hidden costs.
Labor
Finding labor has increasingly become a problem for the construction industry. Uncertainty in 2021 resulted in many construction workers choosing to remain at home instead of returning to the workforce. In 2021, construction industry employment dropped in February, April and May, which correlated to unfilled positions.
Additionally, staff earn increasingly higher rates each year, with a 3.3% rise in wages in 2020 compared to the previous year. Unless integrated into project estimates, the time delays in finding workers and the higher pay rates for them could turn into hidden costs that add to the project’s potential overrun.
7. Bad Project Design
A bad project design can cause serious errors in construction that require future correction or disputes between building teams. When the design doesn't meet standards, contractors who follow the specs may miss essential components not included in the plans.
Unless the construction team corrects the problems, the project may experience a serious delay when it can't pass inspection to obtain the required permits. For instance, waiting too long in the construction process to correct foundation issues could require additional effort, money and time to fix the problem, leading to a project that goes over its scheduled completion date and budget.
8. Not Being Flexible to Changes
Not being flexible enough to adapt to changes can negatively impact construction projects. The impact of a stagnant economy in 2020 halted many construction projects, due to supply chain issues, a lack of labor and work stoppages. Few people could predict such a major disruption for so long. However, it serves as an example of the need for flexibility in construction projects.
Adapting to change orders or situational shifts is easier when using a just-in-time strategy that brings materials and people to the site only for the time needed. This method reduces the need for on-site storage and allows for changes in project components.
Specifically, supply chain issues can make acquiring building materials or equipment difficult. To mitigate this problem, construction companies should collaborate with suppliers and subcontractors to create solutions that are flexible to unanticipated delays. For example, connecting with suppliers for long-term contracts can ensure a steady flow of materials, instead of using a purchase-as-needed approach.
9. Administrative Errors
Sometimes, administrative errors arise from poor communication or administrators who don't understand the full scope of the project. These types of problems may lead to disputes among administrators or with construction teams.
Having more people in leadership roles doesn't always solve administration disputes. Getting everyone the correct data about the project can reduce the chances of disagreements. Using digital solutions to ensure everyone is looking at the same set of information about the project cuts down on communication problems.
10. Not Choosing the Best Workers for the Job
The best workers for the job aren't always the cheapest subcontractors available. Those who put in the lowest bid may also put in the lowest quality work — and mistakes or substandard quality extend the time required on the project to make corrections. Depending on the severity of the errors, another team of subcontractors may need to make corrections to the original group's work.
To ensure qualified people contribute to the project, more than the prices should go into the bidding process. Instead, contractors should examine the work histories of potential subcontractors to find ones who have good records of quality service and safety. The best team for a construction project will operate within the methods established on the site. If the project requires lean practices, all workers should be willing to use those to improve productivity.
11. Safety Incidents
Safety should be paramount on the job site, especially since the construction industry is one of the most hazardous sectors to work in. Unsafe conditions result in accidents that require delays to investigate and workers who must take off time to heal. Each accident increases the time needed to finish the project and puts additional strain on the workers who have to pick up the slack for the injured personnel.
Training a team keeps them abreast of the site's specific rules and reminds them of general construction safety. Management must have someone on-site to monitor for compliance with these guidelines to reduce incidents from occurring. Additionally, technology can improve safety on the worksite by using RFID in equipment or on worker vests to alert drivers and individuals of pending collisions. Another example is the use of bands that alert equipment operators if they doze off in the driver's seats or send a signal if the equipment stays off too long.
12. Time-Wasting Activities
Did you know that up to 14 hours each week goes toward activities that don't contribute to the overall construction work? These time-wasting activities include resolving conflicts, finding project information and fixing mistakes. Additionally, improved communications can reduce the time spent in resolving disputes.
Some software solutions can eliminate the time spent on finding project information. By having all project data on a tablet, computer or mobile device on the site, managers don’t need to spend hours hunting down the answers they need. It's right there in front of them, helping them streamline processes as much as possible.
Lastly, preventing errors before they occur by investing in subcontractors who put quality first can prevent the need to waste time on fixing mistakes. Ultimately, taking the time to build the right team will save you costs down the road.
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