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By Jeff Wing
October 30, 2016
Estimators and Project Managers––the people whose jobs involve coming up with the initial estimate number—don’t look particularly competent if a project’s final cost comes in much higher than what was estimated. Construction firms that consistently run over budget don’t remain viable for long. It’s all a matter of establishing as accurate and informed a figure as possible up front. The estimate is the Big Contractual Promise into which the project must be financially back-engineered, in a sense. This (sometimes desperate) determination to bring a project in on budget helps explain the razor-thin margins that typify the construction industry.
Is there a magic formula which, when applied to a construction project, puts the brakes on spending as the estimated figure is approached––a methodology that miraculously walks the completed job right up to the line for a perfect budget landing?
In a word; no.
But like most complex and seemingly insurmountable problems, the solution to avoiding project cost overruns is uncomplicated, and comes down to a “checklist.” Yes, a checklist. The sort of checklist that contains all the building’s components alongside their itemized price points. When this is done properly and accurately, using real time market pricing, and assuming no natural disasters or major bumps are experienced along the way—the finished building will cost what the owner was told it would cost. The thoroughly checked and rechecked estimate says so.
When a project has cost overruns, how might it have happened? There are so many little traps that can cause a project to run off the budget rails––a truly complete list of potential budgeting missteps would be approximately as tall as the building in question. What follows is a small but broadly representative sampling; 5 common errors that can result in construction project cost overruns. Here goes. (Deep breath—)
Here's a typical misstep. Let's say the Estimating team doesn’t thoroughly do its homework and makes broad assumptions about regional pricing of bulk materials, like stone, for instance. Neither do they sufficiently scope out the logistics of getting the needed bulk materials from their regional sources to the actual job site. They may not be exacting enough when calculating materials storage needs on the site. Depending on the scale of the project, will there be a need for temporary roads to transport the materials from the source to the site? Will local underpasses allow your loaded trucks through? Are there power lines in the way of your transit? What are work rules in the area—Union or Open Shop? Where is the nearest hospital? What are hotel room rates like in the region? In a best case, the estimator visits the site and the surrounding region over several days and so familiarizes himself with all these space, transit, storage, and other details, the element of surprise down the line is all but eliminated as these prospective costs are built into the estimate accordingly.
It’s not uncommon for a seasoned estimator to use the wrong pricing unit data when compiling the numbers. For instance, if the estimator is taking his unit pricing from a Construction Estimator Book, he may inadvertently use the Commercial Facility figures when building the estimate, though his project may not be a commercial facility at all. It’s recommended that the estimator derive costs from the company’s own historical data; the numbers from previous and similar construction projects the company has undertaken. Referencing historical pricing on similar projects by the same company is the surest way to arrive at real world costs that have direct precedent; that is, that were provably correct in a recent previous instance.
It’s important to consider the condition of the heavy machinery when putting together the estimate. Certain types of heavy machinery have fairly predictable breakdown patterns or leakages, and can dump oil all over concrete slabs or otherwise foul the project through leaks or blowouts. There are few work stoppages more frustrating than those caused by the failure of worn machinery in the middle of a project. These headaches fall under the category of Unforeseen Costs, IF they are unforeseen. Of course there is often little choice but to go with the machinery one can afford, so at the very least it is recommended that the condition of the site machinery be carefully considered, and the worst-case likelihood of mid-project breakdowns be given realistic dollar figures. It’s no sin to use “seasoned” machinery (yeah, it’s usually necessary to one degree or another), as long as any related potential repair contingencies are calculated as costs and built into the estimate.
(Pardon the awful alliteration.) The estimator meant to write down dimensions in Linear Yards but scribbled down Linear Feet by mistake. That’s going to cost you. A lot. The Estimator needs to be extra careful that the measurements written down from the plans, drawings and specs are spatially accurate, and are using the right units of measure. This is an incredibly basic mistake to make, but few professionals are immune to basic mistakes. The trick is to not let them sneak under the radar.
An estimator may be professionally accustomed to a certain quality of workmanship in the projects he estimates, and may simply misapprehend what quality of workmanship comprises the project at hand. Bidding on lower-grade projects outside his experience, or conversely, estimating for a higher-grade project for which he has no professional precedent, means incorrect assumptions are going to skew the estimate. Overestimating or underestimating; in both cases the estimate is not going to reflect the accurately calculated costs of a project. The estimator needs to make certain there is an open understanding of what caliber of materials and workmanship will be expected in the job, and price accordingly.
Cost overruns come from many sources. One way to protect oneself against these not-entirely-unforeseen occurrences is to…foresee them. Many overruns can can be prevented by thoughtful inclusion of language in the estimate that addresses all the possible setbacks that can conceivably occur during the project cycle. “If/then” language in the estimate formally protects the budget figures by addressing, in writing, all sorts of contingencies and their consequences. Making specific allowances in the estimate for these numerous potential setbacks is a laborious but necessary exercise in preventive budget forecasting and estimating.
Another crucial aspect in keeping projects on track is making sure all team members are on the same page. Communication is everything in the effort to have a transparent work flow. It’s always a great idea to build metrics into the project that you can check against at various points in the construction. A good cloud-based scheduling tool goes a long way toward making this a workable reality.
A schedule that resides in a commonly accessible (permissions-based) cloud environment can be viewed by all players at the same time, in real time, 24/7. This cloud-based scheduling tool should also be user-customizable, with filter and search functions that can easily display the entire project schedule and let everyone know what everyone else is doing. All eyes will see the same schedule. As in-progress metrics are commonly viewed, costs will be kept in check by team leaders who are on top of the daily goings-on. Transparency is king.
Potential project overruns are lurking around every corner, and keeping them at arm’s length is not an easy task. It means laboring over estimate details, and then being guided by them during the construction phase. Keep that fine-tooth comb handy. Building a bulletproof estimate won’t be a walk in the park, but when a project comes in on (or under!) budget, everyone wins.
How to Manage Entire Construction Budgets Without the Nightmare.
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