Construction cost overruns don’t just happen; they stalk projects right from the start. They hide in project design, project schedules, and nearly any other project aspect, waiting to surprise and confound when least expected.
Follow these strategies to reveal cost overruns and contain them early.
What exactly are budget overruns in construction?
Anybody who knows how to balance a bank account can spot a budget overrun when they see one. Many projects today use the MasterFormat system to organize project information according to the activities needed to complete them. Most projects also use a schedule of values to assign costs to portions of the project.
If you have $2 million budgeted in the SOV (Schedule of Values) for the MasterFormat item “Precast Concrete,” the column next to it shows the amount spent to date. Another column shows the percentage complete. You might also include further details, for instance, how long before the budget is exceeded.
When the number in your ‘Spent’ column exceeds the ‘Budgeted’ number, you’re in the overrun territory. Overruns really sneak up on you when the SOV is tracking costs at too high a level.
To reduce the surprises, smart project planners breakdown the SOV to finer details. This way you won’t see just one line item for precast concrete – you’ll see multiple line items for each form of precast concrete. You might have Precast Concrete Slabs, Precast Concrete Stairs, and Precast Structural Pretensioned Concrete.
Such an approach provides you with a better picture of how fast the money is going out for a particular MasterFormat item. When subordinate items start missing their budgets, you have an early warning of a likely overrun.
Really Big Overruns
Projects have been running in the red since the beginning of time. Some projects, however, stretched the limits of imagination.
Way back in 1973, Canada started building The Big O, a stadium designed for the 1976 Olympics. The original budget was $148.6 million, but the final cost reached $3.1 billion. That’s a budget overrun of almost 2,000 percent, earning the stadium the nickname, “The Big Owe.” To add insult to injury, the stadium wasn’t even completed in time for the Olympics. Contractors waited until the Olympics were over before installing a mast and retractable roof.
Australia claims another of the biggest overruns with its Sydney Opera House. The original budget of $56.2 million was eclipsed by the final cost—$819.4 million. The project’s budget overruns and the ever-extending timeline made the architect reportedly so disgusted with the project he actually never went to see it once completed. The project started in 1959 and was slated to take four years. While scheduled for completion in 1963, Sydney Opera House wasn’t completed until 1973.
The Ins and Outs of Calculating Budgets
The construction budget calculation process is complicated to say the least. The delivery method has a lot to do with the calculations as it determines the information the contractor has while preparing the budget.
For example, in a traditional design-bid-build project, the prime contractor figures the project costs based on the architect’s designs. However, many architects claim to know little about costs themselves and it makes sense; they don’t know the crew productivity factors for each contractor and subcontractor, or the various costs of materials depending on the supplier and location.
Therefore, in such projects, the contractor owns the budget and builds it based on the architect’s design and their own estimates. In a way, everyone works within a vacuum when using the design-bid-build method—the owner is focused on the scope, the architect on the design, and the contractor on the construction.
Unfortunately, the three participants operating in their own silos increase the possibility of overruns. When design and scope change, the contractor is often the last to know.
The budget calculation is quite different in a design-build project. This method includes the contractor much earlier in the process – the contractor works with the owner and architect during the design phase to inform the design process.
Having the contractor involved in the design process means there is a greater understanding of the realities of the build on the part of both the owner and designer. It also means the contractor is kept up to speed on design and scope changes.
For example, if the owner wants a two-tier deck, and the architect designs it in an octagonal shape, the contractor can immediately inform them that such a design drives the costs up. The owner might then decide whether they would rather use a rectangular shape in order to hold costs in line.
Critically, this give and take happens before construction starts. In a design-bid-build project, on the other hand, all of that wrangling often happens once construction is already underway, leading to delays, change orders, and increased costs.
The Factors in Creating the Budget
To come up with the costs of construction, the contractor calculates all the various dimensions for the components and assigns materials, labor, and equipment for each component. Then, the costs get added up. This estimate is based on the Workreakdown Structure (or “WBS”).
The WBS shows the steps needed to build something. So, if the contractor is building a wall from lumber, the steps might include laying out the assembly, nailing the assembly, attaching the top plates, standing and bracing.
Each step includes its own list of materials, labor, and equipment. It also comes with its own costs. Prices generally come from a combination of cost indexes and contractor crew productivity factors.
The contractor tallies up the costs for all components and presents them to the owner as the budget. The budget is often presented in an SOV format at a level of detail agreed upon by the contractor and the owner.
Once everybody knows the expected costs, and work gets underway, the true test of the budget’s accuracy begins.
Dealing With Cost Overruns in Construction
The best way to deal with budget overruns in construction is to prevent them from ever occurring. You do that with planning, but not just planning for the predictable risks, but also for the unforeseen ones.
Outline a Risk Management Plan
Every project, no matter how big or small, needs a risk management plan. Although the plan itself doesn’t have to be complex, it should be as comprehensive as possible.
Creating a risk management plan requires imagination. You need to consider what can possibly go wrong at each stage of the project. If you really want to be comprehensive, you would look at each item in the WBS and imagine the risks.
You will quickly learn two important things: There are risks you can plan for, and there are risks for which you just can’t prepare yourself.
With risks you can plan for, you should list your options for avoiding or mitigating them, and decide what course to follow.
Unpredictable risks require you to review your insurance and your contract terms. You can either insure against the risk or move the risk to someone else.
If you decide to defer the risk, keep in mind that trying to push risk to those who have no control over it is unlikely to cover it at all. Moreover, the move will earn you some new enemies.
Here are some common overrun causes, and ideas you can use in your risk management plan to overcome them or mitigate their effects.
Manage Design Errors
Design errors arise from unknowns not taken into account. They also arise from scope changes. Although people have come to accept design errors as a fact of life, there’s a change on the horizon.
At some point in the not too distant future when building information modeling and integrated project delivery are in wide use, these irritants will shrink to a more manageable scale. In the meantime, the best way to get control of these is to start early.
Regardless of the delivery method, contractors do have the chance to inform design as early in the process as bidding time. As you review the plans, make notes regarding problematic places and suggest alternatives when submitting the bid.
Once you’ve won the project, get to work pouring over the documents. Note all the places where things can go wrong because of incorrect or missing design.
Change orders don’t just happen, they are usually telegraphed in the plans. If you study the plans well, you’ll spot the places where they are likely to occur.
There is another set of change orders that come from changes the owner makes as the project unfolds. Your best defense here is to keep the lines of communication open. Ask the design team and the owner questions, stay current on specifications, and request early warnings for scope and design changes that are in the works.
Weather and Unforeseen Conditions
Some of the most common causes of cost overruns come from weather and unforeseen conditions. If you had done your risk planning well, you accounted for the typical weather. But, you can’t plan for a hurricane, tornado or wildfire, so you just have to have safety plans, insurance and a contingency plan in place.
Unforeseen conditions include things like digging up an old fuel tank that will need to be remediated or discovering the utilities are not exactly where the maps show. Depending on what your contract allows, you can cover these situations with a contingency fund, either your own or the owner’s.
Overcoming Operational Inefficiencies
Every contractor has a continuing opportunity to improve their operational efficiency. Even once a project is underway, you can observe what’s happening and consider how to further boost efficiency.
Manage Material Delays to Streamline Deliverables
Consider using on-site storage so that materials are close to the work area. Use mechanical material handlers to move materials more quickly and safely. Set up notifications with vendors reminding about deliveries, and streamline the delivery process so that drivers know where to drop the loads.
Manage Information Delays with Effective Communication
To get a handle on information delays, you should use new technology. Get plans deliverable via a mobile device, and train people how to use photos and videos to support change requests, substitutions, punch lists, and RFIs. Use a digital project management process like Procore’s to streamline communication and manage all aspects of the project from one place.
Manage Quality to Avoid Rework
When you don’t deliver the quality, a major contributor to overruns—rework—is likely to follow. Not only are you on the hook for the redo, but you’re also spending money on undoing what was wrong, reordering materials, lining up the equipment needed, and juggling labor. All that takes extra time and costs money.
Get on the fast track to quality management by making sure everyone is working from the most recent plans. Verify that people understand the plans and know how to do the work. Finally, have trusted people checking the work as it progresses to ensure it conforms to the plans and the expected quality.
A budget overrun doesn’t have to be in your future. Start early, do your homework, use technology, and keep the lines of communication open.
Manage Client-Caused Delays
Delays caused by owners can sometimes create cost overruns. An owner might issue a stop work order on a critical path activity. Or, tenants of the owner might somehow interfere with the work. Sometimes an owner has a contractual requirement to keep access to the site open. Action or inaction on their parts might restrict access and increase costs. Once again, your best defense is to stay ahead of potential issues.
Keep communication open so you will know about potential owner actions that can affect the work. Don’t let negative owner actions pile up without addressing them. Work to resolve conflicts quickly. Finally, check your contracts for the ‘‘no damage for delay” clause and try to modify it before signing. There are instances where you can prevail for damages when the clause is present, but it’s less likely.
Your efforts to prevent cost overruns will also generate some side benefits. Your project planning will be more exact and timely. You’ll also see a boost in worker productivity and an overall improvement in project outcomes.
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