For professionals in construction—whether you’re a project manager, engineer, construction auditor, accountant, or expert witness—the problem of cost overruns is an all-too-familiar challenge. Even with thorough planning, most construction projects exceed their budgets, leading to frustrated stakeholders and financial losses; this contributing to the cost crisis in construction.
Why does this happen, and how can you avoid cost overruns on your projects?
1. Incomplete or Faulty Planning
Pre-construction plans often miss critical details.
- Design Omissions: Architects’ errors and omissions insurance (D&O) is rarely used, even when oversights drive up costs.
- Unverified Estimates: Contractors’ cost estimates are often accepted at face value, without independent review by cost engineers or auditors.
2. Unforeseen Risks
Construction projects are inherently complex; there are many potential risks, including
- Supply chain delays
- Labor shortages or wage increases
- Unexpected site conditions (e.g., soil quality issues)
Without contingency plans, these risks can quickly inflate project costs.
3. Communication Gaps
Disjointed communication between teams often has financial repercussions. Here are a couple of examples.
- Payment applications and change orders are approved without adequate review, or they lack adequate detail.
- Key stakeholders have different understandings about deliverables, causing delays and disputes.
Think of a construction project like a massive jigsaw puzzle. If one piece is missing or doesn’t fit correctly, the entire picture is compromised, and rework can be costly and time-consuming.
How to Break the Cycle
1. Proactive Budgeting Practices
Prevent overruns before they begin:
- Perform Independent Cost Reviews: Engage cost control professionals to scrutinize estimates, labor rates, and schedules before breaking ground.
- Collaborate With Stakeholders: Increased collaboration with architects, owners, engineers, planners, schedulers, cost control professionals, legal, etc upfront will help reduce risks of cost overruns.
2. Real-Time Monitoring
Track progress continually to catch issues early:
- Engage Construction Auditors: Regularly review payment applications, change orders, and labor costs for discrepancies.
- Collaborate Across Teams: Schedule frequent updates between project managers, accountants, and contractors so that everyone stays on the same page about budget and timeline expectations.
3. Collaborative Solutions
Bring the right experts to the table:
- Engineers: They can ensure your budgets are realistic and aligned with industry standards.
- Expert Witnesses: These experienced professionals (often retained by legal counsel) play a crucial role in legal disputes related to the project.
- Accountants: Use their expertise to analyze financial reports and identify potential risks in real-time.
- Schedule Professionals: Create realistic timelines, monitor progress, and mitigate delays to keep construction projects on time and within budget.
- Cost Control Professionals: Specialize in managing and reducing construction costs & risks.
- Third-Party Cost Estimators: They calculate construction costs using specialized tools and software to assist in providing independent accurate estimates.
Why This Matters
The Cost of Ignoring Expertise
Project owners often hesitate to engage cost control professionals, viewing it as an unnecessary expense. However, this mindset often leads to massive financial losses when budgets spiral out of control. Spending just a small percentage of the budget on experts upfront can save millions in the long run.
Think of it this way: an ounce of prevention is worth a pound of cure. Investing in expertise early not only protects your project’s financial health but also ensures smoother operations and fewer costly surprises down the line.
Key Statistics
According to a KPMG survey, only 31% of projects come within 10% of their budget. This reinforces the importance of proactive cost management and expert oversight.
Your Role as a Construction Professional
1. Conduct Thorough Reviews
Review every element of the project—drawings, specifications, labor rates, contracts, and schedules—before construction begins. This step is critical for uncovering hidden risks.
2. Track and Compare Results
Regularly compare expected costs to actuals using robust software tools and financial analysis. If discrepancies arise, address them immediately.
3. Prioritize Collaboration
Work closely with other professionals—project managers, accountants, auditors, and expert witnesses—to foster a holistic approach to cost control.
Takeaways for Construction Professionals
- Plan Proactively: Engage experts early to review and validate your project plans and budgets.
- Monitor Continuously: Implement real-time tracking of costs and progress to prevent surprises.
- Communicate Clearly: Keep the lines of communication open with everyone involved throughout the project life cycle.
Next Steps for Your Projects
Immediate Actions:
- Audit Current Projects: Review payment applications and change orders to identify potential cost overruns.
- Engage Cost Control Experts: Bring in professionals to validate your project’s financial health before it spirals out of control.
Quick Wins:
- If your project is on budget, celebrate and share those successes to build trust with stakeholders. If it’s off track, act now to prevent further losses.
How to Get Support:
Join the Institute of Construction Advisors & Consultants (ICAC) to network with like-minded professionals and gain access to resources that help you prevent budget overruns. Members can collaborate, share insights, and solve industry-wide challenges effectively.
