Effective project cost management is essential for the success of construction projects.
However, despite meticulous planning and budgeting, cost overruns remain a constant challenge in the industry.
With large-scale projects often exceeding budgets by up to 80%, construction professionals face significant pressure to mitigate financial risks and deliver projects on time and within budget.
In this article, we dive into expert strategies and best practices on how to prevent cost overruns in your construction projects. Let’s get started.
Cost overrun in construction refers to the situation where the actual costs of a project exceed the initially budgeted estimates.
It is essentially the financial discrepancy between what was planned and what is actually spent during the construction process. In the most basic terms - it's when you go over budget.
Cost overruns can wreak havoc on the financial health and timeline of a project, making it crucial for project managers and QSs to understand their causes and implement effective strategies to mitigate them.
Cost overruns can be attributed to various factors throughout the project lifecycle which can significantly disrupt construction projects, often resulting in delays, strained budgets and frustrated stakeholders.
Let’s explore some of the primary culprits behind these budgetary challenges:
Cost escalation refers to the increase in project costs beyond the original budget. It can be caused by various factors such as inflation, changes in material prices, increased labour costs or unexpected market conditions.
To shield your projects from cost escalation, consider the following proactive measures:
“The principle that neither party (client or contractor) should profit from escalation is one to be adopted in any contract negotiations involving escalation costs.” -Downer
Scope creep refers to the gradual expansion of project scope beyond its original boundaries. It often occurs when additional requirements, features or changes are introduced during the course of the project.
When the project scope expands without proper control, it can result in increased labour, equipment and material costs, as well as delays in project completion.
Combat this problem with strategic approaches:
Accurate estimates are the foundation of successful projects. When estimates fall short of the actual costs, it can lead to significant financial challenges and project delays.
To ensure your estimates are as precise as possible, consider implementing the following strategies:
Construction projects are rife with uncertainties, from adverse weather conditions to subcontractor performance issues. To mitigate the impact of these risks, adopt proactive risk management strategies:
Project cost overruns are an unfortunate reality in the construction industry, and when they occur, it’s essential to take swift action to mitigate their impact.
Here are some key steps to consider when costs have overrun:
Begin by identifying the root causes of the cost overrun. Conduct a thorough analysis to understand what factors contributed to the deviation from the original budget.
This may involve reviewing project documentation, conducting interviews with project stakeholders and analysing project data.
By pinpointing the underlying issues, you can develop targeted strategies to address them effectively.
Explore opportunities to reduce costs in other areas of the project to offset the overrun. This could involve renegotiating contracts with suppliers or subcontractors to secure more favourable terms and pricing.
Additionally, consider redesigning specific project components or substituting materials to address supply constraints or inflationary risks.
By assessing redesign and exploring alternative materials, you may uncover opportunities to achieve cost savings without compromising project quality or efficiency.
If a cost overrun has occurred because of a genuine oversight or misunderstanding in the initial project scope, it could be worth renegotiating the contract with the client.
For example, it might happen that human error meant you only quoted for 80% of the project’s requirements, overlooking a crucial aspect that significantly impacted costs.
By openly discussing the oversight with your client and presenting a revised cost breakdown with justification, you may be able to renegotiate the price to better align with the actual scope and costs incurred.
Remember, most clients prioritise project completion with quality outcomes over seeing their contractors go bankrupt.
Once scope creep has been identified, work with the client to create variations to formalise the changes in the project scope.
Variations outline any additions, substitutions, or omissions from the original scope of work and provide clarity on the associated costs and timelines.
By creating variations, you ensure that you’re properly reimbursed for any additional changes to the project scope.
You should reflect on the cost overrun as a valuable learning opportunity. Use the experience to refine your future projects by identifying areas for improvement in your estimating processes, project management practices and risk management strategies.
Consider implementing additional checks and balances to ensure more accurate estimates and better contingency planning in future projects.
By learning from past mistakes and continuously improving your project management, you can mitigate the risk of future cost overruns.
Cost overruns in construction projects can stem from various sources, often arising from unexpected circumstances or miscalculations during the planning phase. Here are some illustrative examples:
These examples underscore the importance of thorough planning, diligent risk assessment and effective project management to mitigate the risk of cost overruns in construction projects.
In today’s digital world, there is a modern solution that will help you effectively manage and mitigate the causes of cost overruns. Trust us, it’s a game-changer:
Inefficient manual processes and paper workflows have long plagued the construction industry. McKinsey & Co. report that the construction industry is the second least digitalised among all major sectors.
With such a heavy reliance on paper workflows, communication and information sharing is delayed.
The problem? Owners and contractors are often working from two different versions of reality. For example, 61% of business owners say they have to make decisions with outdated data due to slow manual processes.
On the other hand, construction cost management software provides a centralised hub where all project stakeholders can collaborate, track expenses and make informed decisions based on real-time data.
It offers several benefits that contribute to cost control and project success, including:
At Lentune, we help construction companies streamline the way they handle project finances. Our project cost management and automation tools help you to save money, improve cash flow and increase productivity. We’d love to show you how it works!
In a live demo, we can answer any questions and show you how Lentune construction software could grow your business.