Tired of seeing your projects go over budget? Cost overruns can occur in various stages of a construction project and can significantly impact the quality of deliverables and timely execution. They have become more prevalent post-COVID due to rising prices of both labor and materials. This article will identify the leading causes of cost overruns and provide practical strategies to keep you on track and within budget.

Understanding Cost Overruns

A cost overrun is when the actual costs incurred during a project exceed the original budget or estimate. To calculate this, simply compare the final cost figure with the initial budget. They can happen in projects of any size and type and can be caused by various factors.

According to Harvard Business Review (HBR) research studying nearly 1,500 projects, the average cost overrun for projects is 27%. The study also revealed that one in six projects experienced average cost overruns of 200%, with a schedule overrun of nearly 70%.

Leading Causes

To effectively prevent overruns, it is crucial to understand the main causes behind them. The following factors are commonly associated with construction projects:

1. Poor Project Estimates

One of the primary causes of cost overruns is poor project estimation. The estimation team and project managers must accurately estimate all project costs before creating a budget. Historical data, expert opinions, and other tools can help define costs. This has been exacerbated by competition for skilled labor, resulting in a mismatch between the skills required by employers and the skills that employees maintain.

2. Unclear Project Scope

Scope creep, the phenomenon where the project scope is not well-defined, is another significant cause. When the project scope is unclear, unexpected tasks and issues can arise during the execution phase, increasing costs and leading to budget overruns. It is critical to carefully define the project scope and manage any changes or additions through proper change order processes. Understanding the contract type and your recourse as a contractor is essential to getting paid for the work you perform.

3. Weather and Unforeseen Conditions

Weather and other unforeseen conditions can significantly impact construction. Factors such as the project’s location and the time of the year (rainy season, dry season, water table near the construction site, etc.) should be considered to anticipate potential weather-related challenges. Proper planning and risk management can help mitigate the impact of these conditions on project costs.

4. Poor Communication Across the Project Team

Effective communication is vital for project success and cost control. Lack of communication among project stakeholders can result in unexpected changes to the project plan, leading to increased costs and budget overruns. Project managers must ensure clear and consistent communication with the sponsor, team members, and other stakeholders throughout the project lifecycle.

How to Avoid Cost Overruns

Now that we understand the leading causes of cost overruns, let's explore practical strategies to prevent them in construction projects:

1. Build and Maintain Vendor Relationships

Building and maintaining solid relationships with vendors is crucial for cost control. Before engaging with vendors, evaluate their capacity, delivery timing, quality, reliability, and overall performance. Understanding the capabilities and limitations of your vendors can help you avoid delays, subpar materials, and unexpected costs.

2. Detailed Project Planning and Estimating

Thorough project planning and accurate estimation are vital in preventing cost overruns. Take the time to analyze project requirements and potential risks and identify all necessary resources. Utilize current and historical data, expert opinions, and other tools to create a detailed project estimate that includes all possible costs. Consider making a risk management or contingency plan to address unforeseen circumstances.

3. Stay Within the Planned Scope

Managing project scope is critical to avoiding cost overruns. While some change orders may be necessary and beneficial, carefully review and assess their impact on the project's budget. Regularly evaluate scope changes and ensure they align with project objectives and budgetary constraints. Implement a structured change management process to control scope effectively.

4. Acquire the Right Skills and Implement Training

Employing skilled and experienced talent is crucial for project success and cost control. Ensure team members have the necessary expertise to complete their respective tasks. Offering training and professional development opportunities can enhance the project team's capabilities and minimize the risk of errors and cost overruns.

5. Implement Effective Risk Management

Developing and implementing a comprehensive risk management plan is beneficial for cost control. Identify potential risks, assess their likelihood and impact, and define appropriate mitigation strategies. Regularly monitor and review risks throughout the project lifecycle and take proactive measures to address them promptly. Effective risk management can help minimize the occurrence and impact of unforeseen events. Include your legal counsel in reviewing contracts to ensure that recourse is available when project overruns occur.

Consider Lutz’s Construction Accounting Services to Avoid Overruns

Cost overruns pose significant challenges to construction projects but can be prevented through careful planning. By implementing these strategies, construction projects can stay on track, within budget, and deliver successful outcomes. If you have any questions or want more information about Lutz’s accounting services for the construction industry, please contact us.

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Mike Tichenor

Audit Manager

Mike Tichenor is an Audit Manager at Lutz. He began his career in 2017. He is responsible for providing assurance services to clients with a focus on the construction and manufacturing industries as well as employee benefit plans.

402.514.0017

mtichenor@lutz.us

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