Combating Cost Overruns in Construction: Identifying Key Causes and Effective Solutions
Construction is a dynamic industry that is continually confronted with uncertainty from various spheres. The industry is impacted the most by trends like market conditions, regulatory frameworks, government intervention, or fluctuating demands. As a result of these developments, significant problems grow in construction projects. Cost overrun is one of the
most prevalent problems in the construction industry today. According to KPMG’s 2020 study, more than 70% of construction projects incur cost overruns. It occurs when the actual cost of a project exceeds the estimated budget, often due to unforeseen circumstances, changes in scope, or mismanagement. This continuing global issue has affected both the
financial and time aspects of a project.
Construction cost is considered one of the main criteria for successful mapping projects. A financial problem can have a major influence on the overall success of a construction project, such as increased expenses, dissatisfied stakeholders, and even legal disputes. McKinsey & Company discovered in their study that construction cost overruns were a key driver in the underperformance of infrastructure projects. According to the International Journal of Project Management’s publication “The Impact of Cost Overruns on Construction Project Success,” cost overruns substantially impact the overall success
of construction projects, influencing schedule, budget, and quality.
These studies and data highlight the significant and widespread impact of cost overruns in the construction industry, reinforcing the need for effective cost control measures, such as risk management. To help construction professionals keep overruns at a minimum or to mitigate this challenge this article will lay out root causes of cost overruns and provide some valuable strategies and implementations that can be taken to keep the project safe and sound.
What are the main causes of project cost overruns?
“When you know the root, you can find the way to a solution.”
There are many reasons why projects have budget overruns. In the National Institute of Standards and Technology (NIST) study, they believe that the root causes of cost overruns in construction projects include poor project planning and inadequate risk management. Ultimately the root cause can be summed up to be bad planning and poor communication.
To understand more the root of this problem, here are four of the most common causes of cost overrun:
- Underestimating project costs
A project manager must estimate project costs at the start of every project. This estimation will guide the project budget. If a budget isn’t accurate and doesn’t account for unexpected spending, you can expect a cost overrun. Organizations that don’t develop a budget outline at all are walking a tightrope without a safety net. They have no way of aligning actual project spending with the original cost estimate. On the flip side, an accurate budget outline makes it easier to see
when costs are escalating. For example, you expected to spend $50,000 within the first month of a 9-month project and you can see your actual spend is $75,000. This is a red flag that you may be looking at a cost overrun down the
- Scope creep
A project’s scope is all the tasks a team must complete to deliver a project. The team has agreed to all of these tasks at the outset of the project. Scope creep happens when one party strays from that agreement and requests additional changes. Implementing these unexpected changes can often lead to project delays and cost overruns. Scope creep is common across all industries, with 34% of all global projects experiencing scope creep.
- Bad risk management
With any project, there are risks. That’s a given. Not having a risk management plan that outlines all potential risks, and a plan for dealing with them is perhaps the riskiest of all. A good risk management plan will anticipate the unexpected,
including unpredictable costs. It will have a strategy to deal with them. If an organization fails to plan for risk, cost overruns are almost inevitable.
- Poor communication
Communication is the lifeblood of any project. It needs to flow from the project manager right through the team to the stakeholders and client. Elements within a project can change at any stage. A team member could run into difficulties. A shipment of critical supplies could be delayed. A specific technology requirement could prove problematic. A lack of communication can mean these unanticipated changes go unreported. This breakdown in communication could lead to a budget overrun.
Ways to prevent cost overrun on a project
Here are some best practices/solutions for preventing cost overruns in construction projects:
- Accurate cost estimation – Establishing accurate and realistic cost estimates is the first step in avoiding cost overruns. This requires a thorough understanding of the project scope, resources, and risks.
- Detailed project planning – Careful and detailed project planning, including the development of a project schedule, can help avoid cost overruns by ensuring that all necessary tasks are accounted for, and resources are allocated
- Effective risk management – Identifying, assessing, and addressing potential risks through a comprehensive risk management plan can help minimize the likelihood of cost overruns.
- Contract management – Properly managing contracts and ensuring that all parties are aligned on project expectations and responsibilities can help avoid disputes that can contribute to cost overruns.
- Communication and collaboration – Maintaining open and regular communication between all stakeholders, including owners, contractors, and subcontractors, can help prevent misunderstandings that can lead to cost overruns.
- Monitoring and control – Regular monitoring and control of project costs, including regular cost reporting and tracking of change orders, can help detect and address cost overruns in a timely manner.
By implementing these best practices, construction professionals can minimize the likelihood of cost overruns and ensure the success of their projects.
How can HWA Alliance help you?
If you are looking for an effective solution to prevent cost overruns and project delays in your construction projects, consider utilizing the Risk Management Service from the HWA Alliance of CPA Firms. Our team of experienced professionals is dedicated to helping the construction industry minimize financial problems through various risk management and cost control measures. With a focus on accuracy, detail, and collaboration, we provide the guidance and support you need to
effectively manage costs and risks in your construction projects.
Don’t let cost overruns and project delays hurt your construction projects and bottom line. Contact HWA Alliance of CPA Firms today to learn more about our Risk Management service and how we can help you prevent financial problems in your construction projects.