Top 8 Causes of Cost Overruns in Construction

Cost overruns are the unfortunate norm in the construction industry, which is notorious for being late and over budget. Additionally, the construction industry’s productivity has been pretty stagnant year over year, with almost 90% of construction workers classifying the industry as unproductive. To understand the causes of cost overruns and why they are so typical in the construction industry, we need to look at the construction process from start to finish and identify areas to help improve and optimize the process.

Here are the top 8 causes of cost overruns in construction: 

1) Time management

Time management is often one of the biggest pitfalls of a construction project. When workers are spending a significant portion of their day waiting to begin working, it slows down the entire project and ends up being extremely costly. 

According to the USG + U.S. Chamber of Commerce, almost 90 percent of construction workers classify the industry as being unproductive. It’s common for construction workers to waste up to half of their day waiting even to begin their part in the project. With effective construction workforce management, this downtime could be drastically reduced, significantly increasing the productivity level of workers on the job site. 

Merely investing in a better time management system can have a massive payoff in the long run by increasing worker productivity, overall efficiency, and attitude towards the project. 

2) Labor shortages

Increasing material costs is one of the unfortunate causes of cost overruns in the construction industry that shows no sign of leveling out. With the more temperate weather and longer daylight hours of the summer season comes an increase in demand for both materials and labor, driving up the price for both.

The construction industry is facing an increase in construction costs year after year, making profit margins slimmer than ever. Additionally, construction material costs are facing a year-round pricing increase, rising nearly 5% during the 2018 calendar year.  

Nearly 80% of respondents to a survey in August 2017 report that firms are having difficulty filling hourly craft worker positions. With the shortage of labor and rising demand for materials, the construction industry faces an unavoidable increase in construction costs in 2020. However, firms can minimize the impact of these rising costs and maximize their profit margins by streamlining their construction processes.  

3) Inaccurate project estimates

It’s common knowledge in the construction industry that the bidding process can get competitive. However, due to the nature of this process, sometimes estimates can under account for costs and not truly reflect the scope of the project. Therefore, critically analyzing project estimates is an essential part of setting accurate and realistic project goals. 

4) Project design errors

Design plans are the backbone of a construction project. Regardless of if there is the correct amount of time and resources allocated, poor project designs error almost certainly result in cost overruns. 

Construction management software helps mitigate many errors in construction design. Tools like construction workflows that use data can be extremely beneficial for project managers to oversee correct project delivery, along with reducing the risk of errors and delays as well. 

Construction software holds the keys to helping a construction project succeed. Correctly collecting and analyzing field data can help increase overall job site productivity by assisting managers in drawing conclusions and making necessary changes to the project. 

5) Administrative mistakes

Proper construction workforce management can help minimize wasteful spending and improve the likelihood of completing a project on time. Time-consuming, labor-intensive tasks, such as accounting, can be streamlined to help manage costs across the project. 

6) Ineffective on-site management

Countless factors go into keeping a project on track during the construction process. Improving the communication on-site between management and subs can help reduce costly mistakes or errors due to miscommunication. 

Effective construction workforce management is crucial to keep a project on track, and a good construction project manager optimizes both job site operations and employee’s labor hours to complete the job more efficiently.

Using project management software can be very helpful on-site to help improve productivity and workflow. Project management software helps project managers communicate essential information with workers, including optimal start times, the flow of tasks, or any changes to the scope of the project instantly across the entire job site.

7) Unplanned costs

Cost management is an integral part of effective construction project management. Without successful cost management, a construction project will not be successful.

Cost management entails budget creation and management, using schedules and estimates created in the planning phase. One of the most challenging aspects of the job is ensuring the project sticks to the approved budget, which can be accomplished through risk mitigation.

8) Lack of communication

Having an open stream of communication between all workers on the job site is key to a project’s success, and collaboration helps make this a reality. In construction, there are a numerous amount of different specialized subcontractors involved in achieving a final project. Collaboration from the planning phase to close out can have a significant impact on the overall efficiency and effectiveness of a project.

Communication skills are a necessity in almost any job–but especially for a construction manager. Working with several different stakeholders at once requires a construction manager to have clear, practical, and concise communication–one of the most essential construction management skills.  

Tips to help control costs

1. Use construction management software

Using construction management software with data management capabilities helps keep everyone on the job site updated on any changes to the scope of the project. It helps connect back-office staff with workers on the job site to ensure an active line of communication across everyone involved in the project.

2. Regularly update cost plan

Consistently analyze and reevaluate cost plans. If costs are higher than expected in one aspect of the process, make sure to balance it out by reducing costs in another area. External factors such as inflation or a shortage of materials can also cause prices to change, and therefore, a project that may have been within budget before could now be over budget. 

3. Consistently submit cost reports

Cost reports are essential to help streamline communication between owners, general contractors, and subcontractors. By updating management with real-time progress reports (e.g., Daily Reports) on a construction project, cost reports help identify early on if any delays or unplanned budget overruns may occur.

4. Prepare and review contingency plans

By having set risk management procedures, project managers can plan for delays and budget overruns and have a set plan of action on how to remedy the issues ahead of time. Contingency plans help prevent having to pay premiums to get the project done on time when something goes wrong at the last minute. For example, construction management software can provide statuses of critical submittals, RFIs, Change Orders, etc., which can signal the project has a bottleneck and unexpected significant delay about to occur. 

5. Encourage project team to design within the cost plan at all stages

Make sure you are following design development control procedures. There is a general rule that 80% of the cost is determined by design and 20% by construction. Ensure each worker understands that construction plans are created per the total budget, and making changes could result in unplanned costs that exceed the projected budget.

Final Thoughts

Cost overruns are an unfortunate reality of the construction industry, but they can be mitigated and minimized systematically changing the construction process and carefully reviewing each step in the process. With proper planning, streamlined communication, and project management software, you can help ensure that the causes of cost overruns are prevented as much as possible in your construction project.