Cost Overruns in Construction

Proper planning will prevent many problems that can haunt a project all the way to completion.

Of course, this is the cost overrun plan for almost all construction projects, but circumstances occur that cause some projects to go astray which make cost overruns inevitable. Key project members staying on top of project cost overruns by confronting problems at discovery and being attentive to avoid the problem from worsening is of the utmost importance.

One important step of project management is to compare the budgeted/estimated project compares with the completed actual project. Cost overruns need a constructive analysis. Once the project is completely finished, and the project costs are paid, a postmortem meeting with significant individuals of the project management team to discuss what went right and what went wrong is highly recommended.

Cost overruns have a broad range across the company spectrum, and several reasons and solutions follow.

Reason: Errors in budgeting/estimating a construction project

1. Mathematical errors-transcribing, pressing wrong keys, omissions and miscalculations
2. Plans and specifications-errors, omissions, vague drawings and scope in the plans and specifications
3. Estimators inexperienced in the field of expertise, estimating programs and unique bid requests by the client
4. Lack of knowledge by the contractor in new locations

Solution: A conscientious estimator will double-check the estimate and includes suppliers’ and subcontractors’ pricing. A triple check by a competent person, preferably a project manager, is necessary to prevent avoidable errors and to review estimates. Comparing the costs by the pound, cubic yard, ton, square feet, etc., by whatever appropriate practice is a useful indicator if the price is in the competitive range.

If the specifications lack the necessary information to perform an accurate estimate, a request to the client for the appropriate documentation should occur in text.  Clarifications in the bid proposal are required if no response or an inadequate one is given. Be sure your proposal is part of the contract, if awarded, to ensure obligations.

Another major problem that often can bring about cost overruns is working in a new environment, whether it is in a nearby or a distant geographical region. Research is vital when venturing off in unknown areas. Consideration to resources (personnel, material and equipment), site conditions, weather, accommodations, and safety requirements is indispensable.

Reason: Costs required beyond the scope of work

1. Conditions unknown to the contractor
2. Requests by client clearly not within the scope of work
3. Client failure to fulfill commitments according to specifications

Solution: A change order request can be difficult when conditions unaware to the contractor are lacking proper documentation. A client’s practicality helps determine whether to grant a Change Order.  If documentation does not exist of why overruns occurred, it would be reasonable to conclude that it was the contractor’s liability.

For clarification purposes, a field order usually originates prior to performing any changes to the scope of work, while a change order comes from the client after completion of the required processing. The process and terminology can vary depending on the companies involved.

The client should sign the agreed upon field order prior to the contractor undertaking the additional costs beyond the scope of work. This will assist in the elimination of conflicts and even legal issues in the future regarding the field order. Whether the field order is on a time and material basis or a firm price, capture all costs that relates to the additional work including delays to other tasks. A systematic approach method can ensure the contractor’s reimbursement to the amount entitled is legitimate.

When the client fails to uphold his/her side of the contract, a change order is a definite possibility. When this happens, much of it involves delays. For example, client-furnished equipment and material not delivered according to specifications-based either on scheduling or manufacturing. When it increases cost, whether through a late schedule delivery or a correction by the contractor for erroneous manufacturing or engineering, a systematic approach method is necessary to assess capital, personnel and equipment resources that are affected by the client’s responsibility. Do not overlook remobilization, decreased productivity due to overtime and escalation of costs applicable to the delays. Remember, the longer the project goes on, the more costs attracted.

Reason: Tools and equipment costs exceed project allocation

1. Inefficient equipment scheduling
2. Poor record-keeping
3. Personnel not held accountable for returning tools

Solution: Schedule your rental equipment in an efficient manner to prevent squandering costs. Do not allow rental tools and equipment to stay on a project if they are not being used. If the equipment is required later in the project, weigh the costs of keeping it or paying pickup and delivery. Keep rental equipment logs showing the dates of equipment delivery and pickup documenting the name of the rental company employee that took the request. Follow up, if possible, with a confirmation e-mail. Awareness of the daily/weekly/monthly time period rate can be cost efficient if monitored properly.

Rental equipment management is a cost saver if used appropriately. Most managers and supervisors with the majority of their experience coming from time and material projects fail to realize the value of proper rental equipment management.

The supervisor or a dedicated “tool man” should keep a record of tools checked out and returned with the person’s signature that uses it. Unless you have a proven reliable crew, not requiring tools be returned the same day as they are checked out is a flawed policy.

Reason: Easily missed costly errors

1. Invoices not checked
2. Accounting errors
3. Deliveries not checked

Solution: Improper checking of invoices is another culprit to cost overruns. Invoices require checking against the purchase order and the delivery and pickup receipts if applicable. If the invoice amount varies from the purchase order amount, the invoice should have documentation that provides a justifiable reason why it differs. The company invoiced should have a signature from their project representative authorizing the change. A valuable rule requires the project manager/supervisor to initial all invoices, if possible, before paying.

Documenting and transcribing errors happen much more than most realize. Those that know the true project costs should be involved in reviewing the job cost report on a regular basis with scrutiny.

A competent person should substantiate any deliveries before it is accepted. If someone signs for a delivery without checking it thoroughly, write down on the receipt “subject to check.”

Other reasons for cost overruns, such as a faulty schedule, lack of security, communication problems and incompetent personnel can create havoc for a project.

If projects are making the intended gross profits and the company bottom line is in the negative, company overhead needs reevaluating and that will go beyond this article.

The importance of preplanning and post analysis are key factors in preventing cost overruns. If mistakes are going to happen, at least learn from them. In order to advance a successful project, remember the Albert Einstein aphorism “Insanity: doing the same thing over and over again and expecting different results.”

 
Gary Hinson has been working in the construction field for thirty years.

Construction Business Owner, July 2009