7 Common Causes For Cost Overruns In Construction
If you’ve ever experienced a construction project go over budget, you may already know that it leads to an unhappy client. While this is a common problem that contractors face, it can hinder your work in the future.
From the bidding stage of a project, clients expect contractors to deliver a completed project at (or under) budget. When actual costs exceed your bid, you lose business and damage your reputation in the market.
However, not every cause of runaway build expenses is within your control as a contractor. Sometimes client input can add costs and change timelines for a project.
How can building professionals reduce the potential for cost overruns? Keep reading to learn about seven common causes of overruns and how to avoid them.
1. Inaccurate Estimates
Starting with the wrong estimated costs in mind can lead directly to budget overruns. If you’re not working with a realistic budget, you can’t manage a project to meet unrealistic cost expectations.
Submitting a proposal with a bid that’s too low can also impact your bottom line. A client might choose you for the project because your bid came in lower than the others. Delivering the project they expect at the cost you promised could be an impossible task.
What happens when you can’t complete the job when your bid was too low in the first place? Your client is unhappy, you cut corners to reduce costs, and the project is over budget anyway—or the quality of your work suffers.
Avoid cost overruns by starting a job with an accurate bid. Using software solutions like BidMatrix and Sage Estimating helps contractors produce accurate bids without sacrificing profit margins or low-balling a job to win the business.
2. Scope Creep
You and your client agreed to the specific project scope and the budget that goes along with it. However, when clients start asking for more mid-project adjustments, contractors find it challenging to finish a job according to the agreed budget amount.
The client is always right, right? While that might be true when delivering excellent customer service, that doesn’t mean you should cover the difference in costs when clients request something outside of the project’s scope and budget.
To help reduce budget overages for construction projects, make sure to define the project’s scope clearly. Itemized budget estimates that correlate to specific scope details help clients understand exactly how the budget supports the project.
Let clients know that any changes to the original scope can increase the budget. Apply change orders that document changes and costs associated with the requested changes.
3. Poor Project Management
Simply calculating the budget and defining the scope of the project is not enough to make the job happen as it should on its own. Construction professionals need excellent project management to stay on time and budget with every budget. When a project goes on for days, weeks, or months longer than planned, labor costs increase.
To arrive at the completion date without going over budget, a project manager must map out each stage of the build and produce a timeline. As the project moves forward, it’s critical to monitor the status of each stage to hit milestones and complete the project on time. Project management software, such as RedTeam, helps every job start and finish on time without budget overruns.
4. Inexperienced Material Management
Waiting for materials to arrive can slow down the work on your project. During the bid and project planning stages, a general contractor must understand what materials they already have in stock versus what they’ll need to order to meet the project’s scope.
Knowing when those materials arrive and scheduling different aspects of the build are essential to end a project on budget. Material delays cause pauses in your timetable when your crew cannot work without those materials. If you have to rush delivery to stay on track, sticking to the budget becomes harder.
Material management must go along with the bidding and planning stage to avoid cost overruns. Know what you have and what you need before finalizing a timeline and projected expenses.
5. Financing Delays
Contractor financing delays make it difficult to get the materials you need on time. Making late payments to your contractor accounts or mismanaging a different client budget can trickle down and affect your current project.
Without enough cash flow, a project can’t move forward on time. Maintaining the budget for a project requires staying up to date on all financial accounts to maintain good credit. Track expenses and invoices accurately and timely to avoid project delays due to lack of funds.
6. Cost Increases
Building contractors base a job estimate on current material and labor costs. When those costs increase unexpectedly during a project, contractors face the potential to exceed the budget.
While you want bids to be accurate, make sure to include enough cushion to account for unforeseen cost increases. When labor costs rise, reducing your workforce can delay the completion of a project. Even if some reduction becomes necessary, make sure you maintain enough workers to produce a quality construction job and meet the deadline.
7. Design Errors
The design seemed fantastic during the scope and budgeting stages. However, during buildout, your team discovers a critical error or missing component to the building’s design.
Design errors can become costly mistakes that delay the completed build. Redoing a completed section of a building with structural issues will quickly erase the rest of the project’s budget. In most cases, a design mistake will come out of your pocket to redesign and correct the problem.
Partnering with the right design experts helps contractors create accurate scopes and bids that translate accurately when it’s time to build. Before finalizing a budget, confirm that the design matches your client’s expectations and will not cause problems during buildout.
Avoiding Cost Overruns Is Easier With the Right Tools
With the right tools, a general contractor can avoid cost overruns, improve their bottom lines, and keep clients happy. In such a competitive industry, it’s become essential to streamline your business’ processes whenever possible, including project management.
Bangert helps improve the processes for building professionals through every stage of a project, from bidding, to project management, and human resources tasks. Before your next project, contact us to see how we can help you avoid budget overruns!