3 Causes of Cost Overruns and How to Manage Them
Cost overruns are a regular occurrence on mid-sized and large multimillion-dollar construction projects across the globe. In fact, as many as 6 out of 10 major construction projects fail to meet their established cost and schedule goals. This winds up costing the construction industry millions of dollars per year, with hundreds to thousands of valuable labor resources essentially poured down the drain.
Fortunately, cost overruns don’t happen overnight. They stalk construction projects right from the start, hiding in designs, schedules, estimates, and nearly every other aspect of the project, just waiting to surprise you when you’re least expecting it. To help you keep cost overruns at a minimum, below, we outline some of the most common causes of overruns to be mindful of. For more information on how you can avoid cost overruns in your upcoming construction project, don’t wait to reach out to one of our Dade County contractor lawyers.
Inaccurate Project Estimates
Underestimation of future costs or the formation of inaccurate estimates is one of the primary causes of cost overruns in medium to large-scale construction projects. Any cost estimate that is based on incorrect quantities, labor rates, bulk material unit costs, or labor productivity expectations will always have a detrimental impact on the final cost estimate. This leads to an unreliable schedule and, yes, a high chance of cost overruns.
The main reason why these estimation errors take place can be attributed to something known as “forecasting biases.” This is when the sponsor or manager’s eagerness to see their project ideas come to life make crucial mistakes, either intentionally or unintentionally. For example, a project manager may make an overly optimistic estimate out of naivety or lack of necessary knowledge and experience.
To prevent this problem, you’ll want to improve your cost estimators’ competencies and skill set as much as possible and increase accountability for estimate inaccuracies within the project. For example, is it specifically outlined who would have to carry cost overruns if they take place? Have you properly allocated estimation responsibilities to the appropriate specialists? If not, it’s time to get in touch with a Dade County contractor lawyer.
Scope Changes/Late Design Changes
As a professional in the construction industry, you know that the business environment is highly dynamic and rarely develops according to our plans. Changes in projects and their scopes are almost unavoidable. Unfortunately, scope creep — continuous or uncontrolled growth of the scope of the project — is a massive problem for project managers.
Scope creep can occur for any number of reasons, including but not limited to a lack of clarity or depth in the original specification document, beginning design or development before a thorough requirements analysis has been completed, poor stakeholder community, delays in supply of essential materials, and more. Any time stakeholders engaged in the project do not fully comprehend its objectives, you’re going to see mistakes like these. You’ll soon find it’s much easier and cheaper to make things right the first time than to remake them multiple times.
Thus, the solution to preventing scope creep is to implement a change control strategy that allows your project to adapt to alterations in the environment. There should be, above anything else, a clear and well-structured method in place for the request, evaluation, and approval of project changes. If you need any further assistance with preventing scope creep and consequent cost overruns, contact one of our Dade County construction attorneys.
Absence of Risk Management Systems
Every project manager wants to see their construction project completed to their exact specifications without any errors or obstacles along the way. However, in a business environment that’s constantly evolving, it becomes increasingly challenging to predict the outcome of scheduled events. Without a thorough environmental analysis and risk management systems in place, your project is bound to fail.
An issue in risk management that frequently results in cost overruns is risk items not being thoroughly evaluated, priced out, or even included in the initial estimate. This is a major mistake not only because the estimating/bidding team is responsible for listing out risk-related events that could go amiss on the project, but because risks must be identified before they can ever be evaluated, priced out, and accurately managed.
The solution to this problem, fortunately, is rather simple. All you need to do is establish and adopt a risk management system that incorporates risk analysis, risk mitigation and response plans, and contingency reserve development aimed to allocate money for the reduction of overruns. If your construction project is currently suffering from any of the problems outlined above and may soon be facing a cost overrun, it’s important that you get in touch with a Dade County construction attorney as soon as possible.
If you would like to speak with one of our Dade County contractor lawyers, please contact us today.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.