The cost overruns in construction projects is a common phenomenon and many experts consider them unavoidable. However, with proper planning of the projects, the cost overruns can be reduced to a minimum. The cost of the project is very important and avoiding these overrun is a major concern for the construction professionals.
To get rid of this problem of costs overrun this problem needs to be analysed right from its roots. The cost overrun can be considered as an issue in the project management and is a result of improper setting of budgets and schedules. In most of the cases, the cost overrun can be considered as the result of inaccurate planning and analysis that is done at the start of the construction project. In many cases, forces beyond human control like extreme weather are also responsible for the costs overrun but in most cases, it is the inaccurate planning and improper project management which is responsible. Hence the problem of cost overrun can be solved by having an accurate planning and highly advanced project management.
Factors responsible for costs overrun in Construction Projects
Now we will discuss some important factors that are responsible for the cost overruns in the construction projects:
1. Inaccurate estimates in the starting of the project
2. Errors in Project design
3. Lack of planning of change orders
4. Errors in Administration
5. Improper Site Management
6. Hiring a wrong Team
The above are all the major factors that are responsible for the costs overrun in the construction projects. When efforts are made in the direction of dealing with these factors individually, the project managers can minimize these overruns and save a lot of money. It is financially viable to go for a project management company, which deals with the above factors, do proper planning, and execute the project accordingly so that costs overrun and variation can be avoided.
Now we will have a look at all of the above factors in detail:
Inaccurate estimates in the starting of the project
Right from the start of the construction project, it is important to get accurate estimates of budgets and schedules. In case of faulty budgets and schedules, there is a risk that your project will head towards overrun cost right from day one. Everyone knows that the bidding process has become very competitive today and this may lead to wrong expectations of the work scope that is decided.
There is a possibility that the project has been estimated as the one size fits all and there are high chances that the estimate will exceed the decided one. Hence the project manager needs to do accurate planning and budget estimation to avoid facing the problem in the future. The preconstruction phase is considered to be the most important phase in the project lifecycle and diligent efforts should be made by the project manager to have realistic estimates of the costs, timelines, and deadlines. The project manager must confirm the cost aspects with various architects and contractors to get close to an accurate estimate. Even in the RFP process, the process of accurately estimating the project can be started. In this phase, it is expected from the owners, architects, and contractors that they express their concerns related to timelines as well as budgets. In case it appears that any of the parties is unrealistic about these estimates, it can be a red flag that the project will experience an overrun in the costs.
It is estimated that the preconstruction and design services will take a share of about 15 percent of your total budget, yet there is great worth of these services even in this share. If these phases of the project are executed successfully there are chances that it will lead to saving a lot of money in the future, even much more than this 15 %.
The preconstruction phase is considered as important as the building phase as considerable cost savings can be achieved when this phase is executed properly. This phase is important as it lay down the foundation of the project and acts as the groundwork for the project to be executed in the future. Proper execution of the preconstruction phase will lead to better documentation, less ambiguity, and confusion as well as a solid and streamlined schedule all leading to great cost savings.
Errors in Project design
For any construction process to be executed successfully, it is important that the design of the construction project is optimum and there are no errors in the design that is finalized. Even if the estimates for the project done in the preconstruction phase are accurate, if the design of the project is faulty, it will lead to a lot of rework as well as overrun of the project cost. A construction project can have design deficiencies in the form of poor design or an incomplete or inaccurate plan.
It is common to have design deficiencies in the construction projects and based on the data of research conducted, they account for nearly 40% of the construction disputes. The finalization of the inaccurate or incomplete plans will lead to substandard results. This may further lead to legal battles between the parties involved.
These disagreements that we have discussed above are completely avoidable if proper caution is taken right from the beginning. There are various advanced design software available, using which can reduce the chances of errors and a proper and optimum design can be availed. Along with the design software, there are different software available which aids in the complete project management process. Real-time changes are monitored by these design software and project management tasks can be executed efficiently by the use of these software pieces. When an unexpected change is witnessed by the project, for example in the design, different parameters related to this change are automatically updated by the software in real-time, which leads to the efficient management of the project without much hassle.
To have an accurate execution of the design by the contractors and subcontractors, they should agree to the scope of the work as well as their duties of rendering performance at the time of contract. All the project and design specifications must be mentioned in the documentation and clear references to them should be given. Warranties of the work performed by the contractors as well as risk allocation chart should all be taken care of during the project execution.
The contract should clearly define the dispute resolution process in case of any dispute in the future. In case of disagreement, it should be seen that heavy legal fees are not leading to the cost overrun of the project. When sufficient caution is taken during the design process to have an accurate design, the projects will not suffer from the costs overruns that are caused due to rework and corrective work at the time of execution of building construction.
Lack of planning of change orders
Along with the design changes, there are change orders, which also contribute to the cost overruns in the construction project. The condition of change order occurs when a contractor/owner finds that the design finalized is not perfect and some changes need to be introduced in the design. This involves the introduction of the new requirements and specifications in the project. These changes are usually introduced after the initial budget and models have been decided.
This introduction of new specifications and requirements will result in high costs of the project and will lead to cost overrun in the project. The budget decided, in the beginning, will be negated by the introduction of these changes. The requirement of additional manpower, time, and materials will lead to cost overruns as these factors affect different other parts of the project.
These changes or change order problems can be addressed right in the contract phase if there is a provision of these changes involved in the planning. These provisions include the cost of additional budget required in case any change occurs. It is important to take care of these changes right in the beginning as non-inclusion of the provision for these changes will lead to problems and disputes in the future. This prior planning is the best way to overcome the costs overrun problem caused by the change orders.
The use of advanced software for the purpose of calculating the impact of changes can help in deciding the provisions for these changes. Different scope changes and budget change provisions can be decided in the planning phase by the adequate use of these software pieces. A new level of functionality can be attained by calculating the impact ahead of time and this will also reduce the number of resources required at the time of execution.
This scope change is an important aspect of project management and should be considered ahead of time to have efficient execution of the project.
Errors in Administration
In case we have an accurate design and there are no change orders as well the project can still experience the overruns if there are errors in administration as well as if the work of administrators is slow. There can be catastrophic results if there are errors in tasks performed by the administrators. There can be a case when one aspect of the project is suffered by the problem and other project managers might not know about it. This situation can persist until it is very late and may lead to disastrous results. Hence, it is very important to formulate planning that will minimize administration errors. It is imperative to get rid of these administration errors which otherwise may lead to huge losses in the future.
The best solution to avoid administration errors is to increase the size of this administration team. This is based on the fact that with more people focussing on a particular part, there are low chances of errors and faults. This is a general solution, which is not very good in the long run. This is due to the fact that increasing the number of people in the administration team will automatically lead to cost overruns.
The other alternative can be that instead of increasing the size of the team, the people involved must be equipped with the right tools. They should be equipped with advanced software pieces so that they can make their decision wisely. The role of multiple administrators can be balanced by using good project management software. The same aspect of the project can be viewed from multiple angles by the use of project management software. Many different and multiple scenarios can be considered by project management software at once. The different parameters of the projects can be iterated and results can be seen through the simulation on the software.
The human errors in the delivery monitoring, invoicing, and accounting all can be minimized by the use of these advanced software pieces. Project management software that digitally supports the project documents as well as provides an alarm on deliveries can solve the problem of errors in administration. The operations and logistics, both can run smoothly by the use of an advanced project management software having the required capabilities.
Improper Site Management
The equipment condition, design integrity, and quality control are the essential parts of project management process for a construction project. These are a few of the important aspects that need to be tracked during the execution of the construction. But in real case scenarios, these aspects are not tracked properly and lead to many cost overruns in the construction project. It can be seen that due to various reasons the site of the project changes frequently. The gap between the mentality of the owners and contractors leads to several disputes and it can be the biggest reason for slowing down the project and diminishing the project’s momentum.
If both sides of contractors as well as owners try to maintain a professional relationship, this problem of the improper site management can be solved. It is important that the site of the project does not change frequently and once finalized the work is carried out on one particular site. The improvement in the on-site communications as well as the use of different construction software is useful in reducing the issues related to site management. With the use of these software pieces, the calculations and design aspects can be referred more clearly in the software and accurate readings can be availed. Side by side analysis of the different scenarios can also be performed which may lead to better results. It is a fact that the calculations performed digitally are more accurate than the ones done manually and design performed with the help of software can be trusted by all. Hence solid decisions can be taken based on the authentic information rather than the office-politics.
More opportunities for collaboration are provided by choosing the right software. Greater and streamlined communication from the remote locations can be done by having design parameters uploaded on the design software. Quick decisions can be taken and the issue in consideration can be analysed more efficiently. This faster communication is also responsible for better decisions as well as real-time insight into the problem into consideration. This all will help in avoiding the cost overruns in the construction project.
Hiring a wrong Team
It is important that the team you have hired for the execution of the project is perfect and is performing its duties well. If all the factors described above are in place but the team is not performing its duties well, it will lead to the overruns in the project’s cost. It is important that the level of standard of the team that you have chosen for your project is optimum and they are all capable of providing quality services.
Unprofessional and inexperienced contractors can make mistakes, which can lead to a lot of losses and cost overruns. The delay and errors caused will lead to heavy losses which will all end up in huge cost overruns. It is important that the selection of the subcontractors is done with precaution and only the experienced and most professional ones are selected for the construction project. Various digital solutions can be used so that the hiring process is streamlined and only the deserving candidates are hired.
Thus, we have seen in detail, the different factors which may lead to the cost overruns in your construction project. It may be possible that one or more of the above factors are responsible for the costs overrun in your project. Hence, it is important to keep these factors in mind right from the planning phase and an effective project management process should be employed. It is important to choose a good project management consultancy having in-depth experience in the construction domain so that these overruns can be avoided and the project can be executed efficiently and with high productivity.