How to Reduce Construction Cost Overruns?

Construction cost overruns can eat into the budget, timeline, and profits of your project. A project that was set to meet a certain budget gets finalized at a higher value due to a variety of factors.

Cost overruns are a problem for contractors, builders, and owners that can be controlled with a detailed estimate and project planning before the start of the work, along with regular construction cost estimation during the job. This article will show you the top ways to control construction cost overruns from estimating to project close.

What are construction cost overruns?

Construction cost overruns are additional costs beyond the approved or bid budget estimate of a project. There could be various reasons why a project has construction cost overruns.

The most common of these are:

• Changes in the bill of quantities.
• Design changes.
• Material price fluctuations.
• Labor cost changes.
• Poor project planning.
• Delays in project construction.
• Estimating errors.
• Scope discrepancies or ambiguities.
• Material wastage.
• Job site conditions.
• Poor communication.

Certain ones may be identified before the start of the job, while others will turn up later in the project, and the objective is to identify potential cost problems ahead of time.

Start with a Detailed Construction Estimate

A construction estimate forms the basis of budgeting for your project. Any errors in the quantities or the cost breakdown could influence the budget figures of your project.

A good estimate should account for materials, labor, equipment, subcontractor costs, and more, in addition to permits and other relevant costs.

The estimator should go through the plans and specifications for the project to determine the quantities before finalizing the cost breakdown.

It is also important to double-check your quantity takeoff, which determines the amount of concrete, steel, lumber, drywall, roof, flooring, plumbing, etc., needed for the project.

By using reliable construction estimating services, contractors can get a good grasp of costs well before they submit a bid.

Review Construction Drawings

Design errors can drive up costs of a project. Prior to starting work on site, review architectural, structural, mechanical, electrical, and plumbing drawings to identify any discrepancies or details that may affect cost.

Compare the plans and specifications to determine if the scope of work and details align with the plans. In case of any confusion or missing pieces, clarify first before ordering materials or starting work. Review of these documents can prevent potential changes in scope that could impact your budget.

Control Scope Changes To Prevent Budget Variations

Changes in scope are one of the major reasons behind construction cost overruns. Even a minor change could affect the material, labor, equipment, and timeline of your project.

Any requested changes to the project scope need to be carefully analyzed and considered before being implemented.

To keep track of all the modifications and their impact on the project, it is recommended that a change order be prepared that notes details like description of changes, materials and cost impact, labor and equipment cost, schedule impact, additional project cost, and approval.

This helps the project team with an in-depth understanding of the modifications and their influence on the project.

Track Material Cost Changes

The cost of materials can fluctuate during your project. Since steel, lumber, concrete, electrical, plumbing, and other materials play an important role in construction, any changes to the cost of these can increase your project costs considerably.

Estimators must remain on the lookout during the estimating and procurement phases for any changes to the cost of materials.

Compare prices against multiple suppliers and ensure you have favorable terms with the chosen supplier to avoid unplanned cost variations.

Tracking material costs can also help reduce material wastage. Ensure that the quantities ordered match the calculations in the takeoff (or updated quantities in case of project changes).

• Improve Quantity Takeoffs

Poorly done quantity takeoffs are a major contributor to cost overruns in a project. Underestimating the material can lead to additional costs of buying the required materials during the project.

Missed concrete quantities could add to the material, labor, and equipment costs of the project. So could errors made in drywall takeoffs. Estimators must use updated copies of the plans to create their estimates. They need to ensure that they measure accurately and check that the quantities align with those of the project’s scope.

While digital tools can aid in measuring, it is essential to double-check the numbers manually.

• Plan Your Labor Costs

In most cases, labor costs comprise the single largest element of the budget. Poor labor planning can increase the costs of a project if it extends beyond the initially estimated time.

Analyze labor costs for every major component in the project and account for productivity, crew size, job site safety, and more, along with the project’s timeline. The project manager also needs to track the hours put into the project and compare them with the labor costs budget.

If the project hours are running higher than expected for a given work package, it is important to analyze the cause and find a way to limit the impact on other components of the project.

• Monitor Your Project Budget

Your project budget should be reviewed at different stages of the project, and not just at the beginning and end. While tracking costs, it helps the project manager compare the estimates versus actual material, labor, subcontractor, equipment, and other costs at regular intervals. For instance, a week-wise or month-wise review could help determine the project’s budget health. 

• Communication With Subcontractors

You can also use subcontractors to reduce your chances of experiencing a cost overrun. Before starting the job, go through the scope, plans, specifications, quantities, and other details with them to ensure that there is clarity about their scope of work. Lack of clarity can result in change orders that drive up costs.

Compare quotes from subcontractors on the same basis – most provide their offers on the scope of work, and a lower quote may fail to account for everything that needs to be done.

• Plan for Unknown Costs

There will always be costs in a project that nobody can predict or plan for. These unplanned costs could arise due to site conditions, weather, material issues, design changes, and other unforeseen circumstances.

A contingency budget can be set aside that accounts for costs that could not be planned for or determined at the estimating phase. This should be decided based on the risks involved and level of detail in the estimating and design. It can’t be used to justify poorly planned estimating or spending.

Use Construction Estimating Services

Construction estimating companies offer a variety of services. These range from helping estimate projects, preparing takeoffs, analyzing material and labor costs, and more.

Services offered could include concrete estimating, drywall estimating, electrical estimating, plumbing estimating, steel estimating, lumber estimating, sitework estimating, etc.

By relying on a company that specializes in construction estimating, you can also offload the work from your in-house estimators and utilize them for other estimating work if you have multiple bids to analyze.

Final Thoughts

Construction cost overruns have the potential to cut into the profits of your project considerably and be a headache for your contractors and owners. Most causes of cost overruns could be dealt with by ensuring that your project estimating and budgeting are well done before the beginning of the work, along with appropriate cost tracking during the course of the job. 

No doubt, by ensuring that your material and labor costs are tracked and any changes are recorded and analyzed, a contractor can keep their project costs in check. Cost control needs to be an ongoing effort as opposed to something done at one point in the estimating process.