7 Key Steps to Avoiding Cost Overruns in Construction
According to a 2016 joint study from Dodge Data & Analytics and the Lean Construction Institute, 49 percent of “typical” construction projects exceeded their budgets according to owners. In addition, global research and consulting firm McKinsey & Company reported in 2015 that up to 80 percent of large construction projects experienced cost overruns.
In other words, cost overruns are so common they’re almost the norm. But that doesn’t have to be the case. Even as construction costs are rising overall, it’s possible to create more accurate budgets and take steps to ensure projects don’t exceed them.
1. Promote early integration. When major project stakeholders — general contractor, owner, designers, major subcontractors — get together and identify potentially costly obstacles or conflicts during the conceptual stage rather than first bumping into them on the drawing board or in the field, it can reduce the number of change orders — and the costs associated with them — down the road. The integrated project delivery approach is especially useful on large, complex projects.
2. Move toward technology.According to McKinsey, the construction industry needs to step up its digital game and embrace processes like rapid digital mapping, which helps avoid “geological surprises” that can inflate the budget, and 5D building information modeling, which makes it easier to see how design changes or project glitches effect the schedule and budget. Paperless offices — both corporate and jobsite — can keep costs down by saving time and improving communication. Internet of Things technology such as machine-to-machine communication can forewarn managers of impending equipment failure or maintenance needs and help them manage inventory.
3. Implement Lean construction techniques. A project that uses Lean construction methods, from pull planning to allocation of teams, is twice as likely to stay on budget according to the Dodge/Lean study.
4. Hire qualified subcontractors. One of the major goals of any construction project is for subcontractors to deliver a quality product according to the schedule laid out for them. That doesn't just happen by accident. Choose subs with the right experience and production capabilities for the job, and make sure they have adequate cash flow to pay their people and buy materials.
5. Check for errors before submitting a bid. Use an experienced estimator and double-check his or her bids for math errors and minor or major line item omissions — for example, leaving out an entire trade or forgetting costs from the bid document addenda. And of course, if the bid documents are vague or incomplete, ask for more details before you bid, or make a bid that’s contingent on final specs.
6. Track costs in real time. During the project, project managers should monitor costs daily and check invoices against purchase orders to identify mistakes and potential overruns immediately.
7. Avoid scope creep. When the work deviates just a little bit from the original scope, it could feel more convenient to absorb the cost. But if this turns into a general practice, the dollars left on the table could represent a significant amount. The best policy is to execute a change order for every addition to or deletion from the original proposal.
Kim Slowey is a writer who has been active in the construction industry for 25 years and is licensed as a certified general contractor in Florida. She received her BA in Mass Communications/Journalism from the University of South Florida and has experience in both commercial and residential construction.