Budget overruns eat into the profits of hardworking contractors and drive up costs for clients, so it’s no surprise that the construction industry has spent considerable time researching this topic. Leading software providers are taking an especially active role, with Procore, Autodesk, Buildern and Propeller among the companies examining the root causes of cost overruns.
Those companies point to inaccurate estimates as a main driver of budget overruns, as contractors make overly optimistic assumptions about the cost and availability of materials, labor, production schedules and even the weather. In some cases, line items are based on incomplete or outdated data, leading to miscalculations during the critical preconstruction phase.
DO AN EARLY RISK ASSESSMENT
T.J. Forbes, a senior solutions engineer at Procore, said contractors should envision the risks associated with projects early in the process so they can build contingency plans into estimates. In a simple example, he pointed to a 12-month project that stretched out to 13 months, resulting in higher labor costs and a sizeable budget overrun.
The initial estimate was off, but it might have been possible to stick to the timeline if project managers had quickly recognized the error, Forbes said. Adding manpower and extending production hours may have been viable ways to accelerate the schedule, and project management software can help contractors weigh their options, he said.
“By learning about [potential budget overruns] sooner, I actually get to make a decision on if I want to do different things to try to prevent that,” Forbes said. “That’s why technology is so important in this. You can start to identify trends sooner and see the integration between the schedule and the budget.”
The competitive nature of the bidding process may lead contractors to make errors regarding the scope of work to be completed and potential difficulties. That’s why it’s vital for contractors to perform due diligence during the preconstruction phase, establishing accurate and realistic project deadlines and costs from architects and subcontractors, according to Grace Ellis, manager of content marketing strategy at Autodesk.
During the RFP process, architects, contractors and owners should express their concerns over the budget and project timelines, Ellis said. “If either of the parties appears to be unrealistic about timing or budget, this should be an immediate red flag that the project is heading straight for an overrun,” she said.
Autodesk estimates that preconstruction and design services may account for up to 15% of a project’s total budget, but “if this process can successfully identify potential issues before construction actually begins, that 15% will be nothing compared to the money saved down the line,” Ellis added.
That’s why technology is so important in this. You can start to identify trends sooner and see the integration between the schedule and the budget.
T.J. Forbes
Senior Solutions Engineer, Procore
THE CASE FOR AI
As the construction industry looks to embrace artificial intelligence, estimating is emerging as a compelling use case. AI could evaluate data from a contractor’s past projects and identify the most frequent materials, processes or stages associated with budget overruns and delays. Contractors could correct recurring errors in their estimating and production processes and compensate for a lack of experience in their estimating departments.
Of course, some cost overruns, such as client-driven changes, supply-chain shocks and economic volatility, may be beyond a contractor’s control. Any number of external factors can impact a construction project, including labor strikes, tariffs, geopolitical conflict and natural disasters.
Similarly, unexpected site conditions such as soil instability, hidden underground utilities and archaeological discoveries could throw a wrench into schedules. Performing geological surveys, soil tests and environmental assessments can help construction teams identify potential issues before breaking ground.
Here are five best practices for preventing budget overruns:
- Establish a contingency fund. Typically ranging from 5% to 10% of the project’s total cost, a contingency fund provides a financial buffer to help manage unforeseen expenses during construction. These funds should be used strategically and judiciously since tapping them too early may leave contractors with no leeway to address future problems.
- Establish processes to manage change orders. When a project’s scope is altered from the initial contract, costs can quickly escalate. Contractors should have clear protocols for promptly reviewing and approving change orders, ensuring that each one is necessary. The effects of each change order on the project’s budget and timeline should be carefully weighed and accounted for.
- Execute the buyout phase strategically. During this crucial stage, project managers and contractors work to secure the best prices and terms for services, labor and materials. Going with the lowest-priced subcontractor or supplier might be a mistake if contractors are sacrificing expertise and reliability. Poor work from a single contractor can lead to costly delays and rework, throwing off production schedules.
- Embrace technology such as BIM and digital twins. These software tools provide a comprehensive view of a project and enable construction teams to meticulously plan production and evaluate different scenarios. In addition, project management software bridges the gap between field operations and office planners by providing real-time insights on construction jobsites.
- Emphasize communication and documentation. Clear communication between stakeholders can minimize the errors that lead to costly rework and help to synchronize construction activities. Stringent quality-control procedures help to prevent rework and delays and ensure that the project meets the client’s goals. Additionally, documenting every decision and process change will help contractors track the project’s progress against its budget so that any deviations are noticed and addressed promptly.
Want to keep your next project on budget?
✅ Read more in Building Better Budgets and Harnessing the Power of Digital Twins.
📤 Share this article with your crew or estimating team to help prevent costly mistakes before they happen.
Photo credit: SHUTTERSTOCK.COM/GREENBIKESTUDIO
