Cost overruns in construction projects are a common occurrence in many projects.
The Construction industry is an integral part of a country’s economy and plays a pivotal role in developing the country’s infrastructure.
Many construction projects experience cost overrun and put a massive financial burden on the Contractor as well as on the owner. However, a proactive approach and preventive and control measures can save these overruns to a larger extent.
What is a cost overrun in construction projects?
Cost overruns in construction projects, are common occurrences, resulting when the actual costs exceed the estimated or budgeted costs.
There is not a single factor that can control the overall cost of the project. Instead, there are many factors contributing to it. We have categorized these factors as the 5Ms and explained further:
This is the most important M in the discussion. Humans are the main resource and asset for any organization and can make anything successful or unsuccessful.
All tasks are directly linked and managed by men and thus controlling this one M could prevent almost all the issues and get the project on budget.
The main controlling factors to consider for this M are as detailed below:
There is no alternate to experience. Even if everything is flawless, overruns are still likely to occur if the team executing the work is not up to a certain standard. The selection of well-qualified workers and fit for the right job strategy must be adopted to avoid overruns.
Training & Skill Development:
In the technological era of today, everything is getting advanced with each passing day. Advancements in new technologies and techniques and the addition of the latest software and skills are the need of the time.
The use of such techniques could save a significant amount of costs. Such training and skill development courses should be timely organized for the use of the latest techniques which contribute to saving significant costs.
ScheduleReader is an example of one of the latest software added in the list to better control the project and thus avoiding any cost overruns.
Awards & Recognitions:
As all tasks are directly performed by the men, human moral is very important in achieving the set target. Proper and timely awards and recognition can boost morale and motivation among the team members.
A sense of being a valuable part of a motivating and recognizing team could make the best use of time and energy and contribute to the completion of the project objective, thus help to avoid any unnecessary extra costs.
This is the most cost allotted M in the discussion. A major portion of the cost is spent on the materials and thus saving a small from this head can actually save a bigger number in terms of total.
The main controlling factors to consider for this M are as detailed below:
For a typical EPC contract, around 60% of the overall budget is consumed for the procurement and thus special attention is necessary to monitor and control all procurement.
Following are some of the points to consider for controlling cost overruns due to procurement:
- Relationships with the supplier are a key factor to be considered. More value can be gained in terms of the relationships with suppliers through intense collaboration or by starting and developing partnership relations with them.
- Negotiation with the vendors must be carefully considered to ensure maximum cost efficiency and transparency, however, research ahead of time for the average value of the material is necessary in order to know your figure before the negotiation.
- Choosing popular brands is not always the best option from a cost perspective. While developing a procurement process, weighing up all the available options in the market with the numerous factors, among which most critical are cost and quality, should be carefully considered.
- For the critical materials, timely delivery should be considered as the top priority as little delay in delivery could be much costly in terms of the idling of pre-planned and deployed resources and commitments. Early engagement with the supplier & engineering team during the FEED stage of a project could lead to saving valuable time and financial resources.
- A significant amount of operational costs can be reduced by streamlining processes, with the use of specialized supply chain software and by maintaining up to date records of all items and vendors.
Storage & Handling:
Proper storage as per construction priorities could save a lot of time especially the small items that are often lost, which requires another lead time for the order placing and delivery and thus causing extra utilization and deployment of resources for more than the planned periods.
All heavy lifts should be planned to place the equipment on location as soon as it arrives at a construction site. Most of the heavy lifts are normally rented to lifting contractors and thus double handling could cost a lot and should be avoided in order to control cost overruns in construction projects.
Construction activities heavily rely on machinery and equipment. Effective utilization of these items can help project managers to control cost overruns in construction projects.
Most heavy equipment e.g. excavators, dumpers, concrete equipment or cranes and etc.. are hired on a rental basis and a contractor has to bear a hefty amount of rents for these services.
Improper and unplanned usage of equipment could affect the budget to a greater extent. Followings control measures can prevent the cost overruns for this M:
- Company-owned equipment must get priority over the rented ones wherever possible.
- A cost and benefit analysis can be carried out to overview if buying the new equipment is of value. This would not only have added to company assets but also have lower depreciation charged to future projects and save the cost overruns.
- The right equipment should be hired at the right time. Idling of services should be avoided all the time and equipment be available when the task is scheduled. ScheduleReader can help a lot in this perspective, by letting the project manager know when a piece of important equipment is scheduled for specified tasks and thus saving unnecessary cost charging to the project and avoiding misunderstandings in the flow of the assignment.
- The utilization of all equipment should be well coordinated and optimized. Over usage of any equipment could result from the increased maintenance and so the cost.
- Productivity, POL consumption, and breakdown of all machines should be regularly recorded and controlling measures should be taken timely. Any abnormal machine should immediately be removed from the project.
The method and procedures of executing any task may vary with a significant impact on the overall cost of the project. Listed below are some of the items under this header to impact the cost and must be controlled/implemented.
An incorrect or flawed cost estimate can have a serious impact on the final cost of the project. This issue can lead to an unreliable schedule & increase the risk of cost overrun in construction project.
The estimate should be prepared or at least reviewed and validated by an experienced cost estimator who is cognizant of the Scope of work.
Many times, the cost estimate is compiled with an attitude of arriving at the lowest cost to win the project. This can sometimes lead to cost overruns in construction projects when actual work is executed and thus should be optimized during the estimation phase of the project.
Scope & Design Changes / Change Orders / Contract Terms:
All construction is directly driven by the engineering design so the defective design or modifications will inevitably be destined for cost overruns.
Design changes could come from the contractor side as a result of human error, site changes, or owner requests for scope changes.
Human errors could be avoided by proper training and experienced staff as detailed above whereas any changes from the client-side should be dealt with with proper change orders.
Proper contractual terms should be part of a formal contract for the claim of such change orders and modifications from the client-side to avoid any disagreements during the construction phase.
The unrealistic and over-optimistic schedule is another factor that contributes to cost overruns in construction projects.
Schedules should always be developed with well-experienced planners in consultation with the project manager and discipline engineers. All the inputs driving the schedule like engineering deliverables, material deliveries, resource availability and mobilization must be correctly taken into consideration.
In addition to these, climate conditions like extreme cold and hot weather and public holidays must be kept in the assigned calendars. These conditions will impact field productivity and delay the handover of the construction project and thus causing cost overruns.
Various software tools are available in the market for better scheduling options like Primavera and ScheduleReader.
ScheduleReader is a great tool in this aspect to view files exported from Primavera P6 in a more presentable way that guides the project manager through the project activities and towards the planned milestones allowing him to take corrective actions when necessary.
Monitoring & Reporting System:
A dedicated project controls teams with proper systems and procedures is highly recommended to ensure proper and accurate monitoring and reporting.
As the project progresses, regular updates of schedule and budget must be done and reviewed to ensure the project on track and in case of any slippages, necessary actions are taken accordingly.
Implemented Graphics Reports in ScheduleReader can give a full overview of project health and help project controllers and project managers to evaluate the project status and whether the progress is according to the plan.
In addition to the above, there are some items where control during the construction stage cannot be performed but must have been considered during the bidding and contract stage.
- Currency exchange rates
Conclusion: Best Ways to Avoid Cost Overruns in Construction Projects:
Cost overruns in the construction industry are a frequent occurrence during projects with many different contributing factors.
This article points out some of the key factors that can contribute to a cost overrun to happen on a construction project, while also sharing few tips and best practices on how to influence these factors and minimize or avoid the cost overruns.
About the Author:
Vivien Goldstrong is a Consultant, Author, and Planning Manager with 22 years of experience and expertise in implementation and consultancy related to Oracle Primavera P6.