A cost overrun is a term commonly used throughout the construction industry. But what does it mean for the average homeowner looking to begin a residential construction project? Simply put, a cost or budget overrun is an unexpected cost, mostly due to an underestimation or excluded item during the budgeting process. Keeping a project on budget is one of the most important tenets of construction management and key to completing a successful project. A quality product delivered on schedule can be overlooked if the project is delivered over budget. Unfortunately, it's safe to say that cost overruns in residential construction projects have become an industry-wide norm. In fact, according to a study from KPMG, only 31% of all construction projects were delivered within 10% of the projected budget in the past three years. Because project budgets are now being examined more closely than ever, the best construction firms can't really afford to accept the new normal.
In order to properly address cost overruns in residential construction projects, it's important to understand the root of the problem. Oftentimes, overruns result from poor project management from the outset of a project, with budgets and schedules set improperly during the planning phase. Although extreme weather, such as we often see here in the Lowcountry, or forces beyond human control can impact budgets, in most cases, a project's overrun is a result of inaccurate analysis or planning before building even starts. In addition to more accurate planning, technology can also help to reduce the common problems that contribute to cost overruns, ensuring a project is completed on time and within budget.
In order to keep cost overruns at a minimum, it is important to understand what causes them in the first place and how to implement best practices and strategies for alleviating them. In the below article, we provide 7 steps to take to ensure cost overruns don't derail your home construction project.
1. Provide Accurate Project Estimates
While all of a project's stakeholders, from the client and architect to the engineer and builder, are eager to get the project started, beginning with faulty schedules and vague budgets will result in an overrun from day one. Due to the competitive nature of the bidding process, project estimates may suffer from inaccurate expectations of the scope of work included in the project. In many cases, some projects will also be estimated on a one size-fits-all basis, increasing the chances of exceeding that initial estimate. Therefore, it is vital to a project's success to perform due diligence during the pre-construction phase to receive accurate and realistic project deadlines and costs from architects and contractors. Estimating the project accurately can begin during the Request For Proposal (RFP) process. This is the time where architects, contractors and clients can express concerns over budget and timelines for the project. If there are unrealistic expectations on project timing or budget, this should be an immediate red flag that the project is likely to result in a cost overrun.
Even though pre-construction and design services may contribute up to as much as 10-15% of the total project budget, this process can successfully identify potential issues before construction actually begins, resulting in money saved on the process down the line. Because of the opportunity for cost savings, pre-construction is considered to be equally as important as the actual building phase because it truly lays the groundwork for the project. A solid planning phase before groundbreaking ensures a better process of documentation, less confusion between administrators and a solid project schedule, all helping to reduce the likelihood of unplanned expenses.
2. Clear and Complete Project Design
A design deficiency is a poorly designed, inaccurate or incomplete construction plan. Incomplete or incorrect plans almost always result in substandard work which can result in a greater chance of disputes. Fortunately, these kinds of disagreements are completely avoidable in most situations thanks to the rise of dedicated project technology. During the design phase, construction software can help reduce the risk of errors or incomplete designs by ensuring everyone is on the same page. Project management is more accurate when using software that can incorporate real time changes and provide an accurate record of quantities and takeoffs. If the project experiences an unexpected change in its scope or one of its processes, it is much easier to plug those design changes into a dynamic digital model of the landscape than to redraw models on paper. Alternatively, to enable contractors and subcontractors to build according to the design specifications, clients and contractors should agree on the specific Scope of Work and performance duties in the contract phase. This documentation should include clear references to all project specifications on design documents, warranties of the exact work to be completed by contractors, a risk allocation chart or definition and a process for solving unforeseen issues. Most importantly, the construction contract should define the dispute resolution and/or mediation process should disagreements arise during construction. Adding an extra level of security will allow for correct project design and the management of clear expectations, ensuring the project won't suffer from cost overruns due to corrective work during the construction phase.
3. Plan Appropriately for Change Orders
Change orders are another common cause of cost overruns in construction projects. A change order occurs when a client or contractor determines that a design isn't working for various reasons or with the introduction of new specs, fixes or requirements after initial models and budgets have been completed. Additional requirements or changes once the project has commenced will generally result in higher costs, which will affect the original project budget. The additional time, manpower and materials required to complete a new initiative may also have to be classified as a cost overrun if the improvements affect other aspects of the project. Consequently, changes can usually be best addressed during the pre-construction phase, when a change order provision can be added to specify procedures and budget needs, should a change be required. If it isn't addressed ahead of time, contractors may increase their total cost of a contract up front in anticipation of changes or disputes that could arise if they didn't adequately plan for the overrun to begin with. Using certain construction software provides the ability to simulate different solutions for scope changes and budget accordingly during the pre-construction phase. Calculating different available solutions in advance will result in a more streamlined process, and an added bonus is that it may result in determining a new level of functionality while reducing the number of extra resources used. Although project scope changes may be necessary, they should be managed proactively and considered ahead of time in order to reduce the likelihood of cost overruns thereby impacting the final budget.
4. Prevent Administration Errors
Even with a solid design plan and implementation and zero project changes, a project could still experience cost overruns if project administrators aren't carefully monitoring a project's progress. If lines of communication between administrators are limited, problems that occur on one aspect of a project may not even become known to other project managers until it is too late. Many contractors and owners believe that the best solution for bad administration is to simply increase the size of the project team. However, this might not be the best solution in the long run as increasing the number of people in administration without solving the underlying issues could lead to collaboration failures that will almost certainly involve a cost overrun. Project management software can help play the role of multiple administrators. Unlike traditional administration, software gives a skeleton crew the ability to view the project from multiple angles, keeping up with many possible scenarios at once. Concepts can be changed digitally and compared side by side to previous iterations of the project. When it comes to human errors in invoicing, accounting and delivery monitoring that could contribute to overruns, software can also help to reduce this risk. Administrative errors may be avoided with a software system that guarantees the accuracy of all project documents and provides alarms for deliveries. The extra digital support that technology provides allows project administrators full visibility and flexibility into a project to keep operations and logistics running smoothly.
5. Avoid Poor Site Management
Design integrity, equipment condition and quality control are just a few of the various aspects of a project that need to be kept on track during construction. Unfortunately, this does not always go as planned leading to severe cost overruns in home construction projects. Some projects are just too large to keep up with every site change and news may travel too slowly across management levels. Improving on-site communication with construction technology software can reduce some of the issues with site management. With the appropriate software, calculations and designs can be referred to digitally for a more accurate reading and different scenarios can be tested side by side to see which will bring the better outcome. Digital calculations are assured to be precise (based on accurate inputs, of course) and software designs can be trusted to accurately depict on-site descriptions; therefore, decisions can be made quickly based on solid information. Faster communication also leads to better decision making capabilities, as real-time insight can address a situation before it becomes a larger issue and impacts the budget.
6. Hire the Right Team
Assuming that everything has been estimated correctly, the project plans are flawless and scope change is being managed effectively. Outside of all of that, overruns are still possible if the team executing the work is not up to a certain level of standards. Inexperienced subcontractors can cause costly mistakes, delays and errors, even with the most impeccable designs and plans. Unfortunately, when hiring subcontractors, many general contractors do not adequately qualify their project teams. Whether they are trying to work with the lowest bid or are just leveraging existing relationships, using the wrong team opens a general contractor up to significant risk. General contractors who go through the extra steps to ensure subcontractor qualification will reduce the probability of experiencing significant cost overruns in construction.
7. Uncoordinated Design Documents
A final cause of cost overruns occurs when conflicting details arise between the architectural, structural, mechanical, civil engineering and landscape plans. All too often, no entity steps up to take ownership of the process to ensure that all plans are effectively coordinated and integrated. Some of the most common examples in residential construction include dropped showers not being shown on structural drawings or plumbing waste lines being placed directly above mechanical chases and trunk lines. Qualified professionals using detailed checklists and software can provide overlays to properly coordinate all of the intricate details, thereby ensuring conflicts are avoided while the project is still on paper, thus reducing finger-pointing, headaches and added costs down the road.
Systematically reducing cost overruns should be a priority in all residential construction project planning. Taking the time to evaluate the reasons for cost overruns and incorporating the right solutions will allow for the ability to execute complex projects with greater control. Through proper planning and with the assistance of construction productivity software, cost overruns can be significantly reduced thereby ensuring the next home construction project will be completed within budget.
Sea Island Builders provides a single point of contact for the design and construction of residential building projects. We utilize state-of-the-art technology to manage projects for ownership while commonly meeting the goal of an on-schedule and on-budget project delivery. Sea Island Builders takes great pride in providing clients with an unrivaled design-build experience. Contact us today if you have questions or want to learn more about the Sea Island Builders Experience.
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