Tips to avoid budget overruns in construction projects

Construction projects can often go over budget, but what should you do if this happens to you? In this blog post, we outline a few steps you can take to try to remedy the situation. Keep in mind that each case is unique, so consult an expert if you’re not sure what to do.

What is budget overrun in project management?

A budget overrun occurs when the actual cost of a project exceeds the budgeted amount.

Common reasons for budget overruns

By understanding the most common reasons for budget overruns, you will be better prepared to avoid them in your own construction projects. Examples of situations that are common:

• Prices of materials increase during construction.
• Increases in labor costs because a project takes longer. Workers then have to work longer than initially planned and labor costs continue.
• Weather conditions such as storms or when temperatures are too low or high can halt construction for several days.
• Changing laws and regulations are sometimes the cause of a construction halt, think of permits that are (temporarily) revoked or political decisions that have an immediate impact in practice.
• Scope creep occurs when the project scope becomes larger than the original scope (baseline) without increasing the budget. This happens, for example, when the client changes or expands requirements during the project and the budget remains the same.

Of course, these are just some of the many possible causes of budget overruns. However, if any of these warning signs are present, it is important to take action to prevent excessive cost increases.

Being aware of the possibility of budget overruns helps you keep your construction project on schedule and budget.

While project teams often perceive budget overruns as a negative, they can also be an opportunity to improve the quality of the project. By re-evaluating the budget and making adjustments, it is possible to avoid future cost overruns and deliver a higher-quality product.

1. Poor planning creates additional costs

A budget overrun occurs when the actual cost of a project exceeds the original budget. In construction, poor planning (for example, over-scheduled or incomplete) is often the cause of budget overruns.

Poor planning often leads to delays, increasing the overall project cost. By taking time to prepare a detailed budget and schedule, you will help prevent budget overruns and keep your construction project on track.

2. Unexpected costs cause budget overruns in construction projects

Every construction project, whether a small home renovation or a large commercial development, is subject to budget overruns. The most common cause of budget overruns is unexpected costs. These can include anything from interim increases in material costs to changed or increased labor costs.

For example, consider the following situation: you have prepared a quote and during the project, when you are about to order materials from the supplier, lumber prices have increased.

Or the project manager suffers labor downtime due to illness or accidents and hiring replacements incurs higher (labor) costs.

While budget overruns are a reality of any construction project, you can take steps to prevent them.

For example, you can create a contingency plan for unexpected costs or budget for them. Performers can work with their architects and engineers to identify potential cost savings in the design process.

3. Additional costs in construction projects due to force majeure

What happens when unexpected events, such as severe weather or a pandemic, throw a spanner in the works? These situations are known as force majeure and can cause budget overruns in construction projects.

In some cases, the additional costs are significant. For example, if a storm damages a construction site, its repair adds millions to the project budget.

And if a pandemic forces workers to stay home, delays can add up to large sums.

Of course, not all force majeure cases are created equal. Some are more likely to cause budget problems than others. So when planning a construction project, it is important to consider the possibility of force majeure and budget accordingly.

How do you avoid budget overruns in your construction project?

Before the project begins

Preventing budget overruns starts with budgeting with a large contingency (at least 10% but preferably more).

It also makes sense to include already in the bid that any price increases in material costs above a certain percentage will be passed on in the final bill.

Furthermore, we have a few tips for you:

• Communication is essential in project management. Does your client clearly understand what he is procuring? Avoid misunderstandings and explain in client language exactly what you have to offer and what not.
• Give a rough financial indication in advance based on what your client wants and expects. It is a good test to see how serious and willing he is. This also helps you estimate your client’s budget, which helps to adjust your approach or advice.
• Give a debrief to your client in the form of a translation of his requirements and put it in writing as well. This helps both you and your client to get the scope as clear as possible in the initial phase. It also forms a test to see if you understand each other well.
• Split the work into need-to-haves and nice-to-haves. This prevents the client from pulling your proposal apart like a menu and only ‘ordering’ parts.

During the project

• Identify third-party dependencies. Which parties still influence your client’s decision-making process? And what are their expectations?
• Be aware of a “change of scope”. If a client indicates that they “actually mean something else,” this may have implications for the budget. In the event of such signals, it is always good to check again whether the client is also willing to pay for his additional wishes. Put these adjusted agreements neatly on paper to avoid confusion afterward.

After the project

• If a construction project keeps on simmering, some expenses will continue. Therefore, clearly establish when the project will be completed and which items are still outstanding. This also gives insight into when the next phase will enter (with the associated new budget).

How do you deal with a budget overrun?

If you are already in the middle of a construction project, first take a close look at your budget and where the overrun is occurring. Is it in one particular area? Are there unexpected costs? Once you have identified the problem areas, then you can look for ways to cut costs. Perhaps you can use cheaper materials or find a more efficient way to do the work?

If cutting back is not an option, you may have to find additional funding. This may mean going back to your client to negotiate a higher budget or applying for additional funding. Whatever you do, make sure you have a solid plan before moving forward.

Finally, keep your team informed and on track. If budget issues cause delays, make sure everyone is aware of the situation and knows what needs to be done to get things back on track.

By staying proactive and keeping everyone informed, everyone can collaborate on solutions and you minimize the impact of a budget overrun.

Conclusion

Does it look like you’re facing a budget overrun? Don’t panic. There are a few things you can do to get your project back on track.

First, take a hard look at your budget and where you can cut back. Distinguish between need-to-haves and nice-to-haves. Maybe there are luxury items you can do without for the time being.

Second, see if you can renegotiate rates with suppliers or subcontractors.

Finally, consider ways to increase revenue so you can cover the extra costs. Taking these steps will prevent budget overruns in your construction project.

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