With a variety of factors contributing to the cost of a construction project, it is important to have all of the necessary details in place to ensure that costs do not exceed budget. As one of the first steps to setting up a construction schedule, it is important to develop a cost effective strategy. The initial planning stage is the foundation for the design and scheduling decisions that will be made throughout the life of the project. When establishing a plan for the construction project, it is essential to consider every aspect of the project including: demographics, land use and access, traffic congestion, utilities and taxes. It is also important to determine what type of land and property will be required as well as any special circumstances that are unique to the area.
According to an internal accounting study conducted on various construction projects, the top three reasons that projects go over budget are: underestimating costs, delays in permitting and estimating errors. Delay in permitting is the most common reason why projects take longer than anticipated. Asking contractors to meet a minimum number of permits can take several months, sometimes years. Additional delays may occur if there are overruns in materials or supplies. Lastly, delays in estimating and obtaining necessary documents can often cause inaccurate final project costs.
Another common reason why most construction projects run over budget is poor communication between contractors and subcontractors. Communication is an integral part of every successful business relationship. Therefore, communicating with subcontractors on time and at the correct cost is essential to a successful project schedule. Most experienced contractors and subcontractors have a great understanding of each other’s requirements and are able to meet deadlines without additional work. However, if communication between both parties is poor, it can lead to additional overruns, mistakes, and increased costs.
Incomplete design documentation is another reason why most construction projects go over budget. Incomplete design documentation often leads to problems later on with materials and supplies, such as having to purchase materials much later than expected, or having to wait until the right time to order materials becomes available. Often times, this results in having to purchase materials at much higher rates, requiring you to borrow money. Additionally, an incomplete design documentation may also leave you with unneeded delays and added costs. An accurate, well-formulated design documentation will make your construction project more efficient and minimize unforeseen costs.
Another common reason why construction projects go over budget is scope changes and overruns. Sometimes, the scope change involves something that you did not anticipate, such as changing the location of a roof. Other times, a scope change may require a major renovation of an aspect of the facility, such as changing the lighting fixture in an office building. In these instances, when the change is sudden, you must make immediate changes to accommodate the new change. The result is increased costs for you, because you must hire contractors and subcontractors and incur other miscellaneous expenses.
Perhaps the biggest reason why construction projects come within budget is the unforeseen circumstances that occur. Unfortunately, sometimes unexpected events take place, which cause you to overspend your budget. This can be caused by unexpected overtime, extra materials purchased because of the need, and/or changes made in the scope of the original contract. In these cases, it becomes necessary for you to absorb the cost change, although you may still be able to recover some of the cost overruns through rework and layaway.
Although the above factors are quite obvious, understanding why they occur is important for you, as a contractor, to keep the line on your own finances. Other reasons why construction costs exceed budget can be attributed to poor design and planning, poor planning and design errors, and the failure of subcontractors to meet their deadlines. Contractors are human and have the tendency to make errors. Sometimes, when the errors are done away with, you can save a significant amount of money, if your contractor has good people working for him. When this happens, costs can be deflected from the front-end projects (design, material and labor) and placed towards the back-end (overhead), resulting in you paying for the services of more contractors, but having saved a substantial amount of money.
It is important for project owners to know and understand why their projects come within a certain budget. There are several resources on the Internet, including government agencies, which can help project owners determine how much they can realistically expect to spend on a particular project, on the grounds of its level of complexity, environmental impact, and risk factors. Most importantly, the Federal government has recently put into place financial penalties, which are intending to make projects more accountable for their expenses, as well as discouraging over-spending by contractors and subcontractors. In general, it is better for construction companies to follow best practices and stick to pre-approved budgets, rather than going overboard in one way or another. By adhering to recommended practices, a construction company can ensure that its budget remains on track and can avoid incurring any unexpected costs, such as those associated with under-budgeting or ignoring safety measures.