Construction is something that everyone will come across atleast once in their life. Whether it’s a house renovation, a deck addition, or a much larger project like a hospital or new office. They range in scope and value. One of the most common issues on construction projects is that they go over budget.
So why do construction projects go over budget? According to a statistical analysis performed on construction projects, the following are the leading causes for projects to go over budget:
- Estimating Errors
- Delay in Permitting
- Incomplete Design leading to changes
- Unforeseen Conditions
- Owner Interference or Lack of Interference
- Delay in Payment
For your reference here is a link to the original research paper – published in the Journal of Sustainable Construction Engineering and Technology.
If construction is such a common activity in our day to day life how can the same mistakes be made over and over again and what can you do to avoid going over budget on your construction project?
The best bet is to avoid the items I listed above, by doing so you’ll stand a better chance of keeping your project under budget. I’m going to walk you through the best approaches on all of these!
Over Budget Due To Errors In The Estimating Process
It’s always a joke amongst construction teams that it’s always the estimator’s fault whenever something is missing in the project budget. The truth, is estimators have a challenging job. Their timelines to prepare a construction estimate or bid a job are often very short and information is typically not fully complete.
Because of this the estimating process is prone to errors. Unfortunately, missing a 0 or forgetting to carry a scope can have serious impacts on the profitability of a job for both the owner and the contractors involved.
For this reason it’s important for estimators to ensure their numbers are correct. While no estimate will ever be perfect you can take some of the following steps to help ensure it’s more accurate:
Take Your Time On The Estimate
Seriously, spending extra time on an estimate. By doing so you’ll give yourself the opportunity to review what you’ve completed for errors and omissions.
If you don’t have time due to a limited submission period – start researching the project before the bid is released, or, ask for an extension. What’s the say – asking never hurt anyone?
By spending extra time on your estimate you can help to avoid the construction project going over budget.
Sub trade and Supplier Coverage
After having worked on the owners side for a while now I understand that contractors love to rely on “their trades”. People build relationships naturally and learn to trust certain people. By developing these relationships a lot of people will have a trade or supplier that they always go to for pricing.
Unfortunately, trades and suppliers are just as prone to making errors as the general contractor.
By having more than one trade or supplier per division provide you with numbers you can more easily identify mistakes and often receive more competitive numbers from people who have less work.
Peer Review Your Construction Estimate
A common way of eliminating errors within the estimating process is through peer review. Prior to submission pull together a group of the most experienced individuals and have them peer review the estimate.
This benefits the team in two ways – the first is that multiple people will all build differently. By incorporating multiple people one of them may come up with a better way to do something giving you the competitive edge.
The second reason is simply catching errors. Each set of eyes means more opportunity to catch mistakes.
Interested in more ways to eliminate errors in the estimating process. Make sure to check out our article on Ways to Eliminate Errors In An Estimate.
Permitting Delays In Construction
Another reason that many construction projects go over budget is due to permit delays. Permits are one of the most common delays found on construction sites. Since owners are typically responsible for obtaining permits – the contractor is typically a fan as it represents an owners delay.
In order to address what can be done to prevent permitting delays, we first need to understand the process and players. Including what is a construction permit?
A construction permit is any document that is granted from an authority that allows the builder to perform a specific action. An example of permits includes:
- Building Permit
- Road Occupation Permit
- Sidewalk Occupation Permit
- Electrical Permit
- HVAC permit
- Underground plumbing permit
There can be many permits on a single construction project so the first step in eliminating delay due to permits is understanding which apply to your project.
A good way of doing this is with a construction permit log. A log lists all of the permits which will apply to your project and identifies who is responsible for obtaining each.
The start of the project should include a permit review meeting where all parties sit down together to prepare this list and assign who is responsible. Creating a permit tracking log is always a good idea.
Give Yourself Time To Obtain Permits
The number one thing you can do when planning your project is to leave sufficient time to get your permits. I see too many schedules where people enter a new market and assume that they can get their permit in two months (with the reality being closer to six).
Be smart about your permit timing and give yourself suitable time. Do research on the market your in and the permit timing. Ask City staff or survey other team members on historical timing to get permits.
Incomplete Design – Every Contractors Dream
Incomplete design. Chances are you have been on a project where the design has been less than stellar. We all have and it’s not a fun experience. Having an incomplete design can lead to costly change orders.
When you have a complete design leading up to the start of the project it has several added benefits.
- Faster tender period due to less questions
- Contractors can be more concise on their number
- Contractors can carry less money for contingency due to less risk in the design documents
- More contractors interested in the project due to less complication
By having a complete design you will reduce the overall cost of your project at the start and reduce the time it takes for procurement.
So how can you improve the overall quality of design documents in order to avoid going over budget?
Hire Quality Consultants: do your homework on the consultants you’re hiring. Make sure that they can provide you with a complete set of documents and the industry. What do I mean by that? Don’t higher a consultant who typically designs houses to build a heavy industrial building. Hiring people with professional, relevant experience.
Plan For Design – have your consultants provide you with a detailed design schedule up front. Don’t force them into artificial deadlines – it will compromise design.
Peer Review – yes I know I’ve mentioned this process before but by having a contractor or another designer complete a peer review on the documents you can catch many errors. Contractors are used to dealing with consultant’s mistakes and can point out discrepancies in the drawings.
But the primary reason that a project will go over budget due to incomplete design is the process that occurs after the award to your contractor.
Changes Orders 🙁
Change orders are by their nature a very inefficient part of the a construction project. There are many reasons that they can cause a construction project to go over budget. Change orders are a profit center for contractors.
By the time you get to the change order process you are no longer in a competitive tendering environment. Because of this some of your leverage on pricing goes away. Contractors will mark up quotations with overhead and profit, and, quite often pricing won’t be legitimate.
To protect yourself from bad pricing it’s best to take a few steps:
- Have your consultants review pricing to confirm if it’s fair.
- Request detailed labour and material breakdowns for all work
- During tendering outline the overhead and profit amounts contractors are allowed to charge
If you combine these three items you can protect yourself from price gouging during the change order process and avoid going over budget on your construction project.
Going Over Budget On Your Construction Project Due To Existing Conditions
When you start a project, whether it is a new building, or a renovation of an existing property there will come a time when you are forced to deal with existing conditions. These instances, have the potential to be some of the most impactful situations on your project. But why are existing conditions a cause for going over budget and how can you more effectively manage them?
Existing conditions are a primary reason construction projects go over budget because they are typically a risk that someone hasn’t accounted for. There are many clauses within most modern contracts to protect contractors from these risks.
When pricing a project there are things that the contractor is aware of, and depending upon your contract type things they can make allowances for to better manage the risk. Unfortunately, not every risk will be accounted for.
Unfortunately existing conditions tend to be one of those risks that many people don’t see coming. As a result they tend to be larger in both the cost and time that they take up on a construction project.
An example of some existing conditions include:
- Unknown ground conditions such as contaminated soils or soft patches
- Mechanical or Electrical Services that you didn’t know were where they are
- Structure that doesn’t match the as-built drawings
- Building structure being weaker than expected
- Underground concealed items
These conditions can have major impacts on both the budget and schedule. As a result it’s worth mitigating the risk related to these as soon as possible to avoid going over budget.
How To Mitigate Risk Related To Existing Conditions To Avoid Going Over Budget
There are a few key strategies to this – we’ve done a very detailed article on renovations but here’s a few ideas you can follow to minimize risk:
- Investigation – this is the simplest way to minimize risk related to existing conditions. By spending time at the start of the project with your contractor or consultants and investigating areas that interact with existing conditions you’ll better understand them.
- Contingency – review historical projects and identify issues they ran into. Assign contingency to those items that relate to your project. Fool me once!
- Simplify Design – avoid complex designs around existing conditions. By simplifying your design and using materials you know will work with most conditions you minimize risk and help your construction project stay on track.
By using each of the above methods together you can help your construction project to avoid going over budget.
Owner Interference Or Lack of Interference
When many people remember bad projects they immediately think of those times when they had a hard ass owner, or an owner who didn’t make decisions on time. There may be light in a dark tunnel however, a study performed by Arcadis showed that construction claims against owners had dropped for five straight years leading up to 2018.
Owner interference in a project can be a challenging issue that is hard for project teams to overcome. Your initial thoughts may be it’s always inexperienced owners that cause this issue. But surprisingly experienced owners can also cause problems. Experienced owners may feel that they know better than the contractors and consultants they hire.
Owner interference can cause projects to go over budget through a few reasons:
- Additional changes to the design as a result of decision or indecision
- Delays in construction due to changes or lack of direction
- Mistakes or errors being made in construction due to owner making incorrect decisions
So what can be done to avoid owner interference on a project? Here are three tips for you as an owner or a team member.
Respect People’s Expertise
On every construction project each company and person has their assigned roles. Each knows their respective specialty better than others. Project teams should rely on experts to make recommendations. It’s okay to challenge people on their opinions when necessary but be careful about stepping on them too much.
Make Decisions When They Are Needed and Empower Others To Make Decisions For Themselves
People in general want to feel recognized for doing a good job. You can help recognize them by giving people the opportunity to make decisions for themselves. There are many coaching sessions online about decision making – but the important part is to allows others to do it.
As an owner or contractor watch the companies and people that work for you. If you see a decision that’s been made that you disagree with address it with the other person or people in private – by disagreeing with someone in public you may be discrediting them the next time they need to stand up for you.
Seventy-one percent of people surveyed said being micromanaged interfered with their job performance while 85 percent said their morale was negatively impacted.
There are many clients who feel that they know best and want to know everything that is happening on a project site. Whether you’re a client, a contractor or a designer there will be people under you. You don’t need to know every detail on what
Delay In Payment
The construction industry is known as a challenging industry to work in. One of the main reasons for the negative stigma surrounding it is because of payment. There are stories everywhere about a contractor getting stiffed on payment or a supplier not getting paid. Maybe an owner doesn’t want to pay because something has gone wrong?
The reason for such feelings is that construction is creating something. It is highly personal to people, and because of that emotions can get involved.
Paying a contractor or supplier should never include the word emotion (unless your company name is emotion. When reviewing payment it should be per the terms of the contract. Period.
When I first started in construction, we had a subcontractor go bankrupt. As a result we found that they weren’t paying their workers or suppliers. Insurance ultimately ended covering the situation but this created a huge amount of extra effort by everyone involved to ensure everyone was paid who was owed.
But how can late payment cause your project to go over budget?
Late payment can cause a project to go over budget in a few different ways.
Delaying Work On Site – if someone doesn’t pay for work performed, further work may be held up as a result. As with everything on a construction site this can have a trickle down effect delaying work from other trades. They then have a claim against the project.
Putting Others At Risk – if someone goes bankrupt or someone isn’t paying Liens can be put on the property. These are costly notices that prevent occupancy of a building until it get’s paid. By having to pay the people for work that may have already been paid, expensive legal costs or by preventing you from opening on time not paying people can cost way more money.
Stick To The Contract – Black and White
As I noted above, paying people or receiving payment should always be done per the terms of the construction contract. It’s important when starting your project to have payment terms clearly defined. Some key things that should be addressed in your agreement:
- Process of payment
- Timeliness of payment
- Disputes and how they are resolved
- Payment in the event of disputes
- Holdback requirements
By defining the above issues within your contract you can protect both the payer and the payee. Once you both understand that you have legal protections in the event of issues on site – you can both relax when payment is handed over.
Weather Delays Causing Budget Issues in Construction
“This is the worst winter we’ve ever had” should be made into a sticker that all construction people should wear.
Weather is an inevitable factor of construction and one that is nearly unavoidable. Weather can cause a construction project to go over budget for the following reasons:
- Delay In Construction – depending upon your contract setup the owner or the contractor may be at risk for delays due to weather.
- Damages to Materials – rain, wind and other major weather events can have an impact to an unfinished building.
- Morale – multiple days of rain can have serious consequences to productivity and morale on site. Especially if the project is outside.
- Productivity – some activities are better performed in good weather. For example excavation can be performed much easier in summer months than winter depending upon your location.
What can you do to avoid weather issues?
There are a number of ways to better manage risk related to weather on a construction site:
Eliminate the Weather
Plan temporary facilities on your project to eliminate the weather. For example, in Vancouver it’s widely recognized that rain is a common occurrence on construction sites. Because of this many projects install temporary tent structures over areas requiring waterproofing.
Plan temporary ways to avoid weather – this could mean completing the roof as soon as the top floor is up to keep water out of the lower floors.
Plan For Weather
This should go without saying but plan your project around the weather. A perfect example of this that I see all too often is starting in the winter in colder months. Plan activities that are the most susceptible to certain weather patterns in time periods when it’s least likely to occur.
Start excavation in the spring time. Pour concrete in summer months. Activities such as interior finishes can happen anytime so long as the building is enclosed so take advantage of that.
Make Allowances For Weather
There are many instances where weather cannot be avoided. Where those instances occur make allowances within your budget to plan for it.
If you’re pouring concrete in winter, allow for winter heat and winter mix in the concrete. If you’re doing roofing in the rainy season consider temporary waterproofing to hold over until the summer.
Provide your project team with contingencies incase they get into trouble and need to take emergency actions.
Weather related incidents are almost a given on any construction project. Because of this it’s important that you take out insurance against them. Understand who owns what insurance and how each company is covered.
By protecting yourself with insurance, if issues arise due to weather on a construction site you can deal with them without concern over personal loss.
BONUS – Going Over Budget By Poor Performance
It’s always the contractors fault. The drawings are so terrible on this project. The subcontractors just aren’t performing!
We’ve all been there where the blame game starts to get played because a party isn’t holding up their end of the deal. In most cases someone is underperforming and others have to make up for them. This can lead to an area of a project lacking and causing delays.
This doesn’t necessarily happen on every project, though it does happen on some.
Below I’m going to run through a wide variety of issues that you can run into on a construction project as a result of poor performance and ways you can manage them to avoid issues.
Poor Performance By Designers and Engineers
Contract documents are not fully developed meaning that during construction many issues are coming forward.
Perform a detailed review of the contract documents by a third party or contractor ahead of time.
Slow responses to contract admin such as RFI’s and Submittals
Hold weekly meetings to keep track of document return.
Poor Performance By Contractors
Progress is not what is reflected on schedules
Track progress daily and hold regular update meetings to understand where things are falling behind. Ask for recovery plans.
Inexperience causing issues on site
Request replacement or supplementary staff. Ensure all contractors are reviewed for competency and capabilities before selection.
Avoiding Going Over Budget – The Silver Bullet
With all of the above reasons and methods to avoid going over budget there is still on fundamental way projects can avoid going over budget. That method is team work.
Buildings weren’t built by a single person and the more your group works together and understands one another the better the project will be.
What’s a reason your project has gone over budget and how do you think it could have been avoided? Let me know in the comments below.
8 thoughts on “Why Construction Projects Go Over Budget”
The architect designs the project and prepares drawings, plans, and specifications outlining what the contractor are to build. The owner then takes the plans and specifications and obtains bids from contractors to build the project (Bid). Finally, the owner selects a contractor to build the project (Build). Projects go over budget when contractors demand more money from the owner for work that was not clearly shown on the plan and specification that the architect prepared. These payment demands are referred to as change orders. This mistake that most owners make is assuming that the architect has prepared a 100% complete set of plans and specification that contain every detail necessary for the contractor to build the project. To the contrary, most owner-architect agreements only require the architect to prepare plans and specifications that show the architect’s general design intent. It is up to the contractor to fill in the blanks by requesting information from the architect during the construction phase of the Project. Problems arise when contractors claim their bid was based on details not shown on the plans and specification and when the detail is revealed during the construction of the project the owner is forced to incur additional costs.
Hey there thanks so much for the comment – agree but it depends upon the contract type. That defines what the contractor is required to provide.
Why do projects go over budget? Most traditional contracts require contractors and sub-contractors to submit bids on incomplete information. Contractors know that despite the calls for a value for money / life cycle approach, lowest price wins and for this reason contractors and sub-contractors submit implausible bids on paper thin margins in order to win. Contractors hope that change orders will enable them to recover some of their profit margins as the work proceeds. If this fails, there are always claims to fall back on.
Procurement should be more inclusive and transparent with early contractor / sub-contractor involvement.
It’s great to learn that you need an underground plumbing permit for certain construction building projects. My brother is in charge of a new construction project and he was wondering what he needs to build a little underground. I’ll be sure to tell him that he should get an underground plumbing permit before starting the project.
Nicely written and very informative. These are literally the reasons why the construction project goes out of budget. Improper planning and estimation is also a big reason why construction projects go out of budget. Get yourself a complete well researched project analysis before starting the project.
These are great examples as to why construction projects tend to go over the budget. There are many small issues that could go wrong during the process which could potentially add up and cause a huge delay.
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