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7 practices to avoid construction cost overruns

Construction cost overruns often make headlines.

Between 2009 and 2013, $500 million was spent on excess costs for construction work on public projects, costs that could have largely been avoided with more rigorous management practices (reference).

The cost overruns affect private sector construction projects just as much, for all countries combined. For the Chunnel, the tunnel under the English Channel completed in 1994, the cost overruns added up to $21 billion, 80% more than the initial budget projection (reference).

One of the most expensive construction projects in history, the Chunnel was privately financed by bank loans and the sale of shares. However, the original shareholders lost most of their investment due to the cost overruns!

Can cost overruns be avoided?

There are indeed projects that respect the budgets, but they make headlines less often. Their success is no accident. The managers of these projects knew how to put proven methods into practice.

If you are a client, it is possible to keep full control of costs at every stage of the project by applying the following seven practices.

 1. Establish a realistic baseline budget

Since resources generally are limited, the budget is the major constraint in achieving a construction project’s objective. All the factors that could influence the budget must therefore be identified during planning.

The initial budget estimate must be produced according to a proven method, including a provision for enough contingencies based on the identified risks. During this phase, recognized industry practices are recommended to ensure the precision of the estimate, which corresponds to the degree of precision of the scope of the project.

The objective is to produce a detailed inventory of the project items, while avoiding the trap of optimistic bias. This means collecting data on the quantities, materials, etc. The budget thus will serve as a baseline in managing the subsequent stages of the project (reference 1).

This type of analysis was produced by Stratégia Conseil for Société de transport de l’Outaouais and its Rapibus project. This study can be viewed by clicking here.

2. Define the control points and the deliverables

Even if all the stakeholders agree on the importance of respecting the project’s budget limits, they may be hard to control along the way and generate cost overruns.

To stay in control of a project and maximize its performance, controls must be applied at various key steps. During these control points, the deliverables of a phase are reviewed before going to the next phase. The design reviews and quality control are good examples.

These control points are stopping times to give the opportunity to:

  • reevaluate the costs;
  • review the margins allocated to budgets and delays;
  • update the project’s risks and contingencies.

It is important to plan these control points upstream and specify the deliverables to be examined and the quality criteria.

3. Provide for contingencies for delays and comply with the schedule

The construction delays often translate into cost overruns. There are consequences both for the budgets and for the schedule. At first glance, slight changes may seem unimportant. However, the accumulation of many postponements, due to minor changes, will significantly increase the project delays and costs.

Just as there is a contingency provision in management of the costs, it is also wise to provide tor time contingencies in the schedule. An expert in this field can assess the project risks with several parameters. The contingencies thus will be defined specifically based on the project.

4. Conduct design review and constructability analyses

The plans and specifications must be analyzed to ensure they are complete. Their content must also be validated before the construction phase.

This practice has two objectives:

  1. Identify and correct the errors, the omissions and the inconsistencies between disciplines.
  2. Verify that the technical solutions chosen are optimal in terms of efficiency and costs over the life cycle of the work.

Remember that the most substantial cost reductions are made early in the planning phases. This is why time periods must be reserved for these activities at the beginning of the project. They serve to present measures and objectives that will be understood by all professionals and validated by the project owner.

5. Optimize the project components

Value analysis workshops also prove to be very beneficial when conducted at the start of planning. These workshops are held in multidisciplinary teams to encourage communication and cooperation among the stakeholders.

The team will follow a three-step process: optimizing the needs, choosing the best options, and reducing costs and delays. The objective of these workshops is to define the functions to which the work must respond, as well as their costs and importance.

This is the opportunity to review the project’s essential needs. It is broken down to identify the priorities and the secondary factors. To achieve a balance between the need and the budget, the concept and the proposed solution must be validated. You can then determine whether the budget is respected or whether it does not meet the needs. It is thus possible to optimize the project while staying within the budget.

To conduct the workshops, it is strongly recommended to call on an external planner who is an expert in the field. This person will have a new look at the project and could call into question the decisions made.

It then will be possible to make choices or design changes oriented to the best product at the lowest cost. The value of the work will be maximized (reference 2).

6. Establish a change management process and avoid late program changes

Program changes often occur during the project. They may lead to cost overruns and significant delays, especially when they occur after the design is completed. In addition, rework costs or dispute resolution expenses will especially hinder the project’s success.

The design reviews mentioned in point 4, as well as a good risk assessment, have the goal of avoiding this kind of situation. If a program change is considered essential by the client, it should be approved only if additional funds are obtained in the initial budget.

Some changes to the project cannot be avoided. To manage these changes, a formal procedure established in advance is necessary for any change request, its implementation, and management of the resources allocated to it.

Each change proposal must be communicated to the decision-makers before it is applied. Close cross-communication will help the other stakeholders quickly discern the consequences of each change in terms of costs, delays, quality of deliverables, and other collateral aspects. By adequately documenting these changes, the people responsible for the project will be able to authorize it or reject it, as the case may be, in full knowledge of the circumstances.

7. Deploy key performance indicators

The success of construction projects depends on a multitude of variables. Dashboards allow selection of a limited number of key performance indicators that give a quick and precise indication of a project’s health. These indicators provide information, for example, on budget expenditures, the progress of the work, delays, risks or milestones.

In short, this allows the clients or their representatives to maintain control of the project, and particularly the costs. Dashboards facilitate quick decision-making, despite the complexity of the issues and factors that influence the project.

The data relevant to the project, and necessary to synthesize it, will be identified to construct dashboards custom-made for the project.

Conclusion

The best way to avoid cost overruns is to institute good project management practices from planning to commissioning. A good analysis and a full understanding of the project from the outset will allow structuring and distribution of the costs, accounting for factors that could affect the budget. If you undertake a major construction project, be sure you are surrounded by experts who will be able to guide you to ensure full control of your projects.

References :

  1. Ling, Jiang et Juan Du. 2014. « An accurate prediction method for budgets of large construction project». In 2014 International Conference on Advances in Materials Science and Information Technologies in Industry. (Xian, 11-12 janvier 2014), p. 4139-4143. Xian : Trans Tech Publications.
  2. Zhang, Yan et Junsheng Mu. 2013. « Discussion on Function Analysis Stage of Value Management In construction Industry ». Applied Mechanics and Materials, vol. 405-408, p. 3447-3450.