Cost overruns can, well, cost you and your client a lot of extra money.
We’ve all been there. Your clients expect you to hit the budget and timeline for your projects, but, due to several factors, you go over budget.
“Hey, we need more money,” is not a fun conversation to have with your clients.
This is what’s known as cost overruns in the construction industry, and it’s an extremely common issue.
Only 31% of all construction projects came within 10% of the budget in the past three years.
And the average cost overrun for a project that cost between $50 million and $1 billion is a whopping 32.5%.
That means that if you budgeted a project for $50 million, you’d actually end up spending $66, 250,000.
Cost overruns are a real problem. You need to know what causes them and, even more importantly, how to avoid them.
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Time and cost overruns in construction projects
Before we get into the details of cost overruns, we need to look at time overruns quickly.
In construction project management (as you probably already know), there are 5 phases: initiation, planning, execution, performance and monitoring, and closure. As a project progresses through this timeline, any number of things can throw a wrench into your well-crafted schedule.
Between the planning and execution phases, you need to get approval from the client. With a timeline all set, you think you can successfully hit your due date if you start soon.
But then they take their sweet time getting back to you.
Anyone who’s worked with a client knows this feeling. As a construction project goes through its timeline, anything could derail that plan and cause a delay in your deadline. Delays in time lead to cost overruns really quickly.
A contractor messing up, a manager falling asleep on the job, or a stakeholder not communicating clearly can quickly derail plans and mess everything up. Which means it’ll end up costing you and your client a pretty extra penny.
Reasons for cost overruns in construction projects
Lots of complex factors contribute to cost overruns, including:
- Inaccurate project estimates
- Errors or slip-ups in project design
- Admin mistakes
- Poor on-site management
- A lack of skilled workers
- Poor communication
- Not planning ahead
- Client’s change in desires
- Slow decision making
- Low motivation
- Too many responsibilities delegated to one person
Don’t feel bad if your own business has run into one of these common problems.
Cost overruns can come from almost anywhere — human error being the dominant factor. Identifying the potential problems is the first step, but how do they directly affect your projects when they happen?
Effects of cost overruns in construction projects
Time is a huge factor in cost overruns, but what effect does it have on your projects? There are a few places where cost overruns have a significant impact.
This one seems a bit obvious, but it’s still important. When your team isn’t firing on all cylinders, mistakes can happen. And mistakes can mean thousands of dollars in extra costs for you and your clients.
Time spent on the project
It might seem obvious that if your timeline gets messed up, odds are you’ll end up spending more money on the project. But sometimes the reverse is also true.
If your client comes to you with changes, saying they absolutely must have 10 Italian crystal chandeliers in the ballroom, that’s going to not only cost more but will also take extra time. You’ll have to import them from your chandelier guy Phillipe in Italy, get them through customs, and install them. While Phillipe will be thrilled you placed such a large order, the specific request will set back your completion date while you wait for your decor to arrive.
Time affects cost, but cost also affects time.
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If you don’t get paid by the client due to a delay, you don’t have the money to pay your own team. Sometimes it’s not just because of money. While you’re working on a complicated project, trying to solve cost overruns, internal admin tasks can fall through the cracks. Missing payroll is a common problem.
This is a serious problem. First, it’s terrible for the morale of your crew and their trust in your leadership. Second, without pay if possible they’ll have a hard time performing their best on the job if, for example, they have a harder time affording gas to get to work or buying lunch. All of this can lead to even further delays if someone gets hurt or just decides not to show up for work.
Word-of-mouth business is key in construction. This isn’t always true, but if some friends are having dinner together, and Angela leans over to Bill to ask who did his office remodel, he’ll have either good or only bad things to say.
Time overruns can quickly ruin your reputation, especially if they happen a lot. You can warn a client that no estimate is perfect, but if it seems like you’re very prone to them clients aren’t going to be very happy.
How to control cost overrun in construction projects
The bad news is cost overruns can drastically impact your business. The good news is that each of the issues we’ve brought up so far has a solution.
1. Build accurate project estimates
Nobody is perfect, and estimates are just that — an estimation of your price. Even though an estimate is more an idea than a concrete amount, it’s still best to make sure you’re getting as close as you can to the right price.
An excellent way to make sure this doesn’t happen is not to jump the gun on a project. Stakeholders and clients will be very excited to get moving on a new project but, if you gloss over the planning phase, you’re not setting yourself up for success. You need to have your schedules and budgets in order before starting. Try to be as accurate and honest as possible, even if the price you quoted during bidding is different from the amount you end up with.
2. Get your admin in order
Half of the battle with time and cost overruns is making sure you’ve got everything in place to run your business efficiently. This should be your first step if your books are all over the place, you miss payroll regularly, or your invoicing process is a mess.
Start with the easy things. Frequently, admin issues can easily be solved with software. Tools like Hubstaff make all your admin work a breeze. With Hubstaff, your crew can track their time from anywhere, and you can easily track expenses, build reports, send invoices, and pay your crew all in one place. Plus, with over 30 integrations, you don’t have to change the way your crew works to get all that admin stuff out of the way.
3. Manage your team correctly
Being a good manager isn’t easy, and poor management can be a big contributor to cost overruns. If you’re not clear with your crew about expectations for their work, they’ll be directionless and could make more mistakes on the job. On the other hand, if you’re not enforcing company rules, teams might slack off and cost overruns can happen.
The solution is simple. Adopting new or better ways of managing your team can go a long way to increasing team morale and building a collaborative atmosphere for your crew.
4. Hire and train the right people
In construction, it’s normal to learn on the job. As a result, it’s crucial that when you hire people, you’re making sure they have a willingness to learn — that they want to put in the hard work to do a good job. If you’re looking to hire someone with experience, make sure that they actually have it. Ask them to do a work trial, and hire them on after they’ve proven their skill level.
Hiring skilled people means fewer mistakes and fewer setbacks. Sure, your nephew might be a hard worker, but make sure he’s shadowing someone you trust before installing that $300 sheet of glass.
5. Plan like it’s your job (because it is)
A lot of construction is planning. Obviously, there’s the building part, but nothing would happen without blueprints, schematics, team organization, and scheduling. Making sure you’re putting time into the planning phase can go a long way to saving you money down the road.
Look at everything from where you’ll source materials to local weather. Try to plan for every possible outcome so that, if someone does go wrong, you and your crew can handle it quickly without floundering.
Don’t be hesitant to plan for a helping hand. Use trusted co-workers, construction project managers, or other management to go through planning with you. Other points of view will often bring up things you may not have thought of on your own.
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6. Keep the energy high
When morale is low, performance will be as well. Crew members need to feel like they’re part of the team, not just another average worker. Make everyone feel important whenever you can.
Maybe that means you have company-wide meetings to discuss bigger-picture plans and ideas. Or, everyone gets free coffee and doughnuts on Friday. Whatever it is, make sure everyone on your crew feels valued.
7. Keep it real with your clients
Sheetrock is going to hit the fan at some point, and you’re going to have to let the client know. Humans are imperfect, and mistakes happen, but you also need to take accountability for your crew’s actions without pointing blame at any one person.
If something goes wrong during a project, let the client know while simultaneously showing how you’re going to rectify the situation. If you need to ask for more money, make sure to emphasize exactly what it’s going towards and why it’s needed.
8. Delegate properly
You have a team for a reason. If you feel like you need to handle everything yourself, this will only lead to considerable overruns in the future.
By delegating, you can better oversee everything as it’s completed and make sure that each task is getting the attention it deserves.
9. Equip your team with the right tools
Hiring the right people is just the first step. The second is making sure your crew is set up for success.
Give them the tools they need so they can focus on their jobs. Platforms like Hubstaff make that easy. With features like geofenced job sites, your crew can automatically clock-in the second they arrive on-site with their phone’s GPS.
This means they don’t have to try and remember when they got to work, and you don’t have to deal with messy time cards. It’s a win-win.
Keeping track of all your moving project management pieces is also essential. Hubstaff Tasks allows you to keep a rolling log of all your current jobs and enables you to put them into a workflow that actually works for you.
Since Hubstaff and Tasks seamlessly integrate with each other, it helps your crew members track towards specific tasks so you always know where the money is being spent.
Even after you implement all these things, cost overruns might still happen. That doesn’t mean this is all pointless.
When sometimes goes wrong in your process, it shows you another area that you can work on with your crew. Look at these moments in the process as learning points that enable you to grow your construction business, not problems.
By being honest about what went wrong and growing from mistakes, you can better prepare for future issues and prevent future cost and time overruns from happening.
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