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How to Avoid Cost Overruns in Construction

Cost overruns in the construction industry have become all too common.

According to research, large construction projects typically take 20% longer to finish than scheduled and can end up being up to 80% over budget.

With already tight profit margins, even a small cost overrun can have a significant impact on the financial viability of a project. In fact, 25% of construction firms report that they’re just 2-3 inaccurate estimates away from being out of business.

So, how can construction professionals avoid cost overruns and ensure that their projects are completed within budget?

In this article, we will explore the common causes of cost overruns and discuss expert strategies to avoid them. Let’s get started.

What causes cost overruns in construction?

Cost overruns can be attributed to various factors throughout the project lifecycle. Let's explore some of the primary culprits:

1. Inaccurate estimates

Accurate estimates are the foundation of successful projects. When estimates fall short of the actual costs, it can create significant financial challenges and project delays.

But fear not, we’re here to share some valuable tips to help you avoid the pitfalls of inaccurate estimates and set your projects up for success:

  • Harness the power of construction cost codes: Cost codes are a game-changer when it comes to project management. They will help you analyse past project data at a granular level to identify patterns, trends and factors that impact costs. With this knowledge, you’ll be able to create more accurate estimates for your projects going forward.  
  • Embrace the wonders of estimating software: Say goodbye to manual calculations and welcome the era of automation. By leveraging powerful software solutions like Procore, you can streamline your estimation process. With just a few clicks, you can now tap into a wealth of data, enhancing the accuracy and efficiency of your estimates.

common causes of construction cost overruns

2. Cost Escalation

Cost escalation refers to the increase in project costs beyond the original budget. It can be caused by various factors such as inflation, changes in material prices, increased labour cost or unexpected market conditions.

To proactively mitigate the risk of cost escalation and keep your projects on track, consider implementing the following strategies:

  • Allocate contingency reserves: Prepare for the unexpected by setting aside a portion of the project budget as contingency reserves. These reserves act as a safety net, allowing you to address unforeseen cost increases without hurting the overall project.
  • Monitor project costs: Keep a close eye on project costs with the help of project cost management software. This powerful tool streamlines expense monitoring, allowing you to track costs in real-time, analyse cost trends and make data-driven decisions to keep your budget on track.

3. Poor risk management

While project managers often create plans with the hope that everything will go as intended, the reality is often far from it.

Unpredictable factors such as poor weather conditions, unexpected site conditions, or the underperformance of a subcontractor can really throw a spanner in the works of your timeline and budget.

To prevent cost overruns resulting from poor risk management, construction professionals should consider the following strategies:

  • Evaluate project risks: Take a proactive approach by identifying and assessing potential risks. Factors such as inflation in material prices, delays with permits and potential labour shortages should be thoroughly evaluated.
  • Prepare backup plans: Don’t leave anything to chance. Develop backup plans and alternative approaches for potential risks. This includes creating alternative schedules, establishing relationships with backup suppliers or subcontractors and exploring different construction methods.

4. Scope Creep

Scope creep refers to the gradual expansion of project scope beyond its original boundaries. It often occurs when additional requirements, features or changes are introduced during the course of the project.

When the project scope expands without proper control, it can result in increased labour, equipment and material costs, as well as delays in project completion.

To effectively combat scope creep and prevent cost overruns, consider implementing these key strategies:

  • Clearly define project scope: Document specific requirements, timelines and deliverables agreed upon with the client to establish a baseline for evaluating changes.
  • Implement a change management process: Establish a structured process for evaluating, approving and implementing scope changes, considering their impact on the timeline, budget and resources.

implementing construction cost management software

How to avoid cost overruns on construction projects

In today’s digital world, there is a modern solution that will help you effectively manage and mitigate the causes of cost overruns. Trust us, it’s a game-changer:

Implement construction cost management software

Inefficient manual processes and paper workflows have long plagued the construction industry. McKinsey & Co report that the construction industry is the second least digitalised among all major sectors.

With such a heavy reliance on paper workflows, communication and information sharing is delayed.

The problem? Owners and contractors are often working from two different versions of reality. For example, 61% of business owners say they have to make decisions with outdated data due to slow manual processes.

On the other hand, construction cost management software provides a centralised hub where all project stakeholders can collaborate, track expenses and make informed decisions based on real-time data.

It offers several benefits that contribute to cost control and project success, including:

  • Streamlined budget management: Easily create detailed budgets, track costs and monitor expenses in real time. Identify potential cost overruns early and take proactive measures.
  • Automated cost tracking: Eliminate manual data entry and reduce human error. The software automatically captures expenses and updates financial records, providing accurate project cost information.
  • Real-time reporting and analytics: Generate real-time reports and analytics to gain valuable insights into project finances. Monitor cost trends, compare actual costs to budgeted amounts and make data-driven decisions to keep the project on track.

How we can help

At Lentune, we help construction companies streamline the way they handle project finances. Our project cost management and automation tools help you to save money, improve cash flow and increase productivity. We’d love to show you how it works!

In a live demo, we can answer any questions and show you how Lentune could grow your business.

Book a demo