Financials and budgeting

Cost overages: How to handle construction project budget overruns

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We know it sucks to admit … but the truth is, budget overruns are just one of those things that happen in the construction industry. Sure, you can try to prepare the best possible estimate, and then add 10-20% for possible overruns, but there’s always a chance you’ll eventually run into a situation where what you quoted simply isn’t enough. Here’s what to do when a construction project goes over budget.

What is cost overrun in construction projects?

A cost overrun (or budget overrun) refers to any unanticipated cost that causes a project to surpass the predetermined construction budget. They can be highly problematic, as budgets are typically agreed upon with clients and stakeholders in advance of project kick-off.

What causes construction cost overrun?

Construction project cost overruns are among the most common. Budget overruns in the construction management industry can happen for a variety of reasons, but they generally fall into one of the following categories.

Scope creep

This is common when dealing with homeowners who haven’t had much work done on their homes. They may follow you around -or catch you at the end of the day – to ask, “While you’re here anyway, could you…” It’s tempting to just say “yes” to minor requests, but before you know it, a $5 goodwill gesture could easily become $1,000 in extra work that must be paid for.

Hidden damage

When estimating a construction project, you should do your best to investigate the work that might be involved. But, sometimes, you will pull up a floor that looked fine, only to discover termites eating away the joists, or drill into a wall to install an electric box only to find black mold. These “discoveries” quickly add up in terms of both project timeline and cost.

Circumstances outside of your control

Snowstorms, hurricanes, and even run-of-the-mill summer thunderstorms can wreak havoc on a construction project. And they’ve all got one thing in common … they’re out of your control and can’t be accounted for during pre-construction project planning.

Miscommunications

The more people involved in planning a construction project, the more chances there are for miscommunications to occur. Whether you accidentally estimated based on the architect’s third draft rather than the fourth – and final – draft, or your salesperson promised granite countertops to seal the deal when you budgeted for butcher block, miscommunications can easily sink the budget.

Follow proper construction risk management procedures to mitigate the likelihood of miscommunication as well as other errors.

How to deal with construction project cost overrun

Unfortunately, even knowing the most common causes of cost overruns in construction projects doesn’t always prevent them. Here are a few ways to handle the situation to keep the consequences to a minimum.

Communicate with all involved parties early

As soon as you notice a problem with the budget, let the homeowner (and any subcontractors) know right away! Always open with a genuine apology and take ownership of the mix-up. Explain clearly and succinctly what happened, and then inform the homeowner of your plan to address the project cost overrun.

Offer solutions

Many construction cost overruns are relatively easy to solve, and most homeowners are reasonably flexible. The homeowner might just be as happy with vinyl flooring instead of tile in the bathroom, or a solid paint color rather than an elaborate wall treatment in the bedroom. You won’t know until you ask. Offer a variety of solutions that put the budget back on track by pulling money from other places, as well as give the homeowner the option to simply pay the difference. If the problem was genuinely your company’s and project team’s fault, be prepared to take the financial hit.

Create a change order

When you and the homeowner reach an agreement, be sure to get it in writing. Draft a change order that clearly specifies the agreed-upon solution, which both parties should sign. Keep a copy for your records and give the homeowner a copy.

Sooner or later, construction project cost overruns will happen to every builder. Fortunately, what truly matters to the vast majority of customers is not the fact that a problem occurred, but how it was handled. Honest communication and problem-solving can bring you to a resolution that works for both parties.

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Buildertrend Staff

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