Construction cost overruns can derail your project if you don’t address them early, but how do you know when to cut your losses? Sometimes compromise is necessary to ensure a project meets its deadlines. If changes, errors, delays or other challenges are causing significant budget overruns, you may need to consider alternative options to save money.
When should you cut your losses to meet deadlines? How can you work with stakeholders to navigate and prevent budget overruns?
Causes of Construction Cost Overruns
There are several common challenges that cause construction project budget overruns. It’s vital to understand these leading root causes so your team can address overruns early.
Cost overruns usually fall into one of two categories — planning or unforeseen issues. For example, one common planning issue is unrealistic project scope. Project stakeholders might have asked for too much without allowing adequate time or funds. Similarly, your project budget estimates may have been inaccurate.
On the other hand, budget overruns can also occur due to factors your team can’t predict or control. For example, supply chain delays remain a frequent source of budgeting issues. Luckily, data from the Associated Builders and Contractors shows that the construction supply chain may be stabilizing as price fluctuations slowed in 2023. It’s still possible for unforeseen supply challenges to increase project costs, though.
Likewise, design errors and rework can also lead to significant construction cost overruns. Sometimes these adjustments are due to simple human error, but other times rework is caused by a late-stage design change. This type of situation often arises as a result of poor communication or project scope issues.
Finally, construction cost overruns sometimes result from factors outside anyone’s control, such as severe weather incidents. Smaller issues like frequent equipment breakdowns or injuries on-site can also add up over time.
When to Cut Your Losses On a Construction Project
How do you know when it’s time to cut your losses and compromise on a construction project? Compromise is sometimes necessary to make sure your team can meet project deadlines. You don’t want to wait until the last minute to decide to start compromising on certain requests, but you don’t want to throw in the towel too early, either.
The best strategy is to keep track of your construction project budget and watch for some red flags. These incidents can indicate it may be time to make a judgment call about how to best proceed on a project.
For example, if your team is more than halfway through a project or already over budget, think carefully before agreeing to any design changes. If project stakeholders demand late-stage changes, try to reason with them and explain that the project is already experiencing cost overruns.
Design changes generally get more expensive the longer a project goes on. Beyond the halfway point, you are more likely to need to cut your losses. Unless a late-stage change is critical for safety or stability, consider trying to negotiate a compromise with the stakeholders.
Sometimes it helps to create rules about when you are going to cut your losses rather than pouring more money into challenges. A great example is the 50/50 rule for equipment repairs. If a vehicle or piece of equipment breaks down, you can either repair it or replace it. The 50/50 rule says that if a repair is going to cost greater than or equal to half the cost of the equipment itself, you should replace it rather than repair it.
Using guidelines like the 50/50 rule can help you create clear boundaries that determine when it’s time to cut your losses. For example, you can determine a maximum overrun amount before starting a project or decide that changes or updates can’t cost more than a certain amount. Good communication with stakeholders is crucial for any rules like this to work.
When to Spend More Money On a Project
There are times when it is worth it to invest a little more money into a project, even if you are going over budget. For example, never compromise on safety. No deadline is worth risking your team members’ lives.
The same goes for structural safety. Some design changes are purely aesthetic or a matter of stakeholder preference. However, in cases where a design change is vital for a building’s stability, it’s usually worth investing the extra money.
As a general rule, you want to do everything you can to make sure stakeholders get the structure they paid for in the safest, most cost-effective way. Try not to compromise on building quality.
How to Compromise and Meet Deadlines
When you do decide to cut your losses on a construction project, you may wonder how you can compromise to meet your deadlines. What are you going to skip, remove or downgrade? How you determine what to compromise on can vary somewhat depending on the scale of the issue. If it is major enough to create a significant cost overrun, you may need to work with project stakeholders to find a solution that works for them.
The first step is to analyze what the client or stakeholders want. Consider why it is not feasible. If the cost overruns are due to a client request, consider whether there are parts of their changes you can manage within project deadlines. Assemble a couple of compromises to offer the client.
The next step is to get in touch with the client or stakeholders to discuss the situation and your proposed solutions. Make sure you clearly explain why a certain request isn’t feasible or what is causing significant cost overruns. It may also help to reassure your stakeholders that you are simply trying to make sure their project stays on track and within budget, rather than cutting corners.
Lay out the compromises you created and ask the stakeholders for their feedback or any ideas they might have. They may be more willing to work out an alternate plan once they get an idea of what is possible within the project specs. Clients who want to prioritize budget are often open to foregoing certain aspects of their design if it is going to increase the cost excessively.
How to Prevent Future Budget Overruns
After resolving construction cost overruns on your current project, you can take steps to prevent them in the future. There may still be situations like severe weather or supply chain issues, but the most common causes of overruns are preventable.
For example, consider using technology to increase visibility and improve communication. Building information modeling (BIM) can help prevent late-stage design changes by ensuring everyone has a clear understanding of the design before construction begins. This is especially important for stakeholders, who may otherwise struggle to visualize a project and plan out design features effectively.
Additionally, on-site tools like IoT sensors can help you identify inefficiencies that often contribute to cost overruns. For example, you can use IoT to monitor vehicle performance, which allows you to spot inefficient fuel consumption and catch maintenance issues sooner. While tech like this requires an initial investment, it can pay off in the long run by preventing large-scale construction project budget overruns.
Navigating Budget Challenges in Construction
Construction cost overruns can be frustrating, but it’s possible to resolve and minimize them. Start by figuring out the cause of budget overruns. If it’s client requests, take time to analyze them and communicate with stakeholders. If a change or expense is not necessary for safety or stability, it may be worth compromising on it rather than going further over budget.
