Are you losing sleep over your construction budget?
You’re not alone. Going over budget must be any owner’s or construction professional’s worst nightmare. In this post, we will talk about 4 common reasons construction budgets get blown:
- design errors
- false estimates
- unforeseen conditions, and
- poor change management
Luckily, all 4 of these hazards can be mitigated with solid project cost management practices. There is an additional factor that affects many projects: increase in scope. As this is within your control as the owner, in this article we’ll focus on the four hazards noted above and how they can be managed.1. Design errors
A project’s design comprises inputs from a range of disciplines, such as architects, structural, and MEP engineers, and others. Within each field, there may be several draftspeople who work on their piece of the jigsaw. With so many people contributing to the overall effort, human error can go unseen. What’s worse, drawings from different consultants may “clash” if their building components fail to interface correctly.
Neglected blunders such as these can surface as unbuildable scope during construction and trigger costly change orders. Apart from bearing the redesign costs, the project’s budget will have to be stretched to pay for the removal and reconstruction of finished work, if needed.
How can design mistakes be prevented?
Human error may be difficult to foresee and prevent internally, with so many consultants working on one project. That’s why an unbiased peer review goes such a long way toward catching blunders. A fresh set of eyes can see the mistakes and coordination issues that the design team missed. If they’re a veteran construction manager, the peer reviewer may also find ways to optimize the design’s cost-efficiency and constructability.2. False estimates
Your general contractor’s (GC) winning bid forms the project’s budget baseline. Whether it’s above or below your project budget, you will expect the GC to complete their work within the quoted price. But what happens when their estimate is incorrect?
There may be several reasons why a GC’s estimate does not align with reality. The most likely one is simple human error. Like your design consultants, a GC’s estimators get prices from a range of subcontractors, who may unwittingly exclude parts of work from their quotes. When their inaccurate price is carried in the GC’s estimate, the project is automatically set up for a budget shortfall. What’s more, the trades’ or the GC’s estimators may misread the plans and arrive at false quantities of materials, labor, and equipment.
If the project’s specs are vague and leave too much room for interpretation, the priced materials may be lower quality and cheaper than the owner intended. Such a lapse may come up as a money-guzzling change order once construction starts.
How can you ensure accuracy in cost estimation?
You cannot control what your GC and their subs price, except by demanding and paying for good quality documents from your design team. You – or better, your construction manager – can review each bid you get line by line and try to pick out pricing anomalies. If you’ve got 3 quotes, and one has a vastly cheaper glazing package than the other 2, you may feel excited about the low number, but it’s really a red flag. Such pricing oddities often show that the bidder omitted or misperceived the design requirements.
Another sound way to validate your bidders’ quotes is to perform an independent estimating exercise. A skilled construction project manager can produce this ‘baseline’ estimate and use it to verify the quotes you get. With a third-party estimate to compare against, your bidders’ pricing flaws will be easier to single out before you award the contract.3. Unforeseen conditions
Hazards that emerge during construction can lead to increased costs and project delays. These unexpected conditions and occurrences may include:
- site hazards, such as poor soil conditions, contamination, bedrock that’s too shallow or too deep
- existing defects, if the project involves a renovation or alteration
- environmental hazards, such as inclement weather, earthquakes, floods, and wildfires
- other hazards – fires, theft, vandalism
Identifying these perils, then eliminating them, or planning a mitigation strategy is referred to as “risk management” – a crucial function of a construction project manager.
With sound risk management policies in place, a project manager should be able to confront some of these hazards before construction begins. For instance, underground site conditions can be assessed through thorough geotechnical surveys. Weather-dependent activities can be planned for the right time of year.
On the other hand, some of these perils are hard to uncover without costly, invasive investigations. For instance, you won’t find rotten studs and joists without first removing cabinetry, fixtures, and drywall. Instead of paying upfront to deconstruct or demolish, it may be wiser to prepare for such hazards with an adequate contingency fund.4. Poor change management
Changes happen when the owner or the builder realizes that the work cannot go on per the current design requirements. More often than not, the changes stem from an owner’s change of mind about a project’s feature and are relatively innocent. However, other times, they are caused by the unforeseen conditions we’ve discussed or flaws in the design. These GC-initiated changes may add substantial new costs to the project’s budget and alter its schedule and scope. Sadly, you can’t avoid them all.
How can changes be prevented?
Some changes can be prevented long before construction, with a well-coordinated design and a clearly spelled-out contract. To soften the financial burden of changes that occur, the project manager must set up procedures that allow sufficient scrutiny of each proposed deviation, and have priced alternatives prepared ahead of time.
Not utilizing a construction budget during design and bidding is an unnecessary risk on any project. Hiring an expert project manager can help you mitigate the factors that often derail construction and lead to extra costs.