How many construction projects go over budget?
Statistics will tell you that 85% of construction projects go over-budget.
But Why? What are the mechanics behind project cost overruns and project schedule delays? Plenty of experienced professionals engage in dialog about this very topic every day and try to arrive at conclusions about how to stop projects from going over budget. In this article I’d like to shed some light on the underlying workings as to the root causes of cost overruns and schedule delays on construction projects. In order to tackle the problem of how to eliminate overruns, it’s important to understand the main reasons why they happen. There is clearly no simple answer to these questions since every project is unique and the influences that trigger overruns can vary tremendously. Luckily, however, there’s been quite a bit of research and experimentation around this exact problem since it is a pervasive issue that so many businesses large and small struggle with. As a result, there have emerged some key factors we can point to that are the major contributors to projects going over budget and suffering schedule delays.
Over the past few decades, projects have changed in many ways – they’re bigger, more complicated, and subject to a far greater degree of regulatory, compliance, environmental and safety implications that add further layers of complexity. Unfortunately, the construction industry hasn’t been one to keep up with the need to adopt technology to effectively manage the increased risk associated with these increased complexities, so continues to suffer the consequences of a reputation for unreliable results.
Some in the industry will have you believe that overruns are simply a result of project changes. Strictly speaking, project changes are of course a significant contributor to projects going over budget, however for the purposes of this discussion, I’d like to separate the idea of a known and approved change in project scope that ends up modifying the project budget and schedule, from budget overruns and cost variances that occur due to bad planning, management, and a lack of controls.
Death by a Thousand Cuts
It’s key to first understand that cost overruns and delays don’t just suddenly happen: they happen continually – mostly in small incremental chunks – throughout the life of the project. It’s rare that any project manager can pinpoint a small handful of major events that compromised the project’s overall successful execution. Most always, it’s many small things that fly under the radar that are not addressed early enough to be corrected before they balloon into bigger issues weeks or months after they happen. These issues don’t just happen during construction either; they are also often baked-into the initial planning & final close-out phases, along with every stage between those. To get to the bottom of why, let’s look at 5 major triggers that cause cost overruns and schedule delays.
- Inaccurate schedule & budgets
- A lack of real-time visibility and control
- Poor methods to measure progress and forecast
- A lack of well-defined processes
- Insufficient historical Information
5 Key Triggers that Cause Project Overruns
1. Inaccurate Project Schedule & Budget
With tight timelines looming, project stakeholders are often impatient to get construction started so will pressure the project team to hurry through the planning process. It’s common to underestimate the amount of upfront planning that needs to happen before there’s any action at the jobsite. Cutting corners during this phase, however will only lead to faulty schedules, incomplete designs, and rushed estimates that steer the project towards an overrun from the get-go. Ensuring there is sufficient diligence during the preconstruction phase will lead to more realistic estimates, and more collaboration with contractors, engineers and architects to safeguard there is satisfactory input from those that can highlight flaws in overly-optimistic estimates. It will also pave the way to a more thorough design that reflects the scale and complexity of major projects – thus ensuring the project schedule & budget is accurate.
2. Lack of Real-Time Visibility and Control
Tracking all a project’s costs and activities on a daily basis can be a burden on those doing the actual work and is often avoided or dismissed as an unnecessary clerical task. Without accurate projected costs however, there is no meaningful way to gauge the costs, hours and progress completed on a project at any point in time. While site personnel such as construction managers, may be physically present in the field to see progress as it’s completed, it is impossible for them to tabulate the financial or schedule impact of a day at the jobsite. Real-time project information leads to real-time control and accurate cost projections. Project cost control is what enables project managers to make decisions on the ongoing health of a project. Decisions that include taking corrective action in a timely manner. Not having to wait until the end of the month to find out what happened weeks ago is the kind of information that becomes the critical element of managing successful projects. When something goes wrong on a project, the size of the impact that it will have on cost and schedule is exponentially related to how fast it can be corrected. In other words, every day that goes by without fixing a problem will accelerate the budget impact.
3. Progress Measurements and Forecasting
Once a project is underway, the execution phase should be thought of as an iteration of incremental periods where at the end of each period there is a process of measuring, forecasting and reporting. Much like how accountants approach period reporting of the fiscal year of their company, a major project needs to be broken into similar incremental cycles. Projects differ of course, in that there is the idea of a timeline of completion for all activities and the overall project itself. Where each activity sits on its timeline of completion at each reporting period, is critical information to know where you’re at on the project. Once the physical progress (percent complete) is known for any activity, project controls can then provide an accurate project forecast. Not having an accurate project forecast is a bit like driving to someplace you’ve never been without regularly checking the map to make sure you’re on the right road and going the right direction. And with that information you’re able to continuously assess how long it will be before you get there and whether you need to correct your course.
Without regular progress measurements and a reliable project forecast, project managers have no visibility into the current projected costs and whether the project is even on plan or not. Like driving down the road with no real clue where you’re going, but crossing your fingers, hoping for the best. This leads to the most insidious and avoidable types of budget overruns as they are unaware of problems as they happen and are thus unable to course-correct. They are also unable to report on this information to key financial stakeholders to make them also aware of pending challenges.
4. Lack of Process
The key elements of good project oversight include thorough planning, budgeting, tracking, measuring, forecasting and reporting. All of these components are managed by a team of people that are resident both in the office and the jobsite; and are often in different business units or even different companies. The thread that holds everything together is a well-defined process that makes expectations and ownership of duties clear and transparent to all team members and stakeholders.
Without a solid process, things get missed, key deliverables fall through the cracks, and the project gets compromised. This is where project budget overruns happen.
Companies that grow from managing small projects to big projects over time often find themselves managing the bigger projects in the same way they managed the small ones – they just throw more people at it without really thinking through all the complications that emerge with more people on the job.
5. Insufficient Historical Information
It’s a common human error to charge blindly into the future without first consulting past experiences and learning from the successes and failures of previous projects to ensure mistakes aren’t repeated over and over. Consider the following examples of what can be gleaned from past projects:
- Stop hiring poor-performing subcontractors
- Know what you paid in the past to get a benchmark for what you should be paying now. For example, average price paid for certain materials over the past year.
- Weather challenges that caused delays
- Labor availability. It may be that in certain areas there are can be a scarcity of skilled labor to fulfill the requirements of a contract.
- Repurpose designs and models. If the new project has an element that is identical to a previously completed project, reuse that design to save money and time.
- Insert better processes where things fell apart in a previous project
- Take advantage of better technology to offload labor-intensive activities that can be done by a system rather than a high-paid person
There are clearly dozens of further examples of areas that can be improved upon by simply recording information that can be utilized to improve each successive project.
At 4castplus, we provide powerful project controls tools to analyze the current, learn from the past and predict project outcomes. With multiple forecasting methods, time-phased planning, EVM, and a wealth of reporting options, you’ll have the critical tools to control project cost and schedule. Call us today for more information.
Updated on November 25, 2022 by Alice Chin