As a builder, breaking ground on a new construction project can be both satisfying and nerve-wracking. From the beginning, you know you’ve done your best to plan ahead and ensure a smooth project however, in the back of your mind, you know that things can and often do go wrong. Some issues are minor and lead to headaches, but aren’t a big impact. Other issues can have a major effect on your project – and its profitability. Here are the top 5 reasons for cost overruns in construction management:
Unforeseen Costs and Underestimates No matter how much effort you put into construction budgeting and managing construction costs, it is rare that your actual total cost will be exactly what you estimated. Material costs can fluctuate with changes in supply and demand, and even tariffs. Labor costs can also increase when crews or crewmembers are replaced or if overtime is required to bring the project back to a planned timeline. You may learn of additional work needed on the job, only after breaking ground. Every bit adds up, and it can be made worse if you were too optimistic with the construction budget and underestimated costs. To reduce your risk of losing money on a project, always add line items into your construction budget for realistic and unforeseen costs. Construction budget software can be very helpful when building out your costs, especially if you include contingency or administrative cost codes in your budget.
Mistakes A simple fact of life is that people make mistakes and accidents happen. When your company is responsible for an error, you’ll have to absorb the cost. Whether materials were improperly installed or damaged after installation, or even if the blueprints were misread and something was built incorrectly, cost overruns are bound to occasionally occur. Also, if the mistake results in a compensable delay, you may be paying contractors for time that they’re not working. While you can’t fully prevent accidents, part of managing construction budgets is estimating a cushion for mistakes to prevent cost overruns.
Change Orders Customers can be indecisive, and even when they seem sure about their construction choices, your customers may change their minds during construction and select new finishes, or select a whole new location for their staircase! While we want to be accommodating to customer requests, we also need to be mindful of the cost impact of revisions to the plan. A simple change order to the master shower may have a domino-effect impact on the project that leads to cost overruns.
Financing Issues Even if your crew is working at peak efficiency and the project has been going off without a hitch, nothing will put the brakes on your project like financing issues. Through no fault of your own, if your lender isn’t able to quickly distribute capital at agreed-upon milestones of your project, you may experience costly delays while you await the next installment of capital. Make sure you work with a lender that can provide streamlined access to capital so financing won’t hold you back. A lender that funds weekly is a more beneficial partner than a lender that could take 30 to 60 days to provide your next draw payment.
Mismanagement This category might give some readers pause. After all, if you’re a project manager, or friends with your project manager, you wouldn’t want to think that he or she could be responsible for cost overruns. But in reality, even the best may occasionally struggle with a construction project. This could range from outside influences (i.e. natural disaster) to more personal issues (i.e. heavy workload). In a competitive world where workers are handling more and more, it can cause breakdowns that lead to cost overruns. To reduce your risk of mismanagement and the cost overruns that would follow, invest in continued training for your project managers and high-quality construction software to assist with construction budget management and project management.Ultimately, managing construction budgets to avoid cost overruns is part art, part science, and part luck. If you are a builder in need of construction software or financing to keep your project on track, contact Snap.Build® today.