Last edited 28 Jan 2019

Cost overruns in construction

In construction, cost overruns are relatively common, occurring when the costs being incurred are in excess of the amounts that have been budgeted for.

There are a number of possible reasons for this:

Construction contracts are often tendered and won on the basis of the lowest cost bid. Costs can then increase as contractors attempt to claw back some profit.
Construction projects are complex, involving a large number of different parties, components, requirements and so on.
They can last a long time, during which costs may change.
Deficiencies and inaccuracies in design.
Poor project management.
Changes in client requirements.
Unforeseen costs that only become apparent as the works progress.
Poor communication between project team members.
Tools and equipment and plant being unavailable, in poor condition, and so on.
Skilled workers being unavailable.
Inaccurate cost information that leads to incorrect pricing (e.g. material prices).
Adverse site or ground conditions.
Late or withheld payments.
Scope creep.

The different ways in which cost overrun can be described include:

As a percentage of the total cost.
As a total percentage including the original budget and the overrun amount.
As a percentage of the cost overruns to the original budget.

In order to address and manage cost overruns, it is important to identify what the root cause is. While specific events such as extreme weather conditions can cause delays or damage which may result in cost overruns, cost overruns are often the result of more complex project management issues that can be difficult to untangle.

The largest cost overruns tend to occur due to a change in requirements. If, for example, the client needs a space to be 20% larger than originally anticipated, then the cost is likely to increase by at least 20%. It is very important therefore to ensure that the project brief is comprehensive and that all project stakeholders accept it and agree on the specific scope of work and performance requirements.

Pre-construction estimates and careful project planning are then vital in terms of ensuring accuracy and confidence in the project costings, particularly if the project is complex and has the potential to change.

Design and construction issues can be mitigated in some cases by using project-wide project management, cost control software or building information modelling (BIM) as a way of ensuring all stakeholders are using the same up-to-date design information, as well as being able to make real-time adjustments.

Change orders may also be a reason for costs overrunning. A change order is work that is added to or deleted from the original scope of work of a contract, which alters the original contract amount and/or completion date.

If the one of the parties to a contract fails to perform as required by the contract, and this results in costs overrunning, this may constitute a breach of contract. A breach of contract may entitle the innocent party to make a claim for damages for the losses it has suffered.

Construction contracts will generally provide for the contractor to claim direct loss and/or expense as a result of the progress of the works being materially affected by relevant matters for which the client is responsible.