Construction projects are no strangers to budget overrun.
In fact, research by Bent Flyvbjerg for his book How Big Things Get Done shows that only 47,9% of major projects are delivered on budget. This number suggests that the issues are more of a habit than a problem. But with increasing material costs, ongoing labor shortages, and other issues, it’s become increasingly important that the factors that are creating budget overrun are addressed.
In recent years, more construction companies are making use of software to prevent budget overruns. And although these types of software can provide valuable insight and help keep things on target, implementing technology alone isn’t enough to fully remove risks.
The most common causes of exceeding a budget suggest underlying issues within a project, so it’s more important to understand and address the causes directly. Here are 6 of the biggest reasons for budget overrun facing US companies.
Inaccurate Initial Forecasts
It can be tempting to rely on over-optimistic forecasts to seal a deal. This immediately puts any team at a disadvantage in working towards an unrealistic target, making it easier for them to find themselves over-budget.
Making forecasts also depends on data that reflects recent market information. Having incomplete, out-of-date, or even incorrect information all cause inaccurate forecasts and make it harder to stay on target.
Instead, businesses should try to operate realistically and ensure the collection and application of accurate, up-to-date reports.
Scope Changes
As projects progress, they are always at risk of scope creep. As the client’s expectations or wants change, the construction company must be able to make these adjustments. As well as this, unclear initial scope projects can add to the uncertainty and make matters more complicated.
These changes force additional costs, and as they add up, companies can find their budget quickly spent, only to find themselves having more work to do with less money. Not just risking budget overrun, but risking damaging relationships with clients
Clear tracking and logging of scope creep should be a priority in project management. Knowing how the scope is changing is key to avoiding overspending.
Poor Cost Visibility
Due to poorly implemented technology or outdated practices, many companies still rely on informal and haphazard tracking of finances. This means that data, even when it’s connected, is at risk of being incomplete, inaccurate, or inaccessible.
This fragmentation across multiple systems can lead to errors in reports. These errors can add up and mean that the true cost of the project isn’t known, not just making an overrun more likely, but also preventing the team from understanding how it happened or when.
It is good business practice to make sure that reporting is consistent, from bigger expenses to smaller purchases, so nothing is missed.
Resource Misallocation
Resource allocation is a vital part of project management. Despite this, inefficiencies in how the workflow is handled and a lack of flexibility to reassign as the project progresses. Leaving one team working with too little, and another working with too much.
An Imbalance within the team can cause delays and frustration among staff. This can put teams at increased risk of labor shortages and of being unable to meet deadlines. These missed deadlines lead to increased costs and push budgets over.
Project management should try to be proactive and consistent with their assessment of workflows and progress as well as having a willingness to be flexible.
Communication Gaps
When a project needs to be done by multiple teams, its progress and completion depend on how well the teams communicate. Poor communication puts teams at risk of misalignment and leaves them not knowing how things are going and what needs to be done.
Inconsistent and inconvenient communication methods, as well as practices that vary from team to team, put them at risk of duplicating work and experiencing excessive hand-off times. These factors increase delays and increase work costs.
Businesses should implement and encourage a clear, consistent method of communication and set expectations across teams.
Reactive Decision Making
Many construction companies still rely on their managers’ ability to react to sudden changes and issues. Despite collecting data from previous projects, it is ignored and not used to forecast and predict for upcoming projects.
Although making good reactive decisions is a valuable skill, it means that when an issue does arrive or an action needs to be taken, it is still a surprise to the team. Decisions made in these situations are at high risk of being expensive or temporary fixes that require attention later on.
To help avoid this, historical data should be actively used to build future plans and set budgets, avoiding repeated mistakes and the need to react to them.
The budget overrun isn’t attributable to a single cause. Instead, they can be found by identifying consistent, repeatable factors that add up over the course of the project. Being able to spot and either plan for or remove these patterns helps make managing finances easier and gives your team the best chance at delivering projects on time and on budget.
