Unforeseen Expenses: Managing Unexpected Costs in Construction Projects
They—whoever “they” are—always say to prepare for the unexpected. This is especially true when preparing for a new construction site project. In addition to keeping employees safe on the worksite and adhering to the projected deadline, proper planning must ensure you exceed your client’s standards while staying within budget.
However, cost control in construction management is rarely ever easy. According to McKinsey’s Construction Productivity Imperative Report, almost all commercial contractors reported that their projects experienced cost overruns. Even more troubling, these projects will, on average, run 80% over budget. This problem is so common that a report by KPMG revealed that just one-third of construction projects come within 10% of the intended budget.
So, what can improve construction cost management so contractors and clients meet their goals? Fortunately, Linarc’s construction management software can help you effectively identify and mitigate unexpected costs.
Here’s what we cover:
5 Common Causes of Cost Overruns
To avoid unforeseen expenses, there needs to be awareness of what causes them in the first place.
Five of the most common culprits behind unforeseen expenses in construction projects include:
- Project Design Errors: Poor communication can lead to design deficiencies. These are to blame for nearly 40% of construction disputes and can lead to cost overruns, subpar work, and even legal battles.
- Administration Mistakes: Another common cause of unexpected costs is administration errors. Even the smallest mistakes can snowball into significant expenses. For example, miscommunication concerning accounting, poor document management, and inappropriate micromanagement can all contribute to cost overruns.
- Inaccurate Estimates: In the race to win cut-throat bidding wars, construction firms may rush when compiling proposals. This could cause inaccurate project estimates, including inexact budgets and schedules. Other companies may build their estimates on a one-size-fits-all basis, increasing their risk of exceeding the initial budget.
- Communication Barriers: Without open lines of communication between all parties, it is nearly impossible to complete your construction project within budget, and to meet a client’s expectations.
- Poor Project Management: Faulty scheduling and project management problems can lead to unexpected costs in construction projects from low-grade performance. This includes poor subcontractor coordination, compromising work quality and causing accidents. Inadequate communication leads to errors and costly revisions, while insufficient inspections allow unnoticed low-grade performance, resulting in expensive repairs. Poorly planned timelines cause rushed work, delays, and increased costs. Inadequate risk assessment leads to unforeseen complications impacting progress, quality, and the budget.
Regardless of the cause, budget creep can lead to decreased operational efficiencies as resources become drained, deadlines are missed, as well as reaching higher levels of debt, unmet expectations, unhappy clients, tarnished brand reputations, or legal troubles.
To control cost overruns, contractors must have the proper practices to better understand their construction cost breakdown, improve collaboration and communication, identify potential problems, and proactively plan budgets.
Here are six ways to mitigate unexpected overruns.
6 Strategies for Preventing Unexpected Costs
1. Proactive Budget Planning & Progressive Budget Assessment
Proactive budget planning is crucial to proper construction management. It involves estimating, allocating, and overseeing every expense associated with a project to prevent unexpected costs, create accurate project scopes, identify necessary resources, enhance planning and decision-making processes, and ensure no deadlines are missed.
However, with so many moving parts, management teams can struggle to stay on top of labor, equipment, material, and overhead costs.
Leveraging advanced construction management software, such as Linarc, alleviates the burden. With our project financials feature, every person on your team can manage budgets and exposures securely. You can track cost revisions, estimates, and change order impacts from a centralized platform.
Proactive budget planning is essential for construction management, but it’s not a one-time task. A progressive budget assessment is necessary to ensure that the project stays on track and within budget. This assessment involves regularly reviewing the budget and comparing it to the actual expenses incurred. By doing so, the management team can identify any discrepancies and take corrective action to prevent cost overruns. With this information, the team can make informed decisions and adjust the budget as needed to keep the project on track.
Additionally, this software allows you to effortlessly make cost managers and accountants part of your extended team to better budget workflows and make confident decisions.
2. Comprehensive Risk Assessment
With detailed plans, it’s fair to expect they will play out as intended. Unfortunately, it’s never that simple. Unforeseen external and internal factors can derail construction projects and lead to cost overruns.
As such, comprehensive risk assessments are essential for pinpointing potential sources of unforeseen expenses.
Advanced assessment capabilities, including risk identification and impact analysis features, allow contractors to identify and mitigate potential problems before they even happen.
Construction management software helps contractors to minimize budget and exposure risks by anticipating potential problems and allocating resources accordingly. It generates future predictions in real-time, helping you closely monitor and better understand cash flow impact as your project advances.
3. Manage the Unexpected with Contingency Budgeting
Construction contingencies enable contractors to better prepare for the unexpected, helping them stay on budget and prevent cost escalations. A contingency is a specific amount you build into your initial cost estimate, allowing you to handle unforeseen expenses without exceeding the budget.
Linarc’s budget management tools help contractors allocate contingency funds for unexpected expenses. This ensures you can handle—and pay for—unanticipated challenges and keeps your project on track.
Our software also tracks and manages contingency budgets, providing effective cost control throughout the entire project lifecycle.
4. Effective Change Order Management
About 35% of projects experience at least one significant change order. Whether it’s something that has been added or removed from your original scope of work, change orders can cause unexpected expenses. However, contractors can’t ignore these changes or tell their clients no. They have to think on their feet and devise a swift solution.
Linarc has you covered. Our software lets you track change order impact on a centralized budget manager, including time, scope, design, and value engineering change orders.
Our change order management feature provides a powerful, cost-effective solution to process, track, and manage change to keep your project moving forward effortlessly while minimizing cost overruns and delays.
5. Real-Time Cost-Tracking and Reporting
Real-time cost tracking and reporting improve transparency and communication while allowing you to see where every dollar in your budget is going. This ensures you’re not spending money on unnecessary equipment, materials, or labor.
Our cost-tracking and reporting capabilities provide contractors with up-to-date insights on project expenses, allowing you to monitor costs closely, analyze trends, and make data-driven decisions to reduce unforeseen expenses.
6. Improved Collaboration and Communication
As previously mentioned, poor communication is one of the leading causes of construction cost overruns.
The construction industry is highly fragmented, and essential project details might not be relayed to clients or team members, leading to uncoordinated processes. This can cause omissions or errors in construction documents, quantities and pricing mistakes, and cost overruns from rework or repairs.
Linarc’s collaboration software tools facilitate seamless communication among project stakeholders. Our software features collaborative project workspaces, allowing each team member to share and access important documents.
Linarc brings all your discussions into one accessible location, creating a single source of truth for your project and ensuring prompt identification and resolution of potential cost issues.
Enhanced communication ensures everyone involved in a construction project is on the same page. This helps to eliminate design errors, streamline admin tasks, and break down silos.
Put a Stop to Unforeseen Expenses
Linarc’s software gives you everything you need to prevent cost overruns. Our solutions allow you to predict future problems, closely track and monitor every dollar, allocate contingency funds, manage change orders, and improve collaboration and communication.
Want to learn how we can help you effectively control and mitigate unforeseen expenses? Request a demo today.