We’ve all seen the headlines when a giant construction project balloons 20, 30, or even 50% more than it was supposed to cost. If you work in procurement, project management, or construction management, it’s enough to make your blood run cold.
None of us ever want to see that happen to any of our projects, but the truth is, there’s a fine line between staying on budget and losing control of project costs.
According to a McKinsey report, the bad news is that up to 98% of large projects in the US are likely to suffer cost overruns averaging up to 80%. Most mega projects exceed their planned schedule by an average of twenty months.
The problem is, once things start to get out of control, it’s a slippery slope and very hard to put the brakes on.
That’s why project cost management is so important. But before we look at some project cost management tips you can use to stay in the black on your construction projects, let’s take a closer look at why project costs escalate so quickly.
Time Is Money
The most critical thing anyone involved in construction project management or oversight needs to understand is that in this industry, time is money.
When projects are quoted or bid, there’s not only a price tag associated with every task, process, and milestone but also a time frame. This means delays are often the number one cause of project cost increases.
Not only will contractors and trades claim more for delays that are out of their control, but you’ll spend more on on-site services from porta potties to site offices and temporary fencing. Even going a few weeks over the project deadline on a big project can increase costs enormously.
Then there might also be penalties, or if the project is due to have a tenant when it’s completed, there may be additional costs to rent suitable space while it gets finished. The bottom line is that if you want to keep project costs under control, you need to ensure that everything happens according to schedule.
Scope Creep and Design Changes
Another big reason project costs get out of control, and project cost management is so important is that things change along the way.
At the moment, these might seem like small changes, but over the course of a project, they can increase the total cost dramatically. Sometimes, these kinds of changes are not avoidable – like when a product that has been specified is discontinued or unavailable. But sometimes, design errors make it necessary for contractors to suggest changes and substitutions. The more changes there are, the higher the final bill is likely to be.
Spending longer on any project’s design and planning phase is always better for ironing out potential problems and double-checking the designs and specifications. That way, when you get bids from contractors and trades, they’ll bid on a project as close to the final version as possible.
Escalation and Supply Chain Problems
Escalation clauses and material-based price increases are always possible when planning and executing a project that takes many months or even years to complete. Still, we’ve seen even more cost overruns attributable to supply chain problems over the past few years.
It may be a few years since the Suez Canal was blocked to shipping traffic or Covid shut down the world’s ports and warehouses, but we’re still seeing the tail end of the chaos it caused. Inflation is not just a consumer project; the construction industry feels the pinch as hard as anyone else.
Cost escalation should always be factored into any long-term construction project and your contingency planning. If it’s already in your budget, you won’t have to scramble to allocate more funds when things get more expensive.
Managing Project Cost Increases
Project cost increases are a fact of life in the construction world, but while there’s no way to guarantee your project will stay on time and budget completely, there are proactive steps you can take to improve project cost management.
1. Hope for the Best, Plan for the Worst
Optimism is terrific, but it could be better when you’ve got project cost management on your mind.
While looking for the best possible deal on supplies, services, and bids is always a good idea, always build a generous buffer and contingencies into your budget. If you don’t need all of them, you’ll come away feeling like you saved a bundle, and if you do, you will only spend as much as you planned to.
2. Be a Master Communicator
Poor communication is one of the biggest reasons for project cost and time overruns, from minor to massive.
One lost email that isn’t addressed on time can trigger all kinds of other problems and delays, and in the construction world, problems and delays equal money.
3. Pay Close Attention to Productivity
The problem with construction projects is that every task, milestone, and trade is intertwined, with multiple threads to the project’s critical path.
Even seemingly minor productivity shortfalls can have a knock-on effect. Before you have time to react, your project is completely off schedule, things are piling up, and your team needs to make substantial schedule changes to accelerate work and get everything back where it should be.
Never ignore delays or productivity shortfalls, no matter how small they seem. In this case, molehills really can turn into mountains.
4. Get Software That Makes It Easy to Manage Project Costs
As a project owner or owner’s representative, you have many large construction projects on your radar at any time. It’s just not possible to attend every meeting, read every site instruction, or scan every Gantt chart that comes across your desk.
That’s why we built Owner Insite. It’s a project cost management platform that’s designed for people who have many different projects running at the same time. While it can give you in-depth information when you need it, it also gives you an instant snapshot of project health whenever you need it.
Log into Owner Insite to see “at a glance” information about costs and schedules to see which projects are doing well and which might need a little more input. This view allows people with lots of projects happening simultaneously to focus their attention where they are necessary when needed.
Contact our team to book a free demo to see how Owner Insite makes project cost management easier in real-time and how you can stay on top of everything and still leave the office occasionally.