project overrun case study answers

Project Cost Overrun: Understanding, Managing, and Preventing

Navigating the complexities of project management requires acumen, strategy, and, above all, vigilance. A typical stumbling block? Project cost overruns – a scenario where spending exceeds the budget initially set for the project. 

This issue strains resources and tests the limits of a project manager’s resilience and problem-solving skills. 

In this comprehensive guide, we’ll explore the intricacies of project cost overruns and how to preempt and address them, paving the way for efficient and economically viable projects.

From common causes of cost overruns, particularly in sectors like construction , to recognizing early signs of budgetary deviations, we’ll help and project manager who needs to understand and overcome budgeting and project challenges.

In a hurry? A quick rundown of navigating project cost overruns

Defining project cost overruns and its risks, recognizing the signs of cost overrun and project failure risk, research, examples, and case studies, strategies to prevent and manage cost overrun, leveraging project management software, wrapping up, faq: demystifying project cost overruns, boost your team’s efficiency with hubstaff's productivity tools.

Project cost overruns are persistent across nearly all fields and industries, and their financial and temporal repercussions can be dire to a team or organization. They often stress project managers, who then need a quick answer immediately. If that’s you, this section should help.

Project cost overruns are when the money it takes to run or complete a project exceeds the budget. Determining an overrun requires understanding project-specific costs and company expenses like equipment or salaries.

Recognizing the signs of cost overruns becomes a pivotal focus, equipping project managers with the tools to identify deviations from budgets early on . Project cost management software that has budgets and tracks time and wages can help.

Warning signs of an ongoing or upcoming cost overrun:

• Unanticipated increases in resource costs
• Delays in project milestones
• Frequent adjustments to the project budget to accommodate unforeseen expenses
• Unforeseen requirements with budget costs
• Team stress and burnout
• Team members become less responsive, or updates become infrequent

Strategies to prevent and manage cost overruns include:

• Accurate project estimations
• Regular budget updates
• Contingency planning
• Resource optimization
• Assessments at the end of projects
• Internal knowledge and learning reviews

The good news is that unexpected costs don’t have to impact a project’s success. With planning, a budget overrun does not have to lead to project failure.

At its core, a project cost overrun occurs when expenditures surpass the initially estimated budget .

You’re likely to feel it both in terms of budget and timeline . When costs spiral out of control, it’s challenging to afford a project and to keep it on track. If your team struggles to hit deadlines, project managers should quickly examine the original project budget to protect against climbing expenses.

Exceeding the original project budget is often a combination of direct and company costs. Direct costs include materials, consultants, rentals, and other needs specific to this project. Typically, a direct cost is limited to a single project.

Company costs are those your organization will incur even without the project. The most common are salaries and wages, core equipment, and facilities. While your company will see these no matter what, it’s good to calculate them in project costs so that you can understand project profitability.

For example, if a project has no direct costs but costs more in employee time than it generates in revenue, the project will create a loss. Unless you planned on this loss, you’ve got a cost overrun.

Why do projects overrun?

Projects eat through their budget because things cost more than expected, there’s more work than expected, or the initial scope could not capture demands. Those break down into:

• Inadequate planning before the project
• Inaccurate project estimates
• A lack of controls during the project
• Deliverables not meeting requirements, extending timelines

Delving into the specific causes of project cost overruns is multifaceted.

There are some aspects you can control or may be able to foresee, like project estimates or scope creep. Unfortunately, there are also external factors that can delay or increase project costs. Economic changes, regulatory hurdles, new laws, and goods shortages are typical outside factors that can harm your project.

For a construction project , typical issues involve resource availability, weather disruptions, and complex logistics. While these concerns make projects susceptible to cost overruns, the best construction project managers will include time and budget buffers to account for possible problems.

Despite advancements in project management methodologies , unforeseen challenges remain inherent in project execution. The dynamics of project environments and evolving stakeholder expectations contribute to the complexity of estimating project costs accurately. Recognizing the potential sources of budgetary deviations allows project managers to adopt a proactive stance, implementing strategies to minimize the impact of these challenges.

Common causes of cost overrun

• Inaccurate initial estimations : Underestimating resources, time, or costs required for completion.
• Scope creep : Modifications to project scope, due to evolving requirements or shifting demands.
• External threats : Economic, regulatory, or unforeseen issues impacting project execution.
• Industry-specific challenges : Unique challenges within specific sectors, such as resource constraints, permitting issues, or weather disruptions in a construction project.
• Communication gaps : Ineffective communication causes project delays, misunderstandings, or misalignment in output.
• Poor risk management : Failure to identify and address potential risks during project planning.
• Unforeseen circumstances : Events beyond project team control, such as disasters or pandemics
• Lack of contingency planning : Absence of plans to address unexpected challenges.

Navigating the landscape of common causes of cost overrun requires a proactive approach to risk management. Regular risk assessments, scenario planning, and contingency reserves empower project managers to anticipate potential challenges and develop strategies to mitigate their impact. 

By fostering a culture of adaptability and resilience within project teams, organizations can enhance their capacity to navigate unforeseen circumstances that may lead to cost overruns.

Proactive project managers distinguish themselves by their ability to identify early signs of cost overrun. Close monitoring of project metrics, effective communication, and utilizing tools to calculate project overrun costs equip them to detect deviations from the budget promptly.

Project managers must possess a keen eye for early indicators of cost overruns to protect their success.

Here’s a short list to help identify signs of an existing cost overrun and warning signs that your project might be close to spiraling out of control.

Signs of an existing budget overrun:

• Consistent discrepancies between actual and projected expenditures.
• Unanticipated increases in resource costs, such as labor, materials, or equipment.
• Delays in project milestones or completion dates beyond the initially planned schedule.
• Frequent adjustments to the project budget to accommodate unforeseen expenses.

Warning signs of a cost overrun:

• Escalating project expenses : A noticeable upward trend in unexpected costs, eating into the buffer you created faster than expected.
• Changes in resource utilization : Significant fluctuations in resource allocation or without clear justifications may signal improper planning.
• Communication breakdown : Difficulty in obtaining accurate and timely project updates, possibly indicating challenges in tracking expenditures.
• Scope creep : Uncontrolled project scope expansion without corresponding budget adjustments.
• Project team stress or fatigue : Increased pressure on the project team to meet deadlines, potentially leading to rushed decision-making and burnout.
• Data issues : Discrepancies between reported project metrics and actual performance, indicating potential inaccuracies in financial tracking.
• Vendor or supplier issues : Delays or shortages in the supply chain that could create longer-term disruptions.
• Stakeholder concerns : When leadership or the client expresses concern over a project’s cost or timeline. 

Being vigilant and proactive in monitoring these signs enables project managers to intervene swiftly, mitigating the impact of cost overruns and ensuring better control over project finances.

Exploring real-world instances provides valuable insights into the nuances of project cost overrun.

You have a few good options for finding projects that will deliver valuable information. We’ve compiled some research, statistics, and case studies below. Beyond that, you can ask project management companies for case studies about their product. Those may help you understand if your problems are typical or if something novel is going wrong.

Vital statistics and research include:

• A review of nearly 1,500 projects found the average overrun is 27% .
• More than 15% of projects will struggle spectacularly, with a cost overrun of 200% .
• A review of construction project cost overruns in Iran and several Asian countries.
• 47.2% of PM trainees said schedule delays were the most significant project management issue, while budget overruns accounted for another 5.7%.
• A construction project review of common overruns, delays, and recommendations.
• Project type doesn’t correlate with overruns; communication issues have the highest correlation .
• A separate study found that communication issues contribute to project failures 33% of the time .
• Just 25% of projects come in within 10% of budget and 10% of timelines.
• 61% of project managers surveyed say that technology reduces project error and cost overruns.

Some reliable reports and project cost overrun case study examples are on that list. For academic research, you’ll find summaries on those websites. But, in many cases, you can click through for a cost overrun in construction projects PDF version of the report.

Mitigating the impact of cost overruns necessitates a proactive approach. Project managers must equip themselves with a repertoire of effective strategies for both prevention and management.

You’ll need skills in planning, risk assessment, project monitoring, team management, and consistent communication.

Project managers will sharpen some of those skills through existing workflows and strategies. Considering options like building accurate project estimations, scenario planning, and analyzing contingency reserves is essential. Exercises in these areas can help control and mitigate overruns or limit threats from scope creep.

Sometimes, cost overruns are inevitable. Here, effective management strategies like resource optimization and renegotiating contracts can minimize their impact.

You can prevent cost overrun on your next effort with robust project planning . However, keeping things on track requires strong project management and detailed communication.

Key strategies to prevent and manage cost overruns

• Conduct thorough research and analysis during project planning.
• Involve key stakeholders in the estimation process for diverse perspectives.
• Establish a collaborative approach within the project team to enhance accuracy.
• Anticipate potential challenges through scenario planning.
• Develop contingency plans to address unforeseen circumstances.
• Regularly update contingency reserves based on project progress and risk assessments.
• Implement real-time monitoring of project metrics such as timelines and resource utilization.
• Utilize project management tools to track progress and identify deviations promptly.
• Set up alerts for critical project metrics to enable timely interventions.
• Identify areas where resources can be reallocated or optimized.
• Conduct regular reviews of resource allocation to align with project budget constraints.
• Foster a culture of adaptability and resilience within the project team.
• Evaluate existing contracts with suppliers or subcontractors.
• Explore opportunities for renegotiation to align with budgetary constraints.
• Maintain transparent communication with contractual partners throughout the project.
• Establish a culture that encourages open dialogue and proactive problem-solving.
• Foster transparent communication within the project team to address challenges collectively.
• Collaborative decision-making enhances the team’s ability to respond to issues promptly.
• Conduct post-project reviews to analyze the causes of cost overruns.
• Document lessons learned and integrate them into future project management processes.
• Encourage a continuous improvement mindset within the project team.

Collectively, these strategies contribute to a robust framework for preventing and managing cost overruns. By adopting a proactive stance, project managers can enhance their ability to navigate challenges, maintain budgetary control, and steer projects toward success.

In the digital age, project management software is a powerful ally in the battle against cost overruns. Tools like Hubstaff Tasks streamline communication, enhance collaboration, and provide real-time insights, empowering project managers to maintain control over costs.

Utilizing a project management tool allows project managers to track project progress, monitor resource allocation, and identify potential deviations from the budget early on. When paired with time tracking , you ensure you accurately estimate current costs. 

Plus, knowing how long it takes people to hit milestones can make it easier to predict your next sprint.

The benefits of project management software extend beyond cost control. 

These tools facilitate efficient communication within the project team, reducing the risk of miscommunications or delays that could contribute to cost overruns. When project boards allow you to add documentation accessible to all team members, keeping everyone on the same page is more manageable.

We’re a big fan of looking for options that include comprehensive reporting and workforce analytics .

Project managers need reports on expenses, resource utilization, and timelines. That way, they can measure a project’s financial health and identify potential issues before they become major challenges. You’ll also craft a project strategy that can help you avoid a project’s scope creep concerns.

Utilizing project management software and tools like Hubstaff offers not only robust project management features but also customizable dashboards and integrations that cater to the unique needs of different projects. As organizations embrace digital transformation, leveraging the capabilities of project management software becomes a strategic imperative for successful cost overrun prevention.

Frankly, we cannot overstate the importance of understanding and managing project cost overruns. 

By embracing proactive strategies, leveraging technological solutions, and learning from real-world examples, project managers can navigate the challenges posed by cost overruns. 

Look for opportunities to apply these strategies at the start of your next project. Think about the tools you need to track expenses and metrics. Work to create success before your project starts by creating plans to mitigate cost overruns.

No one wants to have to stay late or squeeze a budget to get across the finish line. Hopefully, this provides some help to give you and your team a little breathing room on your next project.

Q: What is the primary cause of project cost overruns?

A: Project cost overruns often result from inaccurate initial project estimations and unforeseen circumstances. Despite planning, unexpected challenges such as project changes in scope, resource constraints, or external market shifts can lead to budgetary deviations. Effective risk management, scenario planning, and continuous monitoring are vital to mitigate these challenges and enhance budget predictability.

Q: How can a project manager identify early signs of cost overrun?

A: Early detection of cost overrun signs requires a proactive approach. Your project manager should closely monitor key metrics such as timeline, resource utilization, and expenses. Utilizing project management tools that offer real-time insights and analytics can aid in identifying potential deviations promptly. Moreover, fostering open communication channels within the project team allows for quickly identifying and resolving issues that could contribute to cost overruns.

Q: Can project management software prevent cost overruns?

A: Yes, project management software plays a pivotal role in preventing cost overruns. Tools like Hubstaff streamline communication, enhance collaboration, and provide real-time insights, empowering project leaders to maintain control over project costs. These software solutions facilitate efficient resource allocation, budget tracking, and risk assessment. A project manager can proactively identify potential risks by integrating project management software into workflows, allowing for timely interventions and preventing cost overruns.

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Mitigating Cost Overruns in Construction

Last Updated Aug 13, 2024

In construction, a cost overrun is when the amount spent exceeds the intended or budgeted amount . This is not just a minor hiccup in financial planning — it can reshape the entire project. Unfortunately, cost overruns in the construction industry are quite common, affecting projects of all sizes and scopes. From minor tenant improvements to complex multi-phase developments, surpassing the budget has almost become an expected part of the construction narrative . 

The reasons for overruns are as varied as the projects themselves, encompassing everything from unforeseen environmental conditions and material cost fluctuations to design changes and project management oversights. However, their impacts are wide-reaching. They not only strain financial resources but also affect the quality and execution of the project. Such impacts may result in legal disputes, delayed project completion, and in some cases, complete abandonment of the project. 

Understanding the nuances of cost overruns is crucial for all stakeholders involved in the construction industry, as it sheds light on the importance of meticulous planning, risk management , and adaptive project processes. 

In this article, we explore the impacts of cost overruns, as well as common causes and effective strategies to prevent them.

Learn more about construction budgeting .

Table of contents

The Impacts of Cost Overruns

The repercussions of cost overruns extend well beyond simple budget discrepancies. They create a complex network of consequences that impact not only the financial stability of stakeholders but also influence the punctual completion, overall quality, safety standards, and legal aspects of construction projects.

Learn more : What to Do When a Construction Project is Over Budget

Project Delays and Disruptions

Cost overruns often lead to significant delays and disruptions in construction projects, prolonging the project timeline and escalating indirect costs such as labor and operational expenses. This chain reaction of cost overruns on project schedules triggers a cascade of disruptions and additional impacts throughout the construction process.Extended timelines — or projects falling behind schedule — are a direct outcome of cost overruns. The need for additional funding and the time it takes to secure these funds can slow or halt project progress.

Also, delays often arise from needing to reevaluate and revise project scopes to fit budget constraints.

These setbacks not only affect resource allocation but can disrupt planned workflows and strain relationships with clients and other project parties. Furthermore, these delays can cause compounding effects on the supply chain and subcontracting, complicating inventory management and scheduling. 

Ultimately, cost overruns have a profound impact on every facet of a project, emphasizing the importance of strict budget control and effective execution strategies to ensure project success.

Deep Dive : How to Build Efficient Construction Workflows

Compromised Project Quality and Safety

Cost overruns can also lead to compromises in project quality and safety. To stay within the revised budget, cheaper materials or less skilled labor might be used, which can negatively affect the durability and functionality of the finished structure.

Safety standards are also often jeopardized when budgets become tight. Essential safety measures, such as adequate scaffolding, proper site maintenance, or the use of quality safety equipment, might be neglected to cut costs or expedite the schedule, increasing the risk of accidents and injuries onsite.

Cost overruns can lead to insufficient testing and quality assurance during the construction phase. This lack of thorough testing can result in undetected defects, posing risks to future occupants and users of the building.

Furthermore, when cost overruns lead to compromises in quality, the long-term consequences include increased maintenance and repair expenses. Projects built with lower-quality materials or subpar workmanship are likely to require more frequent repairs, adding to the overall cost of the project in the long run.

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Legal Implications and Brand Impact

If cost overruns result in lower-quality construction, the project may fail to meet regulatory standards and compliance requirements, potentially leading to legal challenges, fines, and the need for costly modifications post-construction. This not only has legal ramifications but also could severely tarnish a company's reputation, particularly among clients. Failure to adhere to the budget can erode trust and credibility, significantly hindering the company's ability to secure future work.

Furthermore, a track record of cost overruns can raise red flags for lenders and investors, making financing future projects more difficult. Lenders and investors are likely to be more cautious, leading to higher borrowing costs or difficulty in obtaining funds. Overall, the legal and reputational fallout from cost overruns can put businesses at a competitive disadvantage. It can affect their ability to bid for new projects, negotiate favorable terms, or maintain a strong position in the market.

9 Common Causes of Cost Overruns in Construction and How to Prevent Them

1. inaccurate cost estimates.

Accurate cost estimates are crucial as they lay the groundwork for establishing a project's budget and understanding its financial landscape. Cost overruns frequently arise when these initial estimates fail to capture the true financial requirements of the project , leading to significant budgetary discrepancies.

Often, this occurs for a variety of reasons. For example, if the data on which these estimates are based is incomplete or outdated, it can lead to miscalculations. Additionally, there can be a tendency towards overly optimistic assumptions regarding costs, disregarding the real-world complexities and unpredictability of construction projects. Furthermore, initial estimates often fail to adequately consider potential risks and uncertainties, such as unexpected increases in material costs or labor shortages. These omissions and inaccuracies in the initial budgeting phase set the stage for financial discrepancies as the project progresses, culminating in significant cost overruns that can derail the entire project's financial feasibility.

To prevent inaccurate cost estimates that result in cost overruns, employ detailed earned value analysis , leverage historical data for informed decision-making and conduct thorough risk assessments with contingency planning. Utilizing advanced estimation software can also enhance accuracy by providing detailed and dynamic cost predictions. 

2. Differing Site Conditions

Differing site conditions — or discrepancies between the project plans and the actual conditions encountered onsite — frequently lead to additional expenses and are a common cause of cost overruns in construction.

These unexpected site conditions can include a variety of issues, such as soil instability, hidden underground structures, archaeological finds more environmental contaminants. 

For instance, a construction team might discover that the soil is less stable than anticipated, requiring additional groundwork and reinforcement, which can significantly increase costs. Similarly, encountering buried infrastructure can halt construction, requiring additional surveys and possibly redesigns to accommodate these findings. These surprises not only add additional direct costs but can also lead to delays, further escalating the overall project expense. 

Adopting a proactive approach is key in mitigating the effects of unforeseen site conditions. 

Firstly, conducting comprehensive site investigations before finalizing the project plan and budget is crucial. This should include detailed geological surveys, soil tests, and environmental assessments to identify potential issues that could arise during construction. 

Utilizing advanced technologies such as ground-penetrating radar and 3D mapping can also provide a clearer understanding of what lies beneath the surface. Furthermore, engaging local experts who are familiar with the area's specific characteristics can provide valuable insights. 

Incorporating flexibility into the project's design and financial planning is also key. This involves setting aside a specific contingency budget to address unforeseen site conditions and structuring the project design to allow for adaptability, minimizing the financial impact of any necessary changes.

Lastly, transparent and continuous communication with all project stakeholders, including clients, contractors, and local authorities, ensures that everyone is prepared and responsive to potential changes that arise due to unforeseen site conditions.

3. Project Complexity and Technical Challenges

Complex projects often involve intricate designs, sophisticated materials, and advanced construction techniques, which can be challenging to estimate accurately in terms of cost and time. The more complex the project, the greater the likelihood of encountering unforeseen technical challenges that can disrupt the workflow. 

For instance, projects that incorporate unique architectural features or require specialized engineering solutions are prone to technical hurdles that may not have been fully anticipated during the planning phase. Additionally, these types of projects typically involve a larger number of stakeholders, including architects, engineers, contractors, and suppliers, each adding layers of coordination and potential for miscommunication. This increased level of coordination can lead to delays and additional costs, especially if changes need to be made during the construction phase.

Project managers must proactively prepare for possible technical challenges, particularly in intricate construction projects. This preparation entails extensive offsite testing of new technologies and materials through mockups and ensuring that all systems are expertly designed and implemented by certified professionals. 

4. Changes in Project Scope or Design

Often, clients may request additional features or changes to the design during the construction process. While some changes might seem minor, they can accumulate, leading to significant increases in both costs and time. For example, upgrading materials, altering layouts, or adding new functionalities requires additional labor, materials, and time.

To prevent scope creep, collaborate with all project stakeholders to define the project scope clearly and comprehensively at the beginning. This process should involve outlining detailed specifications, creating blueprints, and setting explicit guidelines on what is included in the scope of work and what isn't. It’s important that all parties involved, especially the client, agree on this defined scope and understand the implications of changes.

This shared understanding is crucial for maintaining project alignment and managing expectations. 

To safeguard the interests of all involved, incorporate these details regarding the project scope and potential changes into the contract. This serves as a binding guideline, outlining the procedures and consequences of any scope modifications. It provides a clear reference point for decision-making and helps prevent misunderstandings or disputes that might arise from unplanned changes. By formalizing the scope and change order management process in the contract, both the project team and the client are better equipped to handle scope adjustments in a manner that minimizes the risk of cost overruns and project delays.

5. Force Majeure

Unforeseen events, often classified as "force majeure" incidents, can have significant impacts on construction projects, including cost overruns. These events are typically unexpected and beyond the control of the stakeholders involved, such as natural disasters (earthquakes, hurricanes, floods), war, strikes, or pandemics. 

Unforeseen events can lead to significant delays on a project. For example, a natural disaster might damage a construction site or impede access, while a pandemic could lead to labor shortages due to health concerns or travel restrictions. These delays extend the project timeline, increasing labor and operational costs. Furthermore, natural disasters can cause physical damage to the construction site or structure, requiring additional funds for repairs and rebuilding.

These events also often cause serious disruptions to the supply chain which can further increase the cost of materials. If suppliers are unable to fulfill orders due to these events, finding alternative vendors usually comes at a higher price.

To mitigate the financial impact of these unforeseen events, including a force majeure clause in the construction contract is key. This clause should explicitly delineate what scenarios qualify as force majeure, encompassing a broad spectrum of potential unexpected incidents. 

It’s crucial to clearly dictate how risks and additional costs arising from the force majeure event are allocated among the parties involved. In scenarios where a force majeure event renders the project's completion unfeasible, the clause must specify the conditions under which the contract can be rightfully terminated. This ensures a comprehensive and fair strategy for managing the impacts of these events and safeguards all parties' interests.

6. Project Delays

Project delays are a frequent and challenging reality in the construction industry, with the majority of projects failing to meet their original schedule. A critical aspect of effective construction project management is understanding not only how delays lead to additional expenditures, and consequently, cost overruns, but how to mitigate them. 

Delays occur usually due to weather, regulatory approvals, or supply chain issues and prolong the project duration, leading to increased labor and operational costs. Delays often mean that workers are needed on-site for a longer period than initially planned. This results in additional labor costs, especially if workers are paid on an hourly basis or if overtime is required to realign with the project schedule .

The longer a project is delayed, the more likely it is that the prices of materials will increase due to inflation, changes in supply and demand, or other market factors. Furthermore, storing materials for extended periods can lead to additional storage costs or damage to items, requiring them to be replaced.

In some cases, delays result in contractual penalties, further increasing the project costs. Known as liquidated damages , these are the pre-agreed-upon amounts specified in the contract that the contractor must pay to the client for each day the project extends beyond the agreed-upon deadline. These clauses are frequently encountered in projects with stringent deadlines, including commercial or public infrastructure projects . 

Realistic project planning and scheduling are crucial to prevent project delays. This involves creating detailed timelines, allocating resources efficiently, and allowing for buffer time to accommodate minor delays that may arise. Proactively identifying potential risks that could cause delays and developing contingency plans can help to quickly address issues and reduce the impact of delays. Lastly, maintaining clear and regular communication with all project stakeholders, including subcontractors , suppliers and clients, helps to quickly resolve any challenges that occur during construction. 

7. Inflation and Market Fluctuations

Inflation is another factor that can increase the costs of construction materials and labor over the course of a project, especially in long-term projects. The prices quoted at the beginning of a project may become outdated as the cost of raw materials, labor wages, and other expenses rise, leading to budget overruns. Market fluctuations also impact the cost and availability of materials and equipment. For example, a sudden increase in demand for specific materials in the market, or supply chain disruptions, result in higher prices or delays in obtaining necessary items.

To safeguard against cost overruns stemming from inflation and market fluctuations, incorporate flexibility within the project budget, typically through a contingency fund, to accommodate potential cost increases. Proactive procurement strategies, such as acquiring materials early in the project or securing price lock agreements with suppliers, are also effective at preventing future price hikes. Monitoring market trends and inflation rates is key to foreseeing economic shifts, which allows for timely adjustments in the project plan and budget. Furthermore, negotiating fixed-price contracts with suppliers and subcontractors serves as a strategic measure to lock in prices, thereby shielding the project from the financial impacts of market and inflation volatility.

8. Regulatory and Legal Challenges

Construction adheres to a wide range of regulations, including building codes, environmental laws, and safety standards. Changes in these regulations during the course of a project can lead to unexpected work, such as redesigns or additional safety measures, thereby increasing costs.

Depending on the project’s location, obtaining the necessary permits and approvals can be a complex and time-consuming process. Permit-related delays can cause project stagnation, leading to prolonged timelines and increased costs, especially if labor and equipment are underutilized. 

During the predevelopment phase of a project, it’s important to develop a comprehensive understanding of all relevant regulations and legal requirements, including local zoning laws, building codes, and environmental regulations. Conducting thorough due diligence, including performing environmental assessments, early in the planning stage is crucial to pinpoint potential issues that could delay the project or require additional work.

9. Selecting Subcontractors Based Only on Price

Selecting the right contractor partners is crucial for the financial health of a construction project, and it involves more than just considering the lowest bid. When choosing subcontractors, it's important to prioritize finding the best fit based on their track record, expertise, and reliability. Evaluating their past project experiences, ability to meet deadlines, and quality of work can provide more value in the long run than simply opting for the most cost-effective bid. This approach not only helps in ensuring a high standard of workmanship but also reduces the risk of potential delays and additional costs that might arise from engaging less experienced or less reliable subcontractors.

Selecting the lowest bid without considering these factors can lead to various complications and inefficiencies. Contractors offering substantially lower bids may cut corners by using subpar materials or employing less skilled labor, compromising the project's overall quality and safety. This could potentially result in rework or legal disputes which escalate costs even further. 

Learn more: The Importance of Minimizing Construction Rework

The careful selection of subcontractors through a prequalification process involves a balanced consideration of cost, experience, reliability, and the ability to deliver quality results within the project's timeline and budget constraints. By prioritizing these aspects, firms can significantly reduce the risk of cost overruns and ensure the successful completion of their projects.

If a subcontractor is responsible for causing rework or incurring additional costs, the general contractor has the option to issue back charges. These charges are typically levied in scenarios such as delays attributed to the subcontractor, their inability to meet agreed-upon work standards, or when the general contractor must correct errors made by the subcontractor. To compensate for these additional expenses, the general contractor deducts the back charge amount from the payment due to the responsible subcontractor.

It's crucial to clearly outline terms and conditions regarding back charges in the subcontract agreement. This ensures that all parties are aware of the potential financial consequences of non-compliance or poor performance, thereby fostering a mutual understanding of the agreed upon work and reducing the likelihood of disputes.

Addressing Cost Overruns in Construction

Effectively managing cost overruns in construction involves not only understanding the root causes, such as scope creep, regulatory changes and market fluctuations — but also implementing robust project management practices and maintaining transparent communication with all project stakeholders. 

By proactively addressing these issues through detailed planning, risk assessment, and collaboration, construction firms can significantly reduce the likelihood of overruns and ensure the successful and timely completion of their projects. Ultimately, mastering cost management is key to maintaining financial stability, upholding a strong reputation, and securing long-term success in the construction industry.

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Construction Accounting

15 articles

TJ Forbes is a Senior Solutions Engineer at Procore, specializing in financials products, analytics, ERP integrations, workflows, reporting and accounting solutions. He previously worked as a financial manager and project accountant for Stiles, a commercial real estate firm in Ft. Lauderdale. TJ holds a Masters in Financial Management from Southern Adventist University.

Taylor Riso

57 articles

Taylor Riso is a marketing professional with more than 10 years of experience in the construction industry. Skilled in content development and marketing strategies, she leverages her diverse experience to help professionals in the built environment. She currently resides in Portland, Oregon.

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The financial stability of construction firms often hinges on their ability to effectively manage costs, a key factor in keeping projects within budget and securing profitability. The process of cost...

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• Project Management
• Time Management

5 Primary Causes of Cost Overruns

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A cost overrun is the sum of unpredicted expenses that exceeds initial budget estimates at any point throughout the course of project realization.

Cost overruns can be dangerous to project success since they imply that, for maintaining project activities, a firm has to spend funds intended for entirely other purposes at first. In the context of financial constraints, unexpected expenses may also provoke the growth of the organizational dept. Hence, it is pivotal to understand the reasons why cost overruns occur and address them accordingly.

In light of this, we have prepared a guide explaining how to prevent and calculate cost overruns.

What is Cost Overrun?

Signs of cost overrun, how to calculate cost overrun, 5 primary causes of cost overrun.

Cost overrun (budget overrun) refers to situations when actual project costs exceed the estimated costs. It’s essential that every project manager knows how to prevent, identify and manage project cost overruns, otherwise, they can cause project delivery delays and even project failure.

Learn how to master project cost management and avoid overruns from our free guide.

Project managers should know how to spot cost overruns early on. Here are some signs that your project is at risk of cost overrun:

• You don’t have a time and cost tracking system in place
• Project budget is not specified
• No contingency plan is developed and documented
• You don’t schedule and track project resources
• You don’t track costs for each task (at least with a work breakdown structure )
• You have never reviewed and learned from the previous projects’ performance

Calculating cost overrun is easy: you may calculate either the amount or the percentage of the exceeding costs in a following way:

Cost Overrun Amount = Actual Expenses – Budgeted Amount Cost Overrun Percentage = (Actual Expenses – Budgeted Amount) / Budgeted Amount * 100%

1. Improper Risk and Uncertainty Management

Troublefree completion of project activities by following a designed plan is a cherished desire of every result-oriented manager. However, this perfection isn’t that easy to attain – deep business waters are swarmed by all sorts of risks, which are often very easy to stumble upon but are difficult to cope with. Besides, in the environment that evolves apace and spawns new trends each month (if not more often), it becomes incredibly challenging to predict the outcomes of scheduled events.

Therefore, without careful environmental analysis and a risk response strategy, all project designs and approaches to management are bound to fail, regardless of how thoughtful and elaborate they may be. An unpredicted – either internal or external – may cause a direct financial loss and requires unexpected expenses for its handling. When this risk is significant and damaging enough, cost overrun is inevitable.

The best way to reduce the adverse impacts of environmental risks and uncertainty is the adoption of a valid risk management system that incorporates

• Comprehensive risk analysis allowing the identification of the most probable and relevant external risks,
• Risk mitigation and response plans focusing on the strengthening of weak areas in the company’s internal factors and increasing its adaptiveness to external changes,
• Contingency reserve development aimed to allocate a justified amount of money for the reduction of possible risk overruns.

Of course, managers cannot influence such potentially impactful external events as natural disasters and economic recession directly. Nevertheless, both internal and external risks must be paid equal attention during risk management. In this way, unexpected expenses will be less likely to occur and put the project’s success on the line.

2. Estimation Errors

Underestimation of future costs (or the making of overly optimistic estimates) is the primary cause of project overruns in a vast majority of cases. The main reason why estimation errors take place is forecasting biases, either intentional or unintentional. As noted by Condon and Hartman in their “ Playing the Game ” paper, these biases can be a consequence of

• Naivety – belief that everything will go as planned,
• Ignorance – lack of necessary knowledge and expertise,
• Deception – deliberate misrepresentation of the project’s expense picture to make it look viable.

It means that underestimation frequently occurs due to sponsors’ and managers’ eagerness to see their project ideas being brought to life. Those without prior experience in project management face an even higher risk of cost overruns. Inexperienced managers have nothing to compare their current undertakings with and, thus, are prone to make mistakes and miss some essential risk factors out of consideration.

To avoid cost overruns, aim to improve your cost estimators’ competencies and skills and increase accountability for forecast inaccuracies within your projects. More specifically, it would help to

• Allocate estimation responsibilities to experienced specialists as a means to increase rigor and decrease the influence of “gut instinct” on forecasting results,
• Encourage inter-professional collaboration among various stakeholders during the estimation phase,
• Determine who would have to carry cost overruns if they take place,
• Scrutinize and evaluate the created cost estimates multiple times.

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All in all, by taking time and effort to make initial cost calculation more precise and evidence-based, it is feasible to make sure that the project won’t surpass the estimated budget and that its outcomes will be positive.

3. Uncontrolled Scope Changes

Since the business environment is highly dynamic and rarely develops according to our plans, changes in projects and their scopes are usually hard to get away from. The unchecked growth of the project’s scope, also known as  scope creep , is a massive problem for project managers, and it happens on the following occasions:

Underestimated project complexity

If a manager lacks the understanding of the project’s nuances and is unable to predict its complexity, the risk of improper allocation of resources increases.

Imagine learning that your team must do much more than was expected to achieve formulated project goals only after the actual work begins. In this case, you will likely have to establish new deadlines and re-coordinate activities, personnel and technologies. Therefore, the need for additional expenses will arise as well.

Schedule extension

The misunderstanding of project content and nature is only one possible cause of deadline extension. Others include

• Emergence of new project requirements,
• Delays in supply of essential materials,
• Discharge of important employees, and many more external and internal events, both planned and unforeseen.

As such, a prolonged project schedule can be regarded as the primary sign of scope creep. It induces cost overruns as much as the handling of issues that called it forth requires extra efforts and funds.

Poor stakeholder communication

Improper communication and disagreeable relations between parties involved in the project’s realization end in the absence of clarity regarding project objectives, requirements and progress.

For instance, if employees engaged in the project do not fully comprehend its objectives and task approval parameters, they will tend to make mistakes. In turn, managers and sponsors will become dissatisfied with the performance results and will have to demand revisions and corrections from their subordinates.

Clearly, it is much cheaper to make things properly straight away than to remake them multiple times. Hence, inadequate stakeholder communication may give rise to not only scope creep but also large-scale cost overruns.

The success of the project in the context of constant change depends on how controlled that change is. Therefore, to prevent scope creep and consequent cost overruns, Agile Certified Practitioner, Chuck Millhollan recommends implementing a  change control strategy  that includes the following:

• Design of a lean project workflow in order to be more adaptive to alterations in the environment and keep away unnecessary complexities in the course of work;
• Definition of preliminary project scope, as well as the development and approval of scope documentation, to set more explicit boundaries and make more reasonable project change decisions;
• Application of a systematic approach to stakeholder communication that would integrate well-structured methods for requesting, evaluation and approval of project changes.

Additionally, to eliminate the risks of scope changes, it can be suggested to pay more considerable attention to the quality of time estimation and work progress monitoring. With this regard,  time tracking software , which enables managers to overview hours spent on various assignments, is very handy. It helps control how much work is already done and how much time is still needed, making it easy to detect the risk of changes in project deadlines and processes early enough.

4. Project Performance Failures

Small mistakes and fatal errors during the execution of project activities can occur due to multiple reasons, such as

• Poor resource coordination,
• Lack of essential skills and technology,
• Inadequate employee motivation and communication,
• Ineffective project execution plan,
• Absence of clearly defined operational metrics that could be used to standardize and evaluate employee / contractor performance.

Naturally, when something in the project goes wrong, managers have to invest time, money and effort to direct it back on the right track. In this way, big execution mistakes induce a significant risk of surpassing the estimated budget.

Elimination of causes for the abovementioned performance failures is the primary responsibility of project managers and leaders. Thus, to avoid the risk of cost overruns due to execution errors, a well-organized approach to leadership and project management is obligatory.

Overall, for a faultless work on the project, managers and leaders should systematically control EVERY project performance factor, starting from the hiring of skilled personnel and ending with the selection of appropriate progress assessment tools. For the latter, assume applying a piece of  project management software  that allows planning workflows, distributing workloads and supervising employee task performance all in one place. With its assistance, the administration of project management will become much simpler and more efficient.

5. Errors in Project Design

Project design forms the basis for the execution and management processes. It specifies

• Which contents the project must have,
• How it should be performed and supervised,
• What kind of outputs it is expected to produce.

Obviously, with flawed project design, it is naïve to anticipate positive project outcomes – even the most unnoticeable and presumably uncritical deficiencies in the initial plan are likely to be manifested at the later stages in the project’s life cycle, leading to performance failures and other problems provoking unforeseen expenses and jeopardizing project success.

As it is easy to guess, an antidote to cost overruns due to poor project planning is the creation of a proper, comprehensive project design. Besides scope definition, time estimates, communication and risk management strategies that we have discussed before in this article, a  perfect project plan  contains the following key elements:

• Idea justification,
• List of stakeholders and their needs,
• Outline of project objectives, requirements and deliverables,
• Definition of roles and responsibilities,
• Resource allocation targets,
• Description of quality assessment methods.

Most importantly, it is vital to conduct a detailed cost breakdown and develop an accurate  project budget . These two practices are the core elements of effective  project cost management  and a significant prerequisite for successful expense control throughout project realization.

Summing up our overview of the five leading causes of cost overruns, let’s recall them once more. The list consists of

• Inadequate risk management,
• Underestimation of project costs,
• Uncontrolled scope changes,
• Project execution failures,
• Errors in project design.

To prevent unnecessary waste of money when fixing mistakes and achieve the desired project outcomes, address the above issues promptly. Be sure to utilize the discussed solutions – they will be of significant aid in evading risks and enhancing performance efficacy.

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Case study: Time limits and cost overruns on a large-scale transport infrastructure project

Three years after the Rapibus was commissioned, the Board of Directors of the Société de transport de l’Outaouais (STO) mandated Strategia Conseil to conduct an independent review of the Bus Rapid Transit (BRT) project built in 2013.  

The objectives of the mandate were:  

• Clearly explain  cost and time variances  and their causes;  
• Identify the strengths and weaknesses of project management and governance; and  
• Present findings and make recommendations to influence the quality and performance of the management of future projects.  

The unforeseen circumstances encountered during this project’s implementation caused a significant increase in initial costs and an overrun of the announced schedule.  

The project: Deploying new transport infrastructure  

The Rapibus project was initiated about 20 years ago. The Outaouais region sees a lot of heavy road traffic, leading to congestion during rush hour and even during off-peak hours.  

The Communauté urbaine de l’Outaouais (CUO) mandated the Société de transport de l’Outaouais (STO) to improve the reliability and speed of public transit, rather than building an additional interprovincial bridge.  

Various studies have identified the integration of a dedicated bus lane within the existing rail corridor as the best technological choice. Essentially, the Rapibus project is a Bus Rapid Transit on a 15 km bidirectional track.  

At the request of Quebec’s Ministry of Transportation (MTQ), a feasibility study was conducted in 2004. An authorization in principle for the preparation of plans and specifications was then granted in October 2007. In June 2009, the preliminary and final draft design studies were submitted.  

Five months later, in November 2009, the MTQ granted a final authorization and announced its financial contribution to the Rapibus project: up to 75%, through its government assistance program for public transit. The City of Gatineau would be responsible for the remaining 25%.  

Over the years, several adaptations were made to the scope of the project. These adaptations led, among others, to an overrun of the initial schedule and an increase in expected costs.  

Summary of costs and delays  

The table below summarizes the cost and time overruns for the project.  

How can we explain a 16.2% increase in costs and a delay of over 25 months?  

Causes of schedule delays  .

We identified three main causes  explaining  the  schedule overrun .

1. Adoption of an u n r e a l i s t i c timeframe

The  initial  schedule was established when the project  scope  was not defined enough to clearly establish its duration.   This schedule should have been  qualified as  “provisional”, with a certain margin of error, rather than  a   fixed  duration.  Rather, t he 40-month duration w as   interpreted  erroneously  a s   being  “ a  realistic timeframe ”  for the project’s target schedule.

2. Lack of informed planning

The schedule for the final design stage, produced after detailed information on the project was made available, shows that the timeframes for design activities were significantly underestimated. Better planning  c ould have avoided a significant underestimation of the time required for design activities.

3. Lack of contingency in the schedule

The schedule should have  allowed for  contingency for  delay  risks . While it’s impossible to predict all unforeseen events, it would have been wise to perform a risk analysis at the preliminary project stage. Doing so would have  ex posed  the risks and quantified the likelihood of not meeting the 40-month target.  

Causes of cost overruns  

If we compare the projected final cost of $282 million with the target budget of $233.5 million, we calculate a variance of $48.5 million, or 20.8% of the budget. In summary, this $48.5 million difference is due to three main factors:  

• Cost escalation (± $18 million);  
• Increase in indirect costs in Phase 1 (± $23 million); and  
• Increase in direct costs in Phase 2 (± $7 million).

1. Cost escalation

The primary cause of cost overruns was the cost escalation factor. For work to be completed in 2016–2017, the $27.7 million budget (in 2010 dollars) must be indexed by $5.5 million, bringing the total amount to $33.2 million.  

Despite its importance, this rate is rarely taken into account in the project’s financial documents; the reference year of the dollar value is almost never mentioned. However, cost escalation has a very significant impact on the costs of a project, as it provides a measure of the true value of the work over time.

2. Increase in direct and indirect costs

In addition to cost escalation, the budget overrun was largely due to additional direct costs resulting from changes in the scope of the initial work. Underestimated indirect costs in areas such as the following were also a factor: – Professional services – Site overhead costs – Project management and funding  

The increase in indirect costs is certainly linked to budgetary underestimation, but also to a much-too-optimistic timetable (see above).  

Other factors impacting the project  

Project governance  .

The main challenge lies in the STO’s and its team’s ability to adapt to its new status as “project owner”. The shift from an operational role to a project management role for a transit system is  significant .  

While the STO had tried to set up an efficient and effective project-based organization, its limited experience in managing major projects represented a significant risk for stakeholders.  

This could have been mitigated  for example   by  adapt ing  the   project  governance  structure  to the  nature and size of the  pr oject  and  by  reaching  out  to  experts in  the field of  construction project management .  

Risk analysis

The  Rapibus  project  was the only one of its kind in  the P ro vince of  Quebec. Installing a rail line, two bus lanes and a bicycle path in an urban environment and in the same corridor,  as  well as  crossing 18  street  intersections, posed unusual challenges in and of itself.  

It was  s hould have  expected that the implementation process would be fraught with problems to be solved and  uncertainties to be addressed . Although the project definition documents (Feasibility Study-2004, Project Charter-2008 ,  and P/FD) contain ed  considerations and warnings about the project environment and certain conditions that may affect its feasibility, they were not presented as quantifiable risks.  

Risk analyses performed  at the various stages of implementation would have been  necessary . They would have made it possible to understand the events and certainly facilitate the management of the project,  in particular by  assessing each event’s potential impacts on the costs and schedule.  

Conclusion  

The 239 million -dollar  Rapibus   project  is  no doubt a   large-scale public transport project. There w ere  no  other  project s  in Quebec that could  h a v e   serve d  as a model.  

The implementation of this type of public infrastructure project poses major technical and organizational challenges, which further justifies the need to establish an appropriate and transparent  project  governance structure and  to  be supported by experts in construction project management.  

T he success of any project, especially  a large-scale project, requires a well-informed and rigorous management framework. Adopting a structured approach early in the process helps to position the project in relation to its design and implementation progress.  

In conclusion, we  ap p laud  the STO’s initiative to conduct a  post – mortem  analysis of the project to highlight the strengths and weaknesses of its management  processes  and governance mechanisms.  

The main lessons to be learned from this project are:  

• Establish  project  governance that is adapted to the specific requirements of the project;  
• Have a realistic budget and schedule before starting a project (have an independent evaluation, if necessary);  
• Strengthen the application of project management best practices;  
• Obtain  the support of external experts who can  p rovide  advi c e   t o   the client’s  internal  projec t  management t eam;  
• Apply a risk management approach to all phases of the project;  and  
• Ensure informed  and rigorous f ollow -up s  on all project activities by the project manager.  

Note: This case study is based on the Strategia Conseil report, which is  available online (in French only) .  

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When parallel schools of thought fail to converge: the case of cost overruns in project management.

1. Introduction

• What issues are contributing to the ideological divide in cost overrun research in PM?
• How can institutionalised diversity within PM fields contribute to the narrowing, rather than expansion, of theoretical gaps in PM?

2. Literature Review

2.1. diversity and fragmentation, 2.2. institutions and specialisation, 2.3. ideological distancing and encapsulation, 2.4. the ideological “war of words”.

“it conveys a deterministic type of thinking we would have thought extinct in the academia after the probabilistic revolution has shown that nothing is deterministic in nature. The claim that we must know “what will occur” to make an estimate is akin to insisting on understanding the world in terms of Newtonian physics after quantum mechanics, something you would not get away with in physics.”

4. Case Study

4.1. the emergence of engineering evidence science and social behavioural science, 4.2. ideological distancing: on de-bunking “fake news” in a post-truth era.

“This overly critical paper received a strong comment by another group of distinguished scholars: Bent Flyvbjerg, Atif Ansar, Alexander Budzier, Soren Buhl, Chantal Cantarelli, Massimo Garbuio, Carsten Glenting, Mette Skamris Holm, Dan Lovallo, Daniel Lunn, Eric Molin, Arne Ronnest, Allison Stewart and Bert van Wee, which was also published in 2018 with the title, “Five things you should know about cost overrun.”” (ibid, pp. 174–190)

“Love and Ahiaga-Dagbui [ 5 ] may dislike research results like these because they identify members of their profession as unethical.” (p. 184)

“It is striking that this long-standing pattern (of cost overruns), which appears to prevail worldwide, continues unabated despite major improvements in technical capacity for cost estimation–suggestion that its causes lie primarily in the realm of politics rather those of engineering or accounting.” [ 85 ] (p. 221)

“If cost underestimation is to be effectively addressed and good decisions at the outset of a project are to be made in the future, then there is a need for these estimates to be based on reality and not on delusion or falsehoods. Weakening the link between evidence and decisions not only jeopardises the quality of transport policymaking, it threatens the entire enterprise of scientific research.” (p. 366)

“…… However, their bifurcation of the cost underestimation problem into error or lie presents the reader with a false dichotomy, an either/or choice that is practically invalid when juxtaposed with the real-world nature of procuring large infrastructure assets …… This false dichotomy forces the reader to reject complexity in complex decisions and focus on only the two extremes presented, with the assumption that no middle options are available.” (p. 365)

4.3. Failure to Converge—The Behavioural School of Thought

5. discussion.

For instance, they describe our research findings as “fake news”, “myths” (no less than 15 times), “canards”, “factoids”, “flagrant”, “rhetoric”, “misinformation”, and more. We are further accused of having “fooled many people” by having “been just as crafty as Machiavelli” as we “have feigned and dissembled information” “through our research.” (p. 358)

“As a factual observation, in our entire careers, we have never come across language in an academic journal like that used by Love and Ahiaga-Dagbui [ 5 ]. We suggest such language has no place in academic discourse.” (p. 175)

5.1. Pseudo Dichotomy in Logic

5.2. contrasting definitions of error and lie through institutional variation, 5.3. encapsulation.

“Recent developments in behavioural science are causing Kuhnian paradigm shifts in many fields, including project management and forecasting. Love and Ahiaga-Dagbui [ 5 ] are on the wrong side of this shift.” (p. 183)

“The treatment for the planning fallacy has now acquired a technical name, reference class forecasting, and Flyvbjerg has applied it to transportation projects in several countries.” [ 106 ]

“In behavioural terms, the causal chain starts with human bias which leads to underestimation of scope during planning which leads to unaccounted for scope changes during delivery which leads to cost overrun”, explicitly stating, “Your biggest risk is you …” (p. 183)

• The removal of parallel upbringing of theories through encapsulation;
• Bridging the gap created by the existing ideological divide between the dominant SOTs in cost overrun research;
• Removing conflating concepts, which have yielded little positive results, into an organised co-joining relationship.

6. Conclusions

Author contributions, institutional review board statement, informed consent statement, data availability statement, acknowledgments, conflicts of interest.

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Chadee, A.A.; Chadee, X.T.; Ray, I.; Mwasha, A.; Martin, H.H. When Parallel Schools of Thought Fail to Converge: The Case of Cost Overruns in Project Management. Buildings 2021 , 11 , 321. https://doi.org/10.3390/buildings11080321

Chadee AA, Chadee XT, Ray I, Mwasha A, Martin HH. When Parallel Schools of Thought Fail to Converge: The Case of Cost Overruns in Project Management. Buildings . 2021; 11(8):321. https://doi.org/10.3390/buildings11080321

Chadee, Aaron Anil, Xsitaaz Twinkle Chadee, Indrajit Ray, Abrahams Mwasha, and Hector Hugh Martin. 2021. "When Parallel Schools of Thought Fail to Converge: The Case of Cost Overruns in Project Management" Buildings 11, no. 8: 321. https://doi.org/10.3390/buildings11080321

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Question: QUESTION ONE [40]CASE STUDY: THE GREEN COMPANY PROJECT OVERRUNFunctional manager: Our problem was that the customer could not provide us with a fixed set of specifications, because the final set of specifications depended on OSHA and EPA requirements, which could not be confirmed until initial testing of the new plant. Our people, therefore, were asked to

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