Many resources are sharing advice on how to avoid budget overrun, but as we all know, people tendency is not to learn from other peoples mistakes, rather make the mistakes themselves. But how to deal with project cost overrun when you already are it the situation? In this article, I’m sharing some valuable suggestions that have helped me and can be helpful for your construction company.
When I started my first company, I soon got into trouble with projects budget overruns. You know that feeling when you want to get new customers and you trying to do everything to please them, including going extra miles and working on very thin margins. And this is a direct way to get into budget overrun. Since I have been in this situation personally and talking with many construction industry people I listed 7 key actions you can take really help when you face project budget overrun.
If you already experiencing construction project cost overrun, take these actions:
- Understand the real reasons why your budget overrun
- Create an action plan
- Be responsive to your customers and subcontractors
- Talk to your team honestly and agree on the priorities
- Try to retrieve budget, but don't be greedy
- Stop works when payments are late
- Set up cost control system
1. Understand the real reasons of budget overrun
Usually, you can't solve a problem when you don't know the reason what is causing it. There are many reasons why expenses can exceed the planned cost. The key is to understand what's causing it. In construction projects, it might be that the budget overrun is a combination of multiple reasons and the list below will give you some ideas for better understanding the causes:
- Underestimated or wrong calculation.
- One of the major reason for cost overrun is a wrong estimation of the budget. Without change orders, it can be difficult to turn the situation in your favor. Now the real lesson you can learn from this mistake is to understand the error in the estimate. It could be that the project was underestimated on purpose, hoping to turn it around in long run. Whatever the reason it needs to be clear and to avoid it in future.
- Scope creep. Some customers continuously asking for small changes, explaining how easy it would be for you as a contractor to do them, at the same time not expecting to get billed or promising bigger junks of work for that in the future. But in reality, these “small requests” sooner or later go out of control. Going the extra mile will quickly become an expectation for the customer. It’s like “feeding the monster”. Instead, you should agree on the scope with the client, finish what you have promised and get paid for all what is out of the scope. And by the way, never use the words easy, fast, simple when talking about your works. These are the words explaining other peoples works.
- Long-term economic effect. This can be a budget overrun reason when your project is very long, it was stopped for some period or the project calculation was done at the low economy time and the economy now is growing fast. It would be wise to have some “fuse” in your contract for such situations. Some standard contracts have standard conditions, so you can take a closer look at your contract and see if you can review your budget with customer according to contract conditions.
- Bad cost management & cost control. The worst thing is when you find out that your project is over budget at the end of a project. Usually, it is closely related to a bad budget management. It is very common when the times are good, less attention is paid for budget and cost control. Everybody feel confident and the overview looks nice. But if you don't pay attention to your project expenses, it can happen that you will be invoiced higher than agreed from subcontractors, scope changes are not counted accordingly, and some big unpaid invoices was forgotten into a desk drawer, what would eat the project's profit just like that. Make sure that you have a trustful real-time information about your budget situation, and if not, take actions to have it as soon as possible.
- Bauwise cost management software is easy to use tools for monitoring and controlling construction expenses and in real-time.
- Bad resource utilization. Bad management or unproductive use of resources “eats” your margin and leads to budget overrun. It may don't mean that your employees or subcontractors are doing a bad work, but it might mean that they are constantly switching between projects and/or construction sites not fully finishing the tasks and this makes a work non-productive. This is common if the business is booming and hard to find subcontractors.
- Time overrun. It is directly connected to the budget overrun. More time means more overhead, more rental and it all means more costs. This is a fast way to an over cost in your construction project. Make sure you forecast that your works will be late, so you can take timely actions and avoid additional expenses because you are late.
There are other reasons for the project overrun, but these examples will help you to get the idea and find out your own reasons.
2. Create an action plan
Now if you understand what is causing your budget overrun you can create an action plan, for getting the thing on the right track. Sometimes company management just trying to extinguish the fire. But the most important thing is to take the time to focus, create a plan and start implementing it immediately. As Seneca said, “If one does not know to which port one is sailing, no wind is favorable”. You and your team should know exactly what should be done to get things better. Sometimes, planning will also show that there is no another good way from the situation, even so, it will save you from getting in more troubles.
3. Be responsive to your customers and subcontractors
When things are going wrong, it would be the bad decision to avoid talking with your customers or subcontractors. It may be that you don’t know what to say or you are afraid of the reaction, however - be responsive and show up a willingness to communicate. This will create more trust and credit. Do not try to hide things or even worse, do not lie. Instead, you can openly say: “I know that things look [is] bad and the reason is… I’m working on a plan right now and I will get back to you [specify term]...”. Keep on your promise despite any circumstance. If people do not reach you or you are not keeping your promises, peoples become nervous and this makes things much worse.
4. Talk to your team honestly and agree on the priorities
Sometimes business owners are trying to save a team from the bad news. Maybe it is because we all want our team to be motivated or maybe we want to save our own value in the eyes of the team. I think this is wrong. If you have a good team, they might come up with good ideas and even help you to save the business. Also, they will understand the priorities and will be able to act in a more effective way and concentrate on the most important things.
5. Try to regain budget, but don't be too greedy
When costs are running over the first thing you should to is stopping scope creeping. Instead, you should manage and track the change orders with care. Be sure that without the permission nothing will is done. One way to regain additional budget is to negotiate better pricing or terms for materials, works, renegotiate contracts with subcontractors, etc. But don’t be too greedy, this might ruin the relationship with your parties. Keeping fair pricing and good relations with customers & subcontractors - is a long-term strategy for winners.
6. Stop works when payments are late
I have seen situations when the owner is not paying the invoices on time, and the General Contractor is patiently proceeding with construction. Then suddenly the customer goes to bankruptcy, and the court journey starts, creating even more expenses. If the customer does not pay invoices on time - immediately talk with the customer and try to understand the reason why he is late. It might be that this customer is not liquidity or not getting payments from their creditor. The rational solution in this situation is to stop works until you get paid, and this gives you the chance to suggest for them someone who can take it over. Be sure that you don't invest a dangerous amount of money into a spooky project.
7. Set up cost management with the cost control system
If a project suffers budget overrun it is critical to set up a cost control system like bauwise cost management software to have better control over the budget vs actuals, subcontractor agreements, change orders, cashflow and including the ability to approve purchase invoices online. Project managers and company management should be able to operate real-time data and control key indicators, such as profit, completion percentage, cost forecast, and others. Outdated data can cost you crucial time and do not give you a real picture. Cost management system helps you to save time, track your expenses and have more control.
In real life, despite proper planning and all your efforts, you will still sometimes get in the project cost overrun. You need to learn from your mistakes, but even more importantly learn from your successes and continue improving them so you will minimize the risks for the budget overrun in the future. These steps I described above have helped me a lot and I believe these will also help you.
Smart companies "under promise and over deliver".