When a construction project runs over budget, the contractor loses his profit margin and/or may go into the red or the owner has to fork out a lot more money than originally planned. Typically, it's a combination of both.
Neither of those options leaves anyone feeling very good about things and, in worst case scenarios, running severely over-budget can lead to litigation and/or harm to the contractor's reputation.
Typical Reasons Projects Goes Over Budget
Running over budget is not only common, it's to be expected. In fact, this is the reason why most lenders insist on a 20% cushion be included in the total loan figure. According to The Ross Group, most construction projects run anywhere from 15% to 25% over budget. So, keep this in mind as you begin planning your upcoming project.
That being said, any overage above that "typical" amount is inexcusable and can be avoided with proper planning and insight. Here are some of the a project typically encounters overruns:
- Omissions or inadequate allowances.
- Price changes
- Incomplete plans or specifications.
- Owner design and/or material changes.
- Jobsite surprises.
- Design or construction errors.
Work with experienced professionals to avoid omissions or inadequate allowances
Perhaps this is one of the most compelling reasons to do your homework when hiring the right architects and contractors for the job. Omissions occur when a contractor unintentionally leaves important costs out of the original bid. Most of the time, this is due to omitted soft costs but can also be the result of inexperience. Don't just choose the first contractor who shows up on a search engine results page, nor should you choose the one with the lowest bid (often a sign there may be omissions or inadequate allowances!). Do your homework and contact references to ensure your prospective contractor is experienced and reputable.
Inadequate allowances happen when a contractor uses a low total allowance for a product that will probably costs a lot more. For example, if you know you'll want custom cabinetry but the total kitchen cabinet allowance resembles stock cabinet prices, you're dealing with unrealistic allowances - and repeat differences of thousands of dollars add up real quick.
Be timely to avoid unavoidable material price changes
There are certainly factors that are outside the realm of your contractor's control - and price changes are one of these. Your estimate is based on a contractor's costs at that time. One letter from a supplier or vendor the next month can render stated prices null and void. Timeliness is on your side here - most estimates will have an expiration date but the sooner you act, the more likely you are to benefit from current market prices.
Know what you want
The only way a contractor can provide an accurate bid is if he is supplied with detailed facts. If you aren't specific - or your plans aren't specific - it will be difficult for a contractor to come up with a realistic estimate as opposed to a shot in the dark.
Don't change your mind midstream
Change orders are costly because they often include construction delays, material rush orders, design changes or even the tearing out and rebuilding of a finished item. This piggybacks on the the importance of having your ducks in a row ahead of time so the contractor has a complete, detailed and finalized set of plans to work with.
Be prepared for the inevitable jobsite surprises
There are plenty of things you can do ahead of time, from analyzing site water drainage and soil testing, or structural due diligence to identify internal systems needing to be brought up to code. Even so, inevitable jobsite surprises happen to the best of professionals. Sometimes the contractor of previous developer may be required to pick up the costs, other times you are. You just never know. However, this is another reason you should always keep a 15% to 20% contingency allowance in your total project budget.
Hiring experienced professionals reduces errors
Design and construction errors happen, and typically it's the contractor or subs who eat the cost - but not always. You'll note most architectural contracts absolve the architect of design flaw liability. Some construction errors are more difficult to trace back than you'd think. Or, it can just be plain difficult to get some contractors or subs back in there to fix their mess or refund monies spent having it repaired by someone else. These are all further reasons to hire licensed, experienced contractors for any construction project.
Pre-construction diligence and planning are the best weapons you have against running over budget. Knowing what you want, being prepared and hiring experienced professionals will go a long way towards winning the construction budget battle.