Why do projects encounter cost overruns?

Have you experienced a situation where the budget you allocated for a real estate project fell short of the actual amount that was needed? Were you forced to stop, delay the completion of the project or borrow from others?

Cost overrun is among the most common problems encountered by project proponents, contractors and developers, whether newbies or experienced.

But why?

Many times, we fail to understand the root cause of the problem.

Having a better understanding of what they are and how they occur can help reduce the likelihood of having to confront it again in the future.

Inaccurate budgets

Often, inaccurate budgets are brought about by wrong or poor designs. These are further compounded by the lack of details provided in the working drawings or inconsistent plans brought about by poor coordination among design professionals and site engineers.

They are also the result of misunderstandings in the design intent, thus resulting in incorrectly drawn plans, wrong specifications, and understated cost estimates.

Failing to appreciate the design brief can easily increase the cost substantially, as drawn details cannot be constructed as proposed, due to concerns they may not respond to the code requirements or produce the architectural effects needed.

As such, it is paramount to properly check the drawings, and validate them vis-à-vis the specifications. This way, potential gaps or mistakes can be identified early while still in the planning stage. Carrying out proper due diligence by checking the drawings, reviewing the detailed designs, and ensuring that coordination and analysis are made, can reduce, if not eliminate, oversights.

Importantly, hiring the right and qualified professionals who have extensive experience in the required project’s scope of work is key in generating drawings that are accurate and comprehensive.

If elevated costs are noticed early in the planning exercise, there is an urgent necessity to consider value engineering the project, so as to adjust the plans against the presumably higher cost estimate. To set it aside, and delay such corrective action will only lead to more problems, result in future change orders, and consequently force the proponent, developer or contractor to shell out more money.

Some projects also do not allocate sums for contingency. Regrettably, no amount of planning can stop personal preferences from changing, in addition to external events from influencing your project cost. Owners may opt and decide to use expensive brand accessories, fixed site concerns or introduce adjustments. Just recently, the Metro Manila minimum daily wage was increased by forty pesos. That additional amount will surely be demanded by laborers and in turn, their contractors.

The requested increase is justified, as employers need to comply with the minimum legislated wage for their employees.

Poor scheduling

Unrealistic and erroneous work schedules brought about by the lack of understanding of the detailed work involved and project inter-dependencies may also lead to project cost overruns.

Timetables that are aggressive will need more resources like extra manpower and additional equipment, thus requiring more funds. However, those schedules may not necessarily bring about the best use of hired hands.

Failing to undertake a suitable catch-up schedule to deal with project delays can also mean wasted resources, not to mention potential penalties and damages that contractors may face.

Poor site management

Site issues and problems are also brought about by poor site conditions, and failure to institute and impose quality control. Works already constructed may have to be revised, removed, and replaced – all of which will mean added cost to either the contractor and or developer.

Administration errors do occur. The lack of or improper resource mobilization such as that of heavy equipment can also increase the cost unreasonably. Leasing of equipment for a very short duration actually cost more because of the huge amounts demanded for mobilization and demobilization. Meanwhile, late deliveries of these equipment may also result in inefficient use of manpower.

Having too many subcontractors can also affect work conditions and time management. Lack of proper communication can result in improper execution, poor work sequencing, and delays in the start of the next work program brought about by preceding uncompleted work in the same area.

In the end, it is important to be aware of these things and to address these potential sources of cost overruns. It is essential to be familiar with the work relationships, address the root cause of various problems, and to make sure that better planning is always incorporated in any project.

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Henry L. Yap is an architect, fellow in both environmental planning and real estate management. He is one of the undersecretaries of the Department of Human Settlements and Urban Development.