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Construction Cost Overruns

Construction Cost Overruns by Robert D. Rice.

All construction projects begin with a construction bid. The written 'bid' explains the fixed price that the bidder will charge to complete the proposed construction project. Also in the bid is the time that it will take to complete the job. The more massive, or specialized the construction project, the fewer potential bidders there will be for that project. For example, if the federal government puts out a bid to build a dam, not many construction contractors are able to fulfill such a large operation. Whether the project is large or small, cost overruns represent one of the biggest problems facing construction contractors. Overruns arise from projects that are poorly planned, not accurately documented and or saddled with poor supervision. Cost overruns are the fault of the company that presented their bid. Cost overruns are different from cost escalation. Cost escalation usually refers to eventualities that are beyond the control of the bidding company. IE. Inflation...labor strikes, changes in the weather. Escalation and overruns result in costs to complete the job exceeding the bidder's estimated bid price, causing the bidder to lose money on the construction project. Financial overages cut into profit margins, possibly resulting in a net loss for that particular construction project. Some causes for cost overruns can be:

1. Errors in the original project design. These errors can be in the form of omissions or misrepresentations in the original contract proposal. However the inaccuracies may unfold, it is the responsibility of the bidder to foresee them and make the necessary adjustments.

a. The contractor should frequently visit the construction site before the bid is submitted. The site may have variables pertinent to the construction project that are not accurately detailed in the construction project contract. Contractual ambiguities will ultimately lead to money, time and performance being wasted.

b. Line Item Estimating is crucial. Cost breakdowns must include every phase of the construction activity and expense. For example, if the contract calls for the construction of a block wall. The contractor should NOT merely list "Concrete blocks". There needs to be a further breakout of the cost: the concrete block, labor, mortar, flashings, steel rods etc. Leave no 'stone' unturned. Avoid the mistake of underbidding one aspect of the total bid, hoping to get the money back by overstating costs in other areas of your bid to balance-out the total bid value.

c. Have different, skilled individuals under your employ go over the contract details to get varied points of view. Items that are omitted in the contract will lead to disputes, negotiations and possible litigation --all in an effort to mend unwanted performances.

Construction companies need project estimators to evaluate the entire project and come up with the total cost of labor and materials, and the time needed to complete the job. If these estimates are incorrectly tabulated, the project completion is at risk. Allocating contracts solely on the basis of their lowest bid proposal may lead to the selection of an under-qualified contractor. In addition to the proposed low bid, the selection of the winning bidder must also take into account the contractor/sub contractor's work history. Poor work history will likely lead to more of the same. Additionally, bidders should be required to put up a Performance Bond. This bond is an insurance policy that covers any problems or defaults on the part of the contractor, ensuring that the project will be completed to the satisfaction of the customer. Expert project control is needed to locate any deviations from the original project plan, and to make adjustments to keep everything on schedule. Inadequate project management, poor estimation of the time required for completion, lead to cost overruns. Project managers have the responsibility to coordinate all of the various trades involved in the construction project. If any particular trade is discovered lacking in their responsibility, it is the duty of the project manager to report it. Said reporting must result in swift changes in the quality and quantity of the contractor's production. The project manager must also oversee any and all changes made to the original construction contract, ensuring a seamless continuation of the construction project to its conclusion. Their responsibility includes making certain that construction progress matches the agreed to completion schedule. Monetary penalties can be handed down to the contractor when a construction project falls behind the contract timeline or quality is not consistent with what was expected in accordance with the contract. Once the project is underway, however, any changes to the original plan are likely to delay the project's completion. Never allow the customer to amend the original contract without those changes being expressed in writing. Remember, oral agreements are worth the paper they're printed on.

Construction close-out is when the project nears its end. There may be lingering issues that have yet to be resolved. These can be details of the customer's acceptance of final payment, inadequate documentation of completed work, the coordination of the various trades, so that one trade does not interfere with the completion of other trades. All this can disturb the project's finality. When the project is completed have a complete project review. Here is where a comprehensive review must detail everything about the project: the time it took to complete the project, a thorough assessment of all costs, what went right and what went wrong during the project, and desired changes for the next construction bid. Finally, disband project team members and complement achievement as soon as possible to avoid cost overrun due to extra overhead.

References and Bibliography:
1. Carnegie Mellon: Cost Control, Monitoring and Accounting http://pmbook.ce.cmu.edu/12_Cost_Control,_Monitoring,_and_Accounting.html

2. Cited in Zoll, Peter F., "Database Structures for Project Management," Proceedings of the Seventh Conference on Electronic Computation, ASCE, 1979.

3. BORDAT, C et al., 2004. An analysis of cost overrun and time delay of INDOT projects. Joint Transport Research Program Purdue e-pubs

4. CERPA, N. and VERNER, J M., 2009. Why did your project fail. Contributing Article

5. Cost Overruns by Tim Carter
http://www.askthebuilder.com/cost-overruns/

6. Cost overruns in construction
http://www.constructionbusinessowner.com/topics/accounting/accounting-finance/cost-overruns-construction-reasons-and-solutions

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