Construction projects experience cost overruns

Construction projects experience cost overruns

Why do many construction projects experience cost overruns ranging from 10% to over 100%, and how can these overruns be rectified?

The prevalence of cost overruns in construction projects is a significant issue, resulting in millions of dollars in losses for the industry annually and the wastage of valuable engineering and construction labor resources. This problem is particularly common in mid-sized and large multi-million dollar EPC (Engineering, Procurement, and Construction) projects worldwide, with studies indicating that a majority of such projects fail to meet their established cost and schedule goals.

Cost overruns occur due to various reasons:

  1. Scope Issues: Incomplete or unclearly defined Scope of Work (SOW) leads to missed work items and negatively impacts cost estimates.
  2. Estimating Methods & Approaches: Flawed cost estimates based on incorrect quantities, labor rates, and other factors can result in unreliable schedules and cost overruns.
  3. Optimistic Escalation/Inflation/Currency Exchange Rate Estimates: Overly optimistic assumptions regarding cost escalation and currency exchange rates can lead to underfunded estimates.
  4. Lack of EPC Strategy: Absence of a detailed EPC execution plan can result in cost overruns.
  5. Early Estimates/Feed Studies/Conceptual Estimates: Early studies may have optimistic biases and overlook technical and logistical risks.
  6. Insufficient Early/Front End Planning (FEP): Inadequate planning can lead to cost and schedule failures.
  7. Scope Changes/Late Design Changes: Modifications and late changes increase costs and disrupt schedules.
  8. Over-Optimistic Schedules: Unrealistic schedules based on flawed estimates contribute to cost overruns.
  9. Absence of Risk Management Systems: Failure to evaluate and include project risks in estimates leads to overruns.
  10. Inexperienced Project & Construction Management: Inexperienced managers may fail to recognize and address cost overrun risks.
  11. Lack of Project Organization/Roles & Responsibility: Absence of clear roles and responsibilities leads to inefficiencies and potential overruns.
  12. Failure and Lack of Cost Control: Inadequate cost control measures result in accounting-based efforts after work completion.
  13. Inadequate Contingency/Estimate Accuracy: Unrealistic contingencies and lack of Monte Carlo/Range Estimating evaluations contribute to overruns.
  14. Construction Management Issues: Over-manning, high fees, and poor optimization lead to cost overruns.
  15. Poor Communications: Limited communication among team members results in missteps and overruns.
  16. Overcomplex Specifications/EPC Procedures: Complex procedures lead to inefficiencies and indirect cost overruns.
  17. Low Construction Productivity: Poor productivity leads to significant cost overruns.
  18. Poor Construction Contracts: Confrontational contracts and ill-defined terms result in claims and overruns.
  19. Lack of Commissioning/Start-Up Plan: Absence of a commissioning plan leads to unforeseen costs.
  20. Field Mobilization Issues: Rushing to the field with incomplete information leads to prolonged durations and potential overruns.

Addressing these issues requires comprehensive solutions, which will be discussed in future articles. Additionally, stakeholders must actively participate in identifying and mitigating risks to prevent cost overruns.

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