How To Prevent Cost Overruns In Construction Projects

Do you want to know how to actually cut costs in construction? If so, what is the main strategy? Well, that’s what we’re going to cover right now. 

How to Prevent Cost Overruns in Construction Projects

Let me give you a secret. And this is going to make this whole video worthwhile. The secret to life, to marriage, to running a business, to delivering a construction project, and to cutting costs is to add value. In any scenario, even in your employment, instead of always being in the mode of subtraction in our lives, what we don’t want to do, we should be in the mode also, or most of the time, in the mode of what am I going to do? How am I going to add value? Am I adding value enough to where my employer would never consider letting me go, right? Am I adding enough value in my marriage to where there is no worry about the strength of that marriage? Am I adding enough value in my business to where I have raving fan clients? And am I adding enough value so this project doesn’t go wrong? That is the key.

Common Mistakes in Cost Management

I see so many project managers just going through and cutting, cutting, cutting costs. Do we need that? No. Do we need that? We don’t need that consultant. Oh, we can slash that budget. Let’s do better here. Oh, let’s cut that out of the budget. Cut, cut, cut, cut, cut. I have seen people that will literally just try and manage their project from the standpoint of how many costs they can cut out of this, and they never look at engaging and adding value and preventing massive problems. And then they get into a scenario where they’ve now predicted the failure of their project, and now they’re going to have massive overruns on the back end. You can’t do that. You have to buy and pay for the things that you need to make sure the project goes right. You cannot manage through subtraction.

Managing Through Value and Subtraction

Now, can you do both? Yes, you can add value, ensuring you have everything you need to make sure that project goes well and that you pay for it and buy it and that your budgets are properly identified. And then you can say, are there any costs here that I don’t need, and you can cut from there. But you can’t manage through subtraction; you have to manage through value. And you can actually do it through value and subtraction.

The Key to Successful Construction Projects

So here’s what I mean. If you want your project to go well, you will not just reduce budgets and negotiate. You’ll actually plan the darn project. So that’s step number one: the predictor of success for construction projects isn’t did I slash enough budgets and did I reduce my expenses? It was, did we plan it well enough? So you see what I’m getting at here, right? It costs money to plan. It costs money to be in pre-construction. It costs money to get the right people there doing the right things. It costs money to get this thing started off right. And if you start it off with a mentality of subtraction, you’re going to reduce or diminish or remove these altogether. But these were the things from the beginning that were going to really determine the success of your project. So you have to plan the project. That means the right people, that means the right systems, that means the right integration, that means the amount of time that you need. Historically, projects will be 65% over on their duration and on their budget if they don’t plan their project right. So if you want to reduce real costs, not just job cost report-like little budget line item costs, if you want to reduce real costs, then plan the project right and spend the money on the front end. I hate it when we take the money from the front end and just add it to a contingency bucket. So we can spend 5, 6, 10 times the amount of money but just in a more acceptable bucket. It’s easier to pay for things out of contingency than early on in the budget upfront. No, no, get the right people, get the right training, get the right resources, spend the right amount of time and plan the darn project.

Steps to Prevent Cost Overruns

1. Plan the Project: Get the right people, systems, and resources in place. Proper planning prevents projects from going over budget and over time.
2. Add Value: Plan value-added activities and pay for them. Don’t just focus on cutting costs but ensure everything needed for success is in place.
3. Take Your Time: Do not shortchange your pre-construction efforts. Time spent in planning will save days or weeks in the field.
4. Build the Budget According to Your Plan: Don’t create an estimate and then plan. Plan first, then build the budget based on that plan. This ensures the budget aligns with how the project will be executed.
5. Test the Plan: Identify risks and anchor to relevant data. Use historical data to ensure budget accuracy. Cover identified risks with time and money to prevent overruns.

Managing Risks

If you have risks, there are only three things you can do:

• Fix the problem so it doesn’t become a cost overrun.
• Absorb it out of contingency and fee.
• Cover your risk with time and money and have a backup plan to counteract those risks and overruns.

Important Analogy

Would you like to go under the knife of a surgeon who doesn’t do very much pre-planning, creates a budget without looking at the MRI, or hasn’t planned the surgery? No, you’d want a thorough pre-plan with risks identified and covered. The same applies to construction projects.

Conclusion

Preventing overruns requires planning, knowing risks, anchoring to relevant data, covering those risks, and building an appropriate budget. Manage through value, not just subtraction, and ensure your project starts right to avoid cost overruns.

Further Learning

Please read the book, How Big Things Get Done, to understand the importance of planning as it relates to reducing costs. I’ll provide a link to our pre-construction planning Miro board so you can see an outline of the crucial elements for creating a great plan and budget to prevent overruns.