How to Avoid Cost Overruns When Working with Contractors

For the past 70 years, contractor cost overruns in projects have been a recurring headache across various sectors. Despite technological advancements and project management practices, the issue remains prevalent, with no adequate control mechanisms or viable solutions in place. According to a McKinsey & Company survey, about 98% of projects experience cost overruns or delays, with the average cost increase being 80% of the original value.

What is a cost overrun? 

Let’s begin by defining this concept. A project cost overrun, also known as a budget overrun, occurs when the actual cost of a project exceeds the estimated one. This discrepancy arises when the expenses associated with a project, such as salaries, materials, subcontracts, and other related costs, surpass the initial budget allocated for the project.

Internal factors such as scope creep, poor planning and estimation, ineffective resource management, inadequate risk management, communication and coordination issues, and quality control along with assurance failures can influence project cost overruns. External factors, including unexpected inflation or changes in market conditions, further compound the issue of contractor cost overruns. These external influences, often beyond the control of project managers, can significantly impact project costs, exacerbating financial challenges.

It’s essential to understand that a cost overrun does not necessarily indicate poor quality work by the project team. Instead, it serves as an indicator of underlying issues in planning, management, and control. Addressing these issues promptly is crucial to mitigating the impact of cost overruns and ensuring project success.

Top Reasons for Contractor Cost Overruns

1. Ineffective Resource Planning

Inadequate resource planning is a primary contributor to contractor cost overruns. This often results in a lack of adequate resources, including the number of contractors and their skills, education, and experience necessary to achieve all project objectives. Consequently, businesses are forced to allocate extra funds for additional workers, leading to budget overruns and potential delays down the line.

2. Poor Site Contractor Management

Another significant factor contributing to project cost overruns is poor site contractor management. FMI and PlanGrid unveiled the findings of the construction industry report 2018, surveying construction professionals who reported spending only 65% of their time on optimal activities. An average of 14 hours per person per week were dedicated to rectifying errors, searching for data, and navigating conflicts. This substantial amount of time could have been channeled toward priority activities to drive progress on the job site.

When contractors are not effectively managed on-site, it usually leads to project delays, rework, inefficiencies, and unforeseen expenses. These issues ultimately disrupt the project timeline and inflate the budget beyond initial estimates.

3. Absence of Safety Control

The absence of proper safety control measures poses additional challenges, leading to contractor cost overruns. Safety violations pose risks to contractors’ health and result in incurring associated costs and potential fines imposed by regulatory bodies such as OSHA. As of the 2024 update, the maximum penalties from OSHA for both serious and other-than-serious violations have been raised to $16,131 per violation, further exacerbating the financial implications of non-compliance.

The Role of Technology in Mitigating Contractor Cost Overruns

The reliance on outdated pen-and-paper methods for project planning and monitoring further compounds the situation. While traditional approaches have their merits, they are prone to human errors and lack robust project-tracking capabilities, making it challenging to monitor contractor work effectively.

The simplest solution to prevent cost overruns is to embrace technology and adopt specialized contractor management tools. Platforms like Appruv offer comprehensive solutions to address these challenges. From pre-qualifying contractors and verifying their experience to ensuring compliance with safety training requirements, Appruv streamlines the contractor management process. Additionally, it facilitates real-time monitoring of contractor performance on-site, easing the technical and administrative burdens for businesses.

Conclusion

In conclusion, contractor cost overruns have long been a persistent challenge in project management. However, by understanding the underlying causes and implementing practical solutions, businesses can mitigate the impact of these overruns. Embracing technology and leveraging specialized contractor management tools like Appruv are crucial to achieving this goal. While challenges may persist, proactive measures can significantly reduce the frequency and severity of cost overruns, ensuring successful project outcomes in the long run.

If keeping your project within budget while working with contractors is your priority, our team can provide guidance and support. Reach out to Appruv today for expert advice and assistance.