Overshooting the project budget is every construction company’s nightmare but sadly not an uncommon one. In this post I will explore why projects so frequently go over budget.
First, the most obvious bottleneck – Design. Design is a multi-headed process that involves various disciplines like architecture, structural engineering, MEP engineers, etc. and for each there will be multiple people working on the same item and often multiple organisations as well. Errors in such conditions are unavoidable. However the problem is not the errors themselves (most are straightforward and can be easily fixed) but rather their cumulative trickle down (and sometimes up) effect. What kind of errors are we talking about here? Anything from missing information in the design documentation (exhaust fans, dampers, access panels, plumbing/valves) to incorrect information (electric circuits not correctly sized for the loads they will carry) to unclear or missing instructions on mechanical equipment sequences of operation. Errors like these can end up generating too many change requests or increasing the project scope and thereby driving up costs.
Faulty estimates are another factor. Let’s say you hired a contractor and are using the amount quoted in his bid as your baseline budget. What you may not realise is that in his eagerness to win the contract he quoted an attractive but unrealistic amount, something I’ve seen happen more than once. Or human error crept in or he estimated for components that are of lower quality than you want or he accidentally omitted some expensive components; whatever the reason, you can easily find yourself starting the project with an ‘unreal’ baseline number.
Change management can also easily burn out a budget, as anyone who’s ever worked on any kind of budget knows all too well. Which begs the question: why do changes happen? Sometimes (usually) it is because the owner changed his mind or sometimes (rarely) the contractor realises that the work can’t be completed as per the original specs and so a change is required. In both cases the additional costs could not have been predicted.
In this context, I should also mention risk management. Companies have begun creating policies to address risk, like commissioning geotechnical surveys to assess underground site conditions or planning for weather-dependent activities to fall in the most work-friendly seasons but if those policies are not properly enforced a lot of unplanned spend will still ensue.
The above are the top reasons for budget overrun that spring to mind. An exhaustive list would be impossible so I’ll just say there are many many bottlenecks throughout the project life cycle, any one of which can become a dire cash-bleed point that ends up derailing the entire budget.
The point I want to make is that cost overrun is a multi-faceted problem and yes there is a solution but it’s not fast or easy – or cheap. It has to be done at the enterprise level, at the corporate culture level.
It starts with the acknowledgement that Human Error is the key factor and as such cannot be predicted or prevented in the typical project setup. Companies know this. The way construction projects currently work some level of human error is considered ‘normal’ and even acceptable especially when there are multiple consultants working on the same project. And of course, nobody can control what external bidders/contractors do before they are hired. So, besides working with reputed names (very expensive) there’s not much that can be done to resolve this. Even with reputed names the industry has such high churn you never know who exactly you could end up working with. Plus, the mere sight of a temptingly low bid can overrule good judgement. Of course, you could hire someone with oodles of experience to vet the bids but that again will drive up your costs and anyway in our largely-unstandardised industry such skills are hard to find.
So the bottom line is: you can aim for better damage control (firefighting) or better damage prevention (proactive planning). So far we’ve been going with the former aka intensive and unrelenting firefighting from project start to project finish. It’s not working that well, considering how many projects go significantly over budget every year.
I would recommend to Companies tired of firefighting and wanting to try the preventive/proactive approach that they start prioritising the elimination of the unpredictability factor, in simple language their excessive dependence on human skill. How exactly that elimination is to be achieved is the question and to answer it EPC decision-makers need to start thinking more like businessman and less like engineers. Should they invest in more standardisation and best practices? Change the structure of the organisation? Digitise the business process? Decentralise the workforce? The sensible answer is ‘All the above and all at once’ and that implies Digital Technology, preferably multi-phase digital solutions that are tailor-made for EPC contexts. That is in any case what global trends are showing very strongly. So I venture to say that the time is not far when technology-driven construction will be as ubiquitous within the construction industry as budget overrun is now.