How to Prevent Cost Overruns on My Construction Project


Similar to the construction schedule, the construction budget is many times understated, at the time of the contract agreement. I have written on another webpage, about the construction schedule always being extended, and this is normally the same situation with the construction budget. Our entire process of selecting a contractor is focused on the lowest price and the shortest schedule. For a full explanation of this phenomenon, take a look at my webpages entitled, “How to prevent delays in my construction schedule” as well as “My construction project is taking forever, now what? “. Both pages explain how the residential, as well as in many instances, the commercial marketplace, is setting themselves up, for projects that will exceed their original budgets, as well as extend well beyond the projected time of completion.

The basic two ideals, when selecting a contractor for our building project, are minimal time and minimal money. In realistic terms, if these are the two major objectives, why do we assume that creative, aggressive and competitive contractors will not attempt to propose the lowest possible cost analysis, as well as the shortest period of construction, to enable them to be the winner of the bidding? Does it make any realistic sense that a contractor would consider the inclusion of the entire scope of work, or a realistic evaluation of the construction time required, if it meant that they would lose the project to their competitors? Of course not, we are definitely setting ourselves up, for budget overruns and project schedule delays and extensions, simply based upon how we award the project.

All of this being said, what positions can be taken to minimize the cost overruns on the project, assuming that we have used the competitive bidding process to select our contractor. Unfortunately any real assertion of reality, regarding cost and schedule, should be accomplished at the onset of the project. The best method is the hiring of a professional construction manager to facilitate the selection of the proper contractor, and not merely the lowest bid with the shortest time of construction. However assuming that the project has advanced beyond this phase, what can be done to try and reduce the amount of additional work orders, or change orders that the selected contractor will present, during the course of the project?

I have repeated over and over within this website; hire a professional construction consultant to assist you in the management of all of the elements of your construction project. With the assistance of this construction professional, the following processes need to be followed to reduce the exposure to additional work and cost overruns.

  • Scope of work / the accurate and detailed identification of the scope of work, is the ultimate solution to reducing additional work and change orders. It is essential that the successful contractor have a very detailed scope of work included within their contract. If you are not intimidated by your contractor, and have the ability to either video or audio tape the scope review, do it! I have witnessed professional commercial owners, literally video the entire scope review with a contractor. In this manner, the scope review is a given, and not up for any interpretation or disagreement. Include a copy of this audio or video tape as a part of the signed and agreed upon contract.

 

  • Require communication / it is essential that the contractor understand the importance of proper and timely communication. If they believe that there is an additional cost involved with the project, they must identify the cost, via an email. This email must include a value for the cost associated with the additional scope of work, as well as the timing of the work. Both the cost and the time to complete this additional work, within the construction schedule must be explained and approved, by you the owner prior to any work occurring. It must be clearly noted within the contract, that failure to obtain the written approval of the additional work, by the owner, will subject the contractor to assuming full financial liability for the revision or the additional work. Set a specific period of time, such as 48 hours, for notification and approval. In this manner, you will be assured of open communication and acknowledgement of the additional work, without being subject to project delays.

 

  • Push back / it is essential that you or your professional construction consultant continually push back against the contractor. Although the contractor will always attempt to rationalize every additional cost and scope discrepancy, it is essential that the owner drops the hammer immediately, to ensure that the contractor understands that every extra cost will be challenged. Additional work can become extremely habit forming, if the contractor senses a weak spot. Do not allow this to occur, challenge every change order, even if it is totally legit and you are in full agreement to pay the additional cost of the extra work. Play the game, PUSH BACK!!

 

  • Hold the money / although it is the immediate reaction of the residential owner to pay the bill, don’t!! Make sure the contractor understands that you, as the owner are not anxious to part with your money. Make the contractor earn every last dollar. Unfortunately, I have experienced every conceivable negative characteristic of contractors, and implore you the owner, to stand your ground when it comes to payment! Do not pay too early, and if you can, hold off the payments until the last possible moment. Trust me; the contractor will be doing the same thing with all of their suppliers and subcontractors. Do not pay early!!

 

  • Do not trust the contractor / remember that this webpage is entitled “How to prevent cost overruns on my construction project”! This website is not entitled, “How to love my contractor”. Unfortunately if you want to complete your project in a timely manner and have it not cost you money, you need to follow the premise that your contractor is attempting to take as much of your money as possible. You must take the position that this contractor will take no more of my money than the contract has already established! This is not a game of who can find the most change orders and how much I can charge for the alleged additional work. I used to consult for a large contractor whose motto was “anything goes”. This contractor mandated that every project have a minimum of 20% upcharge in additional work. Employees were fired, if this percentage was not reached on their projects! This is a game, for many contractors, and a soft, nice guy will simply get taken to the cleaners!

 

  • If you think it is time to pay the bill, do NOT! / I have to apologize for being as overbearing as I have been, involving money! It is essential that the contractor, NEVER feel that the owner is a push over! Please hold the money; it is essential that you continue to force the contractor to build the project in accordance with the contractual required scope of work! Hold the money as long as possible and pay the minimum you can get away with.

 

  • Secure another contractor / it is highly recommended that you have another contractor ready to take over the project immediately, upon a total breakdown of the relationship with your original contractor. I understand that this can be extremely uncomfortable, however it is your money and you must stand strong! If you have employed a professional construction consultant to assist you with the project, ask them for another contractor. If you have not employed a professional, call the second bidder on the job or even the third. Make it immediately obvious that you are not going to allow the contractor on the project to take advantage of you, and that you are looking for another contractor to take the project over. In most cases, the other contractors will be more than willing to take over the project; it benefits both you, as the owner, and the other contractor. There is no better reputation builder, than being the contractor that was called in to finish a project that a major competitor could not complete!

 

  • Employ a construction lawyer / if the project becomes out of control and there appears to be no additional alternative, the employment of a construction lawyer, earlier in the process, than later, is strongly recommended. Unfortunately, it has become vitally important that the contractors obtaining residential projects are aware that the owners are willing to fight back. There are a number of very young and aggressive contractors that feel that there is no limit to the amount of additional money they can make, based upon additional cost and additional time. There is an element within the construction industry that does not care what the final outcome of the project is. As long as they achieve their financial advancement, they are content to operate with additional work tickets and incorrect construction schedules, constantly being updated. As I have already indicated, that contractor who used the motto “anything goes “could care less if the project was ever completed! This meant that they would do anything to advance their financial wellbeing, period!

 

It is my strong recommendation, that all construction projects be developed and eventually contracted, by the use of the construction manager procedure. This was a very popular means of addressing a construction project without the insults of additional work and scheduling overruns. However, with the advent of the aggressive, ambitious and competitive contractors, the acknowledgement of price and time became the objectives. There were the individuals that actually laughed at the construction manager approach, and preached that the loss of revenue and time was ridiculous, if this manner of construction was used.

By trying to advance the basic elements of the industry, the less money spent and the less time required, the better, we have created the predator element of the construction industry. We have become the inventors of unrealistic prices and unrealistic timing of the work. Contractors now take the, who cares, attitude, get the job, and we will worry about how to make money, later on!

Push back; find the professional construction consultant or the professional construction lawyer to counter this attitude. If you want to eliminate the continual cost increases, the continual scheduling delays, push back, but do it with professionals that understand the industry! This is important!