Although cost overruns are endemic to the construction industry, that doesn’t mean contractors should remain complacent when their expenses start to teeter into the red. According to KMPG, one of the Big Four auditors, only about one-third of construction projects are closing within 10 percent of their proposed budget, which means the majority of projects are experiencing detrimental cost overruns. For contractors, this means there’s never been a better time to scrutinize cost structure and reassess building strategies, especially when you factor in the labor shortage plaguing the industry.
In this two-part series, the Jacksonville construction attorneys at Cotney Construction Law will discuss five common types of construction cost overruns that contractors must identify and address before they get out of hand. Cost overruns can lead to disputes and even litigation if left unchecked. For assistance mediating disputes with owners, consult a Jacksonville construction attorney.
1. Inaccurate Project Estimates
Before a project can commence, a project estimate will be required to ensure that all parties are on the same page. While most owners are in a rush to break ground so that they can start generating a return on their investment, contractors can’t afford to cut corners when procuring a project estimate. Faulty or flatout inaccurate estimates can lead to significant problems down the line. Not only can an inaccurate project estimate lead to cost overruns, but it can also lead to a breach of contract that threatens your relationship with an owner. These disputes often result in work being paused or one party pursuing litigation against the other. Either way you look at it, an inaccurate project estimate that underestimates the cost of a project is going to lead to overruns in the end.
Sometimes, inaccurate project estimates are a byproduct of the ultra-competitive bidding process inherent to the construction industry. Some contractors make the mistake of deflating costs to create a more attractive bid package. When these contractors are unable to keep up with their promises, it doesn’t bode well for their firm as a whole. Don’t rely on a one-size-fits-all approach to cost estimation. Gauge each project independently and only rely on a proven cost estimator you trust to give the final word on your ability to complete the project as proposed.
2. Design Errors
If you are able to avoid the cost estimate issues detailed above, you still have to be certain that the design plan you’re following is solid. A defective design plan can quickly undo all the hard work you contributed to developing a project timeline, budget, and pre-construction plan. Since most cost estimates don’t account for defective work assuming that the building firm is competent and the design plan is sound, this is one of the ways that contractors can be taken by surprise. One study published by Engineers Daily notes that design errors are responsible for 38 percent of construction-related disputes. While these types of errors can be avoided through the use of industry-leading construction software and only relying on trusted architects and engineers, keeping a Jacksonville construction attorney on retainer or investing in a construction law subscription plan can help you minimize the fallout from disputes that arise as a result of defective work.
To learn more about the various types of construction cost overruns, read part two.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.