COST OVERRUNS: WTF?
Ten key accounting calculator, (photo by StellrWeb, Unsplash)
I have heard clients tell each other, “After you have your project budget, plan to spend double!”
Architecture and construction projects are indeed notorious for costing much more than originally planned. Whether a house or a museum, how is it possible that costs could be off by so much from when the project started vs. finally completed?
This isn’t always the case of course. Many architects and builders are capable of bringing in your projects on budget. But client frustrations and cost overruns are more than apparent. So why?
1. IN THE BEGINNING
Let’s start at the beginning. Is the budget really realistic? Frankly, a lot of times, it just isn’t. For example, if you want to buy a new Tesla Model 3 for $20,000, sorry, you will be way over budget when it comes time to pay. It should be an architect’s responsibility to tell their clients, as much as it might disappoint, when a budget is unrealistic. And clients need to listen to their professionals.
2. PROJECT SCOPE
Did the project scope change? If you started with the idea of designing a ten-classroom school building, but later added a two more classrooms, then your initial budget will need to increase. If you started with a 4,000-square-foot, four-bedroom house, but later, you decide you want 5,000 square feet and five bedrooms, well, you get the idea.
One simple word: changes. Regardless of who makes them, changes cost money. And changes during construction are ten times more expensive than when the project is only abstract lines in an architect’s computer. The two biggest culprits of changes are the city and the client. The city inspector might require you to upgrade your electrical system, and that will cost unexpected money. But it is typically client changes, whether during the design process or construction, that will rack up dollars.
No architect has a crystal ball. Even the best minds can’t predict the economy, labor market, or costs of materials. With today’s economy swinging in all directions—pandemic and vaccine, politics, and U-, V-, or K-recoveries—who can anticipate the cost of concrete or steel? The project budget today might not be relevant to economic trends when the project is nearing completion years later.
5. THE UNKNOWN
Known as “unforeseen conditions,” such things cost money. You will rarely open up an existing wall of a house to find a bag of gold. More likely, you will find asbestos or mold, and the cost of remediation was probably not anticipated. Acts of God are also unforeseen. An earthquake or labor strike can cause financial hardships. For example, past cataclysmic fires have destroyed our forests, resulting in the cost of lumber increasing.
Need I say it, “time is money.” Slow city approvals, an inefficient contractor, or again, client changes, will slow down the project, and yes, cost more money. Just consider the simple things on site during construction like a rented dumpster, portable toilet, and security fencing. For every month of delay, there are increasing rental costs.
7. SOFT COSTS
When a client establishes the project budget, there should be line items for hard costs and soft costs. The hard costs are typically known as the cost of construction, which includes the contractor’s overhead and profit. Please ensure to include the long list of soft costs, such as professional fees for architect, engineers, and consultants, agency fees, inspections and testing, contingencies, reproduction expenses, attorney fees, taxes and bank costs, and so on. For a restaurant, there are also appliances, china/glassware/flatware, furniture, art/décor, marketing, website, printing menus, inventory, training, move in, and other miscellaneous startup costs.
8. GENERAL CONTRACTOR
Who is your builder? Did you competitively bid between qualified contractors? Did you negotiate the appropriate cost and contract template, i.e. time and materials, stipulated sum, guaranteed maximum price, etc. One builder might be more expensive but faster. The other might be more affordable but has six extra months to the timeline—and lower quality.
9. HUMAN ERROR
Lastly, and hopefully this doesn’t happen often, but your architect, engineer or builder might have made an error during the process. We are all human after all. If a drawing had the wrong dimension, for example, that could be an expensive problem.
There are countless other reasons that a project might exceed the original expectations. Suffice it to say, the best solution is a combination of reality, decision-making, adaptability, and rationality. Basically, be smart and be part of the solution, not a finger pointer.