In Propeller’s article which compiles construction project cost overrun statistics, they reveal that –

• Nine out of ten projects experience cost overrun
• Only 31% of projects came within 10% of their budget during a 3-year study
• Large projects typically take 20% longer to finish than expected and are up to 80% over budget

In a multi-billion Euro industry, these excess costs have huge implications and every Euro that is overspent equals less profit for the developers and investors. Not to mention that going over budget often causes delays and always causes stress and friction, so must be avoided where possible!

As experienced project developers in Spain, it’s our job to keep the budget under control and in more than 100 projects, with nearly 10,000 units, we’ve been on time and on budget every time. So, in this blog we want to tell you why projects go over budget and then offer you practical tips and tricks to ensure your project comes in on budget, or even under.

Poor planning and costing

At the very start of the project, you need to work out what you’re planning to do, how long it will take and how much it will cost. However, with a large development, or even a luxury villa construction, there are so many people involved, so many materials required and so many variables to take into account, that it’s tough to be really accurate.

You need to ensure the tenders that you receive are accurate, contain all the information you need and of course are correctly calculated. Just a slight inaccuracy on each tender can take a project significantly over budget when put together.

All fees, taxes and services need to be taken into consideration and accurately budgeted.

Not only that, but a comprehensive local understanding of the pace of work and regional variations in weather and culture need to be factored in to avoid delays pushing out the timeline and causing additional unforeseen costs.

Poor contracts

Rock solid contracts are vital for successful projects, as they lock your architects, builders and suppliers into agreed terms and conditions. However, many are not specific enough and are prepared by the suppliers to give them leeway during the project and this can lead to unexpected costs.

For example, we’ve seen contracts which give the construction team the freedom to raise prices during the job, and others which don’t specify exactly what is covered in the services you are contracting. This can mean that the client mistakenly thinks everything is included and has budgeted accordingly, but is then presented with additional bills which take them over budget.

Find out more about the importance of a good contract during development on our blog.

Miscommunication and poor decision making

Clear communication, established processes for logging changes and requests, and communicating any ramifications of these decisions is vital for a successful project. Without this, the project runs out of control, confusion is common and the client won’t get what they want, or be able to control costs.

There are so many decisions to be made and so many moments where clear communication is vital to avoid misunderstandings and cause costly mistakes to happen.

If a client isn’t on-site, or isn’t aware of the implications of a certain decision, or if a supplier or builder isn’t sure what the client really wants, then things easily and quickly get out of hand. At best this can lead to an unexpected outcome, but normally it’s a nasty surprise which is more expensive than expected or causes delays and cost overrun as a result.

You need to establish ways of working and communication channels which leave no room for error and request regular written reports to give updates and ensure you’re in control of the project and thereby stay in control of the budget.

If you know that one aspect of the build has gone over budget, then you can make decisions in other areas to save money and offset that overspend. But if you don’t, you can’t make those adjustments and you will go over.

Start with a project feasibility study

Whether it’s during a luxury villa development or a large scale residential or commercial development you need to start with a clear plan and do the research to make sure that the project makes financial sense. A project feasibility study can make the difference between success and failure.

These studies should be conducted by independent, qualified professionals and be as in-depth as possible, to remove any jeopardy from the build. During this process you should create cost projections to anticipate all the project costs and be able to establish an accurate budget, as well as explore financing options to ensure the money will be able to be accessed. It should include cash flow projections and key payment deadlines to be met, as well as due diligence investigations and fulfilment. Lastly there should be accurate professional valuations of the land and an understanding of any licensing and permit issues which could cause problems or delays.

By taking the time and investing resources into these studies, you know that your project is viable and that your budget is well thought out and accurate.

Only sign contracts which protect and control your budget

A good contract will protect you during the development process so make sure it’s right.

Don’t feel pressured to sign something you don’t fully understand. Use experts to review them, who have the experience and the understanding to know the potential problems and how the contract needs to protect you against them. Make sure they include all the key details such as timeframes, services included (and any exclusions) and if possible include penalties for late finishing to safeguard your timeline, as well as your budget.

Bring in an independent Project Manager from Day 1

An experienced Project Manager will know all about everything we’ve listed above and have practical knowledge of what to do to protect your budget at all times. They will have seen and overcome problems onsite that you couldn’t even imagine and will have the skills and contacts needed to solve things in a timely manner. However, this project manager shouldn’t be affiliated with or provided by your contractor or architect, they should be 100% independent to act in your interest.

Having a single point of contact who can take care of the planning and feasibility studies for you and then take your vision and make it a reality is vital for keeping a project on track. Your project manager will work with you during your budget preparation, tender process, supplier selection and contract preparation.

They should be supporting you with value engineering to make sure you don’t pay over the odds and every Euro spent is worth it. Then they should be monitoring the project, supervising contractors and suppliers, making decisions in your best interest and keeping track of everything so that there are no nasty surprises or additional expenditure that wasn’t in the budget.

We save our clients on average 10% and well exceed the costs of hiring our team, so it really is money very well spent. Contact us to discuss how we can help you, browse our project portfolio on our website to see how we’ve supported clients over the last 30 years, or read our article on a Day in the Life of a Project Manager to find out more about what is involved.