By Holly Welles
There is no avoiding the fact that construction projects are expensive. Depending on the scale of the project, costs can range from thousands to millions of dollars. Cost planning is an essential part of this industry to ensure that money is spent correctly and efficiently, but it’s important to avoid making mistakes here.
What are the most common errors in construction cost planning and how can business owners avoid these mistakes?
Mistake One: Disregarding Common Sense
Some argue that common sense is so rare these days that it should be considered a superpower. But when it comes to construction cost planning, disregarding instinct and common sense can lead to a number of costly problems. The industry has reached a point where construction planners tend to blindly trust the numbers that the computer generates, whether they’re right or not.
The easiest way to avoid this mistake is to use common sense when making construction cost plans. Don’t blindly follow the projections, especially if something feels off.
Mistake Two: Not Predicting Cash Flow
For project managers, leaving cash flow predictions in the hands of accountants is a simple cost estimation mistake that can waste a lot of money in the long run. During the cost planning phase, everyone involved needs to understand when funds are coming in, when funds are going out and how to balance the two.
Without these predictions, cost overruns and late client payments can leave a company struggling to keep its head above water. Avoiding this mistake requires that everyone involved in the planning phase is aware of current and past cash flow and has access to the tools necessary to make predictions about cash flow in the future.
Mistake Three: Ignoring Productivity Adjustments
Construction is an industry that spends much of its time outdoors. That means no matter how much managers and supervisors might yell, workers aren’t going to be able to maintain the same level of productivity year-round. In the winter, snow and frozen ground make it difficult or impossible to continue work. In the summer, supervisors are responsible for ensuring that their employees aren’t subjected to heat-related illnesses.
Avoiding this mistake is as simple as being flexible when it comes to productivity and deadlines. Take things like the weather into account and don’t set deadlines so short that employees are working in dangerous conditions to attempt to accomplish them.
Mistake Four: Underestimating Project Costs
It’s tempting to try and underplay the cost of a project in hopes of securing the bid, but companies that underestimate the cost of a project often end up cutting into their own profits, making it difficult to stay out of debt. Don’t underestimate project costs.
Consider things that might vary dramatically during the course of the project. Site overhead, for example, could cost anywhere from 5 to 15% of the total project costs. Lowering the cost projection to undercut someone else’s bid is going to leave companies scrambling to make up the difference, and that will only cost them money in the long run.
Mistake Five: Not Accounting for Price Changes
The economy is constantly in a state of flux. A year ago, the most expensive part of a cost estimate might have been the fuel to power the heavy equipment. This year, with the cost of crude oil diving into the negatives, getting fuel is the least of many companies’ worries. At the same time, the cost of other necessary supplies is climbing. Since construction projects can stretch out over many months or even years, it is essential to account for price changes when planning construction costs.
It can be challenging to predict how things might change in the next few months or years. No one could have predicted the dramatic drop in the price of crude oil, for example. The easiest way to avoid this mistake is to plan a little bit of flexibility in project budgets. It’s not perfect and companies may still find themselves scrambling to make up for sudden price changes, but having some wiggle room is better than having none at all.
Save Money by Avoiding Common Planning Errors
Construction cost planning errors can cost companies a lot of money and even cause them to lose out on their profits from completed projects. In many cases, the easiest way to avoid these common errors is to rely on common sense and data collection.
These mistakes don’t account for everything. There will always be problems that can sneak up on a well-meaning construction company. The best way to avoid this is to be prepared for anything.
Holly Welles is a real estate writer who covers the latest market trends in everything from residential to commercial spaces. She is the editor behind her own blog, The Estate Update, and curates more advice on Twitter.