What causes construction overruns? And how to avoid going over budget

Who hasn’t faced the frustration of a construction project going over the budget?

It’s a challenge that impacts everyone—your clients are blindsided by unexpected expenses, and your teams are left scrambling to manage delays and complications.

But budget overruns don’t have to be the norm.

Construction overruns happen for a variety of reasons and at any stage of a project.

However, with the right strategies they can be minimized—or even avoided entirely.

To tackle cost overruns, you first need to understand their root causes.

Once you know what drives these budget blowouts, you can take proactive steps to protect your finances, timeline, and reputation.

This guide will break down the common pitfalls of construction budgets and show you how to avoid them.

Here’s what we’ll cover

What is a cost overrun in construction?

A cost overrun happens when the actual expenses of a construction project exceed the budget.

Every project goes through many stages, and at any point challenges can arise with the potential to cause a budget overrun.

Budget overruns don’t just strain your finances.

They can result in project delays, reduced profits, or, in severe cases, abandonment of the project altogether.

There are numerous causes, such as inaccurate cost estimation or fluctuations in material prices that you should be aware of.

Main causes of construction project cost overruns

When your construction project goes over the budget, you may already suspect where things went wrong.

However, identifying the exact cause requires careful analysis of all project stages.

Here are the primary culprits behind construction project over-costing:

Inaccurate cost estimates

Planning a construction project involves accounting for countless cost variables, such as materials or labor.

Miscalculations can occur at any stage of the project planning cycle, whether within your organization or through third-party inputs.

These inaccuracies often set the stage for financial overruns before the project even begins.

Scope creep

For all sorts of reasons, the project scope may change once construction has begun.

For example, a batch of poor-quality materials may cause work to be repeated, or the project outline may need to be reworded to clarify anomalies.

Unfortunately, changes tend to add time and materials rather than reducing the scope, which is why creep is almost always cumulative.

Unexpected events

The Covid-19 pandemic was an extreme example of an event that derailed all kinds of projects and plans globally.

However, around the world, you can find examples of commonplace supply chain disruptions such as natural disasters, labor strikes, or accidents.

Poor project management

With so many moving parts, it’s possible for even the most experienced project managers to miss critical details or make incorrect assumptions.

Inefficient scheduling can lead to costly delays, wasted labor hours, and increased equipment rental fees.

Inaccurate orders or poor inventory control can result in wasted resources, shortages, or last-minute orders that are almost always more expensive. 

Furthermore, inadequate risk management can leave your project vulnerable to unexpected expenses and delays.

Labor shortages

A lack of skilled workers can lead to higher wages, increased competition for resources, and project delays.

It also means the staff you hire may not have sufficient experience to correctly manage project resources, timing, and costs.

Payment delays

Parallel to financing, there is the day-to-day management of cash flow.

Late payments from clients or to your subcontractors can disrupt operations, strain relationships, and potentially halt work altogether.

You may need to renegotiate agreements, which further adds to costs and timing.

Communication problems

With numerous stakeholders involved, there are many opportunities for information to be lost or misinterpreted.

Teams may be working with new subcontractors, unsure of names, or who they should be coordinating with.

Also, construction teams often consist of people from diverse backgrounds with different native languages, and noise interference from heavy machinery adds to the confusion.

Errors in drafting procurement documents

Mistakes in bidding documents for staff or materials can lead to disputes, delays, legal issues, and, ultimately, cost overruns.

Errors can be as simple as typos and misspelled names or as complex as miscalculations in technical specifications.  

How common are construction budget deviations?

Construction budget deviations are more common than many would hope.

Research shows that 78% of corporate and public real estate owners in the US regularly exceed their construction budgets.

In addition, only 31% of projects stay within 10% of budgets, and just 25% of projects meet their planned timelines.

Large-scale projects are especially difficult to manage, with some exceeding budgets by as much as 80%.

The pandemic exacerbated challenges by disrupting global supply chains, leading to significant shortages and price volatility in construction materials.

For instance, essential materials like steel, lumber, and concrete experienced substantial price increases, with delays in production and delivery becoming common.

Although prices have stabilized to some extent, they remain elevated compared to pre-pandemic levels.

As of October 2024, the average price of construction materials had decreased by 1.9% over the past 12 months but remained 39.7% higher than in February 2020.

The good news?

Modern tools are helping construction companies improve cost management.

For example, studies show that 3D Building Information Modeling (BIM) can reduce cost overruns thanks to its ability to provide more accurate cost estimates during the planning phase.

Some sources estimate the savings at up to 40%.

The impact of construction budget overruns

Construction cost hikes are never welcome and often reduce profitability across the board.

Your contractors may need to negotiate additional labor, equipment rental, and site management costs, while project backers face increased outlays in capital investment.

But the negative effects of over-costing go beyond immediate financial impacts.

They can create ripple effects that can hurt your bottom line in unexpected ways.

Here are some prime examples:

Project delays

Addressing budget issues often leads to delays in the project schedule, pushing back completion dates and potentially incurring penalties. 

Reduced project scope

To compensate for overruns, some features or elements of your project might have to be scaled back or eliminated, limiting the ability to maximize returns on the investment.

Strained cash flow

Additional costs can create cash flow problems for construction firms, making it harder to cover expenses and potentially delaying payments to subcontractors and suppliers.

The risk is that these partners will treat you less favorably in future projects.

Increased financing costs

If you come to need additional funding, it might come with higher interest rates or unfavorable terms.

Legal disputes

Some project stakeholders may understandably assert that insufficient care was taken to avoid cost deviations, holding other parties entirely responsible.

Legal action to clear up such issues is generally costly and time-consuming.

Damaged reputation

Construction cost overruns can damage your reputation with contractors and project managers, making it harder to secure financing and partners for future projects.

How to control and manage your construction project budget

Managing construction costs and keeping your project on budget requires careful planning and preparation for potential contingencies.

While unexpected challenges can arise, a solid foundation can help minimize surprises and keep your construction budget under control.

The following section will show you how to proactively manage costs and what to do if a budget overrun occurs:

How to prevent construction projects from going over budget

Conduct thorough research

Leverage industry benchmarks and historical data from past projects, including actual costs, timelines, and resource utilization.

Compare your project with similar projects in the industry to get a realistic sense of cost expectations.

Use reliable cost databases and estimating tools to fine-tune your budget, accounting for regional variations in material and labor costs.

Take the time to study each site in detail—this might involve soil testing, surveying, and assessing existing infrastructure—to identify potential challenges before they become costly surprises.

Be strategic with procurement and subcontractor selection

A cost estimate can give you a ballpark figure, but it doesn’t necessarily consider whether high-quality materials and services can be sourced for less.

That’s where value engineering comes in.

This approach assesses whether alternative materials or construction methods can achieve the same result at a lower cost.

The same principle applies to subcontractor selection.

Choosing reliable partners who prioritize cost efficiency, expertise, and quality can have a major impact on your budget.

Establishing strong relationships and negotiating effectively ensures that every dollar spent delivers maximum value.

Plan for contingencies

No matter how well you plan, unexpected costs will arise.

Material price fluctuations, bad weather, and regulatory changes can all throw a budget off track.

That’s why a contingency fund is essential.

Allocating 5-10% of your total budget, depending on project complexity and risk, gives you a financial buffer to absorb unforeseen expenses.

This proactive step helps keep the project moving without derailing your budget.

Manage change orders effectively

Change orders are a major cause of cost overruns, so having a clear and structured process is key.

Use standardized forms and templates to document all change requests, outlining detailed descriptions, cost implications, and schedule impacts.

A multi-tiered approval process—including input from project owners, architects, engineers, and contractors—ensures that changes are necessary, budgeted, and well-communicated.

Keeping a tight grip on change orders helps prevent scope creep and unexpected cost escalations.

Leverage technology for real-time tracking

Project management software and cloud-based construction financial tools can help you track costs and progress in real-time.

The ability to spot budget deviations early can mean the difference between a minor adjustment and a costly overrun.

While some software focuses on analyzing past cost overruns, the real value lies in tools that help detect financial issues before they spiral out of control.

Foster transparent communication

Miscommunication can lead to costly mistakes, delays, and disputes.

Holding regular check-ins with clients, contractors, and subcontractors ensures that issues are addressed before they escalate.

Many project management platforms now integrate video conferencing and instant messaging, making it easier to keep teams aligned in real-time.

Creating an open dialogue fosters trust and improves problem-solving on the job site.

Conduct regular risk assessments

Identifying risks at the start of a project is crucial—but risk management doesn’t stop there.

Regularly reassessing potential threats allows you to catch problems before they impact your budget.

Keep an eye on early warning signs, whether it’s supply chain disruptions, material shortages, or labor constraints, and adjust your approach accordingly.

Being proactive about risk keeps you ahead of the curve and prevents small issues from becoming costly setbacks.

What to do if your construction project budget goes over

If your software sounds the alarm on rising costs, remember it’s a normal part of running a project. 

A lot can depend on how you respond to the warning, but here are the key actions to consider if this situation arises:

Inform stakeholders immediately

Immediately inform all stakeholders, including the client, project team, subcontractors, and any relevant parties.

Clearly explain the situation, the reasons for the overrun, and the potential impact on the project timeline.

Collaborate on solutions

Work with contractors, suppliers, and other parties to find mutually agreeable cost-saving solutions that address the anomaly.

Reassess the project scope

Identify areas where the scope can be reduced or value-engineered to save costs and potentially bring the project back under budget.

Explore financing options

If necessary, seek additional funding or options like bridge loans or equity investments that could help to cover the burden.

Debrief and document lessons learned

Debrief your team and document the causes of excess spending. This should improve project planning and cost estimation for future projects.

Take the surprises in your stride

There are countless variables that can impact the costs and timelines of a construction project.

This means that preventing cost overruns entirely is asking for the impossible.

However, a good understanding of the common causes, coupled with proactive strategies, can significantly increase your chances of staying on budget.

Techniques like planning for contingencies, researching cost databases, and setting clear processes for managing change can work as a solid foundation for cost control.

Final thoughts

Cost evaluation and planning tools such as the range of construction accounting solutions from Sage, can help with real-time cost tracking, budgeting and forecasting, job costing subcontractor management, and change order management.

By keeping everything in one place, you’re able to be more agile and responsive whether things go right, or wrong.

These are exactly the features you need to minimize financial surprises and ultimately meet your clients’ expectations, every time.