Why Do So Many Construction Projects Go Wildly Over Budget?

Building site with yellow crane in the background.

Overview

In 2016, Carillion was the second-largest construction company in the UK. With sales of over £5.2 billion and a market capitalization of around £1 billion, it employed some 43,000 people worldwide. And yet, in less than two years it had completely collapsed, with debts amounting to some £1.5 billion.1

Carillion in the UK

That demise was blamed on a number of factors, including a series of late payments in the Middle East and the Caribbean. But the main reason was the delays and cost overruns on a succession of projects back in the UK. Notably, on two new hospitals; the Midland Metropolitan Hospital, near Birmingham, and the Royal Liverpool Hospital.

The former, costing £350m, was due to open in 2018 and is now penciled in for 2023. While the latter had an original budget of £335m and was due to open by 2017. But it’s going to end up costing double that and won’t be ready until at least 2022.2

The National Children’s Hospital in Ireland

Those soaring costs however appear positively amateurish when compared to what’s been happening with the National Children’s Hospital in Dublin. Originally budgeted at €650 million and due to be completed in August of 2022, it’s almost certain to break the €2 billion barrier when it’s eventually completed, some time in 2024.

The Development Board, who awarded BAM Ireland the contract, accuse the latter of “under-resourcing… since the beginning”. In other words, it’s the age-old story of a construction company under-estimating its costs at the bidding stage, before revising them once the project was up and running.

Needless to say, BAM Ireland vehemently contest the claim, and in a statement released in February (2021), and reported on in the Irish Times, they accused the Board of;

“strictly enforc(ing) contractual provisions which result in replicating the same notification across a number of different areas.”

In other words, cost overruns and delays are what you get when contractors force construction companies to process so many layers of bureaucracy, that they end up spending as much time on paperwork as they do on actual construction.

Katerra in the US

And the situation is exactly the same on the other side of the Atlantic, as the recent implosion of the would-be construction conglomerate Katerra demonstrates.

Its aim had been to streamline design, supply, and manufacturing into one model, which ought to have led to significant cost reductions. Unfortunately, all it ultimately led to was a massive bankruptcy, which Katerra went into in June of 2021, with debts of between one and ten billion dollars.

Two Reasons for Cost Overruns

There are then two dynamics at play when it comes to the costs of construction and engineering projects. First, there’s the inevitable gap between the planned costs and the actual costs of individual projects.

Because firms so often begin with unrealistically low estimates, manageable problems get transformed into huge cost overruns. So the likes of poor site management, admin errors, failure to plan for change orders, and extreme weather, not to mention the occasional pandemic, all end up being far more costly than they ought to be.

And second, many of the big construction firms suffer from underlying structural problems. Which in turn are caused by exactly the same two things as the individual projects they oversee. Namely, inadequate planning, and, therefore, insufficient capital.

Firms gravitate towards ever-larger projects, in the belief that a handful of huge projects will provide the capital for the rest of the organization. And that growth is an end in itself. But all they end up with are even larger individual cost overruns and delays, which eventually catch up with them.

Going Digital

Firms, whether dealing with organizational structural issues or individual project costs, must ask: How can we significantly enhance our planning? The straightforward solution is a radical overhaul of communication processes. Improved awareness of problems and required funds makes surprises more manageable. While not a cure-all, going digital is a crucial step. Despite its potential, why aren’t more construction and engineering firms swiftly embracing this obvious solution?

Sources

1 https://www.bbc.com/news/business-42666275

2 https://www.liverpoolecho.co.uk/news/liverpool-news/liverpools-new-hospital-went-stalled-18183880

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